<PAGE>
As filed with the U.S. Securities and Exchange Commission on February 25, 1998.
Registration Nos. 333-02205 and 811-07583
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
REPUBLIC ADVISOR FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219-3035
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(614) 470-8000
George O. Martinez
3435 Stelzer Road, Columbus, Ohio 43219-3035
(Name and Address of Agent for Service)
Copy to:
Allan S. Mostoff, Esq.
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, DC 20006
It is proposed that this filing will become effective (check the appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on March 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of its shares of
beneficial interest (par value $0.01 per share) under the Securities Act of
1933, as amended, pursuant to Rule 24f-2 under the Investment Company Act of
1940, as amended. Registrant filed the notice required by Rule 24f-2
with respect to its series, Republic Fixed Income Fund, Republic International
Equity Fund and Republic Small Cap Equity Fund, for their fiscal years ending
October 31, 1997 on January 27, 1998.
Republic Portfolios has also executed this Registration Statement.
<PAGE>
CROSS REFERENCE SHEET
PART A; INFORMATION REQUIRED IN PROSPECTUS
ITEM NUMBER PROSPECTUS CAPTION
Item 1. Cover Page Cover Page
Item 2. Synopsis Highlights
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of Investment Objective
Registrant and Policies; Additional
Risk Factors and Policies;
Special Information Concerning
the Two-Tier Fund Structure
Item 5. Management of the Fund Management of the Trust and
Portfolio Trust
Item 5A. Management's Discussion Not Applicable
of Fund Performance
Item 6. Capital Stock and Other Dividends and
Securities Distributions; Tax Matters;
Description of
Shares, Voting Rights and
Liabilities
Item 7. Purchase of Securities Purchase of Shares;
Being Offered Determination of Net
Asset Value
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Legal Proceedings Not Applicable
PART B; INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL
ITEM NUMBER INFORMATION CAPTION
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and Not Applicable
History
Item 13. Investment Objectives and Investment Objective,
Policies Policies and Restrictions
Item 14. Management of the Registrant Management of the Trust and
Portfolio Trust
Item 15. Control Persons and Management of the Trust and
Principal Holders of Portfolio Trust
Securities
Item 16. Investment Advisory and Management of the Trust and
Other Services Portfolio Trust
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Other Information
Securities
<PAGE>
Item 19. Purchase, Redemption and Determination of Net Asset
Pricing of Securities Being Value; See also:
Offered Prospectus - Purchase of
Shares; Prospectus -
Redemption of Shares;
Prospectus - Determination
of Net Asset Value
Item 20. Tax Status Taxation
Item 21. Underwriters Management of the Trust and
the Portfolio Trust
Item 22. Calculation of Performance Performance Information;
Data See also: Prospectus --
Performance Information
Item 23. Financial Statements Financial Statements
PART C.
Information required to be included in Part C is set forth under the
appropriate items, so numbered, in Part C of this Registration Statement.
<PAGE>
EXPLANATORY NOTE
This post-effective amendment no. 6 (the "Amendment") to the Registrant's
registration statement on Form N-1A (File no. 333-02205) (the "Registration
Statement") is being filed to amend the Registrant's disclosure with respect to
the Republic Fixed Income Fund, Republic International Equity Fund and
Republic Samll Cap Equity Fund. The prospectus included as part of the
Amendment is a combined prospectus that relates not only to the Funds, but
also to the Class Y shares of two series of the Republic Funds.
<PAGE>
[Graphic Omitted]
REPUBLIC
NEW YORK TAX-FREE BOND FUND
REPUBLIC
EQUITY FUND
REPUBLIC
FIXED INCOME FUND
REPUBLIC
INTERNATIONAL EQUITY FUND
REPUBLIC
SMALL CAP EQUITY FUND
[Logo]
[Logo] PROSPECTUS
FAMILY OF FUNDS MARCH 1, 1998
- ---------------
<PAGE>
REPUBLIC FAMILY OF FUNDS:
FIXED INCOME FUND
NEW YORK TAX-FREE BOND FUND
EQUITY FUND
INTERNATIONAL EQUITY FUND
SMALL CAP EQUITY FUND
3435 STELZER ROAD, COLUMBUS, OHIO 43219-3035
- --------------------------------------------------------------------------------
ACCOUNT AND GENERAL INFORMATION: (888) 525-5757 (TOLL FREE)
The Republic Funds (the "Trust") is an open-end investment management
company (a mutual fund) that currently offers a selection of seven portfolios,
each of which has different and distinct investment objectives and policies.
The Republic Advisor Funds Trust (the "Advisor Trust") is an open-end
management investment company that currently consists of three funds, each of
which has different and distinct investment objectives and policies. This
prospectus describes two investment portfolios offered by the Trust and three
investment portfolios offered by the Advisor Trust (the "Funds"), each of
which is advised or managed by Republic National Bank of New York ("Republic,"
"Manager" or "Advisor"):
REPUBLIC FIXED INCOME FUND
REPUBLIC NEW YORK TAX-FREE BOND FUND
REPUBLIC EQUITY FUND
REPUBLIC INTERNATIONAL EQUITY FUND
REPUBLIC SMALL CAP EQUITY FUND
This Prospectus sets forth concisely the information concerning the Funds
that a prospective investor should know before investing. Investors should
read this Prospectus and retain it for future reference. The Trust and Advisor
Trust have each filed with the Securities and Exchange Commission a Statement
of Additional Information, dated January 2, 1998 and March 1, 1998,
respectively, with respect to each of their respective Funds, containing
additional and more detailed information about the respective Fund, each of
which is hereby incorporated by reference into this Prospectus. An investor
may obtain a copy of a Statement of Additional Information without charge by
contacting the Fund at the address and telephone number printed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 1, 1998
<PAGE>
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, REPUBLIC OR ANY OTHER BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS IS SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
Only shares of the Fixed Income Fund, International Equity Fund and Small
Cap Equity Fund and Class Y Shares (the "Adviser Shares") of the New York Tax-
Free Bond Fund and Equity Fund (collectively, the "Shares"), are being offered
by this Prospectus. The Trust offers two other classes of shares of the New
York Tax-Free Bond Fund and Equity Fund pursuant to a separate prospectus.
Shares of the Funds are offered primarily to clients of Republic National Bank
of New York and its affiliates for which Republic National Bank or its
affiliates exercise investment discretion.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS) WHICH
DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, THE ADVISOR
TRUST SEEKS TO ACHIEVE THE INVESTMENT OBJECTIVES OF THE FIXED INCOME FUND,
INTERNATIONAL EQUITY FUND AND SMALL CAP EQUITY FUND (COLLECTIVELY, THE
"ADVISOR FUNDS", BY INVESTING ALL OF EACH FUND'S INVESTABLE ASSETS ("ASSETS")
IN THE FIXED INCOME PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND SMALL CAP
EQUITY PORTFOLIO, RESPECTIVELY, WHICH HAVE THE SAME INVESTMENT OBJECTIVE AS
EACH RESPECTIVE FUND. THE INVESTMENT EXPERIENCE OF EACH FUND WILL CORRESPOND
DIRECTLY WITH THE INVESTMENT EXPERIENCE OF THE CORRESPONDING PORTFOLIO. THE
PORTFOLIOS ARE DIVERSIFIED SERIES OF THE REPUBLIC PORTFOLIOS (THE "PORTFOLIO
TRUST"), WHICH IS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. SEE "SPECIAL
INFORMATION CONCERNING THE TWO-TIER FUND STRUCTURE."
Republic is the investment manager of the Fixed Income Portfolio,
International Equity Portfolio, Small Cap Equity Portfolio (collectively, the
"Portfolios") and the Equity Fund. Republic is also the investment advisor to
the New York Tax-Free Bond Fund. Miller Anderson & Sherrerd ("MAS"), Capital
Guardian Trust Company ("CGTC"), and MFS Institutional Advisors, Inc.
("MFSI"), a wholly owned subsidiary of Massachusetts Financial Services
Company, continuously manage the investment portfolios of the Fixed Income
Portfolio, the International Equity Porfolio and the Small Cap Equity
Portfolio, respectively. Alliance Capital Management L.P. ("Alliance") and
Brinson Partners, Inc. ("Brinson") continuously manage the investment
portfolio of the Equity Fund (MAS, CGTC, MFSI, Alliance and Brinson are
collectively, the "Sub-Advisers").
Shares of each Fund are continuously offered for sale at net asset value
with no sales charge by BISYS Fund Services ("BISYS," the "Distributor" or the
"Sponsor") to customers of a financial institution, such as a federal or
state-chartered bank, trust company or savings and loan association that has
entered into a shareholder servicing agreement with the Trust or Advisor Trust
(collectively, "Shareholder Servicing Agents"). At present, the only
Shareholder Servicing Agents are Republic and its affiliates.
AN INVESTOR WHO IS NOT PURCHASING DIRECTLY FROM THE DISTRIBUTOR SHOULD
OBTAIN FROM HIS SHAREHOLDER SERVICING AGENT, AND SHOULD READ IN CONJUNCTION
WITH THIS PROSPECTUS, MATERIALS DESCRIBING THE PROCEDURES UNDER WHICH SHARES
MAY BE PURCHASED AND REDEEMED THROUGH SUCH SHAREHOLDER SERVICING AGENT.
<PAGE>
HIGHLIGHTS
THE FUNDS PAGE 1
Republic New York Tax-Free Bond Fund and Republic Equity Fund (collectively,
the "Trust Funds") are separate series of Republic Funds (the "Trust"), a
Massachusetts business trust organized on April 22, 1987, which currently
consists of seven portfolios, each of which has different and distinct
investment objectives and policies. Republic Fixed Income Fund, Republic
International Equity Fund and Republic Small Cap Equity Fund (collectively,
the "Advisor Funds") are separate series of Republic Advisor Funds Trust (the
"Advisor Trust"), a Massachusetts business trust organized on April 5, 1996,
which currently consists of three funds, each of which has different and
distinct investment objectives and policies. The Fixed Income Fund and
International Equity Fund are the successors to the Republic Fixed Income Fund
and Republic International Equity Fund, respectively, each a series of
Republic Funds (the "Predecessor Funds") each of which commenced investment
operations on January 9, 1995. The Fixed Income Fund and International Equity
Fund each assumed all of the assets and liabilities of their respective
Predecessor Fund.
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS PAGES 14 AND 25
The investment objective of the Fixed Income Fund is to realize above-
average total return over a market cycle of three to five years, consistent
with reasonable risk, through investment primarily in a diversified portfolio
of U.S. Government securities, corporate bonds, mortgage-backed securities and
other fixed-income securities. The Advisor Trust seeks to achieve the
investment objective of the Fixed Income Fund by investing all of the Fund's
investible assets in the Fixed Income Portfolio, which has the same investment
objective as the Fund. The Fixed Income Portfolio's average weighted maturity
will ordinarily exceed five years.
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Fund with monthly dividends exempt from regular federal,
New York State and New York City personal income taxes as well as to protect
the value of its shareholders' investment. The Trust seeks to achieve the
investment objective of the New York Tax-Free Bond Fund by investing the
assets of the Fund primarily in a non-diversified portfolio of municipal bonds
and notes and other debt instruments the interest on which is exempt from
regular federal, New York State and New York City personal income taxes. The
potential risks of investing in New York Municipal obligations are discussed
in "Additional Risk Factors and Policies -- Risk Factors Affecting Investments
in New York Municipal Obligations."
In seeking its investment objective, the New York Tax-Free Bond Fund may
invest in variable rate instruments and "when-issued" municipal obligations.
The potential risks of investing in these derivative instruments are discussed
in "Additional Risk Factors and Policies -- Variable Rate Instruments" and
"Additional Risk Factors and Policies -- Firm Commitment Agreements and When-
Issued Securities and Municipal Obligations."
The investment objective of the Equity Fund is long-term growth of capital
and income without excessive fluctuations in market value. The Equity Fund
will normally invest in equity securities of large, seasoned companies in
sound financial condition with larger intermediate capitalization which are
expected to show above-average price appreciation.
The investment objective of the International Equity Fund is to seek long-
term growth of capital and future income through investment primarily in
securities of non-U.S. issuers (including American Depository Receipts
("ADRs") and U.S. registered securities) and securities of issuers whose
principal markets are outside of the United States. The Advisor Trust seeks to
achieve the investment objective of the International Equity Fund by investing
all of the Fund's investible assets in the International Equity Portfolio,
which has the same investment objective as the Fund.
The investment objective of the Small Cap Equity Fund is to seek long-term
growth of capital by investing, under normal market conditions, at least 80%
of its investible assets in equity securities of small- and medium-sized
companies that are early in their life cycle but which may have potential to
become major enterprises ("emerging growth companies"). The Advisor Trust
seeks to achieve the investment objective of the Small Cap Equity Fund by
investing all of the Fund's investible assets in the Small Cap Equity
Portfolio, which has the same investment objective as the Fund.
The Fixed Income Portfolio, International Equity Portfolio, and Small Cap
Equity Portfolio are series of Republic Portfolios (the "Portfolio Trust"), a
master trust fund established under the law of the State of New York and
organized on November 1, 1994.
There can be no assurance that the investment objectives of the Funds or the
Portfolios will be achieved.
MANAGEMENT OF THE TRUST, THE ADVISOR TRUST
AND THE PORTFOLIO TRUST PAGE 48
Republic acts as investment manager to the Portfolios pursuant to Investment
Management Contracts with the Portfolio Trust. For its services, the Manager
is entitled to receive from the Fixed Income Portfolio a fee at the annual
rate of 0.20% of the Portfolio's average daily net assets and from each of the
International Equity Portfolio and the Small Cap Equity Portfolio a fee at the
annual rate of 0.25% of each Portfolio's average daily net assets.
Republic also acts as investment adviser to the New York Tax-Free Bond Fund
and as investment manager to the Equity Fund. For its services, each of these
Funds pays the Manager a fee at the annual rate of 0.25% of the New York Tax-
Free Bond Fund's average daily net assets and a fee at the annual rate of
0.175% of the Equity Fund's average daily net assets, respectively. Republic
is currently waiving the fee for the New York Tax-Free Bond Fund. See
"Management of Trust, the Adviser Trust and Portfolio Trust."
MAS continuously manages the investment portfolio of the Fixed Income
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, MAS is paid a fee by the Fixed Income Portfolio, computed daily and
based on the Portfolio's average daily net assets, equal on an annual basis to
0.375% of average daily net assets of the Portfolio, subject to certain
breakpoints on assets in excess of $50 million. See "Management of Trust, the
Adviser Trust and Portfolio Trust."
Alliance and Brinson each continuously manage a portion of the investment
portfolio of the Equity Fund pursuant to a Subadvisory Agreement with the
Manager. The Manager determines the allocation of the Equity Fund's Assets
between Alliance and Brinson. For its services, Alliance and Brinson are each
paid a fee by the Equity Fund, computed daily and based on the Fund's average
daily net assets, equal on an annual basis to 0.325% of the average daily net
assets of the Fund allocated to each Sub-Adviser for management, subject to
certain breakpoints on assets allocated to each Sub-Adviser in excess of $50
million. See "Management of Trust, the Adviser Trust and Portfolio Trust."
CGTC continuously manages the investment portfolio of the International
Equity Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For
its services, CGTC is paid a fee by the International Equity Portfolio,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.70% of the average daily net assets of the Portfolio,
subject to certain breakpoints on assets in excess of $25 million. See
"Management of Trust, the Adviser Trust and Portfolio Trust."
MFSI continuously manages the investment portfolio of the Small Cap Equity
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, MFSI is paid a fee by the Small Cap Equity Portfolio, computed daily
and based on the Portfolio's average daily net assets, equal on an annual
basis to 0.75% of average daily net assets of the Portfolio, subject to
certain breakpoints on assets in excess of $50 million. See "Management of the
Trust, the Adviser Trust and the Portfolio Trust."
BISYS acts as sponsor and as administrator of the Funds (the "Fund
Administrator") and distributor of the Shares of each Fund. For its services
to the New York Tax-Free Bond Fund and the Equity Fund, the Fund Administrator
receives a fee from each Fund equal on an annual basis to 0.10% of the Fund's
average daily net assets, subject to certain breakpoints on assets in excess
of $1 billion. For its services to the Fixed Income Fund, International Equity
Fund and Small Cap Equity Fund, the Fund Administrator receives from each Fund
a fee payable monthly equal on an annual basis to 0.05% of the Fund's average
daily net assets, subject to certain breakpoints on assets in excess of $1
billion. BISYS Fund Services (Ireland) Limited ("BISYS Ireland") acts as
administrator of the Portfolios (the "Portfolios Administrator"). For its
services to the Portfolios, the Portfolios' Administrator receives from each
Portfolio a fee payable monthly equal on an annual basis to 0.05% of each
Portfolio's average daily net assets subject to certain breakpoints on assets
in excess of $1 billion. See "Management of Trust, the Adviser Trust and the
Portfolio Trust."
PURCHASE AND REDEMPTION OF SHARES PAGES 59 AND 61
Shares of the Funds are continuously offered for sale by the Distributor at
net asset value with no sales charge to customers of a financial institution,
such as a federal or state-chartered bank, trust company or savings and loan
association, that has entered into a shareholder servicing agreement with the
Trust or Advisor Trust (collectively, "Shareholder Servicing Agents"). The
minimum initial investment is $1,000 and the minimum subsequent investment is
$100. With respect to the Advisor Funds, the Funds may accept initial and
subsequent investments of lesser amounts in its discretion. No minimum is
imposed on reinvested dividends. The Trust and Advisor Trust each offer to buy
back (redeem) Shares from shareholders of the Funds at any time at net asset
value. See "Purchase of Shares" and "Redemption of Shares." Shares of the
Funds, with the exception of the New York Tax-Free Bond Fund, are offered in
connection with tax-deferred retirement plans. See "Retirement Plans."
DIVIDENDS AND DISTRIBUTIONS PAGE 62
For the Fixed Income Fund and the New York Tax-Free Bond Fund, the Trust and
Advisor Trust each declare all of each Fund's net investment income daily as a
dividend to each Fund's shareholders and distribute all such dividends
monthly. For the Equity Fund, dividends equal to all the Fund's net investment
income earned are distributed quarterly to the Fund's shareholders of record.
For the International Equity Fund and Small Cap Equity Fund, such dividends
are distributed annually and semi-annually, respectively. Any net realized
capital gains are distributed at least annually. All distributions by a Fund
will be invested in additional shares of the Fund, unless the shareholder
instructs the Fund otherwise. See "Dividends and Distributions."
<PAGE>
FEE TABLE
The following table provides a summary of estimated expenses relating to
purchases and sales of Shares, and the aggregate annual operating expenses of
each Fund, and their corresponding Portfolio, if applicable, as a percentage
of the average daily net assets of each Fund. The fiscal year ends of the
Funds and the Portfolios are each October 31. The example illustrates the
dollar cost of such estimated expenses on a $1,000 investment in each Fund.
The Trustees of the Advisor Trust believe that the aggregate per share
expenses of the Fixed Income Fund, International Equity Fund and Small Cap
Equity Fund and the corresponding Portfolios will be less than or
approximately equal to the expenses which the Advisor Funds would incur if the
Advisor Trust retained the services of an investment adviser on behalf of the
Advisor Funds and the Assets of each Advisor Fund were invested directly in
the type of securities being held by the corresponding Portfolio. Historical
information in the expense table regarding investment advisory/management fees
and expenses has been restated to reflect expected fee waivers and expenses
for the current fiscal year.
<TABLE>
<CAPTION>
FIXED NEW YORK INTERNATIONAL SMALL CAP
INCOME TAX-FREE EQUITY EQUITY EQUITY
FUND BOND FUND FUND FUND FUND
------ --------- ------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None None None None None
Annual Fund Operating Expenses
Investment Advisory/Management
Fees after waiver* ............ 0.48% 0.00% 0.50% 0.72% 0.89%
Distribution Fees (Rule 12b-1
fees) ......................... None None None None None
Other Expenses .................. 0.42% 0.80% 0.40% 0.49% 0.36%
---- ---- ---- ---- ----
-- Shareholder Servicing Fee** 0.00% 0.00% 0.00% 0.00% 0.00%
-- Administrative Services Fee 0.10% 0.10% 0.10% 0.10% 0.10%
-- Other Operating Expenses ..... 0.32% 0.70% 0.30% 0.39% 0.26%
Total Fund Operating Expenses after
fee waivers and expense
reimbursements*** ............... 0.90% 0.80% 0.90% 1.21% 1.25%
==== ==== ==== ==== ====
</TABLE>
-----------
*Investment Advisory Management Fees for the New York Tax-Free Bond Fund are
shown net of waivers. Without such waivers, the Investment Advisory/
Management Fees would be equal on an annual basis to 0.25% of the average
net assets of the New York Tax-Free Bond Fund. See "Management of the
Trust, the Adviser Trust and the Portfolio Trust" for a description of the
Investment Advisory/Management Fees payable to the Manager and each of the
Sub-Advisors. There can be no assurance that fees will be waived in the
future. The Manager anticipates that it will reduce or eliminate the fee
waivers during the current fiscal year if it can do so without materially
increasing Total Fund Operating Expenses as a percentage of average daily
net assets.
**The Funds have authorized Shareholder Servicing Fees of up to 0.25%, on an
annual basis, of each Fund's average daily net assets. The fees are not
being paid currently, but the Funds may begin paying these fees in the
future.
***Total Fund Operating Expenses for the Funds are shown net of fee waivers
and expense reimbursements. Without such fee waivers and expense
reimbursements and if the Funds were to pay the full shareholder servicing
fee authorized, the Total Fund Operating Expenses would be equal on an
annual basis to 1.15% of the Fixed Income Fund's average daily net assets,
1.30% of the New York Tax-Free Bond Fund's average daily net assets, 1.15%
of the Equity Fund's average daily net assets, 1.46% of the International
Equity Fund's average daily net assets, and up to 1.50% of the Small Cap
Equity Fund's average daily net assets. There can be no assurance that fees
will be waived or expenses reimbursed in the future.
EXAMPLE
A shareholder would pay the following expenses on a $1,000 investment in
Fund Shares, assuming (1) 5% annual return and (2) redemption at the end of
each period:
<TABLE>
<CAPTION>
FIXED NEW YORK INTERNATIONAL SMALL CAP
INCOME TAX-FREE EQUITY EQUITY EQUITY
FUND BOND FUND FUND FUND FUND
------ --------- ------ ------------- ---------
<S> <C> <C> <C> <C> <C>
1 year ............................. $ 9 $ 8 $ 9 $ 12 $ 13
3 years ............................ $ 29 $ 26 $ 29 $ 38 $ 40
5 years ............................ $ 50 $ 44 $ 50 $ 66 $ 69
10 years ............................ $111 $ 99 $111 $146 $151
</TABLE>
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE AGGREGATE EXPENSES OF THE FUNDS AND THE PORTFOLIOS, AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense tables provided above is to assist investors in
understanding the expenses of investing in a Fund and an investor's share of
the aggregate operating expenses of the Portfolios, if applicable. The
information is based on the expenses the Funds, and their corresponding
Portfolios, if applicable, expect to incur for the current fiscal year. The
expense table shows the expected investment advisory/management fee,
distribution (Rule 12b-1) fee and administrative services fee. For a more
detailed discussion of the costs and expenses of investing in the Funds, see
"Management of the Trust and the Portfolio Trust."
The Funds do not currently pay a shareholder servicing fee. However, each
Fund is authorized to pay a fee up to 0.25%, on an annual basis, of the Fund's
average daily net assets.
Some Shareholder Servicing Agents may impose certain conditions on their
customers, subject to the terms of this Prospectus, in addition to or
different from those imposed by the Trust or Advisor Trust with respect to the
Funds, such as requiring a minimum initial investment or charging their
customers a direct fee for their services. The effect of any such fees will be
to reduce the net return on the investment of customers of that Shareholder
Servicing Agent. Each Shareholder Servicing Agent has agreed to transmit to
shareholders who are its customers appropriate written disclosure of any
transaction fees that it may charge them directly at least 30 days before the
imposition of any such charge.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial data shown below is to assist investors in evaluating the
performance of the Funds' Shares (Class Y or "Adviser Shares" for the New York
Tax-Free Bond Fund and Equity Fund) since commencement of operations through
October 31, 1997. The Fixed Income Fund and International Equity Fund are the
successors to Republic Fixed Income Fund and Republic International Equity
Fund, each a series of Republic Funds (the "Predecessor Funds") which each
commenced investment operations on January 9, 1995. The Fixed Income Fund and
International Equity Fund each assumed all of the assets and liabilities of
their respective Predecessor Fund in a reorganization effective August 1,
1996. The information shown in the following schedule for the years or periods
ended October 31, 1997 and 1996 has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report on each Fund's financial statements is
incorporated by reference into the Statement of Additional Information from
each Fund's Annual Report dated October 31, 1997. The Annual Report also
includes management's discussion of Fund performance, and may be obtained
without charge upon request. This information should be read in conjunction
with the financial statements.
The information for the Funds for the periods ended October 31, 1995 was
audited by the Funds' former independent auditors who expressed unqualified
opinions thereon.
SELECTED DATA FOR A SHARE OUTSTANDING
THROUGHOUT THE INDICATED PERIOD:
<TABLE>
<CAPTION>
REPUBLIC REPUBLIC NEW YORK REPUBLIC
FIXED INCOME FUND TAX-FREE BOND FUND EQUITY FUND
----------------------------------------- ----------------------------- ------------------------------
FOR THE FOR THE
PERIOD PERIOD FOR THE
FOR FOR JANUARY 9, 1995 FOR JULY 1, 1996 FOR THE PERIOD
THE YEAR THE YEAR (COMMENCEMENT THE YEAR (DATE OF YEAR JULY 1, 1996
ENDED ENDED OF OPERATIONS) ENDED INITIAL ENDED (DATE OF INITIAL
OCTOBER 31, OCTOBER 31, TO OCTOBER 31, OCTOBER 31, OFFERING TO) OCTOBER 31, OFFERING TO)
1997 1996 1995 1997 OCTOBER 31, 1996 1997 OCTOBER 31, 1996
----------- ----------- ---------------- ----------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.67 $ 10.96 $ 10.00 $ 10.30 $ 10.18 $ 11.93 $ 11.49
------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income 0.59 0.59 0.46 0.46 0.16 0.10 0.08
Net realized and
unrealized gain on
investments or from
Portfolio .......... 0.31 0.08 0.96 0.36 0.12 3.33 0.42
------- ------- ------- ------- ------- ------- -------
Total from investment
operations 0.90 0.67 1.42 0.82 0.28 3.43 0.50
------- ------- ------- ------- ------- ------- -------
Less dividends:
From net investment
income ............. (0.64) (0.59) (0.46) (0.46) (0.16) (0.13) (0.06)
Net realized capital
gain ............... (0.01) (0.37) -- (0.02) -- (0.22) --
------- ------- ------- ------- ------- ------- -------
Total distributions (0.65) (0.96) (0.46) (0.48) (0.16) (0.35) (0.06)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period ............... $ 10.92 $ 10.67 $ 10.96 $ 10.64 $ 10.30 $ 15.01 $ 11.93
======= ======= ======= ======= ======= ======= =======
Total return(a) ........ 9.14% 6.51% 14.37% 8.38% 5.02%(c) 29.28% 4.72%
Ratios/supplemental
data:
Net assets, end of
period (in 000's) .... $71,686 $42,424 $26,128 $8,901 $8,233 $63,060 $33,155
Ratio of expenses to
average net assets* .. 0.83% 0.83% 0.91%(b) 0.78% 0.60%(b) 0.96% 0.66%(b)
Ratio of net
investment income to
average net assets*. 5.92% 5.51% 5.63%(b) 4.66% 4.78%(b) 0.77% 1.93%(b)
Portfolio turnover
rate(d) ............ 349% 152% 100% 163% 178%(e) 99% 86%(e)
Average commission
rate(d) ............ N/A N/A N/A N/A N/A $0.0438 $0.0599(e)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED DATA FOR A SHARE OUTSTANDING
THROUGHOUT THE INDICATED PERIOD:
REPUBLIC SMALL
REPUBLIC INTERNATIONAL CAP EQUITY
EQUITY FUND FUND
---------------------------------------------------------- ----------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JANUARY 9, 1995 FOR THE YEAR SEPTEMBER 3, 1996
ENDED ENDED (COMMENCEMENT ENDED (COMMENCEMENT
OCTOBER 31, OCTOBER 31, OF OPERATIONS) TO OCTOBER 31, OF OPERATIONS) TO
1997 1996 OCTOBER 31, 1995 1997 OCTOBER 31, 1996
---------------- ---------------- ---------------------- ---------------- ----------------------
Net asset value, beginning
<S> <C> <C> <C> <C> <C>
of period ...................... $ 12.05 $ 10.80 $ 10.00 $ 10.63 $ 10.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .......... 0.12 0.11 0.08 (0.06) --
Net realized and unrealized
gain on investments or from
Portfolio .................... 1.85 1.31 0.75 2.93 0.63
------- ------- ------- ------- -------
Total from investment
operations ................... 1.97 1.42 0.83 2.87 0.63
------- ------- ------- ------- -------
Less dividends:
From net investment
income ....................... (0.11) (0.16) (0.03) (0.06) --
Net realized capital gain ...... (0.15) (0.01) -- (0.06) --
------- ------- ------- ------- -------
Total distributions .......... (0.26) (0.17) (0.03) 2.81 --
------- ------- ------- ------- -------
Net asset value, end of period ... $13.76 $12.05 $10.80 $13.44 $10.63
======= ======= ======= ======= =======
Total return(a) .................. 16.62% 13.22% 8.31% 27.18% 6.30%
Ratios/supplemental data:
Net assets, end of period
(in 000's) ................... $132,924 $96,977 $34,244 $137,996 $92,842
Ratio of expenses to average
net assets* .................. 0.91% 1.11% 1.14%(b) 1.02% 0.91%(b)
Ratio of net investment income
to average net assets* ....... 0.91% 0.99% 1.26%(b) (0.50)% (0.28)%(b)
Portfolio turnover rate(d) ..... 30% 23% 3% 92% 51%
Average commission rate(d) ..... $0.0020 $0.0030 N/A $0.0566 $0.0093
(Footnotes on following page)
- ----------------------------------------------------------------------------------------------------------------------------
* Reflects a voluntary expense limitation and waiver of fees by affiliated parties of the Funds. If this limitation and
waiver had not been in effect, the annualized ratios of expenses and net investment income to average net assets for the
Fixed Income Fund for the years ended October 31, 1997 and October 31, 1996 and the period from January 9, 1995
(commencement of operations) to October 31, 1995 would have been 0.85% and 5.90%, 1.06% and 5.28% and 1.72% and 4.82%,
respectively; for the New York Tax-Free Bond Fund for the year ended October 31, 1997 and the period from July 1, 1996
(date of initial offering) to October 31, 1996 would have been 1.27% and 4.17%, and 2.26% and 3.12%, respectively; for
the Equity Fund for the year ended October 31, 1997 and the period from July 1, 1996 (date of initial offering) to
October 31, 1996 would have been 1.03% and 0.70%, and 0.97% and 1.62%, respectively; for the International Equity Fund
for the years ended October 31, 1997 and October 31, 1996 and the period from January 9, 1995 (commencement of
operations) to October 31, 1995 would have been 0.91% and 0.91%, 1.13% and 0.97%, and 2.12% and 0.28%, respectively; and
for the Small Cap Equity Fund for the year ended October 31, 1997 and the period from September 3, 1996 (commencement of
operations) to October 31, 1996 would have been 1.03% and (0.51%), and 1.17% and (0.54%), respectively. Includes the
respective Fund's share of operating expenses of the respective Portfolios, as appropriate.
(a) For the year or period indicated.
(b) Annualized.
(c) Represents total return for the Class A shares ("Investor Shares") from November 1, 1995 to June 30, 1996, plus the total
return for the Class Y shares ("Adviser Shares") from July 1, 1996 to October 31 1997.
(d) Portfolio turnover and average commission rates, if applicable, for the Fixed Income Fund, International Equity Fund and
Small Cap Equity Fund represent those of each Fund's respective Portfolio for the years or periods indicated.
(e) Represents rate for the entire Fund for the period ended October 31, 1996.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The investment objective of the Fixed Income Fund is to realize above-
average total return over a market cycle of three to five years, consistent
with reasonable risk, through investment in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds rated below investment
grade commonly referred to as "junk bonds"), foreign fixed income securities,
mortgage-backed securities of domestic issuers and other fixed-income
securities. The Fixed Income Portfolio's average weighted maturity will
ordinarily exceed five years. The investment objective of the Fixed Income
Portfolio is the same as the investment objective of the Fixed Income Fund.
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Fund with monthly dividends exempt from regular federal,
New York State and New York City personal income taxes as well as to protect
the value of its shareholders' investment.
The investment objective of the Equity Fund is to seek long-term growth of
capital and income without excessive fluctuations in market value. The Equity
Fund will normally invest in equity securities of large, seasoned companies
with large or intermediate capitalization in sound financial condition which
are expected to show above-average price appreciation.
The investment objective of the International Equity Fund is to seek long-
term growth of capital and future income through investment primarily in
securities of non-U.S. issuers (including ADRs and U.S. registered securities)
and securities whose principal markets are outside of the United States. The
investment objective of the International Equity Portfolio is the same as the
investment objective of the International Equity Fund.
The investment objective of the Small Cap Equity Fund is to seek long-term
growth of capital by investing primarily in equity securities of small- and
medium-sized companies that are early in their life cycle but which may have
potential to become major enterprises ("Emerging Growth Companies"). The
investment objective of the Small Cap Equity Portfolio is the same as the
investment objective of the Small Cap Equity Fund.
There can be no assurance that the investment objectives of the Funds will
be achieved. The investment objectives of each of the Funds and the
Portfolios, if applicable, may be changed without investor approval. If there
is a change in the investment objective of a Fund, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current financial position and needs. Shareholders of the Funds shall
receive 30 days' prior written notice of any change in the investment
objectives of the Funds or the Portfolios, if applicable.
INVESTMENT POLICIES
Since the investment characteristics of the Fixed Income Fund, International
Equity Fund and Small Cap Equity Fund will correspond to those of their
respective Portfolio, the following also includes a discussion of the various
investment policies of the Portfolios.
FIXED INCOME FUND. The investment characteristics of the Bond Fund
correspond to those of the Fixed Income Portfolio. The Fixed Income Portfolio
will normally invest at least 65% of its total assets in fixed income
securities. The Fixed Income Portfolio may invest in the following securities,
which may be issued by domestic or foreign entities and denominated in U.S.
dollars or foreign currencies: securities issued, sponsored or guaranteed by
the U.S. government, its agencies or instrumentalities (U.S. Government
securities); corporate debt securities; corporate commercial paper; mortgage
pass-throughs, mortgage-backed bonds, collateralized mortgage obligations
("CMOs") and other asset-backed securities; variable and floating rate debt
securities; obligations of foreign governments or their subdivisions, agencies
and instrumentalities; obligations of international agencies or supranational
entities; and foreign currency exchange-related securities.
MAS (the "Fixed Income Sub-Adviser") will seek to achieve the Fixed Income
Portfolio's objective by investing at least 80% of the Portfolio's assets in
investment grade debt or fixed income securities. Investment grade debt
securities are those rated by one or more nationally recognized statistical
rating organizations ("NRSROs") within one of the four highest quality grades
at the time of purchase (e.g., AAA, AA, A or BBB by Standard & Poor's Ratings
Group, Inc. ("S&P") or Fitch Investors Service, Inc. ("Fitch") or Aaa, Aa, A
or Baa by Moody's Investors Service, Inc. ("Moody's")), or in the case of
unrated securities, determined by the Fixed Income Sub-Adviser to be of
comparable quality. Securities rated by a NRSRO in the fourth highest rating
category have speculative characteristics and are subject to greater credit
and market risks than higher-rated bonds. See Appendix A to this Prospectus
for a description of the ratings assigned by Moody's, S&P, and Fitch.
Up to 20% of the Fixed Income Portfolio's assets may be invested in
preferred stock, convertible securities, and in fixed income securities that
at the time of purchase are rated Ba or B by Moody's, BB or B by S&P or rated
comparably by another NRSRO (or, if unrated, are deemed by the Fixed Income
Sub-Adviser to be of comparable quality). Securities rated below "investment
grade," i.e., rated below Baa by Moody's or below BBB by S&P, are described as
"speculative" by both Moody's and S&P. Such securities are sometimes referred
to as "junk bonds," and may be subject to greater market fluctuations, less
liquidity and greater risk. For a complete discussion of the special risks
associated with investments in lower rated securities, see "Additional Risk
Factors and Policies -- High Yield/High Risk Securities."
From time to time, the Fixed Income Sub-Adviser may invest more than 50% of
the Fixed Income Portfolio's assets in mortgage-backed securities including
mortgage pass-through securities, mortgage-backed bonds and CMOs, that carry a
guarantee from a U.S. government agency or a private issuer of the timely
payment of principal and interest. For a description of the risks associated
with mortgage-backed securities, see "Additional Risk Factors and Policies --
Mortgage Related Securities." When investing in mortgage-backed securities, it
is expected that the Fixed Income Portfolio's primary emphasis will be in
mortgage-backed securities issued by governmental and government-related
organizations such as the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Association ("FHLMC"). However, the Fixed Income Portfolio may invest
without limit in mortgage-backed securities of private issuers when the Fixed
Income Sub-Adviser determines that the quality of the investment, the quality
of the issuer, and market conditions warrant such investments. Mortgage-
backed securities issued by private issuers will be rated investment grade by
Moody's or S&P or, if unrated, deemed by the Fixed Income Sub-Adviser to be of
comparable quality.
A mortgage-backed bond is a collateralized debt security issued by a thrift
or financial institution. The bondholder has a first priority perfected
security interest in collateral consisting usually of agency mortgage pass-
through securities, although other assets including U.S. Treasury securities
(including zero coupon Treasury bonds), agency securities, cash equivalent
securities, whole loans and corporate bonds may qualify. The amount of
collateral must be continuously maintained at levels from 115% to 150% of the
principal amount of the bonds issued, depending on the specific issue
structure and collateral type. For a complete discussion of mortgage-backed
securities, see "Additional Risk Factors and Policies -- Mortgage-Related
Securities."
A portion of the Fixed Income Portfolio's assets may be invested in bonds
and other fixed income securities denominated in foreign currencies if, in the
opinion of the Fixed Income Sub-Adviser, the combination of current yield and
currency value offer attractive expected returns. These holdings may be in as
few as one foreign currency bond market (such as the United Kingdom gilt
market), or may be spread across several foreign bond markets. The Fixed
Income Portfolio may also purchase securities of developing countries;
however, the Portfolio does not intend to invest in the securities of Eastern
European countries. When the total return opportunities in a foreign bond
market appear attractive in local currency terms, but where, in the Fixed
Income Sub-Adviser's judgment, unacceptable currency risk exists, currency
futures, forwards and options and swaps may be used to hedge the currency
risk. See "Additional Risk Factors and Policies -- Foreign Securities" below
and the Statement of Additional Information.
The Fixed Income Portfolio may invest in Eurodollar bank obligations and
Yankee bank obligations. See "Additional Risk Factors and Policies --
Eurodollar and Yankee Bank Obligations" below. The Fixed Income Portfolio may
also invest in Brady Bonds, which are issued as a result of a restructuring of
a country's debt obligations to commercial banks under the "Brady Plan." See
"Additional Risk Factors and Policies -- Brady Bonds" below. The Portfolio may
also invest in the following instruments on a temporary basis when economic or
market conditions are such that the Fixed Income Sub-Adviser deems a temporary
defensive position to be appropriate: time deposits, certificates of deposit
and bankers' acceptances issued by a commercial bank or savings and loan
association; commercial paper rated at the time of purchase by one or more
NRSRO in one of the two highest categories or, if not rated, issued by a
corporation having an outstanding unsecured debt issue rated high-grade by a
NRSRO; short-term corporate obligations rated high-grade by a NRSRO; U.S.
Government obligations; Government agency securities issued or guaranteed by
U.S. Government-sponsored instrumentalities and federal agencies; and
repurchase agreements collateralized by the securities listed above. The Fixed
Income Portfolio may also purchase securities on a when-issued basis, lend its
securities to brokers, dealers, and other financial institutions to earn
income and borrow money for temporary or emergency purposes.
NEW YORK TAX-FREE BOND FUND. The Adviser seeks to achieve the investment
objective of the New York Tax-Free Bond Fund by investing the assets of the
Fund primarily in municipal bonds and notes and other debt obligations issued
by or on behalf of the State of New York, other states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is exempt
from regular federal income taxes. (Such obligations, whether or not the
interest thereon is subject to the federal alternative minimum tax, are
referred to herein as "Municipal Obligations.") The Adviser invests on behalf
of the New York Tax-Free Bond Fund in certain Municipal Obligations of the
State of New York and its authorities, agencies, instrumentalities and
political subdivisions, and of Puerto Rico, other U.S. territories and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which is exempt from regular federal, New York State and New York
City personal income taxes ("New York Municipal Obligations"). In determining
the tax status of interest on Municipal Obligations and New York Municipal
Obligations, the Adviser relies on opinions of bond counsel who may be counsel
to the issuer of those obligations.
Although under normal circumstances, the Adviser attempts to invest 100%,
and does invest at least 65%, of the New York Tax-Free Bond Fund's assets in
New York Municipal Obligations, market conditions may from time to time limit
the availability of such obligations. To the extent that acceptable New York
Municipal Obligations are not available for investment, the Adviser may
purchase on behalf of the New York Tax-Free Bond Fund Municipal Obligations
issued by other states, their authorities, agencies, instrumentalities and
political subdivisions, the interest income on which is exempt from regular
federal income tax but is subject to New York State and New York City personal
income taxes. As a fundamental policy the Adviser will invest at least 80% of
the New York Tax-Free Bond Fund's net assets in tax exempt obligations. As a
temporary defensive measure, the Adviser may invest up to 20% of the New York
Tax-Free Bond Fund's total assets in obligations, the interest income on which
is subject to regular federal, New York State and New York City personal
income taxes or the federal alternative minimum tax. Also, as a temporary
defensive measure during times of adverse market conditions, assets of the New
York Tax-Free Bond Fund may be held in cash or invested in the short-term
obligations described below, the interest income on which is taxable to
shareholders as ordinary income for federal and New York State and New York
City personal income tax purposes.
All of the investments of the New York Tax-Free Bond Fund are made in:
(1) Municipal bonds that at the date of purchase are rated Aaa, Aa, A or
Baa by Moody's, AAA, AA, A or BBB by S&P's or AAA, AA, A or BBB by Fitch or,
if not rated by any of these rating agencies, are of comparable quality as
determined by the Adviser;
(2) Municipal notes that at the date of purchase are rated MIG
1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by S&P or
F-1+, F-1 or F-2 by Fitch or, if not rated by any of these rating agencies,
are of comparable quality as determined by the Adviser;
(3) Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; and
(4) Commercial paper that at the date of purchase is rated Prime-1 or
Prime-2 by Moody's, A-1+, A-1 or A-2 by S&P or F-1+, F-1 or F-2 by Fitch or,
if not rated by any of these rating agencies, is of comparable quality as
determined by the Adviser, obligations (including certificates of deposit,
bankers' acceptances and repurchase agreements) of banks with at least $1
billion of assets, and cash.
Municipal bonds rated Baa by Moody's or BBB by S&P or Fitch may have some
speculative elements. In evaluating the creditworthiness of an issue, whether
rated or unrated, the Adviser takes into consideration, among other factors,
the issuer's financial resources, its sensitivity to economic conditions and
trends, the operating history of and the community support for the facility
financed by the issue, the quality of the issuer's management, and legal and
regulatory matters. For an explanation of the ratings of Municipal Obligations
by Moody's, S&P and Fitch, see Appendix A. For a comparison of yields on such
Municipal Obligations and taxable securities, see the Taxable Equivalent Yield
Tables in Appendix B. For a general discussion of Municipal Obligations and
the risks associated with an investment therein, see Appendix A to the
Statement of Additional Information.
The maximum maturity of any debt security held for the New York Tax-Free
Bond Fund is 35 years.
Although higher quality Municipal Obligations may produce lower yields, they
generally are easier to sell or trade than lower quality Municipal
Obligations. To protect the value of its shareholders' investment under
adverse market conditions, the Adviser from time to time may deem it prudent
to purchase higher quality Municipal Obligations or taxable obligations for
the New York Tax-Free Bond Fund, with a resultant decrease in yield or
increase in the proportion of taxable income.
The net asset value of the New York Tax-Free Bond Fund's shares changes as
interest rates fluctuate. When interest rates decline, the value of the New
York Tax-Free Bond Fund's portfolio can be expected to rise. Conversely, when
interest rates rise, the value of the Fund's portfolio can be expected to
decline. Such changes in the value of the New York Tax-Free Bond Fund's
portfolio are reflected in the net asset value of shares of the New York Tax-
Free Bond Fund but do not affect the income received by the Fund from its
portfolio securities. Municipal Obligations with longer maturities, such as
those in which the New York Tax-Free Bond Fund is invested, generally produce
higher yields and are subject to greater market fluctuation as a result of
changes in interest rates than such securities with shorter maturities.
Dividends distributed to shareholders rise or fall in direct relation to the
New York Tax-Free Bond Fund's net income. Since available yields vary, no
specific level of income can be assured.
As a non-diversified investment company, the Trust is not subject to any
statutory restriction under the 1940 Act with respect to limiting the
investment of the New York Tax-Free Bond Fund's assets in one or relatively
few issuers. Since the Adviser may invest a relatively high percentage of the
New York Tax-Free Bond Fund's assets in the obligations of a limited number of
issuers, the value of shares of the Fund may be more susceptible to any single
economic, political or regulatory occurrence than the value of shares of a
diversified investment company would be.
The Adviser may invest the assets of the New York Tax-Free Bond Fund in a
relatively high percentage of Municipal Obligations to be paid from revenue
streams of similar types of projects. This may make the New York Tax-Free Bond
Fund more susceptible to any single economic, political or regulatory
occurrence, particularly since most or all such issuers would likely be
located in New York State. As the similarity in issuers increases, the
potential for fluctuation of the net asset value of the New York Tax-Free Bond
Fund's shares also increases. The Adviser may invest more than 25% of the
assets of the New York Tax-Free Bond Fund in industrial revenue bonds (i.e.,
bonds issued by various state and local agencies to finance various industrial
projects). Certain investors in the New York Tax-Free Bond Fund may be
required to pay a federal alternative minimum tax on Fund dividends
attributable to interest on certain industrial revenue bonds. The Adviser also
may invest more than 25% of the assets of the Fund in revenue bonds issued for
housing, electric utilities and hospitals (subject to the restriction that it
may not invest more than 25% of the Fund's assets in any one such industry) at
times when the relative value of issues of such a type is considered by the
Adviser to be more favorable than that of other available types of issues.
Therefore, investors should also be aware of the risks which these investments
may entail.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds
of such an issue, there is a risk that the proceeds of the issue will be in
excess of demand, which would result in early retirement of the bonds by the
issuer. Moreover, such housing revenue bonds depend for their repayment upon
the cash flow from the underlying mortgages, which cannot be precisely
predicted when the bonds are issued. Any difference in the actual cash flow
from such mortgages from the assumed cash flow could have an adverse impact
upon the ability of the issuer to make scheduled payments of principal and
interest on the bonds, or could result in early retirement of the bonds.
Additionally, such bonds depend in part for scheduled payments of principal
and interest upon reserve funds established from the proceeds of the bonds,
assuming certain rates of return on investment of such reserve funds. If the
assumed rates of return are not realized because of changes in interest rate
levels or for other reasons, the actual cash flow for scheduled payments of
principal and interest on the bonds may be adversely affected.
Electric utilities face problems in financing large and lengthy construction
programs, such as cost increases and delay occasioned by regulatory and
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining sufficient rate increases, the effect of
energy conservation and difficulty of the capital markets to absorb utility
debt.
Hospital bond ratings are often based on feasibility studies containing
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by demand
for hospital services, the ability of the hospital to provide the services
required, management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding levels, possible federal or state legislation limiting the
rates of increase of hospital charges, and weakened state finances which limit
and/or delay aid payments.
EQUITY FUND. The Equity Fund will normally invest at least 65% of its total
assets in equity securities of seasoned companies in sound financial condition
with large or intermediate capitalization which are expected to show above-
average price appreciation. The Equity Fund may invest in a broad range of
equity securities, including common and preferred stocks, debt securities
convertible into or exchangeable for common stock and securities such as
warrants or rights that are convertible into common stock.
The Manager will allocate the Equity Fund's assets between Alliance and
Brinson ("the Equity Sub-Advisers"). While the Manager maintains complete
discretion regarding the allocation of the Equity Fund's assets, the Manager
anticipates that it typically will allocate the Fund's assets evenly between
the Equity Sub-Advisers, each of which pursues the Fund's investment objective
in the manner described below.
Alliance. Alliance seeks the Equity Fund's investment objective by pursuing
a "growth" style of investing in marketable equity securities, primarily of
U.S. companies. However, the Equity Fund may purchase foreign, as well as
domestic, equity securities. Alliance normally will invest substantially all
of the Equity Fund's assets allocated to it in common stocks which Alliance
believes will appreciate in value.
Alliance generally seeks to invest the Equity Fund's assets in financially
secure firms with established operating histories that are proven leaders in
their industry or market sector. Such companies may demonstrate
characteristics such as participation in expanding markets, increasing unit
sales volume, growth in revenues and earnings per share, and increasing return
on investments. However, Alliance may invest the Equity Fund's assets in
companies that do not demonstrate such characteristics if it expects such
companies to undergo an acceleration in growth of earnings because of special
factors such as new management, new products, changes in consumer demand or
basic changes in the economic environment.
Alliance analyzes each company considered for investment, using internal
fundamental research analysts, to determine its source of earnings,
competitive edge, management strength, and level of industry dominance as
measured by market share. At the same time, Alliance conducts an analysis of
the financial condition of each company and selects those prospects that
demonstrate the greatest potential for above-average capital appreciation and
growth in earnings. Alliance's philosophy is to seek the best available
combination of relative earnings growth and attractive valuation.
Brinson. Brinson seeks the Equity Fund's investment objective by pursuing a
"value" style of investment management. Brinson's approach to investing for
the Equity Fund is to invest in the equity securities of U.S. companies
believed to be undervalued based upon internal research and proprietary
valuation systems. Investment decisions are based on fundamental research,
internally developed valuation systems and seasoned judgment. Brinson's
research focuses on several levels of analysis, first, on understanding wealth
shifts that occur within the equity market, and second, on individual company
research. At the company level, Brinson quantifies expectations of a company's
ability to generate profit and to grow business into the future.
For each stock under analysis, Brinson discounts to the present all of the
future cash flows that it believes will accrue to the Equity Fund from the
investment in order to calculate a present or intrinsic value. This value
estimate generated by Brinson's proprietary valuation model is compared to
observed market price and ranked against other stocks accordingly. The
rankings, in combination with Brinson's investment judgment, determine which
securities are included in the portfolio.
Brinson monitors and assesses the degree to which the portfolio becomes
concentrated in industry or common types of stocks, and adjusts the portfolio
to balance the price/value opportunities with their concentrations. Brinson
imposes limits on the degree of concentration, as the Equity Fund does not
intend to concentrate its investments in a particular industry.
General. The Equity Fund also may (a) invest in options on securities,
securities indices or foreign currencies, (b) invest in futures contracts and
options on futures contracts, (c) enter into forward foreign currency exchange
contracts, (d) invest up to 10% of its net assets (at the time of investment)
in debt and equity securities which are traded in developed foreign countries,
and (e) invest up to 35% in bonds and other debt securities, including lower
rated, high-yield bonds, commonly referred to as "junk bonds." The Equity Fund
does not intend to write covered call options with respect to securities with
an aggregate market value of more than 10% of its total assets at the time an
option is written. The Equity Fund will not invest more than 5% of its net
assets (at the time of investment) in lower rated (BB/Ba or lower), high-yield
bonds. The Equity Fund may retain any bond whose rating drops below investment
grade if it is in the best interest of the Fund's shareholders. Securities
rated BB/Ba by a NRSRO are considered to have speculative characteristics.
The Equity Fund may lend its portfolio securities. These loans may not
exceed 30% of the value of the Fund's total assets.
The Equity Fund will not purchase securities for trading purposes. Pending
investment in equity and debt and also for temporary defensive purposes, the
Fund may invest without limit in short-term debt and other high-quality,
fixed-income securities and cash equivalents, which may include, but are not
limited to: (i) short-term obligations of the U.S. and foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits, certificates of deposit and bankers' acceptances of U.S. and
foreign banks, (iii) high-quality rated commercial paper of U.S. or foreign
issuers, and (iv) repurchase agreements related to the foregoing. The Equity
Fund may invest up to 15% of its net assets in illiquid securities.
INTERNATIONAL EQUITY FUND. The investment characteristics of the
International Equity Fund correspond to those of the International Equity
Portfolio. The International Equity Portfolio will normally invest at least
80% of its total assets in equity securities of foreign corporations,
consisting of common stocks, and other securities with equity characteristics,
including preferred stock, warrants, rights, securities convertible into
common stock ("convertible securities"), trust certificates, limited
partnership interests and equity participations. The common stock in which the
International Equity Portfolio may invest includes the common stock of any
class or series or any similar equity interest, such as trust or limited
partnership interests. These equity investments may or may not pay dividends
and may or may not carry voting rights. The principal investments of the
International Equity Portfolio will be in equity securities of companies
organized and domiciled in developed nations outside the United States or for
which the principal trading market is outside the United States, including
Europe, Canada, Australia and the Far East, although the Portfolio may invest
up to 20% of its assets in equity securities of companies in emerging markets.
See "Additional Risk Factors and Policies -- Foreign Securities -- Emerging
Markets." The International Equity Portfolio intends to have at least three
different countries represented in its portfolio. It is the current intention
of the International Equity Portfolio to invest primarily in companies with
large market capitalizations. The International Equity Portfolio seeks to
outperform the Morgan Stanley Capital International EAFE (Europe, Australasia
and Far East) Index, a capitalization-weighted index containing approximately
1,100 equity securities of companies located outside the United States. The
International Equity Portfolio invests in securities listed on foreign or
domestic securities exchanges and securities traded in foreign or domestic
over-the-counter markets, and may invest in certain restricted or unlisted
securities.
Under exceptional conditions abroad or when, in the opinion of CGTC (the
"International Equity Sub-Adviser"), economic or market conditions warrant,
the International Equity Portfolio may temporarily invest part or all of its
assets in fixed income securities denominated in foreign currencies,
obligations of domestic or foreign governments and their political
subdivisions ("Government Securities"), and nonconvertible preferred stock, or
hold its assets in cash or equivalents. Debt securities purchased by the
International Equity Portfolio will be limited to those rated, at the time of
investment, in the four highest rating categories by a NRSRO or, if unrated,
determined by the International Equity Sub-Adviser to be of comparable
quality. Securities rated by a NRSRO in the fourth highest rating category are
considered to have some speculative characteristics. When the total return
opportunities in a foreign bond market appear attractive in local currency
terms, but, in the International Equity Sub-Adviser's judgment, unacceptable
currency risk exists, currency futures, forwards and options may be used to
hedge the currency risk. See "Additional Risk Factors and Policies: Forward
Foreign Currency Contracts and Options on Foreign Currencies."
As described under "Management of the Trust, Advisor Trust and the Portfolio
Trust -- Sub-Advisers," CGTC, the International Equity Portfolio's Sub-
Adviser, uses a system of multiple portfolio managers pursuant to which the
Portfolio is divided into segments which are assigned to individual portfolio
managers. Within investment guidelines, each portfolio manager makes
individual decisions as to company, country, industry, timing and percentage
based on extensive field research and direct company contact.
Because of the risks associated with common stocks and other equity
investments, the International Equity Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors with a means of
speculating on short-term stock market movements. The International Equity
Sub-Adviser seeks to reduce these risks by diversifying the portfolio as well
as by monitoring broad economic trends and corporate and legislative
developments.
SMALL CAP EQUITY FUND. The investment characteristics of the Small Cap
Equity Fund correspond to those of the Small Cap Equity Portfolio. The Small
Cap Equity Portfolio seeks to achieve its objective by investing, under normal
market conditions, at least 80% of its assets in equity securities (consisting
of common stocks, preferred stocks, and preference stocks; securities such as
bonds, warrants or rights that are convertible into stocks; and depositary
receipts for those securities) of emerging growth companies. Emerging growth
companies generally would have small (under $1 billion) market capitalizations
and would have annual gross revenues ranging from $10 million to $1 billion,
would be expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and would have
the products, management and market opportunities which are usually necessary
to become more widely recognized. However, the Small Cap Equity Portfolio may
also invest in more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in consumer demand or basic changes in the
economic environment. The Small Cap Equity Portfolio may invest up to 20% (and
generally expects to invest between 5% and 10%) of its assets in foreign
securities (excluding ADRs) (see "Additional Risk Factors and Policies --
Foreign Securities" below).
Although the Small Cap Equity Portfolio will invest primarily in common
stocks, the Portfolio may, to a limited extent, seek appreciation in other
types of securities such as foreign or convertible securities and warrants
when relative values make such purchases appear attractive either as
individual issues or as types of securities in certain economic environments.
In addition to the above the Small Cap Equity Portfolio may engage in
certain investment techniques as described below under the caption "Additional
Risk Factors and Policies." The Small Cap Equity Portfolio's investments are
subject to certain risks, as described in the above-referenced sections of
this Prospectus and the Statement of Additional Information and as described
below under the caption "Additional Risk Factors and Policies."
When MFSI (the "Small Cap Equity Sub-Adviser") believes that investing for
temporary defensive reasons is appropriate, such as during times of
international, political or economic uncertainty or turmoil, or in order to
meet anticipated redemption requests, part or all of the Small Cap Equity
Portfolio's assets may be invested in cash (including foreign currency) or
cash equivalent short-term obligations including, but not limited to,
certificates of deposit, commercial paper, short-term notes and U.S.
Government Securities that the Small Cap Equity Portfolio may invest in
includes Government securities: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance, including:
U.S. Treasury bills (maturities of one year or less); U.S. Treasury notes
(maturities of one to ten years); and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full
faith and credit of the U.S. Government; and (2) obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities, some
of which are backed by the full faith and credit of the U.S. Treasury, e.g.,
direct pass-through certificates of the Government National Mortgage
Association; some of which are supported by the right of the issuer to borrow
from the U.S. Government, e.g., obligations of Federal Home Loan Banks; and
some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association.
ADDITIONAL RISK FACTORS AND POLICIES
DERIVATIVES
The Fixed Income Portfolio and International Equity Portfolio may invest in
various instruments that are commonly known as derivatives. Generally, a
derivative is a financial arrangement the value of which is based on, or
"derived" from, a traditional security, asset, or market index. A mutual fund,
of course, derives its value from the value of the investments it holds and so
might even be called a "derivative." Some "derivatives" such as mortgage-
related and other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
The Fixed Income and International Equity Portfolios may use derivatives for
hedging purposes, cash management purposes, as a substitute for investing
directly in fixed income instruments, and to enhance return when their Sub-
Advisers believe the investment will assist the Portfolios in achieving their
investment objectives. A description of the derivatives that the Fixed Income
and International Equity Portfolios may use and some of their associated risks
follows.
OPTIONS AND FUTURES TRANSACTIONS
The Fixed Income Portfolio, Small Cap Equity Portfolio and Equity Fund may
invest in financial futures contracts, options on futures contracts and
options on securities (collectively, "futures and options"). In addition, the
Fixed Income Portfolio, International Equity Portfolio, Small Cap Equity
Portfolio and Equity Fund may invest in foreign currency futures contracts and
options on foreign currencies and foreign currency futures. The International
Equity Portfolio may only do so for hedging purposes. The Small Cap Equity
Portfolio may also enter into contracts based on indexes of securities and
write covered call and put options and purchase call and put options on
domestic or foreign stock indices. The New York Tax-Free Bond Fund may enter
into transactions in futures contracts on any fixed income securities and
indexes of municipal securities. The New York Tax-Free Bond Fund may only do
so for hedging purposes and not for speculation. Futures contracts provide for
the sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and price. An option is a legal
contract that gives the holder the right to buy or sell a specified amount of
the underlying security, currency or futures contract at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy and a put option conveys the right to sell a specified quantity
of the underlying instrument.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the return of the Portfolios and the Funds. While the
use of these instruments by the Portfolios and the Funds may reduce certain
risks associated with owning its portfolio securities, these techniques
themselves entail certain other risks. If the Sub-Advisers apply a strategy at
an inappropriate time or judge market conditions or trends incorrectly,
options and futures strategies may lower a Portfolio's or Fund's return.
Certain strategies limit the potential of the Portfolios or the Funds to
realize gains as well as limit its exposure to losses. The Portfolios and the
Funds could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments. There can be no
assurance that a liquid market will exist at a time when the Portfolios or
Funds seek to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there
is no assurance that an active secondary market will develop or continue to
exist. Lack of a liquid market for any reason may prevent the Portfolios and
the Funds from liquidating an unfavorable position and the Portfolios or the
Funds would remain obligated to meet margin requirements until the position is
closed. In addition, the Portfolios or the Funds will incur transaction costs,
including trading commissions and options premiums, in connection with its
futures and options transactions, and these transactions could significantly
increase a Portfolio's or Fund's turnover rate.
The Fixed Income Portfolio will not enter into futures contracts or options
thereon to the extent that its outstanding obligations to purchase securities
under these contracts in combination with its outstanding obligations with
respect to options transactions would exceed 35% of its total assets. The
Fixed Income Portfolio will use financial futures contracts and related
options only for "bona fide hedging" purposes, as such term is defined in
applicable regulations of the Commodity Futures Trading Commission, or, with
respect to positions in financial futures and related options that do not
qualify as "bona fide hedging" positions, will enter such non-hedging
positions only to the extent that assets committed to initial margin deposits
on such instruments, plus premiums paid for open futures options positions,
less the amount by which any such positions are "in-the-money," do not exceed
5% of the Fixed Income Portfolio's net assets. The Portfolios and the Funds
will segregate assets or "cover" their positions consistent with requirements
under the 1940 Act. The Fixed Income Portfolio may also purchase and write put
and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. The
Small Cap Equity Portfolio may enter into futures contracts for hedging
purposes, in order to protect the Portfolio's current or intended investments
from the effects of changes in interest or exchange rates and for non-hedging
purposes, to the extent permitted by applicable law. However, the Small Cap
Equity Portfolio will not enter into any futures contracts if immediately
thereafter the value of securities and other obligations underlying all such
futures contracts would exceed 50% of the value of its total assets. The Small
Cap Equity Portfolio may also purchase and write options on futures contracts
for the purpose of protecting against declines in the value of portfolio
securities or against increases in the cost of securities to be acquired, or
for non-hedging purposes. The Small Cap Equity Portfolio may write options on
domestic or foreign stock indices for the purpose of increasing its current
income and/or to protect its portfolio against declines in the value of
securities it owns or increases in the value of securities to be acquired.
The Equity Fund may write covered call options (which are considered
derivatives) which are traded on a national securities exchange with respect
to securities in the portfolio in an attempt to increase its income and to
provide greater flexibility in the disposition of its portfolio securities.
The Small Cap Equity Portfolio may write covered put and call options on
securities and purchase put and call options on securities that are traded on
foreign or U.S. securities exchanges and over the counter. The Small Cap
Equity Portfolio will write options on securities for the purpose of
increasing its return and/or protecting the value of its portfolio. A "call
option" is a contract sold for a price (the "premium") giving its holder the
right to buy a specific number of shares of stock at a specific price prior to
a specified date. A "covered call option" is a call option issued on
securities already owned by the writer of the call option for delivery to the
holder upon the exercise of the option. During the period of the option, the
option writer forgoes the opportunity to profit from any increase in the
market price of the underlying security above the exercise price of the option
(to the extent that the increase exceeds the net premium). The Equity Fund
also may enter into "closing purchase transactions" in order to terminate its
obligation to deliver the underlying security (this may result in a short-term
gain or loss). A closing purchase transaction is the purchase of a call option
(at a cost which may be more or less than the premium received for writing the
original call option) on the same security, with the same exercise price and
call period as the option previously written. If the Equity Fund is unable to
enter into a closing purchase transaction, it may be required to hold a
security that it might otherwise have sold to protect against depreciation.
The Equity Fund does not intend to write covered call options with respect to
securities with an aggregate market value of more than 10% of its total assets
at the time an option is written. This percentage limitation will not be
increased without prior disclosure in the current Prospectus.
The Small Cap Equity Portfolio may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("Forward Contracts") are
intended to minimize the risk of loss to the Fixed Income, International
Equity and Small Cap Equity Portfolios and the Equity Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies.
The Fixed Income Portfolio and International Equity Portfolio may not enter
into such contracts for speculative purposes. The Fixed Income Portfolio has
no specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except
that the Portfolio will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management. The
Small Cap Equity Portfolio may enter into such contracts for hedging purposes
or for non-hedging purposes, to the extent permitted by applicable law. By
entering into transactions in Forward Contracts, however, the Portfolios may
be required to forego the benefits of advantageous changes in exchange rates
and, in the case of Forward Contracts entered into for non-hedging purposes,
the Portfolios may sustain losses which will reduce its gross income. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments and their use involves certain risks beyond
those associated with transactions in Futures Contracts or options traded on
exchanges.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security.
The Fixed Income and International Equity Portfolios may also purchase and
write put and call options on foreign currencies for the purpose of protecting
against declines in the dollar value of foreign portfolio securities and
against increases in the U.S. dollar cost of foreign securities to be
acquired.
The Small Cap Equity Portfolio may also enter into a Forward Contract on one
currency in order to hedge against risk of loss arising from fluctuations in
the value of a second currency (referred to as a "cross hedge") if, in the
judgment of the Small Cap Equity Sub-Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies.
The Fixed Income Portfolio may also combine forward contracts with
investments in securities denominated in other currencies in order to achieve
desired credit and currency exposures. Such combinations are generally
referred to as synthetic securities. For example, in lieu of purchasing a
foreign bond, the Fixed Income Portfolio may purchase a U.S. dollar-
denominated security and at the same time enter into a forward contract to
exchange U.S. dollars for the contract's underlying currency at a future date.
By matching the amount of U.S. dollars to be exchanged with the anticipated
value of the U.S. dollar-denominated security, the Fixed Income Portfolio may
be able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S.
dollar-denominated security.
There is a risk in adopting a synthetic investment position to the extent
that the value of a security denominated in U.S. dollars or other foreign
currency is not exactly matched with the Fixed Income Portfolio's obligation
under the forward contract. On the date of maturity the Fixed Income Portfolio
may be exposed to some risk of loss from fluctuations in that currency.
Although the Fixed Income Sub-Adviser will attempt to hold such mismatching to
a minimum, there can be no assurance that the Sub-Adviser will be able to do
so. When the Fixed Income Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold high-grade, liquid securities or cash in a segregated account with a
daily value at least equal to its obligation under the forward contract.
FOREIGN SECURITIES
The Equity Fund, Fixed Income Portfolio, International Equity Portfolio and
Small Cap Equity Portfolio may invest in foreign securities. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those
applicable to domestic issuers. Investments in foreign securities also involve
the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, other taxes imposed by
the foreign country on the Fund's earnings, assets, or transactions,
limitation on the removal of cash or other assets of the Portfolios, political
or financial instability, or diplomatic and other developments which could
affect such investments. Further, economies of particular countries or areas
of the world may differ favorably or unfavorably from the economy of the
United States. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Furthermore,
dividends and interest payments from foreign securities may be withheld at the
source. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial
arrangements, and transaction costs of foreign currency conversions.
The Small Cap Equity Portfolio may invest in securities of foreign growth
companies, whose rates of earnings growth are expected to accelerate because
of special factors, such as rejuvenated management, new products, changes in
consumer demand, or basic changes in the economic environment or which
otherwise represent opportunities for long-term growth. The Small Cap Equity
Portfolio may also invest in securities of issuers located in countries with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid economic
growth ("emerging markets").
Emerging Markets. Investing in emerging market countries presents greater
risk than investing in foreign issuers in general. A number of emerging
markets restrict foreign investment in stocks. Repatriation of investment
income, capital, and the proceeds of sales by foreign investors may require
governmental registration and/or approval in some emerging market countries. A
number of the currencies of developing countries have experienced significant
declines against the U.S. dollar in recent years, and devaluation may occur
subsequent to investments in these currencies by the Portfolio. Inflation and
rapid fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of certain emerging
market countries. Many of the emerging securities markets are relatively
small, have low trading volumes, suffer periods of relative illiquidity, and
are characterized by significant price volatility. There is the risk that a
future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, or creation of government monopolies, any of which could have
a detrimental effect on the Portfolio's investments.
Investing in formerly communist East European countries involves the
additional risk that the government or other executive or legislative bodies
may decide not to continue to support the economic reform programs implemented
since the fall of communism and could follow radically different political
and/or economic policies to the detriment of investors, including non-market
oriented policies such as the support of certain industries at the expense of
other sectors or a return to a completely centrally planned economy. The
International Equity Portfolio does not currently intend to invest a
significant portion of its assets in formerly communist East European
countries.
With respect to the International Equity Portfolio, "emerging markets"
include any country which in the opinion of the International Equity Sub-
Adviser is generally considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the World Bank) and the
International Monetary Fund. Currently, these countries generally include
every country in the world except Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland,
United Kingdom and United States. The International Equity Portfolio may
invest up to 20% of its assets in the equity securities of companies based in
emerging markets.
With respect to the Small-Cap Equity Portfolio, "emerging markets" include
any country: (i) having an "emerging stock market" as defined by the
International Finance Corporation; (ii) with low- to middle-income economies
according to the International Bank for Reconstruction and Development (the
"World Bank"); (iii) listed in World Bank publications as developing; or (iv)
determined by the Adviser to be an emerging market as defined above.
With respect to the International Equity Portfolio, a company in an emerging
market is one that: (i) is domiciled and has its principal place of business
in an emerging market or (ii) (alone or on a consolidated basis) derives or
expects to derive at least 50% of its total revenue from either goods
produced, sales made or services performed in emerging markets.
With respect to the Small Cap Equity Portfolio, the company's principal
activities are deemed to be located in a particular country if: (a) the
company is organized under the laws of, and maintains a principal office in
that country; (b) the company has its principal securities trading market in
that country, (c) the company derives 50% or more of its total revenues from
goods sold or services performed in that country; or (d) the company has 50%
or more of its assets in that country.
Sovereign and Supranational Debt Obligations. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the
governmental authorities that control the repayment of the debt may be unable
or unwilling to prepay principal and interest when due, and may require
renegotiation or rescheduling of debt payments. In addition, prospects for
repayment of principal and interest may depend on political as well as
economic factors.
DEPOSITARY RECEIPTS
The International Equity Portfolio may invest in American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs"), and International Depositary Receipts ("IDRs"), or other
similar securities convertible into securities of foreign issuers. The Small
Cap Equity Portfolio may invest in ADRs. ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company evidencing the
deposit with such bank or company of a security of a foreign issuer, and are
publicly traded on exchanges or over-the-counter in the United States. In
sponsored programs, an issuer has made arrangements to have its securities
trade in the form of ADRs. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from
an issuer that has participated in the creation of a sponsored program.
EDRs, which are sometimes referred to as Continental Depositary Receipts,
are receipts issued in Europe typically by foreign bank and trust companies
that evidence ownership of either foreign or domestic underlying securities.
IDRs are receipts typically issued by a European bank or trust company
evidencing ownership of the underlying foreign securities. GDRs are receipts
issued by either a U.S. or non-U.S. banking institution evidencing ownership
of the underlying foreign securities.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
securities may be regarded as predominately speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis
of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Fixed Income Portfolio to achieve its investment objective may, to the
extent of its investments in high yield securities, be more dependent upon
such creditworthiness analysis than would be the case if the Fixed Income
Portfolio were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of a highly leveraged company
to make principal and interest payments on its debt securities. If the issuer
of high yield securities defaults, the Fixed Income Portfolio may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero coupon or payment-in-kind securities, the market prices of
such securities are affected to a greater extent by interest rate changes and,
therefore, tend to be more volatile than securities which pay interest
periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations
in the daily net asset value of the Fixed Income Portfolio. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield securities, especially in a
thinly traded market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
rated. The Fixed Income Sub-Adviser does not rely solely on credit ratings
when selecting securities for the Fixed Income Portfolio, and develops its own
independent analysis of issuer credit quality. If a credit rating agency
changes the rating of a security held by the Fixed Income Portfolio, the
Portfolio may retain the security if the Fixed Income Sub-Adviser deems it in
the best interest of investors.
FIXED INCOME SECURITIES
To the extent a Fund or Portfolio invests in fixed income securities, the
net asset value of the Fund or Portfolio may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed
income securities can be expected to rise. Conversely, when interest rates
rise, the value of fixed income securities can be expected to decline. The
Small Cap Equity Portfolio has no restrictions with respect to the maturities
or duration of the fixed income securities it holds. A Fund's or Portfolio's
investments in fixed income securities with longer terms to maturity or
greater duration are subject to greater volatility than a Fund's or
Portfolio's shorter-term obligations. Fixed income securities in which the
Small Cap Equity Portfolio may invest include bonds (including zero coupon
bonds, deferred interest bonds and payable in-kind bonds), debentures,
mortgage securities, notes, bills, commercial paper, obligations issued or
guaranteed by a government or any of its political subdivisions, agencies or
instrumentalities, and certificates of deposit, as well as debt obligations
which may have a call on common stock by means of a conversion privilege or
attached warrants.
ZERO COUPON OBLIGATIONS
The Fixed Income Portfolio may invest in zero coupon obligations, which are
fixed-income securities that do not make regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their face
value. The Fixed Income Portfolio accrues income on these investments for tax
and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fixed Income
Portfolio's distribution obligations, in which case the Portfolio will forego
the purchase of additional income-producing assets with these funds. The
difference between a zero coupon obligation's issue or purchase price and its
face value represents the imputed interest an investor will earn if the
obligation is held until maturity. Zero coupon obligations may offer investors
the opportunity to earn higher yields that those available on ordinary
interest-paying obligations of similar credit quality and maturity. However,
zero coupon obligation prices may also exhibit greater price volatility than
ordinary fixed-income securities because of the manner in which their
principal and interest are returned to the investor.
CONVERTIBLE SECURITIES
Although the Equity Fund's and International Equity Portfolio's equity
investments consist primarily of common and preferred stocks, the Fund and the
Portfolio may buy securities convertible into common stock if, for example,
the Sub-Advisers believe that a company's convertible securities are
undervalued in the market. Convertible securities eligible for purchase by the
International Equity Portfolio and the Equity Fund consist of convertible
bonds, convertible preferred stocks, warrants and rights. See "Additional Risk
Factors and Policies -- Warrants" below and the Statement of Additional
Information for a discussion of these instruments.
WARRANTS
The International Equity Portfolio and the Equity Fund each may invest up to
10% of their net assets in warrants, except that this limitation does not
apply to warrants acquired in units or attached to securities. A warrant is an
instrument issued by a corporation which gives the holder the right to
subscribe to a specific amount of the corporation's capital stock at a set
price for a specified period of time. Warrants do not represent ownership of
the securities, but only the right to buy the securities. The prices of
warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. With respect to the International Equity Portfolio,
warrant positions will not be used to increase the leverage of the Portfolio.
Consequently, warrant positions are generally accompanied by cash positions
equivalent to the required exercise amount.
MORTGAGE-RELATED SECURITIES
Mortgage-Backed Securities. The Fixed Income Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs. Interest and principal payments
on the mortgages underlying mortgage-backed securities are passed through to
the holders of the mortgage-backed securities. Mortgage-backed securities
currently offer yields higher than those available from many other types of
fixed-income securities, but because of their prepayment aspects, their price
volatility and yield characteristics will change based on changes in
prepayment rates. Generally, prepayment rates increase if interest rates fall
and decrease if interest rates rise. For many types of mortgage-backed
securities, this can result in unfavorable changes in price and yield
characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the Fixed
Income Portfolio's mortgage-backed securities may have less potential for
capital appreciation during periods of declining interest rates than other
fixed income securities of comparable maturities, although such obligations
may have a comparable risk of decline in market value during periods of rising
interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of
prepayments may significantly lengthen the effective durations of such
securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting
the investment's average life and perhaps its yield. Whether or not a mortgage
loan is prepaid is almost entirely controlled by the borrower. Borrowers are
most likely to exercise prepayment options at the time when it is least
advantageous to investors, generally prepaying mortgages as interest rates
fall, and slowing payments as interest rates rise. Besides the effect of
prevailing interest rates, the rate of prepayment and refinancing of mortgages
may also be affected by home value appreciation, ease of the refinancing
process and local economic conditions.
Market risk reflects the risk that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and a fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease
the price at which they may be sold.
Credit risk reflects the risk that the Fixed Income Portfolio may not
receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-related
entities are guaranteed as to the payment of principal and interest, but are
not backed by the full faith and credit of the U.S. government. The
performance of private label mortgage-backed securities, issued by private
institutions, is based on the financial health of those institutions.
For further information, see the Statement of Additional Information.
Stripped Mortgage-Backed Securities. The Fixed Income Portfolio may invest
in Stripped Mortgage-Backed Securities ("SMBS") which are derivative multi-
class mortgage securities. SMBS may be issued by agencies or instrumentalities
of the U.S. Government and private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose entities of the foregoing. The
Fixed Income Portfolio's investments in SMBS will be limited to 10% of net
assets.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some
cases, one class will receive all of the interest (the interest-only or IO
class), while the other class will receive all of the principal (the
principal-only or PO class). The cash flows and yields on IO and PO classes
can be extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid
or slow rate of principal payments may have a material adverse effect on the
yield to maturity of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, an
investor may fail to recoup fully its initial investment in an IO class of a
stripped mortgage-backed security. Conversely, if the underlying mortgage
assets experience slower than anticipated prepayments of principal, the yield
on a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, certain of these securities
may be deemed illiquid and subject to the Fixed Income Portfolio's limitations
on investment in illiquid securities. For further information on these
securities, see the Statement of Additional Information.
Other Asset-Backed Securities. The Fixed Income Portfolio may invest in
securities representing interests in other types of financial assets, such as
credit card receivables, automobile loan and lease receivables, aircraft lease
receivables, home equity loan receivables, manufactured housing receivables,
equipment loan and lease receivables, and student loan receivables. Such
securities are subject to many of the same risks as are mortgage-backed
securities, including prepayment risks and risks of foreclosure. They may or
may not be secured by the receivables themselves or may be unsecured
obligations of their issuers. For further information on these securities, see
the Statement of Additional Information.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Fixed Income Portfolio may invest in Eurodollar bank obligations and
Yankee bank obligations. Eurodollar bank obligations are dollar-denominated
certificates of deposit and time deposits issued outside the U.S. capital
markets by foreign branches of U.S. banks and by foreign banks. Yankee bank
obligations are dollar-denominated obligations issued in the U.S. capital
markets by foreign banks. Eurodollar and Yankee obligations are subject to the
same risks that pertain to domestic issues, notably credit risk, market risk
and liquidity risk. Additionally, Eurodollar (and to a limited extent Yankee
bank) obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from freely flowing across its borders. Other risks include: adverse
political and economic developments, the extent and quality of government
regulation of financial markets and institutions, the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign
issuers.
REPURCHASE AGREEMENTS
The Fixed Income Portfolio, New York Tax-Free Bond Fund, Equity Fund,
International Equity Portfolio and Small Cap Equity Portfolio may invest in
repurchase agreements. The Fixed Income Portfolio may invest in repurchase
agreements collateralized by U.S. Government securities, certificates of
deposit and certain bankers' acceptances. With respect to the New York Tax-
Free Bond Fund, Equity Fund and International Equity Portfolio, the Adviser is
authorized to enter into repurchase agreements on behalf of the Fund only with
member banks of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York). The Equity Fund may also enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange, recognized domestic or foreign
securities dealers or institutions which an Equity Sub-Adviser has determined
to be of comparable creditworthiness. The Small Cap Equity Portfolio may enter
into repurchase agreements in order to earn income or available cash or as a
temporary defensive measure. Repurchase agreements are transactions by which a
Portfolio or Fund purchases a security and simultaneously commits to resell
that security to the seller (a bank or securities dealer) at an agreed upon
price on an agreed upon date (usually within seven days of purchase). The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The Advisor or Sub-Advisers will continually monitor the
value of the underlying securities to ensure that their value, including
accrued interest, always equals or exceeds the repurchase price. Repurchase
agreements are considered to be loans collateralized by the underlying
security under the 1940 Act, and therefore will be fully collateralized.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has
declined, the Portfolios or Fund may incur a loss upon disposition of them. If
the seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the Portfolios or Fund may not be able to
substantiate its interest in the underlying securities. While the managements
of the Trust and the Portfolio Trust acknowledge these risks, it is expected
that they can be controlled through stringent security selection criteria and
careful monitoring procedures. As discussed in the Statements of Additional
Information, the Fixed Income, International Equity and Small Cap Equity
Portfolios and the New York Tax-Free Bond and Equity Funds have adopted
certain procedures to minimize the risks of investing in repurchase
agreements.
ILLIQUID INVESTMENTS
The Equity Fund, Fixed Income Portfolio, International Equity Portfolio and
Small Cap Equity Portfolio may invest up to 15% of their net assets in
securities that are illiquid by virtue of the absence of a readily available
market, or because of legal or contractual restrictions on resale. This policy
does not limit the acquisition of securities eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933
or, in the case of the Fixed Income Portfolio only, commercial paper issued
pursuant to Section 4(2) under the Securities Act of 1933 that are determined
to be liquid in accordance with guidelines established by the Portfolio
Trust's Board of Trustees. There may be delays in selling these securities and
sales may be made at less favorable prices. The New York Tax-Free Bond Fund
may invest up to 10% of its net assets in securities which are restricted as
to resale, (other than fixed time deposits and repurchase agreements maturing
in not more than seven days). This policy does not apply to any security if
the holder is permitted to receive payment upon a specified number of days'
notice of the unpaid principal balance plus accrued interest or the investment
by the Trust of all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as the Fund. The
International Equity Portfolio has a separate policy that no more than 10% of
its net assets may be invested in restricted securities which are restricted
as to resale, including Rule 144A and Section 4(2) securities. The Fixed
Income Portfolio has a policy that no more than 25% of its net assets may be
invested in securities which are restricted as to resale, including Rule 144A
and Section 4(2) securities.
Each Sub-Adviser may determine that a particular Rule 144A security is
liquid and thus not subject to the Fixed Income Portfolio's, International
Equity Portfolio's, Small Cap Equity Portfolio's or Equity Fund's limits on
investment in illiquid securities, pursuant to guidelines adopted by the Board
of Trustees. Factors that a Sub-Adviser must consider in determining whether a
particular Rule 144A security is liquid include the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, dealer undertakings to
make a market in the security, and the nature of the security and the nature
of the market for the security (i.e., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Investing in Rule 144A securities could have the effect of increasing the
level of a Portfolio's or Fund's illiquidity to the extent that qualified
institutions might become, for a time, uninterested in purchasing these
securities.
BRADY BONDS
A portion of the Fixed Income Portfolio's assets may be invested in certain
debt obligations customarily referred to as "Brady Bonds," which are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds
have been issued only recently and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and are actively traded in
the over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light
of the risk characteristics of Brady Bonds (including uncollateralized
repayment of principal at maturity for some instruments) and, among other
factors, the history of default with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds should be viewed as speculative. For further information on these
securities, see the Statement of Additional Information.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Fixed Income Portfolio may purchase may have a
floating or variable rate of interest, i.e., the rate of interest varies with
changes in specified market rates or indices, such as the prime rates, and at
specified intervals. Certain floating or variable rate obligations that may be
purchased by the Portfolio may carry a demand feature that would permit the
holder to tender them back to the issuer of the underlying instrument, or to a
third party, at par value prior to maturity. The demand features of certain
floating or variable rate obligations may permit the holder to tender the
obligations to foreign banks, in which case the ability to receive payment
under the demand feature will be subject to certain risks, as described under
"Foreign Securities," above.
VARIABLE RATE INSTRUMENTS
Variable rate instruments that the Adviser may purchase on behalf of the New
York Tax-Free Bond Fund provide for a periodic adjustment in the interest rate
paid on the instrument and permit the holder to receive payment upon a
specified number of days' notice of the unpaid principal balance plus accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or an insurance policy issued with respect to such instrument or by
tendering or "putting" such instrument to a third party.
Because of the variable rate nature of the instruments, during periods when
prevailing interest rates decline, the New York Tax-Free Bond Fund's yield
will decline and its shareholders will forgo the opportunity for capital
appreciation. On the other hand, during periods when prevailing interest rates
increase, the New York Tax-Free Bond Fund's yield will increase and its
shareholders will have reduced risk of capital depreciation. In certain cases,
the interest rate index on which an instrument's yield is based may not rise
and fall to the same extent or as quickly as the general market for Municipal
Obligations. These instruments are considered derivitives and the value of
such instruments may be more volatile than other floating rate Municipal
Obligations.
For additional information concerning variable rate instruments, see
"Investment Objective, Policies and Restrictions -- Variable Rate Instruments"
in the Statement of Additional Information.
INVERSE FLOATING RATE OBLIGATIONS
The Fixed Income Portfolio may invest in inverse floating rate obligations
("inverse floaters"). Inverse floaters have coupon rates that vary inversely
at a multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. In addition, like most other fixed-income securities, the
value of inverse floaters will generally decrease as interest rates increase.
Inverse floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some
inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As
a result, the yield to maturity of an inverse floater CMO is sensitive not
only to changes in interest rates, but also to changes in prepayment rates on
the related underlying mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Fixed Income Portfolio may invest in
certificates of deposit, time deposits, bankers' acceptances, and other short-
term debt obligations issued by commercial banks and savings and loan
associations ("S&Ls"). Certificates of deposit are receipts from a bank or S&L
for funds deposited for a specified period of time at a specified rate of
return. Time deposits in banks or S&Ls are generally similar to certificates
of deposit but are uncertificated. Bankers' acceptances are time drafts drawn
on commercial banks by borrowers, usually in connection with international
commercial transactions. The Fixed Income Portfolio may not invest in time
deposits maturing in more than seven days. The Portfolio will limit its
investment in time deposits maturing from two business days through seven
calendar days to 15% of its total assets.
The Fixed Income Portfolio will not invest in any obligation of a commercial
bank unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies or, in the case of domestic banks which do not
have total assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation
(the "FDIC"), (ii) in the case of U.S. banks, it is a member of the FDIC and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
the Fixed Income Sub-Adviser to be of an investment quality comparable with
other debt securities which may be purchased by the Fixed Income Portfolio.
The Fixed Income Portfolio may also invest in obligations of U.S. banks,
foreign branches of U.S. banks (Eurodollars) and U.S. branches of foreign
banks (Yankee dollars) as a temporary defensive measure. Euro and Yankee
dollar investments will involve some of the same risks as investing in foreign
securities, as described above and in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES
The International Equity and Small Cap Equity Portfolios and the Equity Fund
may lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income. Loans of
securities will be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies. The collateral
will equal at least 100% of the current market value of the loaned securities.
In addition, the International Equity and Small Cap Equity Portfolios will not
lend their portfolio securities to the extent that greater than one-third of
each Portfolios total assets, at fair market value, would be committed to
loans at that time. The Equity Fund will not lend its portfolio securities to
the extent that greater than 30% of its total assets, at fair market value,
would be committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES AND MUNICIPAL
OBLIGATIONS
The Fixed Income Portfolio and International Equity Portfolio may purchase
and sell securities on a when-issued or firm-commitment basis, in which a
security's price and yield are fixed on the date of the commitment but payment
and delivery are scheduled for a future date. On the settlement date, the
market value of the security may be higher or lower than its purchase or sale
price under the agreement. If the other party to a when-issued or firm-
commitment transaction fails to deliver or pay for the security, the Fixed
Income Portfolio and International Equity Portfolio could miss a favorable
price or yield opportunity or suffer a loss. The Portfolios will not earn
interest on securities until the settlement date. The Fixed Income Portfolio
and International Equity Portfolio will maintain in a segregated account with
the custodian cash or liquid securities equal (on a daily marked-to-market
basis) to the amount of its commitment to purchase the securities on a when-
issued basis.
New issues of Municipal Obligations may be offered on a "when-issued" or
"forward delivery" basis. The payment obligation and the interest rate that
will be received on the Municipal Obligations offered on this basis are each
fixed at the time the Trust commits to the purchase for the New York Tax-Free
Bond Fund, although settlement, i.e., delivery of and payment for the
Municipal Obligations, takes place beyond customary settlement time (but
normally within 45 days of the commitment). Between the time the Trust commits
to purchase the "when-issued" or "forward delivery" Municipal Obligation for
the New York Tax-Free Bond Fund and the time delivery and payment are made,
the "when-issued" or "forward delivery" Municipal Obligation is treated as an
asset of the Fund and the amount which the Fund is committed to pay for that
Municipal Obligation is treated as a liability of the Fund. No interest on a
"when-issued" or "forward delivery" Municipal Obligation is accrued for the
New York Tax-Free Bond Fund until delivery occurs. Although the Trust only
makes commitments to purchase "when-issued" or "forward delivery" Municipal
Obligations for the New York Tax-Free Bond Fund with the intention of actually
acquiring them, the Trust may sell these obligations before the settlement
date if deemed advisable by the Adviser. Purchasing Municipal Obligations on a
"when-issued" or "forward delivery" basis can involve a risk that the yields
available in the market on the settlement date may actually be higher (or
lower) than those obtained in the transaction itself and, as a result, the
"when-issued" or "forward delivery" Municipal Obligation may have a lesser (or
greater) value at the time of settlement than the New York Tax-Free Bond
Fund's payment obligation with respect to that Municipal Obligation.
Furthermore, if the Trust sells the "when-issued" or "forward delivery"
Municipal Obligation before the settlement date or if the Trust sells other
obligations from the New York Tax-Free Bond Fund's portfolio in order to meet
the payment obligations, the Fund may realize a capital gain, which is not
exempt from federal, New York State or New York City income taxation.
For additional information concerning "when-issued" or "forward delivery"
Municipal Obligations, see "Investment Objective, Policies and Restrictions --
"When-Issued" Municipal Obligations" in the Statement of Additional
Information.
SWAPS, CAPS, FLOORS AND COLLARS
The Fixed Income Portfolio may enter into swap contracts and other similar
instruments in accordance with its policies. A swap is an agreement to
exchange the return generated by one instrument for the return generated by
another instrument. The payment streams are calculated by reference to a
specified index and agreed upon notional amount. The term "specified index"
includes currencies, fixed interest rates, prices and total return on interest
rate indices, fixed-income indices, stock indices and commodity indices (as
well as amounts derived from arithmetic operations on these indices). For
example, the Fixed Income Portfolio may agree to swap the return generated by
a fixed-income index for the return generated by a second fixed-income index.
The currency swaps in which the Fixed Income Portfolio may enter will
generally involve an agreement to pay interest streams calculated by reference
to interest income linked to a specified index in one currency in exchange for
a specified index in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon notional amount.
The swaps in which the Fixed Income Portfolio may engage also include rate
caps, floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium) and the other party pays periodic amounts based on the
movement of a specified index.
The Fixed Income Portfolio will usually enter into swaps on a net basis,
i.e., the two return streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
returns. The Fixed Income Portfolio's obligations under a swap agreement will
be accrued daily (offset against any amounts owing to the Portfolio) and any
accrued but unpaid net amounts owed to a swap counterparty will be covered by
the maintenance of a segregated account consisting of cash, U.S. Government
securities, or high-grade debt obligations, to avoid any potential leveraging.
The Fixed Income Portfolio will not enter into any swap agreement unless the
unsecured commercial paper, senior debt or the claims-paying ability of the
counterparty is rated AA or A-1 or better by S&P or Aa or P-1 or better by
Moody's, rated comparably by another NRSRO or determined by the Sub-Adviser to
be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fixed Income Portfolio is contractually obligated to make. If the other party
to an interest rate swap defaults, the Fixed Income Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the
swap will default on its contractual delivery obligations. If there is a
default by the counterparty, the Fixed Income Portfolio may have contractual
remedies pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Fixed Income Portfolio would be less favorable than it
would have been if this investment technique were not used.
RISK FACTORS AFFECTING INVESTMENTS IN NEW YORK MUNICIPAL
OBLIGATIONS
The Adviser intends to invest a high proportion of the New York Tax-Free
Bond Fund's assets in New York Municipal Obligations. Payment of interest and
preservation of principal is dependent upon the continuing ability of New York
issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors should consider
the greater risk inherent in the New York Tax-Free Bond Fund's concentration
in such obligations versus the safety that comes with a less geographically
concentrated investment portfolio and should compare the yield available on a
portfolio of New York issues with the yield of a more diversified portfolio
including out-of-state issues before making an investment decision. The
Adviser believes that by maintaining the New York Tax-Free Bond Fund's
investment portfolio in liquid, shorter-term Municipal Obligations, the Fund
is somewhat insulated from the credit risks that may exist for long-term New
York Municipal Obligations.
New York State and other issuers of New York Municipal Obligations have
historically experienced periods of financial difficulties which have caused
the credit ratings of certain of their obligations to be downgraded by certain
rating agencies. There can be no assurance that credit ratings on obligations
of New York State and New York City and other New York Municipal Obligations
will not be downgraded further. See "Investment Objective, Policies and
Restrictions -- Special Factors Affecting New York" in the Statement of
Additional Information.
PORTFOLIO TURNOVER
The Sub-Advisers manage the Fixed Income Portfolio, Equity Fund,
International Equity Portfolio and Small Cap Equity Portfolio generally
without regard to restrictions on portfolio turnover, except those imposed by
provisions of the federal tax laws regarding short-term trading. In general,
the Portfolios and the Fund will not trade for short-term profits, but when
circumstances warrant, investments may be sold without regard to the length of
time held. For the year ended October 31, 1997, the portfolio turnover rate
for the Fixed Income Portfolio was 349%. It is expected that the annual
turnover rate for the Fixed Income Portfolio will not exceed 250% in
subsequent fiscal years. For the year ended October 31, 1997, the portfolio
turnover rate for the Equity Fund was 99% and it is expected that in
subsequent years that the annual turnover rate for the Fund will not exceed
100%. The portfolio turnover rate for the International Equity Portfolio was
30% for the year ended October 31, 1997 and it is expected that in subsequent
years the annual turnover rate for the Portfolio will not exceed 40%. The
portfolio turnover rate for the Small Cap Equity Portfolio for the year ended
October 31, 1997 was 92%. It is anticipated that in subsequent fiscal years
the portfolio turnover rate for the Small Cap Equity Portfolio will not exceed
100%. Because the Fixed Income Portfolio has a portfolio turnover rate of 100%
or more, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than those of a fund with a
lesser portfolio turnover rate. See "Portfolio Transactions" and "Tax Matters"
below.
The Adviser fully manages the New York Tax-Free Bond Fund's portfolio by
buying and selling securities, as well as by holding selected securities to
maturity. In managing the New York Tax-Free Bond Fund's portfolio, the Trust
seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers. For a description of the
strategies which are used in managing the New York Tax-Free Bond Fund's
portfolio, which include adjusting the average maturity of the New York Tax-
Free Bond Fund's portfolio in anticipation of a change in interest rates, see
"Investment Objective, Policies and Restrictions -- Portfolio Management" in
the Statement of Additional Information.
For the year ended October 31, 1997, the portfolio turnover rate for the New
York Tax-Free Bond Fund was 163%. The Adviser anticipates that in subsequent
years the annual turnover rate of the New York Tax-Free Bond Fund's assets
generally will not exceed 300%. The Trust engages in portfolio trading for the
New York Tax-Free Bond Fund if it believes a transaction net of costs
(including custodian charges) will help achieve the investment objective of
the Fund. Expenses to the New York Tax-Free Bond Fund, including brokerage
commissions, and the realization of capital gains which are taxable to the
Fund's shareholders tend to increase as the portfolio turnover increases.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. For a further discussion of portfolio transactions, see "Investment
Objective, Policies and Restrictions -- Portfolio Transactions" in the
Statements of Additional Information.
The Trust may, in the future, seek to achieve the investment objectives of
the New York Tax-Free Bond Fund or Equity Fund by investing all of its assets
in a no-load, open-end management investment company having the same
investment objective and policies and substantially the same investment
restrictions as those applicable to the Funds. In such event, the Funds'
Investment Advisory Contracts or Investment Management Contracts would be
terminated and the administrative services fees paid by the Funds would be
reduced. Such investment would be made only if the Trustees of the Trust
believe that the aggregate per share expenses of the Funds and such other
investment companies will be less than or approximately equal to the expenses
which the Funds would incur if the Trust were to continue to retain the
services of investment advisers for the Funds and the assets of the Funds were
to continue to be invested directly in portfolio securities.
The investment policies of the Funds and the Portfolios are described above.
Except as otherwise stated, these investment policies may be changed by the
Board of Trustees of either the Trust or Advisor Trust without approval by the
shareholders of the Funds. The Statement of Additional Information includes a
further discussion of investment policies, including the investment of the New
York Tax-Free Bond Fund's assets in participation interests and the use of
futures contracts to protect the Fund to some extent from fluctuations in
interest rates, and a listing of the specific investment restrictions which
govern the investment policies of the Fund, including a restriction that not
more than 10% of the Fund's net assets may be invested in securities that are
not readily marketable, such as repurchase agreements maturing in more than
seven days. Although the Trust currently does not borrow money on behalf of
the New York Tax-Free Bond Fund for the purpose of leveraging, these
restrictions permit the Trust to borrow money on behalf of the Fund for
certain other purposes in amounts up to 33 1/3% of the Fund's net assets
(although no securities will be purchased for the Fund at any time at which
borrowings exceed 5% of the Fund's total assets taken at market value). These
specific investment restrictions and the fundamental policy described above
may not be changed without the approval of New York Tax-Free Bond Fund
shareholders. If a percentage restriction (other than a restriction as to
borrowing) or a rating restriction on investment or utilization of assets is
adhered to at the time an investment is made, or assets are so utilized, a
later change in percentage resulting from changes in the value of the New York
Tax-Free Bond Fund's portfolio securities or a later change in the rating of a
portfolio security are not considered a violation of policy.
INVESTMENT RESTRICTIONS
Each of the Funds and the Portfolios has adopted certain investment
restrictions designed to reduce exposure to specific situations (except that
none of these investment restrictions shall prevent the Funds from investing
all of their Assets in a registered investment company with substantially the
same investment objective). These investment restrictions are set forth in the
Statement of Additional Information.
Certain limitations described in the Statements of Additional Information
are fundamental and may be changed only with the approval of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940 Act)
of the respective Portfolio or Fund, as the case may be. The other investment
restrictions described in the Statements of Additional Information are not
fundamental policies meaning that the Board of Trustees of the Portfolio Trust
may change them without investor approval. If a percentage limitation on
investment or utilization of assets as set forth in the Statements of
Additional Information is adhered to at the time an investment is made, a
later change in percentage resulting from changes in the value or total cost
of a Fund's or Portfolio's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
SPECIAL INFORMATION CONCERNING THE TWO-TIER FUND STRUCTURE
The Advisor Trust, which is an open-end investment company, seeks to achieve
the investment objectives of the Fixed Income Fund, International Equity Fund
and Small Cap Equity Fund by investing all of each Fund's investible assets in
the Fixed Income Portfolio, International Equity Portfolio, and the Small Cap
Equity Portfolio, respectively, series of a separate open-end investment
company with the same investment objectives as each respective Fund. Other
mutual funds or institutional investors may invest in the Portfolios on the
same terms and conditions as the Funds. However, these other investors may
have different sales commissions and other operating expenses which may
generate different aggregate performance results. Information concerning other
investors in the Portfolios is available by calling the Sponsor at (614)
470-8000. The two-tier investment fund structure has been developed relatively
recently, so shareholders should carefully consider this investment approach.
The investment objectives of the Advisor Funds may be changed without the
approval of the shareholders of the Advisor Funds and the investment
objectives of the Portfolios may be changed without the approval of the
investors in the Portfolios. Shareholders of the Advisor Funds shall receive
30 days prior written notice of any change in the investment objective of an
Advisor Fund or a Portfolio. For a description of the investment objectives,
policies and restrictions of the Portfolios, see "Investment Objectives and
Policies" above.
Except as permitted by the Securities and Exchange Commission, whenever the
Advisor Trust is requested to vote on a matter pertaining to a Portfolio, the
Advisor Trust will hold a meeting of the shareholders of the corresponding
Advisor Fund and, at the meeting of investors in the Portfolio, the Advisor
Trust will cast all of its votes in the same proportion as the votes of the
Advisor Fund's shareholders even if all Advisor Fund shareholders did not
vote. Even if the Advisor Trust votes all its shares at the Portfolio meeting,
other investors with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio.
The Advisor Trust may withdraw an Advisor Fund's investment in its
corresponding Portfolio as a result of certain changes in the Portfolio's
investment objective, policies or restrictions or if the Board of Trustees of
the Trust determines that it is otherwise in the best interests of the Advisor
Fund to do so. Upon any such withdrawal, the Board of Trustees of the Advisor
Trust would consider what action might be taken, including the investment of
all of the assets of the Advisor Fund in another pooled investment entity or
the retaining of an investment adviser to manage the Advisor Fund's assets in
accordance with the investment policies described above with respect to the
corresponding Portfolio. In the event the Trustees of the Advisor Trust were
unable to accomplish either, the Trustees will determine the best course of
action.
As with traditionally structured funds which have large investors, the
actions of such large investors may have a material affect on smaller
investors. For example, if a large investor withdraws from a Portfolio, a
small remaining fund may experience higher pro rata operating expenses,
thereby producing lower returns. Additionally, a Portfolio may become less
diverse, resulting in increased portfolio risk.
For descriptions of the management and expenses of the Portfolios, see
"Management of the Trust, Advisor Trust and the Portfolio Trust" below and in
the Statements of Additional Information.
MANAGEMENT OF THE TRUST,
THE ADVISOR TRUST AND
THE PORTFOLIO TRUST
The business and affairs of the Trust, the Advisor Trust and the Portfolio
Trust are managed under the direction of their respective Boards of Trustees.
The Trustees of each of the Trust, the Advisor Trust and the Portfolio Trust
are Frederick C. Chen, Alan S. Parsow, Larry M. Robbins and Michael Seely.
Additional information about the Trustees, as well as the executive officers
of the Trust, the Advisor Trust and the Portfolio Trust, may be found in the
Statements of Additional Information under the caption "Management of the
Trust and the Portfolio Trust -- Trustees and Officers."
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising
from the fact that the same individuals are Trustees of the Trust, the Advisor
Trust and the Portfolio Trust. Under the conflicts of interest procedures, the
Trustees will review on a quarterly basis any potential conflicts of interests
after consulting with Fund counsel, the Manager and the Fund Administrator. If
a potential conflict of interest arises, the Board of Trustees of the entity
that may be adversely affected will take such action as is reasonably
appropriate to resolve the conflict, up to and including establishing a new
Board of Trustees for such entity. See "Management of the Trust and the
Portfolio Trust" in the Statements of Additional Information for more
information about the Trustees and the executive officers of the Trust, the
Advisor Trust and the Portfolio Trust.
INVESTMENT MANAGER/ADVISER
Republic, whose address is 452 Fifth Avenue, New York, New York 10018,
serves as investment manager to the Portfolios pursuant to Investment
Management Contracts with the Portfolio Trust. Subject to the general guidance
and the policies set by the Trustees of the Portfolio Trust, Republic provides
general supervision over the investment management functions performed by the
Sub-Advisers. For its services under the Investment Management Contracts, the
Manager is entitled to receive from the Portfolio Trust fees, payable monthly,
at the annual rate of 0.20% of the Fixed Income Portfolio's average daily net
assets and at the annual rate of 0.25% of each of the International Equity
Portfolio's and Small Cap Equity Portfolio's average daily net assets.
Republic also serves as investment adviser to the New York Tax-Free Bond
Fund. The Adviser manages the investment and reinvestment of the assets of the
New York Tax-Free Bond Fund and continuously reviews, supervises and
administers the Fund's investments pursuant to an Investment Advisory
Contract. Subject to such policies as the Board of Trustees of the Trust may
determine, the Adviser places orders for the purchase and sale of the New York
Tax-Free Bond Fund's investments directly with brokers or dealers selected by
it in its discretion. The Adviser does not place orders with the Distributor.
Peter J. Loftus, Senior Portfolio Manager, is the individual who is primarily
responsible for the day-to-day management of the New York Tax-Free Bond Fund's
portfolio. Prior to joining Republic in 1997, Mr. Loftus was a Senior Vice
President at Dillon, Read & Co. for five years where he managed tax-exempt
trading and hedging for the firm. He also spent seven years at Paine Webber as
a Vice President involved in the trading and distribution of tax-exempt
securities. For its services under the Investment Advisory Contract, the
Adviser receives from the New York Tax-Free Bond Fund a fee, payable monthly,
at the annual rate of 0.25% of the Fund's average daily net assets. Republic
is currently waiving this fee.
Republic also serves as investment manager to the Equity Fund pursuant to an
Investment Management Contract with the Trust. For its services to the Equity
Fund, the Manager is paid a fee by the Equity Fund, computed daily and based
on the Fund's average daily net assets, equal on an annual basis to 0.175% of
the Fund's average daily net assets.
Republic is a wholly owned subsidiary of Republic New York Corporation, a
registered bank holding company. As of June 30, 1997, Republic was the 16th
largest commercial bank in the United States measured by deposits. Republic or
an affiliate of Republic serves as investment adviser to the other series of
the Trust. Republic currently provides investment advisory services for
individuals, trusts, estates and institutions.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Funds
or Portfolios, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of obligations so purchased. With
respect to the New York Tax-Free Bond Fund, Republic and its affiliates deal,
trade and invest for their own accounts in Municipal Obligations and are
dealers of various types of Municipal Obligations. Republic and its affiliates
may sell Municipal Obligations to, and purchase them from, other investment
companies sponsored by BISYS. The Adviser will not invest any New York Tax-
Free Bond Fund assets in any Municipal Obligation purchased from itself or any
affiliate, although under certain circumstances such obligations may be
purchased from other members of an underwriting syndicate in which Republic or
an affiliate is a non-principal member. This restriction should not limit the
amount or type of Municipal Obligations available to be purchased for the
Fund.
Republic has informed the Trust that, in making its investment decisions, it
does not obtain or use material inside information in the possession of any
division or department of Republic or in the possession of any affiliate of
Republic.
Based upon the advice of counsel, Republic believes that the performance of
investment advisory and other services for the Funds and Portfolios will not
violate the Glass-Steagall Act or other applicable banking laws or
regulations. However, future statutory or regulatory changes, as well as
future judicial or administrative decisions and interpretations of present and
future statutes and regulations, could prevent Republic from continuing to
perform such services for the Funds and Portfolios. If Republic were
prohibited from acting as investment manager to the Funds and Portfolios, it
is expected that the Board of Trustees of the Trust and the Advisor Trust
would recommend to Fund shareholders approval of a new investment advisory
agreement with another qualified investment adviser selected by the Board, or
that the Board, would recommend other appropriate action.
SUB-ADVISERS
Fixed Income Fund. MAS continuously manages the investment portfolio of the
Fixed Income Portfolio pursuant to a Sub-Advisory Agreement with the Manager.
For its services, the Fixed Income Sub-Adviser is paid a fee by the Portfolio,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.375% of net assets up to $50 million, 0.25% of net assets
over $50 million up to $95 million, $300,000 on net assets over $95 million up
to $150 million, 0.20% of net assets over $150 million up to $250 million, and
0.15% of net assets over $250 million. It is the responsibility of the Fixed
Income Sub-Adviser not only to make investment decisions for the Fixed Income
Portfolio, but also to place purchase and sale orders for the portfolio
transactions of the Portfolio. See "Portfolio Transactions."
MAS, whose address is One Tower Bridge, West Conshohocken, Pennsylvania
19428, is a Pennsylvania limited partnership founded in 1969. MAS provides
investment services to employee benefit plans, endowment funds, foundations
and other institutional investors. As of September 30, 1997, MAS had in excess
of $55.7 billion in assets under management.
On January 3, 1996, Morgan Stanley Group Inc. acquired MAS in a transaction
in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly
owned subsidiary of Morgan Stanley Group Inc., became the sole general partner
of MAS. Morgan Stanley Asset Management Holdings Inc. and two other wholly
owned subsidiaries of Morgan Stanley Group Inc. became the limited partners of
MAS. Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries are engaged in a wide range of financial services.
Kenneth B. Dunn, whose business experience for the past five years is
provided below, is the individual portfolio manager responsible for management
of the Fixed Income Portfolio.
Partner, MAS, since prior to 1991. Portfolio Manager, MAS
Fixed Income and MAS Domestic Fixed Income Portfolios, since
1987; MAS Fixed Income II Portfolio, since 1990; MAS Mortgage-
Backed Securities and Special Purpose Fixed Income Portfolios,
since 1992; and, MAS Municipal and PA Municipal Portfolios,
since 1994.
Equity Fund. Alliance and Brinson each continuously manages a portion of the
investment portfolio of the Equity Fund, subject to the supervision and
direction of the Manager, pursuant to a Sub-Advisory Agreement with the
Manager. The Manager determines the allocation of the Equity Fund's assets
between Alliance and Brinson. For their services, Alliance and Brinson are
each paid a fee by the Equity Fund, computed daily and based on the Fund's
average daily net assets allocated to such Equity Sub-Adviser for management,
equal on an annual basis to 0.325% of net assets up to $50 million, 0.25% of
net assets over $50 million up to $100 million, 0.20% of net assets over $100
million up to $200 million, and 0.15% of net assets over $200 million. It is
the responsibility of each Equity Sub-Adviser not only to make investment
decisions for the Equity Fund, but also to place purchase and sale orders for
the Portfolio transactions of the Fund.
Alliance, a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, is a leading international
investment manager supervising client accounts with assets as of September 30,
1997 totalling approximately $217 billion. Alliance has six offices in the
United States, and subsidiaries of Alliance operate out of offices in Bahrain,
Istanbul, London, Luxembourg, Mumbai (Bombay), Paris, Singapore, Sao Paulo,
Sydney, Tokyo and Toronto. Alliance and its subsidiaries employ over 1,300
persons worldwide.
Alliance's clients are primarily major corporate employee benefit funds,
public employee retirement systems, investment companies, foundations and
endowment funds. The 54 registered investment companies managed by Alliance
comprising 116 separate investment portfolios currently have over two million
shareholders. There are 20 other non-U.S. investment companies comprising 20
separate investment portfolios also managed by Alliance. As of September 30,
1997, Alliance was retained as an investment manager of employee benefit fund
assets for 29 of the Fortune 100 companies.
Alliance Capital Management Corporation ("ACMC") is the general partner of
Alliance and conducts no other active business. Units representing assignment
of beneficial ownership of limited partnership interests of Alliance are
publicly traded on the New York Stock Exchange. As of September 30, 1997, The
Equitable Life Assurance Society of the United States ("Equitable"), ACMC,
Inc. and Equitable Capital Management Corporation ("ECMC") were the beneficial
owners of approximately 57% of the outstanding units of Alliance. ACMC, ECMC,
and ACMC, Inc. are wholly owned subsidiaries of Equitable. Equitable, a New
York life insurance company, is a wholly owned subsidiary of The Equitable
Companies Incorporated, a Delaware corporation ("ECI"), whose shares are
publicly traded on the New York Stock Exchange. As of March 1, 1997, AXA, a
French insurance holding company, owned 59% of the issued and outstanding
shares of the common stock of ECI.
John L. Blundin, an Executive Vice President and Portfolio Manager, and
Christopher Toub, a Senior Vice President and Equity Portfolio Manager, have
primary portfolio management responsibility for the Equity Fund's assets
allocated to Alliance. Mr. Blundin has 33 years of investment experience,
including 25 years of experience as a portfolio manager at Alliance. Mr. Toub
has 17 years of investment experience, including six years of experience as a
portfolio manager at Alliance. Prior to joining Alliance in 1992, Mr. Toub was
a Portfolio Manager at Marcus, Schloss & Co.
Brinson, a Delaware corporation, is an investment management firm managing,
as of June 30, 1996, approximately $58 billion, primarily for pension and
profit sharing institutional accounts. Brinson was organized in 1989 when it
acquired the institutional asset management business of The First National
Bank of Chicago and First Chicago Investment Advisors, N.A. Brinson and its
predecessor entities have managed domestic and international investment assets
since 1974 and global investment assets since 1982. Brinson has offices in
Basel, London, Melbourne, New York, Paris, Singapore, Sydney and Tokyo, in
addition to its principal office at 209 South LaSalle Street, Chicago, IL
60604-1295. Brinson is an indirect wholly owned subsidiary of Swiss Bank
Corporation ("Swiss Bank"). Swiss Bank, with headquarters in Basel,
Switzerland, is an internationally diversified organization with operations in
many aspects of the financial services industry. On December 8, 1997, Swiss
Bank announced its intention to merge with Union Bank of Switzerland. Subject
to shareholder approval, the merger is scheduled to occur during the second
quarter of 1998. Brinson also serves as the investment advisor to seven other
investment companies.
Jeffrey J. Diermeier, Managing Partner-U.S. Equities at Brinson, has primary
portfolio management responsibility for the Fund's assets allocated to
Brinson. Mr. Diermeier has 22 years of investment experience at Brinson.
International Equity Fund. CGTC continuously manages the investment
portfolio of the International Equity Portfolio pursuant to a Sub-Advisory
Agreement with the Manager. For its services, the International Equity Sub-
Adviser is paid a fee by the International Equity Portfolio, computed daily
and based on the Portfolio's average daily net assets, equal on an annual
basis to 0.70% of net assets up to $25 million, 0.55% of net assets over $25
million up to $50 million, 0.425% of net assets over $50 million up to $250
million, and 0.375% of net assets over $250 million. It is the responsibility
of the International Equity Sub-Adviser not only to make investment decisions
for the International Equity Portfolio, but also to place purchase and sale
orders for the portfolio transactions of the Portfolio. See "Portfolio
Transactions."
CGTC, which was founded in 1968, is a wholly owned subsidiary of The Capital
Group Companies, Inc., both of which are located at 333 South Hope Street, Los
Angeles, California 90071. As of September 30, 1997, CGTC managed in excess of
$56 billion of assets primarily for large institutional clients. CGTC's
research activities are conducted by affiliated companies with offices in Los
Angeles, San Francisco, New York, Washington, D.C., Atlanta, London, Geneva,
Singapore, Hong Kong and Tokyo.
Capital Research and Management Company ("CRMC"), another wholly owned
subsidiary of The Capital Group Companies, Inc., provides investment advisory
services to the following mutual funds, which are know collectively as the
American Funds Group: AMCAP Fund, American Balanced Fund, American High Income
Municipal Bond Fund, American High Income Trust, American Mutual Fund, The
Bond Fund of America, The Cash Management Trust of America, Capital Income
Builder, Inc., Capital World Bond Fund, EuroPacific Growth Fund, Fundamental
Investors, The Growth Fund of America, Income Fund of America, Intermediate
Bond Fund of America, The Investment Company of America, Limited Term Tax-
Exempt Bond Fund of America, The New Economy Fund, New Perspective Fund,
Smallcap World Fund, The Tax-Exempt Bond Fund of America, The American Funds
Tax-Exempt Series I, The American Funds Tax-Exempt Series II, The Tax-Exempt
Money Fund of America, The American Funds Income Series, The U.S. Treasury
Money Fund of America, Washington Mutual Investors Fund, and Capital World
Growth and Income Fund. CRMC also provides investment advisory services to:
American Variable Insurance Series and Anchor Pathway Fund, which are used
exclusively as underlying investment vehicles for variable insurance contracts
and policies, and to Endowments, Inc. and Bond Portfolio for Endowments, Inc.,
whose shares may be owned only by tax-exempt organizations. Capital
International, Inc., an indirect wholly owned subsidiary of The Capital Group
Companies, Inc., provides investment advisory services to Emerging Markets
Growth Fund, Inc., which is a closed-end investment company.
The following persons are primarily responsible for portfolio management of
the International Equity Portfolio: David Fisher, Vice Chairman of CGTC, has
had 32 years experience as an investment professional (28 years with CGTC or
its affiliates); Harmut Giesecke, Senior Vice President and Director of
Capital International, Inc., has had 26 years experience as an investment
professional (25 years with CGTC or its affiliates); Nancy Kyle, Senior Vice
President of CGTC, has had 24 years experience as an investment professional
(7 years with CGTC or its affiliates; from 1980 to 1990, Ms. Kyle was managing
director of J. P. Morgan Investment Management, Inc.); John McIlwraith, Senior
Vice President of CGTC, has had 28 years experience as an investment
professional (13 years with CGTC or its affiliates); Robert Ronus, President
of CGTC, has had 29 years experience as an investment professional (25 years
with CGTC or its affiliates); and Nilly Sikorsky, Director of The Capital
Group Companies, Inc., has had 35 years experience as an investment
professional, all of which was with CGTC or its affiliates.
Small Cap Equity Fund. MFSI continuously manages the investment portfolio
of the Small Cap Equity Portfolio pursuant to a Sub-Advisory Agreement with
the Manager. For its services, the Small Cap Equity Sub-Adviser is paid a fee
by the Small Cap Equity Portfolio, computed daily and based on the Portfolio's
average daily net assets, equal on an annual basis to 0.75% of assets up to
$50 million and 0.60% of assets in excess of $50 million. It is the
responsibility of the Small Cap Equity Sub-Adviser not only to make investment
decisions for the Small Cap Equity Portfolio, but also to place purchase and
sale orders for the portfolio transactions of the Portfolio. See "Portfolio
Transactions."
The Small Cap Equity Sub-Adviser, together with its parent company,
Massachusetts Financial Services Company ("MFS"), is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual fund in
the U.S., Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $69.4 billion on behalf of
approximately 2.7 million investor accounts as of November 30, 1997. As of
such date, the MFS organization managed approximately $44.2 billion of assets
invested in equity securities, approximately $20.1 billion of assets invested
in fixed income securities, and $4.1 billion of assets invested in securities
of foreign issuers and non-U.S. dollar securities. MFS is a wholly owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), which is a wholly
owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., which in turn is
a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S.
since 1895, establishing a headquarters office in the U.S. in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
The portfolio managers of the Small Cap Equity Portfolio are John W. Ballen
and Brian Stack, Senior Vice President and Vice President respectively, of the
Small Cap Equity Sub-Adviser. Mr. Ballen has been employed as a portfolio
manager by the Small Cap Equity Sub-Adviser or MFS since prior to 1991. Mr.
Stack has been employed as a portfolio manager or analyst by the Small Cap
Equity Sub-Adviser or MFS since prior to 1991.
MFS also serves as investment adviser to the MFS Family of Funds and to MFS
Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS Institutional Trust, MFS/Sun Life Series Trust, and seven variable
accounts, each of which is a registered investment company established by Sun
Life of Canada (U.S.) in connection with the sale of various fixed/variable
annuity contracts. MFS and the Small Cap Equity Sub-Adviser also provide
investment advice to substantial private clients.
DISTRIBUTOR AND SPONSOR
BISYS, whose address is 3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219,
acts as sponsor and principal underwriter and distributor of Shares of the
Funds pursuant to a Distribution Contract with the Trust and the Advisor
Trust. The Distributor may, out of its own resources, make payments to broker-
dealers for their services in distributing Shares.
ADMINISTRATIVE SERVICES PLAN
The Trust has adopted an Administrative Services Plan with respect to Shares
of the New York Tax-Free Bond and Equity Funds which provides that the Trust
may obtain the services of an administrator, transfer agent, custodian and one
or more Shareholder Servicing Agents, and may enter into agreements providing
for the payment of fees for such services.
FUND ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Funds with
general office facilities and supervises the overall administration of the
Funds and the Portfolios including, among other responsibilities, assisting in
the preparation and filing of all documents required for compliance by the
Funds and the Portfolios with applicable laws and regulations and arranging
for the maintenance of books and records of the Funds and the Portfolios. For
its services to the New York Tax-Free Bond Fund and Equity Fund, BISYS
receives from each Fund fees payable monthly equal on an annual basis (for the
Fund's then-current fiscal year) to 0.10% of the Fund's average daily net
assets up to $1 billion; 0.08% of the next $1 billion of such assets; and
0.07% of such assets in excess of $2 billion. For its services to the Fixed
Income Fund, International Equity Fund and Small Cap Equity Fund, BISYS
receives from each Fund fees payable monthly equal on an annual basis (for the
Fund's then-current fiscal year) to 0.05% of the Fund's average daily net
assets up to $1 billion; 0.04% of the next $1 billion of such assets; and
0.035% of such assets in excess of $2 billion. For providing similar services
to the Portfolios, BISYS (Ireland) receives from each Portfolio fees payable
monthly equal on an annual basis (for the Portfolio's then-current fiscal
year) to 0.05% of the first $1 billion of a Portfolio's average daily net
assets; 0.04% of the next $1 billion of such assets; and 0.035% of such assets
in excess of $2 billion.
BISYS provides persons satisfactory to the respective Boards of Trustees to
serve as officers of the Trust, the Advisor Trust and the Portfolio Trust.
Such officers, as well as certain other employees of the Trust, of the Advisor
Trust and of the Portfolio Trust, may be directors, officers or employees of
BISYS or its affiliates.
TRANSFER AGENT
The Trust and the Advisor Trust has each entered into a Transfer Agency
Agreement with Investors Bank & Trust Company ("IBT") pursuant to which IBT
acts as transfer agent (the "Transfer Agent") for the Shares of the Funds, and
the Portfolios Trust has entered into a Transfer Agency Agreement with
Investors Fund Services (Ireland) Limited (also, a "Transfer Agent"). The
Transfer Agent maintains an account for each shareholder of the Funds and
investor in the Portfolios, performs other transfer agency functions, and acts
as dividend disbursing agent for the Funds.
CUSTODIAN
Pursuant to respective Custodian Agreements, IBT also acts as the custodian
(the "Custodian") of the foreign assets of the Funds and the Portfolios and
Republic acts as custodian of the domestic assets of the Funds and the
Portfolios (the "Custodians"). The Portfolio Trust's Custodian Agreements
provide that the Custodians may use the services of sub-custodians with
respect to the Portfolios. The Custodians' responsibilities include
safeguarding and controlling each Fund's cash and each Portfolio's cash and
securities, and handling the receipt and delivery of securities, determining
income and collecting interest on each Portfolio's investments, maintaining
books of original entry for portfolio accounting and other required books and
accounts, and calculating the daily net asset value of each Portfolio.
Securities held for the Portfolios may be deposited into the Federal Reserve-
Treasury Department Book Entry System or the Depositary Trust Company. The
Custodians do not determine the investment policies of the Funds or the
Portfolios or decide which securities will be purchased or sold for the
Portfolios. For their services, IBT and Republic each receives such
compensation as may from time to time be agreed upon by it and the Trust or
the Portfolio Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent, including Republic,
pursuant to which a Shareholder Servicing Agent, as agent for its customers,
among other things: answers customer inquiries regarding account status and
history, the manner in which purchases and redemptions of Shares may be
effected and certain other matters pertaining to the Funds; assists
shareholders in designating and changing dividend options, account
designations and addresses; provides necessary personnel and facilities to
establish and maintain shareholder accounts and records; assists in processing
purchase and redemption transactions; arranges for the wiring of funds;
transmits and receives funds in connection with customer orders to purchase or
redeem Shares; verifies and guarantees shareholder signatures in connection
with redemption orders and transfers and changes in shareholder-designated
accounts; furnishes (either separately or on an integrated basis with other
reports sent to a shareholder by a Shareholder Servicing Agent) monthly and
year-end statements and confirmations of purchases and redemptions; transmits,
on behalf of the Trust and the Advisor Trust proxy statements, annual reports,
updated prospectuses and other communications from the Trust and the Advisor
Trust to the shareholders of the Funds; receives, tabulates and transmits to
the Trust and the Advisor Trust proxies executed by shareholders with respect
to meetings of shareholders of the Funds the Trust or the Advisor Trust; and
provides such other related services as the Trust and the Advisor Trust or a
shareholder may request. Although the Funds do not currently compensate
Shareholder Servicing Agents for performing these services with respect to the
Shares, each Fund is authorized to pay a shareholder servicing fee up to
0.25%, on an annual basis, of the Fund's average daily net assets.
The Trust and the Advisor Trust understand that some Shareholder Servicing
Agents also may impose certain conditions on their customers, subject to the
terms of this Prospectus, in addition to or different from those imposed by
the Trust or the Advisor Trust, such as requiring a different minimum initial
or subsequent investment, account fees (a fixed amount per transaction
processed), compensating balance requirements (a minimum dollar amount a
customer must maintain in order to obtain the services offered), or account
maintenance fees (a periodic charge based on a percentage of the assets in the
account or of the dividends paid on those assets). Each Shareholder Servicing
Agent has agreed to transmit to its customers who are holders of Shares
appropriate prior written disclosure of any fees that it may charge them
directly and to provide written notice at least 30 days prior to the
imposition of any transaction fees.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Funds. The Trust and the Advisor Trust engage
banks as Shareholder Servicing Agents on behalf of the Funds only to perform
administrative and shareholder servicing functions as described above. The
Trust and the Advisor Trust believe that the Glass-Steagall Act should not
preclude a bank from acting as a Shareholder Servicing Agent. There is
presently no controlling precedent regarding the performance of shareholder
servicing activities by banks. Future changes in either federal statutes or
regulations relating to the permissible activities of banks, as well as future
judicial or administrative decisions and interpretations of present and future
statutes and regulations, could prevent a bank from continuing to perform all
or part of its servicing activities. If a bank were prohibited from so acting,
its shareholder customers would be permitted to remain Fund shareholders, and
alternative means for continuing the servicing of such shareholders would be
sought. In such event, changes in the operation of the Funds might occur and a
shareholder serviced by such bank might no longer be able to avail himself of
any automatic investment or other services then being provided by such bank.
The Trustees of the Trust and the Advisor Trust do not expect that
shareholders of the Funds would suffer any adverse financial consequences as a
result of these occurrences.
OTHER EXPENSES
The Funds bear all costs of their operations other than expenses
specifically assumed by the Distributor, Manager, Adviser or the Sub-Advisers.
See "Management of the Trust and the Portfolio Trust -- Expenses and Expense
Limits" in the Statements of Additional Information. Expenses attributable to
the Shares shall be allocated to the Shares only. In event a particular
expense is not reasonably allocable by class or to a particular class, it
shall be treated as a Fund expense or a Trust or Advisor Trust expense. Trust
expenses directly attributable to a Fund are charged to that Fund; other
expenses are allocated proportionately among all the portfolios in the Trust
or the Advisor Trust in relation to the net assets of each portfolio.
PORTFOLIO TRANSACTIONS
To the extent consistent with applicable legal requirements, the Sub-
Advisers may place orders for the purchase and sale of portfolio investments
for the Portfolios with Republic New York Securities Corporation, subject to
obtaining best price and execution for a particular transaction. See the
Statements of Additional Information.
CLASSES OF SHARES
In addition to the Adviser Shares of the New York Tax-Free Bond Fund and the
Equity Fund, the Trust currently offers two other classes of shares of these
Funds, the Class B shares and the Class A shares (formerly Class C shares; the
"Investor Shares"), pursuant to a separate prospectus. Class B Shares and
Investor Shares may have different class expenses, which may affect
performance. Investors may obtain information concerning other classes of
shares of the New York Tax-Free Bond Fund and Equity Fund directly from their
Shareholder Servicing Agent, or by calling 1-800-782-8183.
DETERMINATION OF NET ASSET VALUE
The net asset value of a particular share in a Fund is determined on each
day on which the New York Stock Exchange is open for regular trading ("Fund
Business Day"). This determination is made once during each such day as of
4:00 p.m., New York time, by dividing the value of each Fund's net assets
(i.e., the value of its investment in its corresponding Portfolio, if
applicable, and other assets less its liabilities, including expenses payable
or accrued) by the number of Shares outstanding at the time the determination
is made.
The value of each Fund's investment in its corresponding Portfolio, if
applicable, is also determined once daily at 4:00 p.m., New York time, on each
day the New York Stock Exchange is open for regular trading ("Portfolio
Business Day").
The determination of the value of a Fund's investment in its corresponding
Portfolio is made by subtracting from the value of the total assets of the
Portfolio the amount of the Portfolio's liabilities and multiplying the
difference by the percentage, effective for that day, which represents the
Fund's share of the aggregate beneficial interests in the Portfolio.
Values of assets in a Fund's portfolio or held by a Portfolio are
determined on the basis of their market or other fair value, as described in
the Statement of Additional Information.
PURCHASE OF SHARES
Shares may be purchased through Shareholder Servicing Agents without a sales
load at their net asset value next determined after an order is received by a
Shareholder Servicing Agent if it is transmitted to and accepted by the
Transfer Agent. Purchases are therefore effected on the same day the purchase
order is received by the Transfer Agent provided such order is received prior
to 4:00 p.m., New York time, on any Fund Business Day. The Trust and the
Advisor Trust intend the Funds to be as fully invested at all times as is
reasonably practicable in order to enhance the yield on their assets. Each
Shareholder Servicing Agent is responsible for and required to promptly
forward orders for shares to the Transfer Agent.
All purchase payments are invested in full and fractional Shares. The Trust
and the Advisor Trust each reserve the right to cease offering Shares for sale
at any time or to reject any order for the purchase of Shares.
An investor may purchase Shares through the Distributor directly or by
authorizing his Shareholder Servicing Agent to purchase such Shares on his
behalf through the Transfer Agent.
Exchange Privilege. By contacting the Transfer Agent or his Shareholder
Servicing Agent, a shareholder may exchange some or all of his Shares for
shares of one or more of the following investment companies (or series
thereof) at net asset value without a sales charge: Republic U.S. Government
Money Market Fund (Adviser Class), Republic New York Tax-Free Money Market
Fund (Adviser Class), Republic Fixed Income Fund, Republic New York Tax-Free
Bond Fund (Adviser Class), Republic Equity Fund (Adviser Class), Republic
International Equity Fund, Republic Small Cap Equity Fund and such other
Republic Funds or other registered investment companies (or series thereof)
for which Republic serves as investment adviser as Republic may determine. An
exchange may result in a change in the number of Shares held, but not in the
value of such Shares immediately after the exchange. Each exchange involves
the redemption of the Shares to be exchanged and the purchase of the shares of
the other Republic Fund which may produce a gain or loss for tax purposes.
The exchange privilege (or any aspect of it) may be changed or discontinued
upon 60 days' written notice to shareholders and is available only to
shareholders in states in which such exchanges legally may be made. A
shareholder considering an exchange should obtain and read the prospectus of
the other Republic Fund and consider the differences in investment objectives
and policies before making any exchange.
Shares are being offered only to customers of Shareholder Servicing Agents.
Shareholder Servicing Agents and securities brokers may offer services to
their customers, including specialized procedures for the purchase and
redemption of Shares, such as pre-authorized or automatic purchase and
redemption programs. Each Shareholder Servicing Agent may establish its own
terms, conditions and charges, including limitations on the amounts of
transactions, with respect to such services. Charges for these services may
include fixed annual fees, account maintenance fees and minimum account
balance requirements. The effect of any such fees will be to reduce the net
return on the investment of customers of that Shareholder Servicing Agent.
Conversely, certain Shareholder Servicing Agents may (although they are not
required by the Trust or the Advisor Trust to do so) credit to the accounts of
their customers from whom they are already receiving other fees amounts not
exceeding such other fees or the fees received by the Shareholder Servicing
Agent from each Fund, which will have the effect of increasing the net return
on the investment of such customers of those Shareholder Servicing Agents.
Shareholder Servicing Agents may transmit purchase payments on behalf of
their customers by wire directly to a Fund's custodian bank by following the
procedures described above.
For further information on how to direct a Shareholder Servicing Agent to
purchase Shares, an investor should contact his Shareholder Servicing Agent
(see back cover for address and phone number).
RETIREMENT PLANS
Shares of the Funds, with the exception of the New York Tax-Free Bond Fund,
are offered in connection with tax-deferred retirement plans. Application
forms and further information about these plans, including applicable fees,
are available from the Trust, the Advisor Trust or the Sponsor upon request.
The tax law governing tax-deferred retirement plans is complex and changes
frequently. Before investing in the Funds through one or more of these plans,
an investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Funds, with the exception of the New York Tax-Free Bond Fund,
may be used as a funding medium for an IRA. An Internal Revenue Service-
approved IRA plan may be available from an investor's Shareholder Servicing
Agent. In any event, such a plan is available from the Sponsor naming IBT, as
custodian. The minimum initial investment for an IRA is $250; the minimum
subsequent investment is $100. IRAs are available to individuals who receive
compensation or earned income and their spouses whether or not they are active
participants in a tax-qualified or Government-approved retirement plan. An IRA
contribution by an individual who participates, or whose spouse participates,
in a tax-qualified or Government-approved retirement plan may not be
deductible, in whole or in part, depending upon the individual's income.
Individuals also may establish an IRA to receive a "rollover" contribution of
distributions from another IRA or a qualified plan. Tax advice should be
obtained before planning a rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase Shares of the Funds, with the
exception of the New York Tax-Free Bond Fund, for retirement plans for self-
employed persons which are known as Defined Contribution Plans (formerly Keogh
or H.R. 10 Plans). Republic offers a prototype plan for Money Purchase and
Profit Sharing Plans.
SECTION 457 PLAN, 401(k) PLAN, 403(b) PLAN
The Funds, with the exception of the New York Tax-Free Bond Fund, may be
used as vehicles for certain deferred compensation plans provided for by
Section 457 of the Internal Revenue Code of 1986, as amended (the "Code"),
with respect to service for state governments, local governments, rural
electric cooperatives and political subdivisions, agencies, instrumentalities
and certain affiliates of such entities. The Funds may also be used as
vehicles for both 401(k) plans and 403(b) plans.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his account at
any time at the net asset value next determined after a redemption order in
proper form is furnished by the shareholder to his Shareholder Servicing
Agent, and is transmitted to and received by the Transfer Agent. Redemptions
are effected on the same day the redemption order is received by the Transfer
Agent provided such order is received prior to 4:00 p.m., New York time, on
any Fund Business Day. Shares redeemed earn dividends up to and including the
Fund Business Day prior to the day the redemption is effected.
The proceeds of a redemption are normally paid from a Fund in federal funds
on the next Fund Business Day following the date on which the redemption is
effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists. To be in a position to eliminate excessive expenses,
the Trust and the Advisor Trust reserve the right to redeem upon not less than
30 days' notice all Shares in an account which has a value below $50. However,
a shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
A shareholder may redeem Shares only by authorizing his Shareholder
Servicing Agent to redeem such Shares on his behalf (since the account and
records of such a shareholder are established and maintained by his
Shareholder Servicing Agent). For further information as to how to direct a
Shareholder Servicing Agent to redeem Shares, a shareholder should contact his
Shareholder Servicing Agent (see back cover for address and phone number).
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or more
may establish a Systematic Withdrawal Plan under which they redeem at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00
per payment). Depending on the amounts withdrawn, systematic withdrawals may
deplete the investor's principal. Investors contemplating participation in
this Plan should consult their tax advisers. No additional charge to the
shareholder is made for this service.
DIVIDENDS AND DISTRIBUTIONS
For the Fixed Income Fund and the New York Tax-Free Bond Fund, the Advisor
Trust and the Trust, respectively, declares all of each Fund's net investment
income daily as a dividend to the Fund shareholders. Dividends substantially
equal to all of each Fund's net investment income earned during the month are
distributed in that month to each Fund's shareholders of record. For the
Equity Fund, dividends equal to all of the Fund's net investment income earned
are distributed quarterly to the Fund's shareholders of record. For the
International Equity Fund and the Small Cap Equity Fund, such dividends are
distributed annually and semi-annually, respectively. Generally, the Fund's
net investment income consists of the interest and dividend income it earns,
less expenses. In computing interest income, premiums are not amortized nor
are discounts accrued on long-term debt securities in the Portfolio, except as
required for federal income tax purposes.
Each Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated investment companies.
Unless a shareholder elects to receive dividends in cash, dividends are
distributed in the form of additional shares of the Fund (purchased at their
net asset value without a sales charge).
With respect to the Fixed Income Fund, certain mortgage-backed securities
may provide for periodic or unscheduled payments of principal and interest as
the mortgages underlying the securities are paid or prepaid. However, such
principal payments (not otherwise characterized as ordinary discount income or
bond premium expense) will not normally be considered as income to the Fixed
Income Portfolio and therefore will not be distributed as dividends to the
Fixed Income Fund shareholders. Rather, these payments on mortgage-backed
securities generally will be reinvested by the Fixed Income Portfolio in
accordance with its investment objective and policies.
TAX MATTERS
This discussion is intended for general information only. An investor should
consult with his own tax advisor as to the tax consequences of an investment
in the Funds, including the status of distributions from the Funds under
applicable state or local law and, with respect to the New York Tax-Free Bond
Fund, the possible applicability of a federal alternative minimum tax to a
portion of the distributions of the Fund.
Each year, the Trust and the Advisor Trust each intend to qualify the Funds
and elect that the Funds be treated as a separate "regulated investment
company" under Subchapter M of the Code. To so qualify, the Funds must meet
certain income, distribution and diversification requirements. Provided such
requirements are met and all investment company taxable income and net
realized capital gains of the Funds are distributed to shareholders in
accordance with the timing requirements imposed by the Code, generally no
federal (or, in the case of the New York Tax-Free Bond Fund, New York State
and New York City) income or excise taxes will be paid by the Funds on amounts
so distributed.
Dividends and capital gains distributions, if any, paid to shareholders are
treated in the same manner for federal and, in the case of the New York Tax-
Free Bond Fund, New York State and New York City income tax purposes whether
received in cash or reinvested in additional shares of the Funds. Shareholders
must treat dividends, other than long-term capital gain dividends, as ordinary
income. Distributions of net capital gain (other than short-term capital gain)
whether received in cash or reinvested in Fund Shares, will be taxable to
shareholders at the applicable capital gains rate (generally a maximum rate of
20% or 28%, depending on the Fund's holding period in the assets sold),
regardless of how long a shareholder has held the Fund Shares. Certain
dividends declared in October, November, or December of a calendar year to
shareholders of record on a date in such a month are taxable to shareholders
(who otherwise are subject to tax on dividends) as though received on December
31 of that year if paid to shareholders during January of the following
calendar year.
NEW YORK TAX-FREE BOND FUND
Federal Income Taxes. After the end of each calendar year, each shareholder
receives a statement setting forth the federal, New York State and New York
City personal income tax status of all dividends and capital gains
distributions, if any, made during that calendar year.
In accordance with the New York Tax-Free Bond Fund's investment objective,
it is expected that most of the Fund's net income will be attributable to
interest from Municipal Obligations and, as a result, most of the dividends to
Fund shareholders will be designated by the Trust as "exempt-interest
dividends" under the Code, which may be treated as items of interest
excludible from a shareholder's gross income for purposes of the regular
federal income tax. Since the preservation of capital and liquidity are
important aspects of the New York Tax-Free Bond Fund's investment objective,
the Adviser may from time to time invest a portion of the Fund's assets in
obligations the interest on which is not exempt from regular federal income
taxes. Moreover, dividends attributable to interest on certain Municipal
Obligations which may be purchased for the New York Tax-Free Bond Fund may be
treated as a tax preference item for shareholders potentially subject to an
alternative minimum tax and all exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax or environmental tax. Although
it is not intended, it is possible that the New York Tax-Free Bond Fund may
realize short-term or long-term capital gains or losses from its portfolio
transactions.
Any short-term capital loss realized upon the redemption of shares within
six months from the date of their purchase will be disallowed to the extent of
any exempt-interest dividends received during such period. In addition, any
short-term capital loss realized upon the redemption of shares within six
months from the date of their purchase will be treated as long-term capital
loss (rather than short-term) to the extent of the long-term capital gain
allocable to the redeemed shares.
Shareholders redeeming shares after tax-exempt income has been accrued but
not declared as a dividend should know that the portion of redemption proceeds
representing such income may be subject to taxation as a capital gain even
though it would have been tax-exempt had it been declared as a dividend prior
to redemption. Redemption of shares of the New York Tax-Free Bond Fund can be
effected with the least adverse tax consequences immediately after the first
business day of any month (the time at which the dividend representing
substantially all the income accrued for the previous month is declared).
The Code provides that interest on indebtedness incurred, or continued, to
purchase or carry shares of the New York Tax-Free Bond Fund is not deductible.
Further exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be subject
to federal income tax. Finally, entities or persons who may be "substantial
users" (or persons related to "substantial users") of facilities financed by
industrial development or private activity bonds should consult their tax
advisors before purchasing shares of the New York Tax-Free Bond Fund.
State and Local Taxes. The exemption for federal income tax purposes of
dividends derived from interest on Municipal Obligations does not necessarily
result in an exemption under the income or other tax laws of any state or
local taxing authority. However, to the extent that dividends are derived from
interest on New York Municipal Obligations, the dividends will also be
excluded from the gross income of a New York individual resident shareholder
for New York State and New York City personal income tax purposes.
DIVIDENDS FROM THE NEW YORK TAX-FREE BOND FUND ARE NOT EXCLUDED IN
DETERMINING NEW YORK STATE OR NEW YORK CITY FRANCHISE TAXES ON CORPORATIONS
AND FINANCIAL INSTITUTIONS.
OTHER FUNDS
Foreign Tax Withholding. Income received by the Funds or Portfolios from
sources within foreign countries may be subject to withholding and other
income or similar taxes imposed by such countries. In the case of the Fixed
Income Fund, International Equity Fund and Small Cap Equity Fund, if more than
50% of the value of a Portfolio's total assets at the close of its taxable
year consists of securities of foreign corporations, the corresponding Fund
will be eligible and intends to elect to treat its share of any non-U.S.
income and similar taxes it pays (or which are paid by the Portfolio) as
though the taxes were paid by the Fund's shareholders. Pursuant to this
election, a shareholder will be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign taxes paid by the Fund or Portfolio, and will be entitled either to
deduct (as an itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. federal income tax liability, subject to limitations.
No deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit. Shareholders will be notified within 60 days after the
close of the taxable years for the Fixed Income Fund, International Equity
Fund and Small Cap Equity Fund whether the foreign taxes paid by the Funds or
Portfolios will be treated as paid by the shareholders of each Fund for that
year. Furthermore, foreign shareholders may be subject to U.S. tax at the rate
of 30% (or lower treaty rate) of the income resulting from a Fund's election
to treat any foreign taxes paid by it as paid by its shareholders, but will
not be able to claim a credit or deduction for the foreign taxes treated as
having been paid by them.
The Funds generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer
identification number ("TIN") or social security number and to make such
certifications as the Funds may require, (2) the Internal Revenue Service
notifies the shareholder or the Funds that the shareholder has failed to
report properly certain interest and dividend income to the Internal Revenue
Service and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's federal income tax
liability. Dividends from a Fund attributable to that Fund's net investment
income and short-term capital gains generally will be subject to U.S.
withholding tax when paid to shareholders treated under U.S. tax law as
nonresident alien individuals or foreign corporations, estates, partnerships
or trusts.
------------------------------
The Trust and the Advisor Trust are each organized as a Massachusetts
business trust and, under current law, is not liable for any income or
franchise tax in the Commonwealth of Massachusetts as long as each series of
the Trust and the Advisors Trust (including the Funds) qualifies as a
"regulated investment company" for purposes of Massachusetts law.
For additional information relating to the tax aspects of investing in the
Funds, see the Statements of Additional Information.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declarations of Trust of each the Trust and the Advisor Trust permits
their respective Trustees to issue an unlimited number of full and fractional
shares of beneficial interest (par value $0.001 per share) and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Trust or the Advisor
Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has seven
series of shares, each of which constitutes a separately managed fund. The
Advisor Trust has three series of shares, each of which constitutes a
separately managed fund. The Trust and the Advisor Trust each reserve the
right to create additional series of shares. Currently, the New York Tax-Free
Bond Fund and Equity Fund are divided into two classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust and Advisor Trust are not required and have no current
intention to hold annual meetings of shareholders, although the Trust and the
Advisor Trust will hold special meetings of Fund shareholders when in the
judgment of the Trustees of the Trust or the Advisor Trust it is necessary or
desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust or the Advisor Trust. Under certain
circumstances the shareholders of one or more series could control the outcome
of these votes. Shares of each class of a series (New York Tax-Free Bond Fund
and Equity Fund) represent an equal pro rata interest in such series and,
generally, have identical voting, dividend, liquidation, and other rights,
preferences, powers, terms and conditions, except that: (a) each class shall
have a different designation; (b) each class of shares shall bear any class
expenses; and (c) each class shall have exclusive voting rights on any matter
submitted to shareholders that relate solely to its distribution arrangement,
and each class shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class.
The series of the Portfolio Trust will vote separately or together in the
same manner as the series of the Advisor Trust. Under certain circumstances,
the investors in one or more series of the Portfolio Trust could control the
outcome of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust or the Advisor Trust in connection with requesting a
meeting of shareholders of the Trust or the Advisor Trust for the purpose of
removing one or more Trustees. Shareholders of the Trust and the Advisor Trust
also have the right to remove one or more Trustees without a meeting by a
declaration in writing subscribed to by a specified number of shareholders.
Upon liquidation or dissolution of a Fund, shareholders of the Fund would be
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders.
The Declarations of Trust of each of the Trust and the Advisor Trust
provides that, at any meeting of shareholders of the Funds, the Trust or the
Advisor Trust, a Shareholder Servicing Agent may vote any shares as to which
such Shareholder Servicing Agent is the agent of record and which are
otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
The Trust and the Advisor Trust are each an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a business trust may, under certain circumstances, be
held personally liable as partners for its obligations. However, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Portfolio Trust is organized as a master trust fund under the laws of
the State of New York. The Portfolios are separate series of the Portfolio
Trust, which currently has only these three series. The Portfolio Trust's
Declaration of Trust provides that the Fixed Income Fund, International Equity
Fund and Small Cap Equity Fund and other entities investing in the Portfolio
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) are each liable for all obligations of
their respective Portfolio. However, the risk of a Fund incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations. Accordingly, the Trustees of the Advisor Trust believe that
neither the Fixed Income Fund, International Equity Fund and Small Cap Equity
Fund nor their shareholders will be adversely affected by reason of the
investment of all of the Assets of the Advisor Funds in their corresponding
Portfolios.
Each investor in the Portfolios, including the Fixed Income Fund,
International Equity Fund and Small Cap Equity Fund, may add to or reduce its
investment in the Portfolios on each Portfolio Business Day. At 4:00 p.m., New
York time on each Portfolio Business Day, the value of each investor's
beneficial interest in the Portfolios is determined by multiplying the net
asset value of each Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, which are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m., New York time on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors in the Portfolio. The percentage so
determined is then applied to determine the value of the investor's interest
in the Portfolio as of 4:00 p.m., New York time on the following Portfolio
Business Day.
PERFORMANCE INFORMATION
Total return and yield data for the Funds may from time to time be included
in advertisements about the Trust and the Advisor Trust. The Trust may also
include tax equivalent yield data for the New York Tax-Free Bond Fund. "Total
return" is expressed in terms of the average annual compounded rate of return
of a hypothetical investment in a Fund over periods of 1, 5 and 10 years. All
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that all dividends and distributions
are reinvested when paid. "Yield" refers to the income generated by an
investment in a Fund over the 30-day (or one month) period ended on the date
of the most recent balance sheet of the Fund included in the Trust's or the
Advisor Trust's registration statement with respect to the Fund. The "tax
equivalent yield" refers to the yield that a fully taxable bond fund would
have to generate, given a stated aggregate state and local income tax rate, in
order to produce an after-tax yield equivalent to that of the New York Tax-
Free Bond Fund. The use of a tax equivalent yield allows investors to compare
the yield of the New York Tax-Free Bond Fund, all or a significant portion of
which is exempt from regular federal, New York State and New York City
personal income taxes, with yields of funds which are not so tax exempt. See
the Statement of Additional Information for further information concerning the
calculation of yield and total return data.
Historical total return information for any period or portion thereof prior
to the establishment of the Fixed Income Fund, International Equity Fund or
Small Cap Equity Fund will be that of its corresponding Portfolio, adjusted to
assume that all charges, expenses and fees of the Fund and its respective
Portfolio which are presently in effect were deducted during such period.
Since these total return, yield and tax equivalent yield quotations are
based on historical earnings and since a Fund's total return yield and tax
equivalent yield fluctuate from day to day, these quotations should not be
considered as an indication or representation of a Fund's total return, yield
or tax equivalent yield, if applicable, in the future. Any performance
information should be considered in light of a Fund's investment objective and
policies, characteristics and quality of the Fund's portfolio and the market
conditions during the time period indicated, and should not be considered to
be representative of what may be achieved in the future. From time to time the
Trust and the Advisor Trust may also use comparative performance information
in such advertisements, including the performance of unmanaged indices, the
performance of the Consumer Price Index (as a measure for inflation), and data
from Lipper Analytical Services, Inc. and other industry publications.
PRIOR PERFORMANCE
The following table sets forth performance information for the Fund's
average annual total returns of all institutional separate accounts and, in
the case of the International Equity Fund, institutional private accounts and
collective investment vehicles managed by the Fixed Income Sub-Adviser, Equity
Sub-Adviser, International Equity Sub-Adviser and Small Cap Equity Sub-Adviser
with investment objectives, policies and restrictions substantially similar to
the Fixed Income Fund, Equity Fund, International Equity Fund and Small Cap
Equity Fund and their corresponding Portfolio, if applicable, and which have
been managed as the Portfolios have been, and are expected to be, managed.
The composite data is provided to illustrate the past performance of the
Sub-Advisers in managing substantially similar accounts as measured against
the specified market index and does not represent the performance of the Fixed
Income Fund, Equity Fund, International Equity Fund or Small Cap Equity Fund
or the Fixed Income Portfolio, International Equity Portfolio or Small Cap
Equity Portfolio. Investors should not consider this composite performance
data as an indication of future performance of the Funds, the Portfolios or
the Sub-Advisers.
The institutional separate accounts and, in the case of the International
Equity Fund, institutional private accounts and collective investment vehicles
that are included in each Sub-Adviser's composite are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Fund and the Portfolio by the 1940 Act or the Code.
Consequently, the performance results of each Sub-Adviser's composite could
have been adversely affected if the institutional separate accounts included
in the composite had been regulated as investment companies under the federal
securities laws.
Returns for each period assume reinvestment of all net investment income,
are adjusted to assume that all charges, expenses and fees of each Fund and
each Portfolio which are currently in effect (as measured by the current
expense ratios of the Fund and the Portfolio) were deducted during such
periods, and are calculated in accordance with Securities and Exchange
Commission guidelines. The investment results of each Sub-Adviser's composite
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the Fixed Income Fund, Equity Fund,
International Equity Fund and Small Cap Equity Fund or an individual investing
in the Funds.
FIXED INCOME
----------------------------------------
ANNUALIZED RETURNS
----------------------------------------
FUND SUB-ADVISER SALOMON BIG
PERFORMANCE COMPOSITE+ INDEX(2)
----------- ---------- --------
1 Year(1) ............................ 9.14% 9.16% 8.89%
Since Portfolio Inception (1/9/95) ... 10.67% N/A* 10.58%
5 Years(1) ........................... N/A 8.30% 7.57%
10 Years(1) .......................... N/A 9.42% 9.30%
- ------------
(1) Through October 31, 1997.
(2) The Salomon Broad Investment Grade Bond Index is a market-capitalization-
based total return index containing U.S. fixed rate issues having a
maturity of greater than one year and at least $25 million outstanding.
The Salomon BIG Index includes Treasury, Government-sponsored, mortgage-
backed, and investment grade corporate issues.
+ If the expense ratio of the Fund after expense reimbursements were used as
the basis for adjustment, the Sub-Adviser composite average annual returns
would be 9.18% for the one year, 8.32% for 5 years and 9.44% for 10 years.
* Sub-Adviser performance information is not available for this time period.
EQUITY
----------------------------------------------------------------
RUSSELL RUSSELL
FUND ALLIANCE 1000 BRINSON 1000 RUSSELL
PERFORMANCE COMPOSITE+ GROWTH(2) COMPOSITE+ VALUE(3) 1000(4)
----------- ---------- --------- ---------- -------- -------
1 Year(1) .... 29.28% 36.29% 30.47% 28.91% 33.18% 31.84%
Since
Inception* 24.98% 27.38% 25.56% 27.11% 27.07% 26.33%
5 Years(1) ... N/A 19.81% 18.41% 22.01% 20.97% 19.70%
Since
12/31/87 ..... N/A 17.80% 17.64% 19.42% 17.60% 17.66%
- ------------
(1) Through October 31, 1997.
(2) The Russell 1000 Growth Index is an unmanaged index of those companies in
the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values.
(3) The Russell 1000 Value Index is an unmanaged index of those companies in
the Russell 1000 Index with lower price-to-book ratios and lower
forecasted growth values.
(4) The Russell 1000 Index is an unmanaged index of the 1000 largest U.S.
companies (representing approximately 90% of the total market
capitalization) in the Russell 3000 Index, which represents approximately
98% of the U.S. equity market by capitalization.
+ If the expense ratio of the Fund after expense reimbursements were used as
the basis for adjustment, the Alliance composite average annual returns
would be 36.38% for the one year, 27.47% since Fund inception, 19.90% for
5 years and 17.88% since December 31, 1987 and the Brinson composite average
annual returns would be 29.00% for the one year, 27.19% since Fund
inception, 22.01% for 5 years and 19.51% since December 31, 1987.
* Since Fund inception (8/1/95).
INTERNATIONAL EQUITY
----------------------------------------
ANNUALIZED RETURNS
----------------------------------------
FUND SUB-ADVISER EAFE
PERFORMANCE COMPOSITE INDEX(2)
----------- --------- --------
1 Year(1) ............................ 16.62% 15.09% 4.92%
Since Portfolio Inception (1/9/95) ... 13.57% N/A* 7.85%
5 Years(1) ........................... N/A 15.54% 12.07%
10 Years(1) .......................... N/A 11.77% 6.99%
- ------------
(1) Through October 31, 1997.
(2) The EAFE Index includes 1,112 companies in twenty countries representing
the stock markets of Europe, Australia, New Zealand and the Far East. The
combined market capitalization of these companies represents approximately
60% of the aggregate market value of the stock exchanges. The EAFE Index
is capitalization weighted in U.S. dollars and includes dividends.
* Sub-Adviser performance information is not available for this time period.
SMALL CAP EQUITY
----------------------------------------
ANNUALIZED RETURNS
----------------------------------------
FUND SUB-ADVISER RUSSELL 2000
PERFORMANCE COMPOSITE+ INDEX(2)
----------- ---------- --------
1 Year(1) ............................ 27.18% 26.82% 29.33%
Since Portfolio Inception (9/3/96) ... 29.12% N/A* 27.49%
3 Years(1) ........................... N/A 29.01% 21.29%
- ------------
(1) Through October 31, 1997.
(2) The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest companies (representing approximately 10% of the total market
capitalization) in the Russell 3000 Index, which represents approximately
98% of the U.S. equity market by capitalization.
+ If the expense ratio of the Fund after expense reimbursements were used as
the basis for adjustment, the Sub-Adviser composite average annual returns
would be 26.83% for the one year and 29.02% for 3 years.
* Sub-Adviser performance information is not available for this time period.
Any performance information should be considered in light of each Advisor
Fund's investment objective and policies, characteristics and quality of the
Advisor Fund's portfolio and the market conditions during the time period
indicated, and should not be considered to be representative of what may be
achieved in the future. From time to time the Advisor Trust may also use
comparative performance information in such advertisements, including the
performance of unmanaged indices, the performance of the Consumer Price Index
(as a measure for Inflation), and data from Lipper Analytical Services, Inc.
and other industry publications.
A Shareholder Servicing Agent may charge its customers direct fees in
connection with an investment in the Funds, which will have the effect of
reducing the net return on the investment of customers of that Shareholder
Servicing Agent Conversely, the Trust and the Advisor Trust have been advised
that certain Shareholder Servicing Agents may credit to the account of their
customers from whom they are already receiving other fees amounts not
exceeding such other fees or the fees received by the Shareholder Servicing
Agent from the Fund, which will have the effect of increasing the net return
on the investment of such customers of Shareholder Servicing Agents. Such
customers may be able to obtain through their Shareholder Servicing Agent
quotations reflecting such decreased or increased return.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust or the Advisor
Trust, as applicable, 3435 Stelzer Road, Columbus, Ohio 43219-3035.
GENERAL AND ACCOUNT INFORMATION (888/525-5757 (TOLL FREE)
--------------------
The Statements of Additional Information by each of the Trust and the
Advisor Trust, dated March 1, 1998, with respect to each Fund contains more
detailed information about the Fund, including information related to (i) the
Fund's investment restrictions, (ii) the Trustees and officers of the Trust
and the Manager, Adviser, Sub-Adviser and Sponsor of the Fund, as applicable,
(iii) portfolio transactions, (iv) the Fund's shares, including rights and
liabilities of shareholders, and (v) additional yield information, including
the method used to calculate the total return, yield and tax equivalent yield,
if applicable, of the Fund.
<PAGE>
APPENDIX A
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements. The
future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded as
having extremely poor prospects.
The characteristics of corporate debt obligations rated by S&P are generally
as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB is predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with terms of the obligation.
BB indicates the lowest degree of speculation; CC indicates the highest degree
of speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest.
A bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are
generally as follows:
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated
in the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally
rated "-/+".
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payments of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D-- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer's long-
term debt is rated A or better; the issuer has access to at least two
additional channels of borrowing; and basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial paper
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and consumer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determine how the issuer's
commercial paper is rated with various categories.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
The tables below show the approximate taxable yields which are equivalent
to tax-exempt yields, for the ranges indicated, under (i) federal and New York
State personal income tax laws, and (ii) federal, New York State and New York
City personal income tax laws, in each case based upon the applicable 1997
rates. Such yields may differ under the laws applicable to subsequent years if
the effect of any such law is to change any tax bracket or the amount of
taxable income which is applicable to a tax bracket. Separate calculations,
showing the applicable taxable income brackets, are provided for investors who
file single returns and for those investors who file joint returns. For cases
in which two or more state (or city) brackets fall within a federal bracket,
the highest state (or city) bracket is combined with the federal bracket. The
combined income tax brackets shown reflect the fact that state and city income
taxes are currently deductible as an itemized deduction for federal tax
purposes (however, a taxpayer's itemized deductions may be subject to an
overall limitation, the effect of which has not been taken into account in
preparing these tables).
<TABLE>
<CAPTION>
FEDERAL AND NEW YORK STATE TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
- -------------------------------------------- INCOME -------------------------------------------------------------------------
SINGLE JOINT TAX 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
RETURN RETURN BRACKET** EQUIVALENT TAXABLE YIELD
- --------------------- ------------------- ------------ -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,650 $ 0-$ 41,200 20.82% 3.79% 4.42% 5.05% 5.68% 6.31% 6.95% 7.58% 8.21%
$ 24,651-$ 59,750 $ 41,201-$ 99,600 32.93% 4.47% 5.22% 5.96% 6.71% 7.45% 8.20% 8.95% 9.69%
$ 59,751-$124,650 $ 99,601-$151,750 35.73% 4.67% 5.45% 6.22% 7.00% 7.78% 8.56% 9.33% 10.11%
$124,651-$271,050 $151,751-$271,050 40.38% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06% 10.90%
Over $271,050 Over $271,050 43.74% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66% 11.55%
- ----------
* Net amount subject to federal and New York State personal income tax after deductions and exemptions.
** Effective combined federal and state tax bracket. This table does not take into account: (i) any taxes other than the regular
federal income tax and the regular New York State personal income tax; or (ii) the New York State tax table benefit recapture
tax. Also, it is assumed that: (i) there are no federal or New York State minimum taxes applicable; (ii) a shareholder has no
net capital gain; and (iii) a shareholder's taxable income for federal income tax purposes is the same as his or her taxable
income for New York State income tax purposes. Also, this table does not reflect the fact that, due to factors including the
federal phase-out of personal exemptions and reduction of certain itemized deductions for taxpayers whose adjusted gross
income exceed specified thresholds, a shareholder's effective marginal tax rate may differ from his or her tax bracket rate.
<CAPTION>
FEDERAL, NEW YORK STATE AND NEW YORK CITY TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
- -------------------------------------------- INCOME -------------------------------------------------------------------------
SINGLE JOINT TAX 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
RETURN RETURN BRACKET** EQUIVALENT TAXABLE YIELD
- --------------------- ------------------- ------------ -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 $ 25,000 $ 0-$ 45,000 36.09% 4.69% 5.48% 6.26% 7.04% 7.82% 8.61% 9.39% 10.17%
$ 25,001-$ 59,750 $ 45,001-$ 99,600 36.10% 4.69% 5.48% 6.26% 7.04% 7.82% 8.61% 9.39% 10.17%
$ 59,751-$124,650 $ 96,601-$151,750 38.80% 4.90% 5.72% 6.54% 7.35% 8.17% 8.99% 9.80% 10.62%
$124,651-$271,050 $151,751-$271,050 43.24% 5.29% 6.17% 7.05% 7.93% 8.81% 9.69% 10.57% 11.45%
Over $271,050 Over $271,050 46.43% 5.60% 6.53% 7.47% 8.40% 9.33% 10.27% 11.20% 12.13%
- ----------
* Net amount subject to federal, New York State and New York City personal income tax after deductions and exemptions.
** Effective combined federal, state and city tax bracket. This table does not take into account: (i) any taxes other than the
regular federal income tax, the regular New York State personal income tax, and the regular New York City personal income tax
(including the temporary tax surcharge and the additional tax); or (ii) the New York State tax table benefit recapture tax.
Also, it is assumed that: (i) there are no federal, state or city minimum taxes applicable; (ii) a shareholder has no net
capital gain; and (iii) a shareholder's taxable income for federal income tax purposes is the same as his or her income for
state and city tax purposes. Also, this table does not reflect the fact that, due to factors including the federal phase-out
of personal exemptions and reduction of certain itemized deductions for taxpayers whose adjusted gross income exceed specified
thresholds, a shareholder's effective marginal tax rate may differ from his or her tax bracket rate.
</TABLE>
While it is expected that most of the dividends paid to the shareholders
of the New York Tax-Free Bond Fund will be exempt from federal, New York State
and New York City personal income taxes, portions of such dividends from time
to time may be subject to such taxes.
<PAGE>
REPUBLIC FIXED INCOME FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Miller Anderson & Sherrerd - Sub-Adviser
("MAS" or the "Sub-Adviser")
BISYS Fund Services -
Administrator, Distributor and Sponsor
("BISYS" or the "Administrator of the Fund" or
the "Distributor" or the "Sponsor")
BISYS Fund Services (Ireland), Limited -
Administrator of the Portfolio
("BISYS (Ireland)")
STATEMENT OF ADDITIONAL INFORMATION
Republic Fixed Income Fund (the "Fund") is a separate series of
Republic Advisor Funds Trust (the "Trust"), an open-end management investment
company which currently consists of three funds, each of which has different and
distinct investment objectives and policies. The Trust seeks to achieve the
Fund's investment objective by investing all of the Fund's investable assets
("Assets") in the Fixed Income Portfolio (the "Portfolio"), which has the same
investment objective as the Fund. The Portfolio is a series of Republic
Portfolios (the "Portfolio Trust"), an open-end management investment company.
The Fund is described in this Statement of Additional Information.
Shares of the Fund are offered only to clients of Republic and its
affiliates for which Republic or its affiliates exercises investment discretion.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS
FOR THE FUND, DATED MARCH 1, 1998 (THE "PROSPECTUS"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
March 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS ...........................
Mortgage-Related and Other Asset-Backed Securities ...............
Brady Bonds ......................................................
Foreign Currency Exchange-Related Securities .....................
Sovereign and Supranational Debt Obligations .....................
Mortgage Dollar Roll Transactions ................................
Portfolio Management .............................................
Investment Restrictions ..........................................
Percentage and Rating Restrictions ...............................
PORTFOLIO TRANSACTIONS ....................................................
PERFORMANCE INFORMATION ...................................................
Consumer Price Index .............................................
Lehman Brothers Government/Corporate Index .......................
Salomon Bond Index ...............................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST ...........................
Trustees and Officers ............................................
Compensation Table ...............................................
Investment Manager ...............................................
Sub-Adviser ......................................................
Administrator and Portfolio Administrator ........................
Custodian, Transfer Agents, and Fund Accounting Agents ...........
Expenses .........................................................
DETERMINATION OF NET ASSET VALUE ..........................................
TAXATION ..................................................................
Options, Futures, Forward Contracts and Swap Contracts ...........
OTHER INFORMATION .........................................................
Capitalization ...................................................
Voting Rights ....................................................
Independent Auditors .............................................
Counsel ..........................................................
Registration Statement ...........................................
FINANCIAL STATEMENTS ......................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated March 1, 1998 of the Fund by which
shares of the Fund are offered. Unless the context otherwise requires, terms
defined in the Prospectus have the same meaning in this Statement of Additional
Information as in the Prospectus.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Portfolio discussed under the caption "Investment
Objective and Policies" in the Prospectus.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Portfolio may also invest in debt securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations") and in other types of mortgage-related
securities.
There are two methods of trading mortgage-backed securities. A specific
pool transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This is
in contrast with the typical mortgage transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be delivered
is specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. For example, in a
TBA transaction an investor could purchase $1 million 30-year FNMA 9's and
receive up to three pools on the settlement date. The pool numbers of the pools
to be delivered at settlement will be announced shortly before settlement takes
place. The terms of the TBA trade may be made more specific if desired. For
example, an investor may request pools with particular characteristics, such as
those that were issued prior to January 1, 1990. The most detailed specification
of the trade is to request that the pool number be known prior to purchase. In
this case the investor has entered into a specific pool transaction. Generally,
agency pass-through mortgage-backed securities are traded on a TBA basis. The
specific pool numbers of the securities purchased do not have to be determined
at the time of the trade.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the 12 Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues participation
certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the credit worthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Portfolio will not
purchase mortgage-related securities or other assets which in the Sub-Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the
Portfolio's net assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, and Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B, or
C Bond currently being paid off. When the Series A, B, and C Bonds are paid in
full, interest and principal on the Series Z Bond begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC CMOS. FHLMC CMOs are debt obligations of FHLMC issued in multiple
classes having different maturity dates which are secured by the pledge of a
pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs,
payments of principal and interest on the CMOs are made semiannually, as opposed
to monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which, in
turn, is equal to approximately 100% of FHA prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities --Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability and may be deemed "illiquid"
and subject to the Portfolio's limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
IO class), while the other class will receive all of the principal (the
principal-only or PO class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed
securities unrelated to mortgage loans. Asset-backed securities present certain
risks that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same type of security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to avoid payment of
certain amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicer to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES - TYPES OF
CREDIT SUPPORT. Mortgage-backed securities and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failure by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The U.S. Bond Index Portfolio will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
BRADY BONDS
The Brady Plan was conceived by the U.S. Treasury in the 1980's in an
attempt to produce a debt restructuring program that would enable a debtor
country to (i) reduce the absolute level of debt of its creditor banks, and (ii)
reschedule its external debt repayments, based upon its ability to service such
debts by persuading its creditor banks to accept a debt write-off by offering
them a selection of options, each of which represented an attractive substitute
for the nonperforming debt. Although it was envisioned that each debtor country
would agree to a unique package of options with its creditor banks, the plan was
that these options would be based upon the following: (i) a discount bond
carrying a market rate of interest (whether fixed or floating), with principal
collateralized by the debtor country with cash or securities in an amount equal
to at least one year of rolling interest; (ii) a par bond carrying a low rate of
interest (whether fixed or floating), collateralized in the same way as in (i)
above; and (iii) retention of existing debt (thereby avoiding a debt write-off)
coupled with an advance of new money or subscription of new bonds.
Brady Plan debt restructurings totaling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity,
(ii) the collateralized interest payments, (iii) the uncollateralized payments,
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants such as Currency
Exchange Warrants SM ("CEWs"SM) are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese yen or German deutsche mark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required to either sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unaccrued obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation (the "OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate
linked securities ("PERLs"SM) are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that time.
The return on "standard" PERLS is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S. dollar;
"reverse" PERLS are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). PERLS may in limited cases be subject to acceleration of
maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be
made at maturity.
PERFORMANCE INDEXED PAPER. Performance indexed paper ("PIPs"SM) is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on PIPs is
established at maturity as a function of the spot exchange rates between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity. The Portfolio has no current intention
of investing in CEWsSM, PERLsSM or PIPsSM.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS
Debt instruments issued or guaranteed by foreign governments, agencies,
and supranational organizations ("sovereign debt obligations"), especially
sovereign debt obligations of developing countries, may involve a high degree of
risk, and may be in default or present the risk of default. The issuer of the
obligation or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and interest when due, and
may require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on political as
well as economic factors.
MORTGAGE DOLLAR ROLL TRANSACTIONS
The Portfolio may engage in dollar roll transactions with respect to
mortgage securities issued by the Government National Mortgage Association, the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. In a dollar roll transaction, the Portfolio sells a mortgage-backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on the
securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the reinvestment
of the sales proceeds. The Portfolio may also be compensated by receipt of a
commitment fee. When the Portfolio enters into a mortgage dollar roll
transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Portfolio's custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Portfolio's investment restrictions.
PORTFOLIO MANAGEMENT
The Sub-Adviser's investment strategy for achieving the Portfolio's
investment objective has two basic components: maturity and duration management
and value investing.
MATURITY AND DURATION MANAGEMENT. Maturity and duration management
decisions are made in the context of an intermediate maturity orientation. The
maturity structure of the Portfolio is adjusted in anticipation of cyclical
interest rate changes. Such adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of longer term, secular shifts in the levels of interest rates
(i.e., shifts transcending and/or not inherent to the business cycle).
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Sub-Adviser's maturity and duration strategy lies in analysis
of the U.S. and global economies, focusing on levels of real interest rates,
monetary and fiscal policy actions, and cyclical indicators.
VALUE INVESTING. The second component of the Sub-Adviser's investment
strategy for the Portfolio is value investing, whereby the Sub-Adviser seeks to
identify undervalued sectors and securities through analysis of credit quality,
option characteristics and liquidity. Quantitative models are used in
conjunction with judgment and experience to evaluate and select securities with
embedded put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit the portfolio to benefit from the
price appreciation of individual securities during periods when interest rates
are unchanged.
INVESTMENT RESTRICTIONS
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities". The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940, as amended (the "1940
Act").
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than
real estate limited partnerships, and may purchase and sell
marketable securities which are secured by interests in real
estate;
(3) make loans except: (i) by purchasing debt securities in
accordance with its investment objective and policies, or
entering into repurchase agreements, and (ii) by lending its
portfolio securities;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any
issuer if, as the result, more than 5% of the Portfolio's
(Fund's) total assets, taken at market value at the time of such
investment, would be invested in the securities of such issuer,
except that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(6) underwrite the securities of other issuers (except to the extent
that the Portfolio (Fund) may be deemed to be an underwriter
within the meaning of the 1933 Act in the disposition of
restricted securities);
(7) acquire any securities of companies within one industry if as a
result of such acquisition, more than 25% of the value of the
Portfolio's (Fund's) total assets would be invested in securities
of companies within such industry; provided, however, that there
shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a temporary
defensive position;
(8) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Portfolio
(Fund) may borrow as a temporary measure to satisfy redemption
requests or for extraordinary or emergency purposes, provided
that the Portfolio (Fund) maintains asset coverage of at least
300% for all such borrowings;
(9) issue senior securities, except as permitted under the 1940 Act.
In applying fundamental policy number seven, mortgage-backed securities
shall not be considered a single industry. Mortgage-backed securities issued by
governmental agencies and government-related organizations shall be excluded
from the limitation in fundamental policy number seven. Private mortgage-backed
securities (i.e., not issued or guaranteed by a governmental agency or
government-related organization) that are backed by mortgages on commercial
properties shall be treated as a separate industry from private mortgage-backed
securities backed by mortgages on residential properties.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by their respective Boards of Trustees without
investor approval (except that none of the following investment policies shall
prevent the Trust from investing all of the Assets of the Fund in a separate
registered investment company with substantially the same investment
objectives).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(a) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 10%
of its net assets; provided, however, that the Portfolio (Fund)
may not purchase any security while outstanding borrowings exceed
5% of net assets;
(b) invest in futures and/or options on futures to the extent that
its outstanding obligations to purchase securities under any
future contracts in combination with its outstanding obligations
with respect to options transactions would exceed 35% of its
total assets;
(c) invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of its total assets (included within
that amount, but not to exceed 2% of the value of the Portfolio's
(Fund's) net assets, may be warrants that are not listed on the
New York Stock Exchange, the American Stock Exchange or an
exchange with comparable listing requirements; warrants attached
to securities are not subject to this limitation);
(d) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities,
but it may make margin deposits in connection with transactions
in options, futures, and options on futures; or sell short
unless, by virtue of its ownership of other securities, it has
the right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is
made upon the same conditions (transactions in futures contracts
and options are not deemed to constitute selling securities
short);
(e) purchase or retain securities of an issuer if those officers and
Trustees of the Portfolio (Fund) or the Manager or Sub-Adviser
owning more than 1/2 of 1% of such securities together own more
than 5% of such securities;
(f) pledge, mortgage or hypothecate any of its assets to an extent
greater than one-third of its total assets at fair market value;
(g) invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund), determined at the time of investment, in
securities that are illiquid because their disposition is
restricted under the federal securities laws or securities for
which there is no readily available market; provided, however
that this policy does not limit the acquisition of (i) securities
that have legal or contractual restrictions on resale but have a
readily available market or (ii) securities that are not
registered under the 1933 Act, but which can be sold to qualified
institutional investors in accordance with Rule 144A under the
1933 Act and which are deemed to be liquid pursuant to guidelines
adopted by the Board of Trustees ("Restricted Securities");
(h) invest more than 25% of its assets in Restricted Securities
(including Rule 144A Securities);
(i) invest for the purpose of exercising control over management of
any company;
(j) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets
or consolidations and except as may otherwise be permitted by the
1940 Act; provided, however, that the Portfolio shall not invest
in the shares of any open-end investment company unless (1) the
Portfolio's Sub-Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge
in connection with the investment;
(k) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
government or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous
operations;
(l) write or acquire options or interests in oil, gas or other
mineral explorations or development programs or leases.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Portfolio or a later change in the rating of a security held by the
Portfolio is not considered a violation of policy; however, the Sub-Adviser will
consider such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is primarily responsible for portfolio decisions and
the placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of the Portfolio's
investments with Republic New York Securities Corporation, an affiliate of the
Manager.
Because the Portfolio invests primarily in fixed-income securities, it
is anticipated that most purchases and sales will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant brokerage
commissions with respect to securities transactions. For the fiscal year ended
October 31, 1997, the Portfolio paid aggregate brokerage commissions equal to
$4,837, none of which was paid to broker-dealers that provided "brokerage and
research" services to the Sub-Adviser.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and total return
for the Fund, both computed in accordance with formulas prescribed by the
Securities and Exchange Commission (the "SEC"), in advertisements or reports to
shareholders or prospective investors.
Quotations of yield for the Fund will be based on all investment income
per share (as defined by the SEC during a particular 30-day (or one month)
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
YIELD = 2[( --- + 1) -1]
cd
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
n
P (1 + T) = ERV
where
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period. All total return figures
reflect the deduction of a proportional share of Fund expenses
on an annual basis, and assume that all dividends and
distributions are reinvested when paid. The Fund also may,
with respect to certain periods of less than one year, provide
total return information for that period that is unannualized.
Any such information would be accompanied by standardized
total return information.
Historical performance information for any period or portion thereof
prior to the establishment of the Fund will be that of the Portfolio, adjusted
to assume that all charges, expenses and fees of the Fund and the Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Annual Total Return -- Year Ended October 31, 1997: 9.14%
-- Year Ended October 31, 1996: 6.51%
Average Annual Total Return -- January 9, 1995 (commencement of operations)
to October 31, 1997: 10.67%.
Performance information for the Fund may also be compared to various
unmanaged indices, described below. Unmanaged indices (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs and
expenses. Comparative information may be compiled or provided by independent
ratings services or by news organizations. Any performance information should be
considered in light of the Fund's investment objective and policies,
characteristics and quality of the Fund, and the market conditions during the
given time period, and should not be considered to be representative of what may
be achieved in the future.
The Fund may from time to time use one or more of the following
unmanaged indices for performance comparison purposes:
CONSUMER PRICE INDEX
The Consumer Price Index is published by the U.S. Department of Labor
and is a measure of inflation.
LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U.S. Treasury, issues of government agencies, and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds and nonconvertible
debt issued by or guaranteed by foreign or international governments and
agencies. All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for others. Any security downgraded during the
month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
SALOMON BOND INDEX
The Salomon Bond Index, also known as the Broad Investment Grade (BIG)
Index, is a fixed income market capitalization-weighted index, including U.S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U.S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the index is published monthly.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
officers are "interested persons" (as defined in the 1940 Act) of the Trust and
the Portfolio Trust. The address of each, unless otherwise indicated, is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
FREDERICK C. CHEN, Trustee
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW, Trustee
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, Trustee
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, Trustee
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
KAREN DOYLE*, Vice President
Manager of Client Services for BISYS Fund Services, Inc., October 1994
to present; from 1979 to October 1994, an employee of the Bank of New
York.
FRANK M. DEUTCHKI*, Vice President
Employee of BISYS Fund Services, Inc., April 1996 to present; Vice
President, Chase Global Funds Service, September 1995 to April 1996;
Vice President, Mutual Funds Service Company, 1989 to September 1995.
ADRIAN WATERS*, Treasurer
Employee of BISYS Fund Services (Ireland) LTD., May 1993 to present;
Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer
Employee of BISYS Fund Services (Ireland) LTD., March 1994 to present;
Supervisor, Price Waterhouse, 1990 to March 1994.
ALAINA METZ*, Assistant Secretary
Chief Administrator, Administrative and Regulatory Services, BISYS Fund
Services, Inc., June 1995 to present; Supervisor, Mutual Fund Legal
Department, Alliance Capital Management, May 1989 to June 1995.
Messrs. Grimm, Deutchki and Waters and Mss. Doyle, Brady and Metz
also are officers of certain other investment companies of which BISYS or an
affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation From
Aggregate Accrued as Annual Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement Trustees
- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Frederick C. Chen $1,600 none none $8,600
Alan S. Parsow $1,600 none none $7,600
Larry M. Robbins $1,800 none none $7,600
Michael Seely $1,600 none none $7,600
* The Fund Complex includes the Trust, Republic Funds, and the Portfolio Trust.
</TABLE>
The compensation table above reflects the fees received by the Trustees
for the year ended October 31, 1997. The Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust will receive an annual
retainer of $5,600 and a fee of $1,000 for each meeting of the Board of Trustees
or committee thereof attended, except that Mr. Robbins will receive an annual
retainer of $7,600 and a fee of $1,000 for each meeting attended.
As of January 14, 1998, the Trustees and officers of the Trust and the
Portfolio Trust, as a group, owned less than 1% of the outstanding shares of the
Fund. As of the same date, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund (the Trust has no knowledge of the
beneficial ownership of such shares): Republic National Bank of New York,
Pension Plan & Trust, 452 Fifth Avenue, 27th Floor, New York, New York, 10018 -
44.92%; Kinco & Co., c/o RNB Securities Services, One Hanson Place - Lower
Level, Brooklyn, New York, 11243 - 11.54%; Republic New York Securities Corp.,
Customer Account No. 10122, Attention Paul Botta, One Hanson Place -- Lower
Level, Brooklyn, New York 11243 - 10.28%; and Republic National Bank of New
York, Pooled Profit Sharing Plan, 452 Fifth Avenue, 27th Floor, New York, New
York, 10018 - 7.32%. In addition, the identities and addresses of two owners of
5% or more of the outstanding shares of the Fund have been withheld at the
request of the shareholders. Shareholders who own more than 25% of the
outstanding voting securities of the Fund may be able to control the outcome of
any matter submitted for the approval of shareholders of the Fund.
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT MANAGER
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the Manager is entitled to receive a fee from
the Portfolio, computed daily and paid monthly, equal on an annual basis to
0.20% of the Portfolio's average daily net assets. For the period from January
9, 1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, investment management
fees aggregated $0, $98,923 and $184,724, respectively, of which the entire
amount was waived.
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
SUB-ADVISER
MAS, as the Portfolio's Sub-Adviser, is responsible for the investment
management of the Portfolio's assets, including making investment decisions and
placing orders for the purchase and sale of securities for the Portfolio
directly with the issuers or with brokers or dealers selected by MAS or Republic
in its discretion. See "Portfolio Transactions." MAS also furnishes to the Board
of Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
For its services, MAS receives from the Portfolio a fee, computed daily
and based on the Portfolio's average daily net assets, equal on an annual basis
to 0.375% of net assets up to $50 million, 0.25% of net assets over $50 million
and up to $95 million, $300,000 on net assets over $95 million and up to $150
million, 0.20% of net assets over $150 million and up to $250 million, and 0.15%
of net assets over $250 million. For the period from January 9, 1995 (Portfolio
commencement of operations) to October 31, 1995 and for the fiscal years ended
October 31, 1996 and October 31, 1997, sub-advisory fees aggregated $53,963,
$185,480 and $276,784, respectively.
The investment advisory services of MAS to the Portfolio are not
exclusive under the terms of the Sub-Advisory Agreement. MAS is free to and does
render investment advisory services to others.
ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Each Administration Agreement will remain in effect until March 31,
1999, and automatically will continue in effect thereafter from year to year
unless terminated upon 60 days' written notice to BISYS or BISYS (Ireland), as
appropriate. Each Administration Agreement will terminate automatically in the
event of its assignment. Each Administration Agreement also provides that
neither BISYS nor BISYS (Ireland), as appropriate, nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust or Portfolio Trust except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
For the period from January 9, 1995 (Portfolio commencement of
operations) to October 31, 1995 and for the fiscal years ended October 31, 1996
and October 31, 1997, the Portfolio accrued administration fees of $7,195,
$24,731 and $46,181, respectively. The Fund (or its predecessor) accrued
administration fees of $20,274 (of which the entire amount was waived), $17,934
(of which $8,078 was waived) and $29,549 (none of which was waived) during
these respective periods.
CUSTODIAN, TRANSFER AGENTS, AND FUND ACCOUNTING AGENTS
With respect to domestic assets, Republic serves as custodian for the
Fund and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio, and as
transfer agent and fund accounting agent for the Fund. The Custodian may use the
services of sub-custodians with respect to the Portfolio. The principal business
address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117. IBT Fund
Services (Canada) Inc. serves as the fund accounting agent for the Portfolio,
and Investors Fund Services (Ireland) Limited is the Portfolio's transfer agent.
EXPENSES
Trust expenses directly related to the Fund are charged to the Fund;
other expenses are allocated proportionally among all of the portfolios of the
Trust in relation to the net asset value of the portfolios.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the Shares is determined on each day on
which the New York Stock Exchange ("NYSE") is open for trading. As of the date
of this Statement of Additional Information, the NYSE is open every weekday
except for the days on which the following holidays are observed: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Bonds and other fixed income securities listed on a foreign exchange
are valued at the latest quoted sales price available before the time when
assets are valued. For purposes of determining the Portfolio's net asset value,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by any major bank.
Bonds and other fixed-income securities which are traded
over-the-counter and on a stock exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds and
other fixed-income securities this ordinarily will be the over-the-counter
market. Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Portfolio's portfolio may be
valued on the basis of valuations furnished by a pricing service, use of which
has been approved by the Board of Trustees of the Portfolio Trust. In making
such valuations, the pricing service utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or exchange
or over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Portfolio Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such valuations are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of the Portfolio Trust.
Interest income on long-term obligations in the Portfolio's portfolio
is determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued plus amortization of
premium.
Subject to the Trust's compliance with applicable regulations, the
Trust on behalf of the Fund and the Portfolio have reserved the right to pay the
redemption or repurchase price of shares of the Fund, either totally or
partially, by a distribution in kind of portfolio securities from the Portfolio
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust will redeem Fund shares in kind only if it has received a
redemption in kind from the Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind.
TAXATION
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
Each year, to qualify as a separate "regulated investment company"
under the Code, at least 90% of the Fund's investment company taxable income
(which includes, among other items, interest, dividends and the excess of net
short-term capital gains over net long-term capital losses) must be distributed
to Fund shareholders and the Fund must meet certain diversification of assets,
source of income, and other requirements. If the Fund does not so qualify, it
will be taxed as an ordinary corporation.
The Portfolio has obtained a ruling from the Internal Revenue Service
("IRS") that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether the Fund satisfies the income
and diversification requirements to maintain its status as a RIC, the Fund, as
an investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed equal to the sum of (1) at least 98% of the Fund's
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of the Fund's capital gain net income for the
12-month period ending, as a general rule, on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
Under certain circumstances, the Fund may be taxed on income deemed to
be earned from certain CMO residuals.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Rate Gain" or "28% Rate Gain," depending upon the Portfolio's
holding period for the assets sold. "20% Rate Gains" arise from sales of assets
held by the Portfolio for more than 18 months and are subject to a maximum tax
rate of 20%, "28% Rate Gains" arise from sales of assets held by the Portfolio
for more than one year but no more than 18 months and are subject to a maximum
tax rate of 28%. Net capital gains from assets held for one year or less will be
taxed as ordinary income. Distributions will be subject to these capital gains
rates regardless of how long a shareholder has held Fund shares.
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP CONTRACTS
Some of the options, futures contracts, forward contracts and swap
contracts entered into by the Portfolio may be "Section 1256 contracts." Section
1256 contracts held by the Portfolio at the end of its taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
Code) are "marked-to-market" with unrealized gains or losses being treated as
though they were realized. Any gains or losses, including "marked-to-market"
gains or losses, on Section 1256 contracts are generally 60% long-term and 40%
short-term capital gains or losses ("60/40") although all foreign currency gains
and losses from such contracts may be treated as ordinary in character absent a
special election.
Generally, hedging transactions and certain other transactions in
options, futures, forward contracts and swap contracts undertaken by the
Portfolio may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gain or loss realized by the
Portfolio. In addition, losses realized by the Portfolio on positions that are
part of a straddle may be deferred under the straddle rules, rather than being
taken into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures, forward contracts and swap contracts to the Portfolio are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Portfolio. Short-term gain is taxed as ordinary income when
distributed to Fund shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Recently enacted rules may affect the timing and character of gain if
the Portfolio engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Portfolio enters into
certain transactions in property while holding substantially identical property,
the Portfolio would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Portfolio's holding period in the property. Loss from a constructive sale would
be recognized when the property was subsequently disposed of, and its character
would depend on the Portfolio's holding period and the application of various
loss deferral provisions of the Code.
Rules governing the tax aspects of swap contracts are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner deemed to be
appropriate, the IRS might not necessarily accept such treatment. If it does
not, the status of the Fund as a regulated investment company might be affected.
The Fund intends to monitor developments in this area. Certain requirements that
must be met under the Code in order for the Fund to qualify as a regulated
investment company may limit the extent to which the Portfolio will be able to
engage in swap agreements.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
Earnings derived by the Portfolio from sources outside the U.S. may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty and the
Portfolio would undertake any procedural steps required to claim the benefits of
such a treaty. With respect to any non-U.S. taxes actually paid by the
Portfolio, if more than 50% in value of the Portfolio's total assets at the
close of any taxable year consists of securities of foreign corporations, the
Fund will elect to treat its share of any non-U.S. income and similar taxes the
Portfolio pays as though the taxes were paid by the Fund's shareholders.
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and to a maximum tax rate of 28% if the shareholder's
holding period for the shares is more than one year but not more than 18 months.
Gain from the sale of shares held for not more than one year will be taxed as
short-term capital gain. Any loss realized on a sale or exchange of Fund shares
will be disallowed to the extent that the shares disposed of are replaced
(including replacement through reinvesting of dividends and capital gain
distributions in the Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 5, 1996.
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board
of Trustees may establish additional series (with different investment
objectives and fundamental policies) at any time in the future. Establishment
and offering of additional series will not alter the rights of the Fund's
shareholders. When issued, shares are fully paid, nonassessable, redeemable and
freely transferable. Shares do not have preemptive rights or subscription
rights. In liquidation of the Fund, each shareholder is entitled to receive his
pro rata share of the net assets of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Interests in the Portfolio have no preference, preemptive, conversion
or similar rights, and are fully paid and non-assessable. The Portfolio Trust is
not required to hold annual meetings of investors, but will hold special
meetings of investors when, in the judgment of the Portfolio Trust's Trustees,
it is necessary or desirable to submit matters for an investor vote. Each
investor is entitled to a vote in proportion to the share of its investment in
the Portfolio.
Except as described below, whenever the Trust is requested to vote on a
matter pertaining to the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast all of its votes on each matter at a meeting of
investors in the Portfolio proportionately as instructed by the Fund's
shareholders. However, subject to applicable statutory and regulatory
requirements, the Trust would not request a vote of the Fund's shareholders with
respect to any proposal relating to the Portfolio which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Trust and the Fund for the fiscal year ending
October 31, 1998. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's and Portfolio's income tax returns, and assist in
the preparation of filings with the SEC. The address of KPMG Peat Marwick LLP is
99 High Street, Boston, Massachusetts 02110. The Portfolio Trust has appointed
KPMG as its independent auditors to audit the Portfolio's financial statements
for the fiscal year ending October 31, 1998.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the SEC under the 1933 Act with respect to shares of the Fund, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1997 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1997 as filed with the SEC. A
copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Capital Guardian Trust Company - Sub-Adviser
("CGTC" or the "Sub-Adviser")
BISYS Fund Services -
Administrator of the Fund, Distributor and Sponsor
("BISYS" or the "Administrator of the Fund" or
the "Distributor" or the "Sponsor")
BISYS Fund Services (Ireland), Limited -
Administrator of the Portfolio
("BISYS (Ireland)")
STATEMENT OF ADDITIONAL INFORMATION
Republic International Equity Fund (the "Fund") is a separate series of
Republic Advisor Funds Trust (the "Trust"), an open-end management investment
company which currently consists of three funds, each of which has different and
distinct investment objectives and policies. The Trust seeks to achieve the
Fund's investment objective by investing all of the Fund's investable assets
("Assets") in the International Equity Portfolio (the "Portfolio"), which has
the same investment objective as the Fund. The Portfolio is a series of Republic
Portfolios (the "Portfolio Trust"), an open-end management investment company.
The Fund is described in this Statement of Additional Information.
Shares of the Fund are offered only to clients of Republic and its
affiliates for which Republic or its affiliates exercises investment discretion.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS
FOR THE FUND, DATED MARCH 1, 1998 (THE "PROSPECTUS"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
March 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS ..........................
U.S. Government Securities ............................................
Convertible Securities ................................................
Repurchase Agreements .................................................
Investment Restrictions ...............................................
Percentage and Rating Restrictions ....................................
PORTFOLIO TRANSACTIONS ...................................................
PERFORMANCE INFORMATION ..................................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST ..........................
Trustees and Officers .................................................
Compensation Table ....................................................
Investment Manager ....................................................
Sub-Adviser ...........................................................
Administrator and Portfolio Administrator .............................
Custodian, Transfer Agents, and Fund Accounting Agents ................
Expenses ..............................................................
DETERMINATION OF NET ASSET VALUE .........................................
TAXATION .................................................................
Options, Futures and Forward Contracts ................................
Swap Agreements .......................................................
Investment in Passive Foreign Investment Companies ....................
Disposition of Shares .................................................
OTHER INFORMATION ........................................................
Capitalization ........................................................
Voting Rights .........................................................
Independent Auditors ..................................................
Counsel ...............................................................
Registration Statement ................................................
FINANCIAL STATEMENTS .....................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated March 1, 1998, of the Fund by which
shares of the Fund are offered. Unless the context otherwise requires, terms
defined in the Prospectus have the same meaning in this Statement of Additional
Information as in the Prospectus.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Portfolio discussed under the caption "Investment
Objective and Policies" in the Prospectus.
U.S. GOVERNMENT SECURITIES
For liquidity purposes and for temporary defensive purposes, the
Portfolio may invest in U.S. Government securities held directly or under
repurchase agreements. U.S. Government securities include bills, notes, and
bonds issued by the U.S. Treasury and securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government.
Some U.S. Government securities are supported by the direct full faith
and credit pledge of the U.S. Government; others are supported by the right of
the issuer to borrow from the U.S. Treasury; others, such as securities issued
by the Federal National Mortgage Association ("FNMA"), are supported by the
discretionary authority of the U.S. Government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. Government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
CONVERTIBLE SECURITIES
The Portfolio may buy securities that are convertible into common
stock. The following is a brief description of the various types of convertible
securities in which the Portfolio may invest.
Convertible bonds are issued with lower coupons than non-convertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to common
shares becomes more valuable.
Convertible preferred stocks are non-voting equity securities that pay
a fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
Warrants entitle the holder to buy the issuer's stock at a specific
price for a specific period of time. The price of a warrant tends to be more
volatile than, and does not always track, the price of its underlying stock.
Warrants are issued with expiration dates. Once a warrant expires, it has no
value in the market.
Rights represent a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public.
REPURCHASE AGREEMENTS
The Portfolio may invest in instruments subject to repurchase
agreements only with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York) in U.S.
Government securities. Under the terms of a typical repurchase agreement, an
underlying debt instrument would be acquired for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument at a fixed price and time, thereby determining the
yield during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. A repurchase agreement is
subject to the risk that the seller may fail to repurchase the security.
Repurchase agreements may be deemed to be loans under the 1940 Act. All
repurchase agreements entered into on behalf of the Fund are fully
collateralized at all times during the period of the agreement in that the value
of the underlying security is at least equal to the amount of the loan,
including accrued interest thereon, and the Portfolio or its custodian bank has
possession of the collateral, which the Portfolio Trust's Board of Trustees
believes gives the Portfolio a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been definitively established. This
could become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Portfolio but only constitute collateral for the seller's obligation to
pay the repurchase price. Therefore, the Portfolio may suffer time delays and
incur costs in connection with the disposition of the collateral. The Board of
Trustees of the Portfolio Trust believes that the collateral underlying
repurchase agreements may be more susceptible to claims of the seller's
creditors than would be the case with securities owned by the Portfolio. The
Portfolio will not invest in a repurchase agreement maturing in more than seven
days if any such investment together with illiquid securities held for the
Portfolio exceed 15% of the Portfolio's net assets.
INVESTMENT RESTRICTIONS
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities." The term "voting securities" as used in this paragraph has
the same meaning as in the 1940 Act.
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
(3) make loans except for the lending of portfolio securities pursuant
to guidelines established by the Board of Trustees and except as otherwise in
accordance with the Portfolio's (Fund's) investment objective and policies;
(4) borrow money, except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes, provided that
the Portfolio (Fund) maintains asset coverage of at least 300% for all such
borrowings;
(5) underwrite the securities of other issuers (except to the extent
that the Portfolio (Fund) may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 (the "1933 Act") in the disposition of restricted
securities);
(6) acquire any securities of companies within one industry, if as a
result of such acquisition, more than 25% of the value of the Portfolio's
(Fund's) total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a temporary defensive
position;
(7) issue senior securities, except as permitted under the 1940 Act;
(8) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase securities of any issuer if, as a result, more than 5% of the
Portfolio's (Fund's) total assets taken at market value would be invested in the
securities of any single issuer;
(9) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase a security if, as a result, the Portfolio (Fund) would hold more than
10% of the outstanding voting securities of any issuer.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by the Board of Trustees without shareholder
approval (except that none of the following investment policies shall prevent
the Trust from investing all of the Assets of the Fund in a separate registered
investment company with substantially the same investment objectives).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(1) borrow money, except that the Portfolio (Fund) may borrow for
temporary or emergency purposes up to 10% of its net assets; provided, however,
that the Portfolio (Fund) may not purchase any security while outstanding
borrowings exceed 5% of net assets;
(2) sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options and futures contracts are not deemed to
constitute short sales of securities;
(3) purchase warrants, valued at the lower of cost or market, in excess
of 10% of the value of its net assets. Included within that amount, but not to
exceed 2% of the value of the Portfolio's (Fund's) net assets, may be warrants
that are not listed on the New York or American Stock Exchanges or an exchange
with comparable listing requirements. Warrants attached to securities are not
subject to this limitation;
(4) purchase securities on margin, except for use of short-term credit
as may be necessary for the clearance of purchases and sales of securities, but
it may make margin deposits in connection with transactions in options, futures,
and options on futures;
(5) invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund), determined at the time of investment, in securities that are
illiquid because their disposition is restricted under the federal securities
laws or securities for which there is no readily available market; provided,
however that this policy does not limit the acquisition of (i) securities that
have legal or contractual restrictions on resale but have a readily available
market or (ii) securities that are not registered under the 1933 Act, but which
can be sold to qualified institutional investors in accordance with Rule 144A
under the 1933 Act and which are deemed to be liquid pursuant to guidelines
adopted by the Board of Trustees ("Restricted Securities");
(6) invest more than 10% of the Portfolio's (Fund's) assets in
Restricted Securities (including Rule 144A securities);
(7) invest for the purpose of exercising control over management of any
company;
(8) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers' commissions or
in connection with mergers, acquisitions of assets or consolidations and except
as may otherwise be permitted by the 1940 Act; provided, however, that the
Portfolio shall not invest in the shares of any open-end investment company
unless (1) the Portfolio's Sub-Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge in connection
with the investment;
(9) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign government or
political subdivisions thereof) which have (with predecessors) a record of less
than three years' continuous operations;
(10) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases;
(11) purchase or retain securities of an issuer if those officers and
Trustees of the Portfolio (Fund) or the Manager or Sub-Adviser owning more than
1/2 of 1% of such securities together own more than 5% of such securities.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Fund or a later change in the rating of a security held by the Fund is
not considered a violation of policy; however, the Sub-Adviser will consider
such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is primarily responsible for portfolio decisions and
the placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of Portfolio investments
for the Portfolio with Republic New York Securities Corporation, an affiliate of
the Manager.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), the Sub-Adviser may cause the Portfolio to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Sub-Adviser an amount of commission for effecting a securities transaction
for the Fund in excess of the commission which another broker-dealer would have
charged for effecting that transaction. For the fiscal years ended October 31,
1996 and October 31, 1997, the Portfolio paid aggregate brokerage commissions
equal to $352,429 and $295,571, respectively, none of which was paid to
broker-dealers that provided "brokerage and research services" to the
Sub-Adviser. For the period January 9, 1995 (commencement of operations) to
October 31, 1995, there were no brokerage commissions paid from the Portfolio.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees of the
Portfolio Trust may determine, and subject to seeking the most favorable price
and execution available, the Sub-Adviser may consider sales of shares of the
Fund as a factor in the selection of broker-dealers to execute portfolio
transactions for the Portfolio.
Investment decisions for the Portfolio and for the other investment
advisory clients of the Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security may be sold for certain clients even though it could have been bought
for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Sub-Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Fund and for other clients of the Sub-Adviser
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchases or
sales. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients
in terms of the price paid or received or of the size of the position
obtainable.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return for the
Fund, computed in accordance with formulas prescribed by the Securities and
Exchange Commission ("SEC"), in advertisements or reports to shareholders or
prospective investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
n
P (1 + T) = ERV
where
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period. All total return figures
reflect the deduction of a proportional share of Fund expenses
on an annual basis, and assume that all dividends and
distributions are reinvested when paid. The Fund also may,
with respect to certain periods of less than one year, provide
total return information for that period that is unannualized.
Any such information would be accomplished by standardized
total return information.
Historical performance information for any period or portion thereof
prior to the establishment of the Fund will be that of the Portfolio, adjusted
to assume that all charges, expenses and fees of the Fund and the Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Annual Total Return -- Year Ended October 31, 1997: 16.62%
-- Year Ended October 31, 1996: 13.22%.
Average Annual Total Return -- January 9, 1995 (commencement of operations) to
October 31, 1997: 13.57%.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Morgan Stanley Capital International EAFE
(Europe, Australasia and Far East) Index. Unmanaged indices (i.e., other than
Lipper) generally do not reflect deductions for administrative and management
costs and expenses. Comparative information may be compiled or provided by
independent ratings services or by news organizations. Any performance
information should be considered in light of the Fund's investment objectives
and policies, characteristics and quality of the Fund, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
officers are "interested persons" (as defined in the 1940 Act) of the Trust and
the Portfolio Trust. The address of each, unless otherwise indicated, is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
FREDERICK C. CHEN, Trustee
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW, Trustee
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, Trustee
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, Trustee
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
KAREN DOYLE*, Vice President
Manager of Client Services for BISYS Fund Services, Inc., October 1994
to present; from 1979 to October 1994, an employee of the Bank of New
York.
FRANK M. DEUTCHKI*, Vice President
Employee of BISYS Fund Services, Inc., April 1996 to present; Vice
President, Chase Global Funds Service, September 1995 to April 1996;
Vice President, Mutual Funds Service Company, 1989 to September 1995.
ADRIAN WATERS*, Treasurer
Employee of BISYS Fund Services (Ireland) LTD., May 1993 to present;
Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer
Employee of BISYS Fund Services (Ireland) LTD., March 1994 to present;
Supervisor, Price Waterhouse, 1990 to March 1994.
ALAINA METZ*, Assistant Secretary
Chief Administrator, Administrative and Regulatory Services, BISYS Fund
Services, Inc., June 1995 to present; Supervisor, Mutual Fund Legal
Department, Alliance Capital Management, May 1989 to June 1995.
Messrs. Grimm, Deutchki and Waters and Mss. Doyle, Brady and Metz
also are officers of certain other investment companies of which BISYS or an
affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement Trustees
- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Frederick C. Chen $1,600 none none $8,600
Alan S. Parsow $1,600 none none $7,600
Larry M. Robbins $1,800 none none $7,600
Michael Seely $1,600 none none $7,600
* The Fund Complex includes the Trust, Republic Funds, and the Portfolio Trust.
</TABLE>
The compensation table above reflects the fees received by the Trustees
for the year ended October 31, 1997. The Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust will receive an annual
retainer of $5,600 and a fee of $1,000 for each meeting of the Board of Trustees
or committee thereof attended, except that Mr. Robbins will receive an annual
retainer of $7,600 and a fee of $1,000 for each meeting attended.
As of January 14, 1998, the Trustees and officers of the Trust and the
Portfolio Trust, as a group, owned less than 1% of the outstanding shares of the
Fund. As of the same date, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund (the Trust has no knowledge of the
beneficial ownership of such shares): Republic National Bank of New York,
Pension Plan & Trust, 452 Fifth Avenue, 27th Floor, New York, New York, 10018 -
27.97%; Republic National Bank of New York, Pooled Profit Sharing Plan, 452
Fifth Avenue, 27th Avenue, New York, New York, 10018 - 7.50%; and Kinco & Co.
c/o RNB Securities Services, One Hanson Place, Brooklyn, New York 11243 -
12.24%. In addition, the identity and address of one owner of 5% or more of the
outstanding shares of the Fund have been withheld at the request of the
shareholder. Shareholders who own more than 25% of the outstanding voting
securities of the Fund may be able to control the outcome of any matter
submitted for the approval of shareholders of the Fund.
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT MANAGER
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the Manager is entitled to receive a fee from
the Portfolio, computed daily and paid monthly, equal on an annual basis to
0.25% of the Portfolio's average daily net assets. For the period from January
9, 1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, investment management
fees aggregated $0, $243,751 and $466,480, respectively, of which the entire
amount was waived.
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
SUB-ADVISER
CGTC, as the Portfolio's Sub-Adviser, is responsible for the investment
management of the Portfolio's assets, including making investment decisions and
placing orders for the purchase and sale of securities for the Portfolio
directly with the issuers or with brokers or dealers selected by CGTC or
Republic in its discretion. See "Portfolio Transactions." CGTC also furnishes to
the Board of Trustees of the Portfolio Trust, which has overall responsibility
for the business and affairs of the Portfolio Trust, periodic reports on the
investment performance of the Portfolio.
For its services, CGTC receives from the Portfolio a fee, computed
daily and based on the Portfolio's average daily net assets, at the annual rate
of 0.70% of net assets up to $25 million, 0.55% of net assets over $25 million
up to $50 million, 0.425% of net assets over $50 million up to $250 million, and
0.375% of net assets in excess of $250 million. For the period from January 9,
1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, sub-advisory fees
aggregated $131,059, $514,874 and $893,016, respectively.
The investment advisory services of CGTC to the Portfolio are not
exclusive under the terms of the Sub-Advisory Agreement. CGTC is free to and
does render investment advisory services to others.
ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Each Administration Agreement will remain in effect until March 31,
1999, and automatically will continue in effect thereafter from year to year
unless terminated upon 60 days' written notice to BISYS or BISYS (Ireland), as
appropriate. Each Administration Agreement will terminate automatically in the
event of its assignment. Each Administration Agreement also provides that
neither BISYS nor BISYS (Ireland), as appropriate, nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust or the Portfolio Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
For the period from January 9, 1995 (Portfolio commencement of
operations) to October 31, 1995, and for the fiscal years ended October 31, 1996
and October 31, 1997, the Portfolio accrued administration fees of $9,433,
$48,750 (of which $117 was waived voluntarily) and $93,296 (none of which was
waived), respectively. The Fund (or its predecessor) accrued administration fees
of $20,274 (of which $5,914 was waived voluntarily), $36,129 (of which $16,007
was waived voluntarily) and $62,326 (none of which was waived) during these
respective periods.
CUSTODIAN, TRANSFER AGENTS, AND FUND ACCOUNTING AGENTS
With respect to domestic assets, Republic serves as custodian for the
Fund and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio, and as
transfer agent and fund accounting agent for the Fund. The Custodian may use the
services of sub-custodians with respect to the Portfolio. The principal business
address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117. IBT Fund
Services (Canada) Inc. serves as the fund accounting agent for the Portfolio,
and Investors Fund Services (Ireland) Limited is the Portfolio's transfer agent.
EXPENSES
Trust expenses directly related to the Fund are charged to the Fund;
other expenses are allocated proportionally among all of the portfolios of the
Trust in relation to the net asset value of the portfolios.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the Shares is determined on each day on
which the New York Stock Exchange ("NYSE") is open for trading. As of the date
of this Statement of Additional Information, the NYSE is open every weekday
except for the days on which the following holidays are observed: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Sub-Adviser typically completes its trading on behalf of the
Portfolio in various markets before 4:00 p.m., and the value of portfolio
securities is determined when the primary market for those securities closes for
the day. Foreign currency exchange rates are also determined prior to 4:00 p.m.
However, if extraordinary events occur that are expected to affect the value of
a portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolio Trust.
Subject to the Trust's compliance with applicable regulations, the
Trust on behalf of the Fund and the Portfolio have reserved the right to pay the
redemption or repurchase price of shares of the Fund, either totally or
partially, by a distribution in kind of portfolio securities from the Portfolio
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust will redeem Fund shares in kind only if it has received a
redemption in kind from the Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind.
TAXATION
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
Each year, to qualify as a separate "regulated investment company"
under the Code, at least 90% of the Fund's investment company taxable income
(which includes, among other items, interest, dividends and the excess of net
short-term capital gains over net long-term capital losses) must be distributed
to Fund shareholders and the Fund must meet certain diversification of assets,
source of income, and other requirements. If the Fund does not so qualify, it
will be taxed as an ordinary corporation.
The Portfolio has obtained a ruling from the Internal Revenue Service
("IRS") that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether the Fund satisfies the income
and diversification requirements to maintain its status as a RIC, the Fund, as
an investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed equal to the sum of (1) at least 98% of the Fund's
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of the Fund's capital gain net income for the
12-month period ending, as a general rule, on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Rate Gain" or "28% Rate Gain," depending upon the Portfolio's
holding period for the assets sold. "20% Rate Gains" arise from sales of assets
held by the Fund for more than 18 months and are subject to a maximum tax rate
of 20%, "28% Rate Gains" arise from sales of assets held by the Portfolio for
more than one year but no more than 18 months and are subject to a maximum tax
rate of 28%. Net capital gains from assets held for one year or less will be
taxed as ordinary income. Distributions will be subject to these capital gains
rates regardless of how long a shareholder has held Portfolio shares.
OPTIONS, FUTURES AND FORWARD CONTRACTS
Some of the options, futures contracts and forward contracts entered
into by the Portfolio may be "Section 1256 contracts." Section 1256 contracts
held by the Portfolio at the end of its taxable year (and, for purposes of the
4% excise tax, on certain other dates as prescribed under the Code) are
"marked-to-market" with unrealized gains or losses being treated as though they
were realized. Any gains or losses, including "marked-to-market" gains or
losses, on Section 1256 contracts are generally 60% long-term and 40% short-term
capital gains or losses ("60/40") although all foreign currency gains and losses
from such contracts may be treated as ordinary in character absent a special
election.
Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Portfolio may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gain or loss realized by the Portfolio. In addition, losses
realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Portfolio are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Portfolio.
Short-term gain is taxed as ordinary income when distributed to Fund
shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character, and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Recently enacted rules may affect the timing and character of gain if
the Portfolio engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Portfolio enters into
certain transactions in property while holding substantially identical property,
the Portfolio would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Portfolio's holding period in the property. Loss from a constructive sale would
be recognized when the property was subsequently disposed of, and its character
would depend on the Portfolio's holding period and the application of various
loss deferral provisions of the Code.
SWAP AGREEMENTS
Rules governing the tax aspects of swap contracts are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner deemed to be
appropriate, the IRS might not necessarily accept such treatment. If it does
not, the status of the Fund as a regulated investment company might be affected.
The Fund intends to monitor developments in this area. Certain requirements that
must be met under the Code in order for the Fund to qualify as a regulated
investment company may limit the extent to which the Portfolio will be able to
engage in swap agreements.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Portfolio may invest in shares of foreign corporations (through
ADRs) which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Portfolio receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Portfolio held the PFIC shares. The
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
Alternative tax treatment may be available with respect to PFIC shares
held by the Portfolio. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. Alternatively, another election would
involve marking to market PFIC shares at the end of each taxable year, with the
result that unrealized gains are treated as though they were realized and
reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
DISPOSITION OF SHARES
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum tax rate of 28% if the shareholder's holding
period for the shares is more than one year but not more than 18 months. Gain
from the disposition of shares held for not more than one year will be treated
as short-term capital gains. Any loss realized on a sale or exchange of Fund
shares otherwise will be short-term. Any loss realized on a sale or exchange of
Fund shares will be disallowed to the extent that the shares disposed of are
replaced (including replacement through reinvesting of dividends and capital
gain distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 5, 1996.
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) at any time in the future. Establishment and offering
of additional series will not alter the rights of the Fund's shareholders. When
issued, shares are fully paid, nonassessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
liquidation of the Fund, each shareholder is entitled to receive his pro rata
share of the net assets of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Interests in the Portfolio have no preference, preemptive, conversion
or similar rights, and are fully paid and non-assessable. The Portfolio Trust is
not required to hold annual meetings of investors, but will hold special
meetings of investors when, in the judgment of the Portfolio Trust's Trustees,
it is necessary or desirable to submit matters for an investor vote. Each
investor is entitled to a vote in proportion to the share of its investment in
the Portfolio.
Except as described below, whenever the Trust is requested to vote on a
matter pertaining to the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast all of its votes on each matter at a meeting of
investors in the Portfolio proportionately as instructed by the Fund's
shareholders. However, subject to applicable statutory and regulatory
requirements, the Trust would not request a vote of the Fund's shareholders with
respect to any proposal relating to the Portfolio which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Trust and the Fund for the fiscal year ending
October 31, 1998. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's and Portfolio's income tax returns, and assist in
the preparation of filings with the SEC. The address of KPMG Peat Marwick LLP is
99 High Street, Boston, Massachusetts 02110. The Portfolio Trust has appointed
KPMG as its independent auditors to audit the Portfolio's financial statements
for the fiscal year ending October 31, 1998.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the Shares offered by the
Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the SEC under the 1933 Act with respect to shares of the Fund, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1997 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1997 as filed with the SEC. A
copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
MFS Institutional Advisors, Inc. -
Sub-Adviser
("Sub-Adviser")
BISYS Fund Services -
Administrator of the Fund, Distributor and Sponsor
("BISYS" or the "Administrator of the Fund" or the "Distributor" or the
"Sponsor")
BISYS Fund Services (Ireland), Limited -
Administrator of the Portfolio
("BISYS (Ireland)")
STATEMENT OF ADDITIONAL INFORMATION
Republic Small Cap Equity Fund (the "Fund") is a separate series of
Republic Advisor Funds Trust (the "Trust"), an open-end management investment
company which currently consists of three funds, each of which has different and
distinct investment objectives and policies. The Trust seeks to achieve the
Fund's investment objective by investing all of the Fund's investable assets
("Assets") in the Small Cap Equity Portfolio (the "Portfolio"), which has the
same investment objective as the Fund. The Portfolio is a series of Republic
Portfolios (the "Portfolio Trust"), an open-end management investment company.
The Fund is described in this Statement of Additional Information.
Shares of the Fund (the "Shares") are offered only to clients of
Republic and its affiliates for which Republic or its affiliates exercises
investment discretion.
This Statement of Additional Information is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Prospectus
for the Fund, dated March 1, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
March 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS...................
Investment Restrictions..................................
Percentage and Rating Restrictions.......................
PORTFOLIO TRANSACTIONS............................................
PERFORMANCE INFORMATION...........................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST...................
Trustees and Officers....................................
Investment Manager.......................................
Sub-Adviser..............................................
Administrator and Portfolio Administrator................
Fund Accounting Agent....................................
Custodian and Transfer Agent.............................
DETERMINATION OF NET ASSET VALUE..................................
TAXATION..........................................................
Options, Futures and Forward Contracts...................
Swap Agreements..........................................
Investment in Passive Foreign Investment Companies.......
Disposition of Shares....................................
OTHER INFORMATION.................................................
Purchase of Shares.......................................
Capitalization...........................................
Voting Rights............................................
Independent Auditors.....................................
Counsel..................................................
Registration Statement...................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated March 1, 1998, of the Fund by
which shares of the Fund are offered. Unless the context otherwise requires,
terms defined in the Prospectus have the same meaning in this Statement of
Additional Information as in the Prospectus.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Portfolio discussed under the caption "Investment
Objective and Policies" in the Prospectus.
FOREIGN SECURITIES: The Portfolio may invest in foreign securities as
discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Portfolio may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Portfolio may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Portfolio's custodian in five days. The Portfolio may also
execute trades on the U.S. markets using existing ADRs. A foreign issuer of the
security underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly the
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the issuer
of the underlying security. ADRs may also be subject to exchange rate risks if
the underlying foreign securities are denominated in foreign currency.
EMERGING MARKETS: The Portfolio may invest in Emerging Market
Securities. Such investments entail significant risks as described in the
Prospectus under the caption "Additional Risk Factors -- Emerging Markets" and
as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities
held by the Portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Portfolio's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest when due
in accordance with the terms of such debt. A governmental entity's willingness
or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International Monetary Fund,
and the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest averages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Portfolio) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and tarnish its trade account surplus, if
any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities
markets of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to the
volume of trading in the securities of U.S. issuers could cause prices to be
erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market size may
cause prices to be unduly influenced by traders who control large positions.
Adverse publicity and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of portfolio
securities.
DEFAULT; LEGAL RECOURSE -- The Portfolio may have limited legal
recourse in the event of a default with respect to certain debt obligations it
may hold. If the issuer of a fixed-income security owned by the Portfolio
defaults, that Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt obligations
of private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued in
the courts of the defaulting party itself. The Portfolio's ability to enforce
its rights against private issuers may be limited. The ability to attach assets
to enforce a judgment may be limited. Legal recourse is therefore somewhat
diminished. Bankruptcy, moratorium and other similar laws applicable to private
issuers of debt obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for example, is
of considerable importance. In addition, no assurance can be given that the
holders of commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested. The Sub-Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN CURRENCIES -- Some emerging market countries also may have
managed currencies, which are not free floating against the U.S. dollar. In
addition, there is risk that certain emerging market countries may restrict the
free conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which the Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Portfolio
may enter into repurchase agreements with sellers who are member firms (or a
subsidiary thereof) of the New York Stock Exchange or members of the Federal
Reserve System, recognized domestic or foreign securities dealers or
institutions which the Sub-Adviser has determined to be of comparable
creditworthiness. The securities that the Portfolio purchases and holds have
values that are equal to or greater than the repurchase price agreed to be paid
by the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Portfolio, or the purchase and repurchase prices
may be the same, with interest at a standard rate due to the Portfolio together
with the repurchase price on repurchase.
The repurchase agreement provides that in the event the seller fails to
pay the price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Portfolio will have the right to liquidate the securities.
If at the time the Portfolio is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Portfolio's exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Portfolio. The Portfolio has adopted
and follows procedures which are intended to minimize the risks of repurchase
agreements. For example, the Portfolio only enters into repurchase agreements
after the Sub-Adviser has determined that the seller is creditworthy, and the
Sub-Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are marked
to market every business day) is required to be greater than the repurchase
price, and the Portfolio has the right to make margin calls at any time if the
value of the securities falls below the agreed upon margin.
LENDING OF PORTFOLIO SECURITIES: The Portfolio may seek to increase its
income by lending portfolio securities to entities deemed creditworthy by the
Sub-Adviser. The Portfolio would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the
Portfolio would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
based on investment of the collateral. The Portfolio would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Sub-Adviser to be of good
standing, and when, in the judgment of the Sub-Adviser, the consideration which
could be earned currently from securities loans of this type justifies the
attendant risk. If the Sub-Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 30% of the
value of the Portfolio's total assets.
OPTIONS ON SECURITIES: The Portfolio may write (sell) covered call and
put options on securities ("Options") and purchase call and put Options. The
Portfolio may write Options for the purpose of attempting to increase its return
and for hedging purposes. In particular, if the Portfolio writes an Option which
expires unexercised or is closed out by the Portfolio at a profit, the Portfolio
retains the premium paid for the Option less related transaction costs, which
increases its gross income and offsets in part the reduced value of the
portfolio security in connection with which the Option is written, or the
increased cost of portfolio securities to be acquired. In contrast, however, if
the price of the security underlying the Option moves adversely to the
Portfolio's position, the Option may be exercised and the Portfolio will then be
required to purchase or sell the security at a disadvantageous price, which
might only partially be offset by the amount of the premium.
The Portfolio may write Options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call Option against that security. The exercise price of the call Option the
Portfolio determines to write depends upon the expected price movement of the
underlying security. The exercise price of a call Option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Portfolio in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call Options on
the same security, a practice known as a "straddle." By writing a straddle, the
Portfolio undertakes a simultaneous obligation to sell or purchase the same
security in the event that one of the Options is exercised. If the price of the
security subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be exercised
and the Portfolio will be required to sell the underlying security at a below
market price. This loss may be offset, however, in whole or in part, by the
premiums received on the writing of the two Options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the Options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call Option on a portfolio security, the Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the Option. By writing a put
Option, the Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price above its then current market value,
resulting in a loss unless the security subsequently appreciates in value. The
writing of Options will not be undertaken by the Portfolio solely for hedging
purposes, and may involve certain risks which are not present in the case of
hedging transactions. Moreover, even where Options are written for hedging
purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Portfolio may also purchase put and call Options. Put Options are
purchased to hedge against a decline in the value of securities held in the
Portfolio's portfolio. If such a decline occurs, the put Options will permit the
Portfolio to sell the securities underlying such Options at the exercise price,
or to close out the Options at a profit. The Portfolio will purchase call
Options to hedge against an increase in the price of securities that the
Portfolio anticipates purchasing in the future. If such an increase occurs, the
call Option will permit the Portfolio to purchase the securities underlying such
Option at the exercise price or to close out the Option at a profit. The premium
paid for a call or put Option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the Option, and,
unless the price of the underlying security rises or declines sufficiently, the
Option may expire worthless to the Portfolio. In addition, in the event that the
price of the security in connection with which an Option was purchased moves in
a direction favorable to the Portfolio, the benefits realized by the Portfolio
as a result of such favorable movement will be reduced by the amount of the
premium paid for the Option and related transaction costs.
The staff of the Securities and Exchange Commission ("SEC") has taken
the position that purchased over-the-counter options and certain assets used to
cover written over-the-counter options are illiquid and, therefore, together
with other illiquid securities, cannot exceed a certain percentage of the
Portfolio's assets (the "SEC illiquidity ceiling"). Although the Sub-Adviser
disagrees with this position, the Sub-Adviser intends to limit the Portfolio's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Portfolio intends to write over-the-counter
options only with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York. Also, the contracts the Portfolio has in place
with such primary dealers will provide that the Portfolio has the absolute right
to repurchase an option it writes at any time at a price which represents the
fair market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Portfolio for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Portfolio will treat all
or a portion of the formula as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Portfolio may also write over-the-counter
options with non-primary dealers, including foreign dealers, and will treat the
assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
OPTIONS ON STOCK INDICES: The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices ("Options on
Stock Indices"). The Portfolio may cover call Options on Stock Indices by owning
securities whose price changes, in the opinion of the Sub-Adviser, are expected
to be similar to those of the underlying index, or by having an absolute and
immediate right to acquire such securities without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities in its portfolio.
Where the Portfolio covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index and, in
that event, the Portfolio will not be fully covered and could be subject to risk
of loss in the event of adverse changes in the value of the index. The Portfolio
may also cover call options on stock indices by holding a call on the same index
and in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian. The Portfolio may cover put options on
stock indices by maintaining cash or cash equivalents with a value equal to the
exercise price in a segregated account with its custodian, or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Portfolio in cash or cash
equivalents in a segregated account with its custodian. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Portfolio will receive a premium from writing a put or call option
on a stock index, which increases the Portfolio's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of an
index on which the Portfolio has written a call option falls or remains the
same, the Portfolio will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises, however,
the Portfolio will realize a loss in its call option position, which will reduce
the benefit of any unrealized appreciation in the Portfolio's stock investment.
By writing a put option, the Portfolio assumes the risk of a decline in the
index. To the extent that the price changes of securities owned by the Portfolio
correlate with changes in the value of the index, writing covered put options on
indexes will increase the Portfolio's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
The Portfolio may also purchase put options on stock indices to hedge
their investments against a decline in value. By purchasing a put option on a
stock index, the Portfolio will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this strategy
will largely depend on the accuracy of the correlation between the changes in
value of the index and the changes in value of the Portfolio's security
holdings.
The purchase of call options on stock indices may be used by the
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid if the value of the index does
not rise. The purchase of call options on stock indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
FUTURES CONTRACTS: The Portfolio may enter into contracts for the
purchase or sale for future delivery of securities or foreign currencies or
contracts based on indexes of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the
Portfolio's portfolio securities or adversely affect the prices of long-term
bonds or other securities which the Portfolio intends to purchase at a later
date. Futures Contracts may also be entered into for non-hedging purposes to the
extent permitted by applicable law. A "sale" of a Futures Contract means a
contractual obligation to deliver the securities or foreign currency called for
by the contract at a fixed price at a specified time in the future. A "purchase"
of a Futures Contract means a contractual obligation to acquire the securities
or foreign currency at a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or
currencies, such deliveries are very seldom made. Generally, a Futures Contract
is terminated by entering into an offsetting transaction. The Portfolio will
incur brokerage fees when it purchases and sells Futures Contracts. At the time
such a purchase or sale is made, the Portfolio must allocate cash or securities
as a margin deposit ("initial deposit"). It is expected that the initial deposit
will vary but may be as low as 5% or less of the value of the contract. The
Futures Contract is valued daily thereafter and the payment of "variation
margin" may be required to be paid or received, so that each day the Portfolio
may provide or receive cash that reflects the decline or increase in the value
of the contract.
The purpose of the purchase or sale of a Futures Contract, for hedging
purposes in the case of a portfolio holding long-term debt securities, is to
protect the Portfolio from fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, if the Portfolio owned
long-term bonds and interest rates were expected to increase, the Portfolio
might enter into Futures Contracts for the sale of debt securities. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Portfolio's Futures Contracts should increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. However, since the futures market
is more liquid than the cash market, the use of Futures Contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities. Transactions entered into for
non-hedging purposes include greater risk, including the risk of losses which
are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Portfolio could take advantage
of the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Portfolio could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Portfolio could have the effect of
diluting dividend earnings. To the extent the Portfolio enters into Futures
Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or short-term money market
instruments from the portfolio of the Portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such Futures Contracts, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar
manner, in order to protect against declines in the dollar value of portfolio
securities denominated in foreign currencies, or increases in the dollar value
of securities to be acquired.
A Futures Contract on an index of securities provides for the making
and acceptance of a cash settlement based on changes in value of the underlying
index. The Portfolio may enter into stock index futures contracts in order to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices and for non-hedging purposes to the extent
permitted by applicable law. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or in whole,
offset increases in the cost of securities that Fund intends to purchase. As
such acquisitions are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon the termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities. Futures Contracts on other
securities indexes may be used in a similar manner in order to protect the
portfolio from broad fluctuations in securities prices and for non-hedging
purposes to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Portfolio may write and purchase
options to buy or sell Futures Contracts ("Options on Futures Contracts"). The
writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security or currency underlying the Futures
Contract. If the futures price at expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium, less
related transaction costs, which provides a partial hedge against any decline
that may have occurred in the Portfolio's portfolio holdings. The writing of a
put Option on a Futures Contract constitutes a partial hedge against increasing
prices of the security or currency underlying the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio will incur a loss
which will be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio securities
and changes in the value of its futures positions, the Portfolio's losses from
existing Options on Futures Contracts may to some extent be reduced or increased
by changes in the value of portfolio securities.
The Portfolio may purchase Options on Futures Contracts for hedging
purposes as an alternative to purchasing or selling the underlying Futures
Contracts, or for non-hedging purposes to the extent permitted by applicable
law. For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline, a rise in interest
rates or a decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the Portfolio may, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease in
portfolio value occurs, it may be offset, in whole or part, by a profit on the
option. Conversely, where it is projected that the value of securities to be
acquired by the Portfolio will increase prior to acquisition, due to a market
advance, or a decline in interest rates or a rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, the Portfolio may
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Portfolio to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Portfolio to forego all
or a portion of such benefits up to the amount of the premium paid and related
transaction costs. Transactions entered into for non-hedging purposes include
greater risk, including the risk of losses which are not offset by gains on
other portfolio assets.
FORWARD CONTRACTS: The Portfolio may enter into forward foreign
currency exchange contracts for the purchase or sale of a specific currency at a
future date at a price set at the time of the contract (a "Forward Contract").
The Portfolio may enter into Forward Contracts for hedging purposes as well as
for non-hedging purposes. The Portfolio may also enter into Forward Contracts
for "cross hedging" purposes as noted in the Prospectus. Transactions in Forward
Contracts entered into for hedging purposes will include forward purchases or
sales of foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such securities. By entering into such
transactions, however, the Portfolio may be required to forego the benefits of
advantageous changes in exchange rates. The Portfolio may also enter into
transactions in Forward Contracts for other than hedging purposes, which
presents greater profit potential but also involves increased risk. For example,
if the Sub-Adviser believes that the value of a particular foreign currency will
increase or decrease relative to the value of the U.S. dollar, the Portfolio may
purchase or sell such currency, respectively, through a Forward Contract. If the
expected changes in the value of the currency occur, the Portfolio will realize
profits which will increase its gross income. Where exchange rates do not move
in the direction or to the extent anticipated, however, the Portfolio may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative.
The Portfolio has established procedures consistent with statements by
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. In those instances in
which the Portfolio satisfies this requirement through segregation of assets, it
will maintain, in a segregated account, cash, cash equivalents or high grade
debt securities, which will be marked to market on a daily basis, in an amount
equal to the value of its commitments under Forward Contracts.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
PORTFOLIO'S PORTFOLIO -- The Portfolio's ability effectively to hedge all or a
portion of its portfolio through transactions in Options, Futures Contracts, and
Forward Contracts will depend on the degree to which price movements in the
underlying instruments correlate with price movements in the relevant portion of
that Fund's portfolio. If the values of portfolio securities being hedged do not
move in the same amount or direction as the instruments underlying Options,
Futures Contracts or Forward Contracts traded, the Portfolio's hedging strategy
may not be successful and the Portfolio could sustain losses on its hedging
strategy which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the instrument
underlying an Option, Future Contract or Forward Contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transaction had not
been undertaken. In the case of futures and Options based on an index of
securities or individual fixed income securities, the portfolio will not
duplicate the components of the index, and in the case of Futures Contracts and
Options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contracts. As a
result, the correlation probably will not be exact. Consequently, the Portfolio
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation. In
addition, where the Portfolio enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Portfolio incurs the risk of imperfect correlation between changes in the values
of the two currencies, which could result in losses.
The correlation between prices of securities and prices of Options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the Option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the
Sub-Adviser may still not result in a successful transaction. The trading of
Options on Futures Contracts also entails the risk that changes in the value of
the underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the Option, Futures Contract or Forward
Contract approaches.
The trading of Options, Futures Contracts and Forward Contracts also
entails the risk that, if the Sub-Adviser's judgment as to the general direction
of interest or exchange rates is incorrect, the Portfolio's overall performance
may be poorer than if it had not entered into any such contract. For example, if
the Portfolio has hedged against the possibility of an increase in interest
rates, and rates instead decline, the Portfolio will lose part or all of the
benefit of the increased value of the securities being hedged, and may be
required to meet ongoing daily variation margin payments.
It should be noted that the Portfolio may purchase and write Options
not only for hedging purposes, but also for the purpose of attempting to
increase its return. As a result, the Portfolio will incur the risk that losses
on such transactions will not be offset by corresponding increases in the value
of portfolio securities or decreases in the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract or Option
on a Futures Contract can only be terminated by entering into a closing purchase
or sale transaction, which requires a secondary market for such instruments on
the exchange on which the initial transaction was entered into. If no such
market exists, it may not be possible to close out a position, and the Portfolio
could be required to purchase or sell the underlying instrument or meet ongoing
variation margin requirements. The inability to close out option or futures
positions also could have an adverse effect on the Portfolio's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract
may be adversely affected by "daily price fluctuation limits," established by
the exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Portfolio from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which Options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of
an Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available
information on which the Portfolio will make trading decisions concerning
transactions related to foreign currencies or foreign securities may not be as
complete as the comparable data on which the Portfolio makes investment and
trading decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, and the markets for foreign
securities as well as markets in foreign countries may be operating during
non-business hours in the United States, events could occur in such markets
which would not be reflected until the following day, thereby rendering it more
difficult for the Portfolio to respond in a timely manner.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position, unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. This could make it difficult or impossible to enter into a desired
transaction or liquidate open positions, and could therefore result in trading
losses. Further, over-the-counter transactions are not subject to the
performance guarantee of an exchange clearing house and the Portfolio will
therefore be subject to the risk of default by, or the bankruptcy of, a
financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be
conducted in the same manner as those entered into on United States exchanges,
and may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may be
present in connection with such transactions. Moreover, the SEC or the
Commodities Futures Trading Commission ("CFTC") has jurisdiction over the
trading in the United States of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Portfolio to enter into the
trading strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Portfolio may
receive interest or dividend payments, or the proceeds of the sale or redemption
of such securities, in foreign currencies. The Portfolio may also be required to
receive delivery of the foreign currencies underlying options on foreign
currencies or Forward Contracts it has entered into. This could occur, for
example, if an option written by the Portfolio is exercised or the Portfolio is
unable to close out a Forward Contract it has entered into. In addition, the
Portfolio may elect to take delivery of such currencies. Under such
circumstances, the Portfolio may promptly convert the foreign currencies into
dollars at the then current exchange rate. Alternatively, the Portfolio may hold
such currencies for an indefinite period of time if the Sub-Adviser believes
that the exchange rate at the time of delivery is unfavorable or if, for any
other reason, the Sub-Adviser anticipates favorable movements in such rates.
While the holding of currencies will permit the Portfolio to take
advantage of favorable movements in the applicable exchange rate, it also
exposes the Portfolio to risk of loss if such rates move in a direction adverse
to the Portfolio's position. Such losses could also adversely affect the
Portfolio's hedging strategies. Certain tax requirements may limit the extent to
which the Portfolio will be able to hold currencies.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Portfolio will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Portfolio enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Portfolio's assets. In addition, the Portfolio must comply with the requirements
of various state securities laws in connection with such transactions.
The Portfolio has adopted the additional policy that it will not enter
into a Futures Contract if, immediately thereafter, the value of securities and
other obligations underlying all such Futures Contracts would exceed 50% of the
value of the Portfolio's total assets. Moreover, the Portfolio will not purchase
put and call options if, as a result, more than 5% of its total assets would be
invested in such options.
When the Portfolio purchases a Futures Contract, an amount of cash and
cash equivalents will be deposited in a segregated account with the Portfolio's
custodian so that the amount so segregated will at all times equal the value of
the Futures Contract, thereby insuring that the leveraging effect of such
Futures is minimized.
Investment Restrictions
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities". The term "voting securities" as used in this paragraph has
the same meaning as in the 1940 Act.
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money (including from a bank or through
reverse repurchase agreements, forward roll transactions involving mortgage
backed securities or other investment techniques entered into for the purpose of
leverage), and except that it may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "State and Federal Restrictions"
below;
(2) underwrite securities issued by other persons except insofar as the
Portfolios may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed 30%
of the Portfolio's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for the Portfolio's portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Portfolio's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government securities) of any one
issuer.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by the Board of Trustees without shareholder
approval (except that none of the following investment policies shall prevent
the Trust from investing all of the Assets of the Fund in a separate registered
investment company with substantially the same investment objective).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(i) borrow money (including from a bank or through reverse repurchase
agreements or forward roll transactions involving mortgage backed securities or
similar investment techniques entered into for leveraging purposes), except that
the Portfolio may borrow for temporary or emergency purposes up to 10% of its
total assets; provided, however, that no Portfolio may purchase any security
while outstanding borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, and reverse repurchase agreements are
not considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer to be held
for the Portfolio; provided further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any securities of any open-end
investment company unless the Portfolio (Fund) (1) waives the investment
advisory fee, with respect to assets invested in other open-end investment
companies and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable;
(viii) invest more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) in (a) securities that are restricted as to
resale under the 1933 Act, and (b) securities that are issued by issuers which
(including predecessors) have been in operation less than three years (other
than U.S. Government securities), provided, however, that no more than 5% of the
Portfolio's total assets are invested in securities issued by issuers which
(including predecessors) have been in operation less than three years;
(ix) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not be
subject to this restriction;
(x) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is an officer or partner of
the Advisor, if after the purchase of the securities of such issuer for the
Portfolio one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value;
(xi) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Portfolio (Fund) as part of a unit or attached to securities at the time of
purchase), but not more than 2% of the Portfolio's net assets may be invested in
warrants not listed on the New York Stock Exchange Inc. ("NYSE") or the American
Stock Exchange;
(xii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more than 10% of the
Portfolio's net assets (taken at market value) is represented by such
securities, or securities convertible into or exchangeable for such securities,
at any one time (the Portfolios have no current intention to engage in short
selling);
(xiii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within the
investment policies of the Portfolio and the option is issued by the Options
Clearing Corporation, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b) the
aggregate value of the obligations underlying the puts determined as of the date
the options are sold shall not exceed 50% of the Portfolio's net assets; (c) the
securities subject to the exercise of the call written by the Portfolio must be
owned by the Portfolio at the time the call is sold and must continue to be
owned by the Portfolio until the call has been exercised, has lapsed, or the
Portfolio has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's obligation to deliver securities pursuant
to the call it has sold; and (d) at the time a put is written, the Portfolio
establishes a segregated account with its custodian consisting of cash or
short-term U.S. Government securities equal in value to the amount the Portfolio
will be obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio has
purchased a closing put, which is a put of the same series as the one previously
written); and
(xiv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and (a) the options or
futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net assets; and
(c) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Portfolio's total assets.
Percentage and Rating Restrictions
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Fund or a later change in the rating of a security held by the Fund is
not considered a violation of policy; however, the Sub-Adviser will consider
such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by employees of the Sub-Adviser who are appointed and supervised by its
senior officers. Changes in the Portfolio's investments are reviewed by its
Board of Trustees. The Portfolio's portfolio manager or management committee may
serve other clients of the Sub-Adviser or any subsidiary of the Sub-Adviser in a
similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Sub-Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In the
United States and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Sub-Adviser normally
seeks to deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject to the
requirement of seeking execution at the best available price, securities may, as
authorized by each Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Sub-Adviser. At present no arrangements for the recapture of commission payments
are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of
the National Association of Securities Dealers, Inc. (the "NASD") and such other
policies as the Trustees may determine, the Sub-Adviser may consider sales of
shares of the Fund and of certain investment company clients of MFS Fund
Distributors, Inc., the principal underwriter of certain funds in the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
Under the Sub-Advisory Agreement and as permitted by Section 29(e) of
the Securities Exchange Act of 1934, the Sub-Adviser may cause the Portfolio to
pay a broker-dealer which provides brokerage and research services to the
Sub-Adviser an amount of commission for effecting a securities transaction for
the Portfolio in excess of the amount other broker-dealers would have charged
for the transaction if the Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their respective overall responsibilities to the
Portfolio or to their other clients. Not all of such services are useful or of
value in advising the Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Sub-Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Sub-Adviser's other clients in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided such Research. For the
period from September 3, 1996 (Portfolio commencement of operations) to October
31, 1996, the Portfolio paid aggregate brokerage commissions equal to $65,132,
of which $42,400 (on $37,168,763 of transactions) was paid to broker-dealers
that provided Research to the Sub-Adviser. For the year ended October 31, 1997,
the Portfolio paid aggregate brokerage commissions equal to $316,521, none of
which was paid to broker-dealers that provided "brokerage and research services"
to the Sub-Adviser.
In certain instances there may be securities which are suitable for the
Portfolio as well as for the portfolio of one or more of the other clients of
the Sub-Adviser or any affiliate of the Sub-Adviser. Investment decisions for
the Portfolio and for such other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Sub-Adviser to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. In other cases, however, the
Sub-Adviser believes that the Portfolio's ability to participate in volume
transactions will produce better executions for the Portfolio.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return for the
Fund, computed in accordance with formulas prescribed by the Securities and
Exchange Commission ("SEC"), in advertisements or reports to shareholders or
prospective investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula:
n
P (1 + T) = ERV
where
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period. All total return figures
reflect the deduction of a proportional share of Fund expenses
on an annual basis, and assume that all dividends and
distributions are reinvested when paid. The Fund also may,
with respect to certain periods of less than one year, provide
total return information for that period that is unannualized.
Any such information would be accomplished by standardized
total return information.
Historical performance information for any period or portion thereof
prior to the establishment of the Fund will be that of the Portfolio, adjusted
to assume that all charges, expenses and fees of the Fund and the Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Annual Total Return -- Year Ended October 31, 1997: 27.18%
For the period from September 3, 1996 (commencement of
operations) to October 31, 1996: 6.30%
Average Annual Total Return -- September 3, 1996 (commencement of operations) to
October 31, 1997: 29.12%
Performance information for the Fund may also be compared to various
unmanaged indices. Unmanaged indices (i.e., other than Lipper) generally do not
reflect deductions for administrative and management costs and expenses.
Comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information should be
considered in light of the Fund's investment objectives and policies,
characteristics and quality of the Fund, and the market conditions during the
given time period, and should not be considered to be representative of what may
be achieved in the future.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
Trustees and Officers
The principal occupations of the Trustees and executive officers of
the Trust for the past five years are listed below. Asterisks indicate that
those officers are "interested persons" (as defined in the 1940 Act) of the
Trust and the Portfolio Trust. The address of each, unless otherwise indicated,
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FREDERICK C. CHEN, Trustee
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW, Trustee
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of
Parsow Partnership, Ltd. (investments).
LARRY M. ROBBINS, Trustee
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, Trustee
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Service Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investment Consulting (investment firm).
KAREN DOYLE*, Vice President
Manager of Client Services for BISYS Fund Services, Inc., October 1994
to present; from 1979 to October 1994, an employee of the Bank of New
York.
FRANK M. DEUTCHKI*, Vice President
Employee of BISYS Fund Services, Inc., April 1996 to present; Vice
President, Chase Global Funds Service, September 1995 to April 1996;
Vice President, Mutual Funds Service Company, 1989 to September 1995.
ADRIAN WATERS*, Treasurer
Employee of BISYS Fund Services (Ireland) LTD., May 1993 to present;
Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer
Employee of BISYS Fund Services (Ireland) LTD., March 1994 to present;
Supervisor, Price Waterhouse, 1990 to March 1994.
ALAINA METZ*, Assistant Secretary
Chief Administrator, Administrative and Regulatory Services, BISYS
Fund Services, Inc., June 1995 to present; Supervisor, Mutual Fund
Legal Department, Alliance Capital Management, May 1989 to June 1995.
Messrs. Grimm, Deutchki and Waters and Mss. Doyle, Brady and Metz
also are officers of certain other investment companies of which BISYS or an
affiliate is the administrator.
Compensation Table
<TABLE>
<S> <C> <C> <C> <C>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund Complex*
Name of Compensation Part of Fund Benefits Upon to Trustees
Trustee from Trust Expenses Retirement
Frederick C. Chen $1,600 none none $8,600
Alan S. Parsow $1,600 none none $7,600
Larry M. Robbins $1,800 none none $7,600
Michael Seely $1,600 none none $7,600
</TABLE>
* The Fund Complex includes the Trust, Republic Funds, and the Portfolio
Trust.
The compensation table above reflects the fees received by the
Trustees for the year ended October 31, 1996. The Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust will receive an
annual retainer of $5,600 and a fee of $1,000 for each meeting of the Board of
Trustees or committee thereof attended, except that Mr. Robbins will receive an
annual retainer of $7,600 and a fee of $1,000 for each meeting attended.
As of January 14, 1998, the Trustees and officers of the Trust and
the Portfolio Trust, as a group, owned less than 1% of the outstanding shares of
the Fund. As of the same date, the following shareholders of record owned 5% or
more of the outstanding Shares (the Trust has no knowledge of the beneficial
ownership of such Shares): Republic National Bank of New York, Pension Plan &
Trust, 452 Fifth Avenue, 27th Floor, New York, New York 10018 - 24.37%;
Republic National Bank of New York, Pooled Profit Sharing Plan, 452 Fifth
Avenue, 27th Floor, New York, New York 10018 - 18.35%; and Kinco & Co., c/o RNB
Services, One Hanson Place, Brooklyn, New York 11243 - 8.21%. In addition, the
identity and address of one owner of 5% or more of the outstanding shares of the
Fund have been withheld at the request of the shareholder. Shareholders who own
more than 25% of the outstanding voting securities of the Fund may be able to
control the outcome of any matter submitted for the approval of shareholders of
the Fund.
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
Investment Manager
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the Manager is paid a fee by the Portfolio,
computed daily, equal on an annual basis to 0.25% of the Portfolio's average
daily net assets. For the period from September 3, 1996 (Portfolio commencement
of operations) to October 31, 1996 and for the fiscal year ended October 31,
1997, investment management fees aggregated $30,803 and $429,442, respectively,
all of which was waived.
The Investment Management Contract will continue in effect with respect to
the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
Sub-Adviser
MFS Institutional Advisors, Inc., as the Portfolio's Sub-Adviser, is
responsible for the investment management of the Portfolio's assets, including
making investment decisions and placing orders for the purchase and sale of
securities for the Portfolio directly with the issuers or with brokers or
dealers selected by the Sub-Adviser or Republic in their discretion. See
"Portfolio Transactions." The Sub-Adviser also furnishes to the Board of
Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
The Sub-Adviser, together with its parent company, MFS, and their
predecessor organizations, has a history of money management dating from 1924.
MFS is a wholly owned subsidiary of Sun Life Assurance Company of Canada (U.S.),
which is a wholly owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.,
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada. The Prospectus contains information with respect to the management of
the Sub-Adviser and other investment companies for which the Sub-Adviser or MFS
serve as as investment adviser.
For its services, the Sub-Adviser receives from the Portfolio a fee,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.75% of assets up to $50 million and 0.60% of assets in
excess of $50 million. For the period from September 3, 1996 (Portfolio
commencement of operations) to October 31, 1996 and for the fiscal year ended
October 31, 1997, sub-advisory fees aggregated $85,616 and $1,104,635,
respectively.
The investment advisory services of the Sub-Adviser to the Portfolio
are not exclusive under the terms of the Sub-Advisory Agreement. The Sub-Adviser
is free to and does render investment advisory services to others.
Administrator and Portfolio Administrator
Each Administration Agreement will remain in effect until March 31, 1999,
and automatically will continue in effect thereafter from year to year unless
terminated upon 60 days' written notice to BISYS or BISYS (Ireland), as
appropriate. Each Administration Agreement will terminate automatically in the
event of its assignment. Each Administration Agreement also provides that
neither BISYS nor BISYS (Ireland), as appropriate, nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust or Portfolio Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
For the fiscal period ended October 31, 1996, the Portfolio accrued
administration fees equal to $6,161, of which $2,683 was waived, and the Fund
accrued administration fees equal to $3,953, of which $1,760 was waived. For the
fiscal year ended October 31, 1997, the Portfolio accrued administration fees
equal to $85,889 and the Fund accrued administration fees equal to $56,899, none
of which fees were waived.
Custodian, Transfer Agents, and Fund Accounting Agents
With respect to domestic assets, Republic serves as custodian for the Fund
and the Portfolio, with repsect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio and as
transfer agent and fund accounting agent for the Fund. The Custodian may use the
services of sub-custodians with respect to the Portfolio. The principal business
address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117. IBT Fund
Services (Canada) Inc. serves as the fund accounting agent for the Portfolio,
and Investors Fund Services (Ireland) Limited is the Portfolio's transfer agent.
Expenses
Trust expenses directly related to the Fund are charged to the Fund;
other expenses are allocated proportionally among all of the portfolios of the
Trust in relation to the net asset value of the portfolios.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of the Fund is determined on
each day on which the New York Stock Exchange ("NYSE") is open for trading. As
of the date of this Statement of Additional Information, the NYSE is open every
weekday except for the days on which the following holidays are observed: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Sub-Adviser typically completes its trading on behalf of the
Portfolio in various markets before 4:00 p.m., and the value of portfolio
securities is determined when the primary market for those securities closes for
the day. Foreign currency exchange rates are also determined prior to 4:00 p.m.
However, if extraordinary events occur that are expected to affect the value of
a portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolio Trust.
Subject to the Trust's compliance with applicable regulations, the
Trust on behalf of the Fund and the Portfolio have reserved the right to pay the
redemption or repurchase price of shares of the Fund, either totally or
partially, by a distribution in kind of portfolio securities from the Portfolio
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust will redeem Fund shares in kind only if it has received a
redemption in kind from the Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind.
TAXATION
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
Each year, to qualify as a separate "regulated investment company"
under the Code, at least 90% of the Fund's investment company taxable income
(which includes, among other items, interest, dividends and the excess of net
short-term capital gains over net long-term capital losses) must be distributed
to Fund shareholders and the Fund must meet certain diversification of assets,
source of income, and other requirements. If the Fund does not so qualify, it
will be taxed as an ordinary corporation.
The Portfolio has obtained from the Internal Revenue Service ("IRS") a
ruling that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether the Fund satisfies the income
and diversification requirements to maintain its status as a RIC, the Fund, as
an investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed equal to the sum of (1) at least 98% of the Fund's
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of the Fund's capital gain net income for the
12-month period ending, as a general rule, on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Rate Gain" or "28% Rate Gain," depending upon the Portfolio's
holding period for the assets sold. "20% Rate Gains" arise from sales of assets
held by the Portfolio for more than 18 months and are subject to a maximum tax
rate of 20%, "28% Rate Gains" arise from sales of assets held by the Portfolio
for more than one year but no more than 18 months and are subject to a maximum
tax rate of 28%. Net capital gains from assets held for one year or less will be
taxed as ordinary income. Distributions will be subject to these capital gains
rates regardless of how long a shareholder has held Fund shares.
Options, Futures and Forward Contracts
Some of the options, futures contracts and forward contracts entered
into by the Portfolio may be "Section 1256 contracts." Section 1256 contracts
held by the Portfolio at the end of its taxable year (and, for purposes of the
4% excise tax, on certain other dates as prescribed under the Code) are
"marked-to-market" with unrealized gains or losses being treated as though they
were realized. Any gains or losses, including "marked-to-market" gains or
losses, on Section 1256 contracts are generally 60% long-term and 40% short-term
capital gains or losses ("60/40") although all foreign currency gains and losses
from such contracts may be treated as ordinary in character absent a special
election.
Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Portfolio may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gain or loss realized by the Portfolio. In addition, losses
realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Portfolio are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Portfolio.
Short-term gain is taxed as ordinary income when distributed to Fund
shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character, and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Recently enacted rules may affect the timing and character of gain if
the Portfolio engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Portfolio enters into
certain transactions in property while holding substantially identical property,
the Portfolio would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Portfolio's holding period in the property. Loss from a constructive sale would
be recognized when the property was subsequently disposed of, and its character
would depend on the Portfolio's holding period and the application of various
loss deferral provisions of the Code.
Investment in Passive Foreign Investment Companies
The Portfolio may invest in shares of foreign corporations (through
ADRs) which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Portfolio receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Portfolio held the PFIC shares. The
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
Alternative tax treatment may be available with respect to PFIC shares
held by the Portfolio. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. Alternatively, another election may be
available that would involve marking to market the PFIC shares at the end of
each taxable year, with the result that unrealized gains are treated as though
they were realized and reported as ordinary income, any mark-to-market losses
and any loss from an actual disposition of PFIC shares would be deductible as
ordinery losses to the extent of any net mark-to-market gains included in income
in prior years.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
Disposition of Shares
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum rate of 28% if the shareholder's holding
period for the shares is more than one year but not more than 18 months. Gain
from the disposition of shares held not more than one year will be taxable as
short-term capital gain. Any loss realized on a sale or exchange of Fund shares
will be disallowed to the extent that the shares disposed of are replaced
(including replacement through reinvesting of dividends and capital gain
distributions in the Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
OTHER INFORMATION
Purchase of Shares
Certain clients of the Adviser whose assets would be eligible for
purchase by the Fund may purchase shares of the Trust with such assets. Assets
so purchased by the Fund will be subject to valuation and other procedures by
the Board of Trustees.
Capitalization
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 5, 1996.
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) at any time in the future. Establishment and offering
of additional series will not alter the rights of the Fund's shareholders. When
issued, shares are fully paid, nonassessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
liquidation of the Fund, each shareholder is entitled to receive his pro rata
share of the net assets of the Fund.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Interests in the Portfolio have no preference, preemptive, conversion
or similar rights, and are fully paid and non-assessable. The Portfolio Trust is
not required to hold annual meetings of investors, but will hold special
meetings of investors when, in the judgment of the Portfolio Trust's Trustees,
it is necessary or desirable to submit matters for an investor vote. Each
investor is entitled to a vote in proportion to the share of its investment in
the Portfolio.
Except as described below, whenever the Trust is requested to vote on a
matter pertaining to the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast all of its votes on each matter at a meeting of
investors in the Portfolio proportionately as instructed by the Fund's
shareholders. However, subject to applicable statutory and regulatory
requirements, the Trust would not request a vote of the Fund's shareholders with
respect to any proposal relating to the Portfolio which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund.
Independent Auditors
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Trust and the Fund for the fiscal year ending
October 31, 1998. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's and Portfolio's income tax returns, and assist in
the preparation of filings with the SEC. The address of KPMG Peat Marwick LLP is
99 High Street, Boston, Massachusetts 02110. The Portfolio Trust has appointed
KPMG as the independent auditors of the Portfolio for its fiscal year ending
October 31, 1998.
Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Trust's registration statement filed with
the SEC under the 1933 Act with respect to shares of the Fund, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1997 of each of
the Fund and the Portfolio are hereby incorporated herein by reference from the
Annual Report of the Fund dated October 31, 1997 as filed with the SEC. A copy
of such report will be provided without charge to each person receiving this
Statement of Additional Information.
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS.
(a) Financial Statements
(i) Included in Part A of the Registration Statement:
FINANCIAL HIGHLIGHTS -- Republic Fixed Income Fund; Republic New York
Tax-Free Bond Fund (Class Y Shares only); Republic Equity Fund (Class Y Shares
only); Republic International Equity Fund; Republic Small Cap Equity Fund.
(ii) Incorporated by reference into Part B of the Registration
Statement:
REPUBLIC FIXED INCOME FUND
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Report of Independent Auditors
REPUBLIC INTERNATIONAL EQUITY FUND
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
REPUBLIC SMALL CAP EQUITY FUND
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the period September 3,
1996 (commencement of operations) to October 31, 1996 and for the year ended
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Independent Auditors' Report
REPUBLIC FIXED INCOME PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
REPUBLIC INTERNATIONAL EQUITY PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
REPUBLIC SMALL CAP EQUITY PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the period September 3,
1996 (commencement of operations) to October 31, 1996 and for the year ended
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Independent Auditors' Report
(b) Exhibits
1. Declaration of Trust; Establishment and designation of series for
Republic Fixed Income Fund, Republic International Equity Fund, and
Republic Small Cap Equity Fund.2
2. By-Laws.1
6(a) Distribution Agreement regarding Republic Fixed Income Fund, Republic
International Equity Fund and Republic Small Cap Equity Fund.5
9. Administration Agreement regarding Republic Fixed Income Fund, Republic
International Equity Fund and Republic Small Cap Equity Fund.5
10. Opinion of counsel.2
11. Consents of independent auditors.
16. Schedule for computation of performance quotations.2
17. Financial data schedules.
19(a) Powers of attorney for Trustees and officers.4
19(b) Power of Attorney for Adrian Waters.5
19(c) Power of Attorney for Walter B. Grimm.
- -----------------
1 Incorporated herein by reference from the registration statement on Form
N-1A of the Registrant (File No. 333-2205) (the "Registration Statement")
as filed with the Securities and Exchange Commission (the "SEC") on
April 3, 1996.
2 Incorporated herein by reference from pre-effective amendment no. 1 to the
Registration Statement as filed with the SEC on June 24, 1996.
3 Incorporated herein by reference from pre-effective amendment no. 2 to the
Registration Statement as filed with the SEC on July 31, 1996.
4 Incorporated herein by reference from post-effective amendment no. 2 to the
Registration Statement as filed with the SEC on November 26, 1996.
5 Incorporated herein by reference from Post-effective amendment no. 5 to the
Registration Statement as filed with the SEC on February 28, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of October 31, 1997, the number of holders of shares of beneficial
interest (par value $0.01 per share) of each Fund was as follows:
Republic Fixed Income Fund: 52.
Republic International Equity Fund: 120.
Republic Small Cap Equity Fund: 113.
ITEM 27. INDEMNIFICATION
Reference is hereby made to Article V of the Registrant's Declaration of
Trust. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees or officers of the Registrant by the
Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is
aware that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Investment Company
Act of 1940 and, therefore, is unenforceable.
If a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees or officers
of the Registrant in connection with the successful defense of any act, suit or
proceeding) is asserted by such trustees or officers in connection with the
shares being registered, the Registrant will, unless in the opinion of its
Counsel, the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
(a) Republic National Bank of New York ("Republic") acts as investment
adviser to Republic Funds and Republic Advisor Funds Trust, and is a subsidiary
of Republic New York Corporation ("RNYC"), 452 Fifth Avenue, New York, New York
10018, a registered bank holding company. Republic's directors and principal
executive officers, and their business and other connections for at least the
past two years, are as follows (unless otherwise noted by footnote, the address
of all directors and officers is 452 Fifth Avenue, New York, New York 10018):
NAME -- BUSINESS AND OTHER CONNECTIONS
KURT ANDERSEN
Vice Chairman and a Director of Republic New York Corporation ("RNYC") and
Republic Bank.
ANTHONY G. CHAPPELL
Executive Vice President and Director of Republic Bank.
CYRIL S. DWEK
Vice Chairman of the Board and Director of Republic Bank and RNYC.
ERNEST GINSBERG
Vice Chairman of the Board and Director of RNYC and Republic Bank.
NATHAN HASSON
Vice Chairman of the Board, Director and Treasurer of Republic Bank and
Vice Chairman of the Board and Director of RNYC.
JEFFREY C. KEIL
President and Director of RNYC and Vice Chairman of the Board and
Director of Republic Bank.
PETER KIMMELMAN
A private investor and a Director of RNYC and Republic Bank.(1)
PAUL L. LEE
Executive Vice President and Director of Republic Bank;
Executive Vice President and General Counsel of RNYC.
LEONARD LIEBERMAN
Director of various companies, including Consolidated Cigar Corporation and
Outlet Communications, Inc.; Director of RNYC and Republic Bank.
WILLIAM C. MACMILLEN, JR.
President, William C. MacMillen & Co., Inc. (Investment Banking) and
a Director of RNYC and Republic Bank.(2)
PETER J. MANSBACH
Director and Chairman of the Executive Committee of Republic Bank and RNYC.
MARTIN F. MERTZ
Director of RNYC and Republic Bank.
CHARLES G. MEYER, JR.
President of Cord Meyer Development Co. and Director of Republic Bank.(3)
JAMES L. MORICE
Partner in the management consulting and executive search firm of
Mirtz Morice, Inc. and a Director of RNYC and Republic Bank.(4)
E. DANIEL MORRIS
President, Corsair Capital Corporation and Director of RNYC.
DR. JANET L. NORWOOD
Senior Fellow at The Urban Institute (research organization); Director of RNYC
and Republic Bank.
JOHN A. PANCETTI
Director of RNYC and Republic Bank.
VITO S. PORTERA
Vice Chairman of the Board, and a Director of RNYC and Republic Bank. Also,
Chairman of the Board of Republic International Bank of New York, the Florida
Edge Act subsidiary of Republic Bank.
WILLIAM P. ROGERS
Partner, Rogers & Wells and Director of RNYC and Republic Bank.
SILAS SAAL
Vice Chairman and Director of Republic Bank and RNYC; Chief Trading Officer of
Republic Bank.
DOV C. SCHLEIN
President and Chief Operating Officer of Republic Bank, and a Director of RNYC
and Republic Bank.
RICHARD C. SPIKERMAN
Executive Vice President and Director of Republic Bank.
JOHN TAMBERLANE
Director of Republic Bank; President of the Consumer Bank Division of Republic
Bank.
WALTER H. WEINER
Chairman of the Board, Director and Chief Executive Officer of Republic Bank
and RNYC.
GEORGE T. WENDLER
Vice Chairman and Director of Republic Bank; Senior Credit Officer of Republic
Bank.
PETER WHITE
Senior Consultant and a Director of RNYC and Republic Bank.
- -----------------------------------
(1) 1270 Avenue of the Americas, Suite 3010, New York 10020.
(2) 254 Victoria Place, Lawrence, New York 11559.
(3) 111-15 Queens Boulevard, 2nd Floor, Forest Hills, New York,
New York 11375.
(4) One Dock Street, Stamford, CT 06902
ITEM 29. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services (the "Sponsor") and its affiliates serve as
distributor and administrator for other registered investment companies.
(b) The information required by this Item 29 with respect to each director
or officer of BISYS is hereby incorporated herein by reference from Form BD as
filed by the Sponsor pursuant to the Securities Exchange Act of 1934 (File No.
8-32480).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of: Republic National
Bank of New York, 452 Fifth Avenue, New York, New York 10018; BISYS Fund
Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035; and Investors Bank &
Trust Company, N.A., 200 Clarendon Street, Boston, Massachusetts 02117.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) The Registrant will furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the Act were applicable to the Registrant, except
that the request referred to in the third full paragraph thereof may only be
made by shareholders who hold in the aggregate at least 10% of the outstanding
shares of the Registrant, regardless of the net asset value or values of shares
held by such requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Republic Advisor Funds Trust certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has caused this
post-effective amendment to its registration statement (the "Registration
Statement") on Form N-1A (File Nos. 333-02205 and 811-07583) to be signed on its
behalf by the undersigned, thereto duly authorized, on the 25th day of
February, 1998.
REPUBLIC ADVISOR FUNDS TRUST
By WALTER B. GRIMM**
---------------------------
Walter B. Grimm
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 25, 1998.
WALTER B. GRIMM**
- --------------------------
Walter B. Grimm
President
ADRIAN WATERS**
- --------------------------
Adrian Waters
Treasurer and Principal Accounting and Financial Officer
ALAN S. PARSOW*
- --------------------------
Alan S. Parsow
Trustee
LARRY M. ROBBINS*
- --------------------------
Larry M. Robbins
Trustee
MICHAEL SEELY*
- --------------------------
Michael Seely
Trustee
FREDERICK C. CHEN*
- --------------------------
Frederick C. Chen
Trustee
*By /S/ DAVID J. HARRIS
--------------------------
David J. Harris
as attorney-in-fact pursuant to a power of attorney filed as
Exhibit 19 to post-effective amendment No. 2.
**By /S/ CATHERINE BRADY
--------------------------
CATHERINE BRADY
as attorney-in-fact pursuant to powers of attorney filed as
Exhibit 19 to post-effective amendment No. 2, Exhibit 19 to post-effective
amendment No. 5, and Exhibit 19 hereto.
<PAGE>
Republic Portfolios (the "Portfolio Trust") has duly caused this amendment
to the registration statement on Form N-1A (File Nos. 333-02205 and 811-07583)
("Registration Statement") of Republic Advisor Funds Trust (the "Trust") to be
signed on its behalf by the undersigned, thereto duly authorized on the 25th of
February, 1998.
REPUBLIC PORTFOLIOS
By WALTER B. GRIMM**
--------------------------
Walter B. Grimm
President
Pursuant to the requirements of the Securities Act of 1933, the Trust's
Registration Statement has been signed below by the following persons in the
capacities indicated on February 25, 1998.
WALTER B. GRIMM**
- --------------------------
Walter B. Grimm
President
ADRIAN WATERS**
- --------------------------
Adrian Waters
Treasurer and Principal Accounting and Financial Officer of the Portfolio Trust
ALAN S. PARSOW*
- --------------------------
Alan S. Parsow
Trustee of the Portfolio Trust
LARRY M. ROBBINS*
- --------------------------
Larry M. Robbins
Trustee of the Portfolio Trust
MICHAEL SEELY*
- --------------------------
Michael Seely
Trustee of the Portfolio Trust
FREDERICK C. CHEN*
- --------------------------
Frederick C. Chen
Trustee of the Portfolio Trust
*By /S/ DAVID J. HARRIS
--------------------------
David J. Harris
as attorney-in-fact pursuant to a power of attorney filed as
exhibit 19 to post-effective amendment No. 2.
**By /S/ CATHERINE BRADY
--------------------------
CATHERINE BRADY
as attorney-in-fact pursuant to powers of attorney filed as
Exhibit 19 to post-effective amendment No. 2, Exhibit 19 to post-effective
amendment No. 5, and Exhibit 19 hereto.
<PAGE>
EXHIBIT LIST
Exhibit No. Exhibit Name
11 Consents of Independent Auditors
17 Financial Data Schedules
19(c) Power of Attorney
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
Republic Funds and
Republic Advisor Funds Trust:
We consent to the use of our report, dated December 12, 1997, incorporated
herein by reference and to the references to our firm under the captions
"FINANCIAL HIGHLIGHTS" in the prospectus and "Independent Auditors" in the
statements of additional information.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 25, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
Republic Funds Portfolios:
We consent to the use of our report, dated December 12, 1997, incorporated
herein by reference and to the reference to our firm under the caption
"Independent Auditors" in the statements of additional information.
KPMG
Toronto, Ontario
February 25, 1998
<PAGE>
Exhibit 99.19(c)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints each of Catherine Brady and Adrian Waters to act as
attorney-in-fact and agent, with power of substitution and resubstitution, for
the undersigned in any and all capacities to sign the Registration Statement of
Republic Funds, Republic Advisor Funds Trust, and Republic Portfolios, and pre-
or post-effective amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, whereby ratifying and conforming all that said
attorney-in-fact, or her substitute of substitutes, may do or cause to be done
by virtue hereof.
/s/ Walter B. Grimm
------------------------
Walter B. Grimm
Date: February 20, 1998
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
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<NAME> REPUBLIC FUNDS TRUST
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