<PAGE>
REPUBLIC
NEW YORK TAX-FREE
BOND FUND
REPUBLIC EQUITY FUND
REPUBLIC
FIXED INCOME FUND
PROSPECTUS REPUBLIC
FEBRUARY 29, 2000 INTERNATIONAL EQUITY
FUND
REPUBLIC
SMALL CAP EQUITY FUND
REPUBLIC FAMILY OF FUNDS
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.
<PAGE>
- --------------------------------------------------------------------------------
REPUBLIC FUNDS TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
[LOGO] RISK/RETURN SUMMARY AND FUND EXPENSES
- ----------------------------------------------------------------------------------------
Carefully review this 3 Republic New York Tax-Free Bond Fund
important section, which 10 Republic Equity Fund
summarizes each Fund's 17 Republic Fixed Income Fund
investments, risks, past 24 Republic International Equity Fund
performance, and fees. 31 Republic Small Cap Equity Fund
[LOGO] INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- ----------------------------------------------------------------------------------------
Review this section 38 Republic New York Tax-Free Bond Fund
for information on 39 Republic Equity Fund
investment strategies 41 Republic Fixed Income Fund
and risks. 42 Republic International Equity Fund
44 Republic Small Cap Equity Fund
46 General Risk Factors: All Funds
48 Specific Risk Factors
[LOGO] FUND MANAGEMENT
- ----------------------------------------------------------------------------------------
Review this section 51 The Investment Adviser
for details on 53 Portfolio Managers
the people and 55 The Distributor and Administrator
organizations who provide 56 The Two-Tier Fund Structure
services to the Funds.
[LOGO] SHAREHOLDER INFORMATION
- ----------------------------------------------------------------------------------------
Review this section for 57 Pricing of Fund Shares
details on how 58 Purchasing and Adding to Your Shares
shares are valued, 61 Selling Your Shares
and how to purchase, 65 Exchanging Your Shares
sell and exchange shares. 66 Dividends, Distributions and Taxes
This section also describes
related charges and
payments of dividends
and distributions.
[LOGO] FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------
Review this section for 69 Republic New York Tax-Free Bond Fund
details on selected 70 Republic Equity Fund
financial statements 71 Republic Fixed Income Fund
of the Funds. 72 Republic International Equity Fund
73 Republic Small Cap Equity Fund
[LOGO] PRIOR PERFORMANCE OF INVESTMENT SUB-ADVISERS
- ----------------------------------------------------------------------------------------
[LOGO] TAXABLE EQUIVALENT YIELD TABLES
- ----------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The following is a summary of key information about the Funds, each of which
offers Adviser (Class Y) Shares in this Prospectus. You will find additional
information about the Funds, including a detailed description of the Funds'
investment objectives, strategies and risks, after this Summary.
<TABLE>
<S> <C>
REPUBLIC NEW YORK TAX-FREE BOND FUND
INVESTMENT OBJECTIVE The investment objective of the New York
Tax-Free Bond Fund is to provide
shareholders of the Fund with income
exempt from regular federal, New York
State and New York City personal income
taxes.
PRINCIPAL The Fund seeks to achieve its investment
INVESTMENT STRATEGIES objective by investing its assets
primarily in a non-diversified portfolio
of municipal bonds, notes, commercial
paper, U.S. Government securities, and
other debt instruments the interest on
which is exempt from regular federal
(except for U.S. Government securities),
New York State and New York City personal
income taxes.
</TABLE>
3
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
PRINCIPAL Market Conditions: The Fund's performance
INVESTMENT RISKS per share will change daily based on many
factors, including the quality of the
instruments in the Fund's investment
portfolio, national and international
economic conditions and general market
conditions. You could lose money on your
investment in the Fund or the Fund could
underperform other investments.
Credit Risk: The Fund could lose money if
the issuer of a fixed income security
owned by the Portfolio defaults on its
financial obligation.
Interest Rate Risk: Changes in interest
rates will affect the yield and value of
the Fund's investments in debt securities.
Derivatives Risk: The Fund may invest in
derivative instruments (e.g., option and
futures contracts) to help achieve its
investment objective. The Fund may do so
only for hedging purposes and not for
speculation. These investments could
increase the Fund's price volatility or
reduce the return on your investment.
Concentration Risk: Because the Fund will
concentrate its investments in New York
obligations and may invest a significant
portion of its assets in the securities of
a single issuer or sector, the value of
the Fund's assets could lose significant
value due to the poor performance of a
single issuer or sector.
Historically, New York State and other
issuers of New York Municipal Obligations
have experienced periods of financial
difficulty. Because a significant share of
New York State's economy depends on
financial and business services, any
change in market conditions that adversely
affects these industries could affect the
ability of New York and its localities to
meet its financial obligations. If such
difficulties arise in the future, you
could lose money on your investment.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT
OF HSBC BANK USA ('HSBC') AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
</TABLE>
4
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Looking to add a monthly tax-exempt
income component to your investment
portfolio
Seeking higher potential returns than
provided by money market funds
Willing to accept the risks of price and
income fluctuations
Investing short-term reserves
This Fund will not be appropriate for
anyone:
Investing emergency reserves
Seeking safety of principal
Who does not live in New York
The investment objective and strategies of
the Fund are not fundamental and may be
changed without approval of the Fund
shareholders. If there is a change in the
investment objective or strategies of the
Fund, shareholders should consider whether
the Fund remains an appropriate investment
in light of their then current financial
position and needs. There can be no
assurance that the investment objective of
the Fund will be achieved.
</TABLE>
5
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
PERFORMANCE BAR
CHART AND TABLE
The chart and table on this page show how the Republic New York Tax-Free Bond
Fund has performed and how its performance has varied from year to year. The bar
chart assumes reinvestment of dividends and distributions.
YEAR-BY-YEAR
TOTAL RETURNS
AS OF 12/31
FOR ADVISOR (CLASS Y)
SHARES*
[CHART]
1997 - 8.50%
1998 - 6.41%
1999 - -3.08%
Of course, past performance does not indicate how the
Fund will perform in the future.
- -------------------------------
<TABLE>
<S> <C>
Best quarter: 2Q 1997 +3.65%
Worst quarter: 2Q 1999 - 2.20%
</TABLE>
* The Fund only offers Adviser (Class Y) Shares pursuant
to this prospectus. The Fund offers three additional
classes of shares pursuant to a separate prospectus. The
Adviser (Class Y) Shares of the Fund are offered only to
clients of HSBC and its affiliates for whom HSBC or its
affiliates exercises investment discretion.
6
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The table below compares the Fund's performance over time to that of the Lehman
NY Exempt Index, an index composed of investment grade New York tax-exempt
securities, all having a $50 million minimum maturity value, and the Lipper NY
Municipal Bond Fund Index, an unmanaged, equally weighted index composed of the
30 largest mutual funds with a similar investment objective. The table assumes
reinvestment of dividends and distributions.
-----------------
AVERAGE ANNUAL
TOTAL RETURNS (for
the periods ended
December 31, 1999)
- -------------------------------
<TABLE>
<CAPTION>
INCEPTION PAST SINCE
DATE YEAR INCEPTION
<S> <C> <C> <C>
ADVISER (CLASS Y) SHARES* July 1, 1996 - 3.08% 8.32%
LEHMAN NY EXEMPT INDEX - 1.99% 6.81%**
LIPPER NY MUNICIPAL BOND FUND - 4.96% 4.04%**
</TABLE>
* The New York Tax-Free Bond Fund offers three other classes of shares (Class
A, Class B and Class C Shares) pursuant to another prospectus. Only Adviser
(Class Y) Shares are offered by this prospectus.
** Since September 1, 1996
7
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
FEES AND EXPENSES
As an investor in the Republic New York Tax-Free Bond Fund, you may pay the
following fees and expenses if you buy and hold Adviser (Class Y) Shares of the
Fund. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
<TABLE>
<S> <C>
------------------------
SHAREHOLDER
TRANSACTION EXPENSES ADVISER
(FEES PAID DIRECTLY (CLASS Y)
FROM YOUR INVESTMENT) SHARES
Maximum sales charge (load) on
purchases None
----------------------------------------------
Maximum deferred sales charge
(load) None
------------------------
ANNUAL FUND
OPERATING EXPENSES ADVISER
(EXPENSES THAT ARE DEDUCTED (CLASS Y)
FROM FUND ASSETS) SHARES
Management fee 0.25%
----------------------------------------------
Distribution (12b-1) fee None
----------------------------------------------
Other expenses 0.70%
----------------------------------------------
Total Fund
operating expenses 0.95%
----------------------------------------------
Fee waiver and
expense reimbursement'D' 0.25%
----------------------------------------------
Net operating expenses 0.70%
</TABLE>
'D' Pursuant to an expense limitation agreement.
8
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
EXAMPLE
This Example is intended to help you compare the cost of investing in Adviser
(Class Y) Shares of the Fund with the cost of investing in other mutual funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
<TABLE>
<S> <C> <C> <C> <C>
------------------
REPUBLIC NEW YORK 1 3 5 10
TAX-FREE BOND FUND YEAR YEARS YEARS YEARS
ADVISER (CLASS Y)
SHARES $72 $278 $501 $1,144
</TABLE>
9
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
REPUBLIC EQUITY FUND
INVESTMENT OBJECTIVE The investment objective of the Equity
Fund is long-term growth of capital and
income without excessive fluctuations in
market value.
PRINCIPAL The Fund seeks to achieve its objective by
INVESTMENT STRATEGIES investing at least 65% of its assets in
equity securities of seasoned medium and
large-sized companies that are expected to
show above average price appreciation. To
achieve its investment objective, the Fund
will pursue two styles of investing.
The 'GROWTH' STYLE of investing focuses on
investing 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.
The 'VALUE' STYLE of investing focuses on
investing 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 valuations systems
and seasoned judgment.
</TABLE>
10
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
PRINCIPAL Market Risk: The Fund's performance per
INVESTMENT RISKS share will change daily based on many
factors, including national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or
the Fund could underperform other
investments.
Equity securities have greater price
volatility than fixed income instruments.
The value of the Fund will fluctuate as
the market price of its investments
increases or decreases.
Issuer Risk: The value of a security may
fluctuate for a variety of reasons that
relate to the issuer, including, but not
limited to, management performance and
reduced demand for the issuer's products
and services.
Derivative Risk: The Fund may invest in
derivative instruments (e.g., option and
futures contracts) to help achieve its
investment objective. The Fund intends to
do so primarily for hedging purposes.
These investments could increase the
Fund's price volatility or reduce the
return on your investment.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT
OF HSBC AND IS NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
</TABLE>
11
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Seeking a long-term goal such as
retirement
Looking to add a growth component to your
investment portfolio
Willing to accept higher risks of
investing in the stock market in exchange
for potentially higher long-term returns
This Fund will not be appropriate for
anyone:
Seeking monthly income
Pursuing a short-term goal or investing
emergency reserves
Seeking safety of principal
The investment objective and strategies of
the Fund are not fundamental and may be
changed without approval of the Fund
shareholders. If there is a change in the
investment objective or strategies of the
Fund, shareholders should consider whether
the Fund remains an appropriate investment
in light of their then current financial
position and needs. There can be no
assurance that the investment objective of
the Fund will be achieved.
</TABLE>
12
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
PERFORMANCE BAR
CHART AND TABLE
The bar chart on this page shows the Republic Equity Fund's annual returns and
how its performance has varied from year to year. The bar chart assumes
reinvestment of dividends and distributions.
YEAR-BY-YEAR
TOTAL RETURNS
AS OF 12/31
FOR ADVISOR (CLASS Y)
SHARES*
[CHART]
1997 - 28.57%
1998 - 29.59%
1999 - 10.05%
Of course, past performance does not indicate how the
Fund will perform in the future.
-------------------------------
<TABLE>
<S> <C>
Best quarter: 4Q 1998 +23.38%
Worst quarter: 3Q 1998 -11.52%
</TABLE>
* The Fund only offers Adviser (Class Y) Shares pursuant
to this prospectus. The Fund offers three additional
classes of shares pursuant to a separate prospectus.
Adviser (Class Y) Shares of the Fund are offered only to
clients of HSBC and its affiliates for whom HSBC or its
affiliates exercises investment discretion.
13
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The table below compares the Fund's performance over time to that of the Russell
1000 Index, an unmanaged index of the 1000 largest U.S. companies (representing
approximately 90% of the total market capitalization) in the Russell 3000 Index
(representing approximately 98% of the U.S. equity market by capitalization),
the Lipper Growth Fund Index, an unmanaged, equally weighted index composed of
30 of the largest mutual funds with a similar investment objective, and the
Lipper Large Cap Core Index, an index composed of mutual funds that have an
investment objective similiar to that of the Fund. The table assumes
reinvestment of dividends and distributions.
-----------------
AVERAGE ANNUAL
TOTAL RETURNS (for
the periods ended
December 31, 1999)
<TABLE>
<CAPTION>
INCEPTION PAST SINCE
DATE YEAR INCEPTION
<S> <C> <C> <C>
---------------------------------
ADVISER (CLASS Y) SHARES* July 1, 1996 10.05% 21.36%
---------------------------------
RUSSELL 1000 INDEX 20.91% 28.84%**
---------------------------------
LIPPER GROWTH FUND INDEX 27.96% 28.39%**
---------------------------------
LIPPER LARGE CAP CORE INDEX 19.35% 24.50%***
- -----------------------------------------------------------------
</TABLE>
* The Equity Fund offers three other classes of shares (Class A, Class B and
Class C Shares) pursuant to another prospectus. Only Adviser (Class Y) Shares
are offered in this prospectus.
** Since September 1, 1996.
*** Since July 1, 1996.
14
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
FEES AND EXPENSES
As an investor in the Republic Equity Fund, you may pay the following fees and
expenses if you buy and hold Adviser (Class Y) Shares of the Fund. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets, and are reflected in the share price.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES ADVISER
(FEES PAID DIRECTLY FROM YOUR (CLASS Y)
INVESTMENT) SHARES
Maximum sales charge (load) on
purchases None
---------------------------------------------
Maximum deferred sales charge
(load) None
ANNUAL FUND OPERATING EXPENSES ADVISER
(EXPENSES THAT ARE DEDUCTED FROM (CLASS Y)
FUND ASSETS) SHARES
Management fee 0.45%
---------------------------------------------
Distribution (12b-1) None
---------------------------------------------
Other expenses 0.24%
---------------------------------------------
Total Fund operating expenses 0.69%
---------------------------------------------
</TABLE>
15
<PAGE>
REPUBLIC EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
EXAMPLE
This Example is intended to help you compare the cost of investing in Adviser
(Class Y) Shares of the Fund with the costs of investing in other mutual funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
REPUBLIC EQUITY FUND YEAR YEARS YEARS YEARS
ADVISER (CLASS Y)
SHARES $70 $221 $384 $859
</TABLE>
16
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
REPUBLIC FIXED INCOME FUND
INVESTMENT OBJECTIVE The investment objective of the Fixed Income
Fund is to realize above-average total
return, consistent with reasonable risk,
through investment primarily in a diversified
portfolio of fixed income securities.
PRINCIPAL The Fund seeks to achieve its investment
INVESTMENT STRATEGIES objective by investing all of its assets in
the Republic Fixed Income Portfolio (the
'Portfolio'), which has the same investment
objective as the Fund. This two-tier fund
structure is commonly referred to as a
'master/feeder' structure because one fund
(the Fixed Income Fund or 'feeder fund') is
investing all its assets in a second fund
(the Portfolio or 'master fund').
The Portfolio invests primarily in fixed
income securities, such as U.S. Government
securities, corporate debt securities and
commercial paper, mortgage-backed and
asset-backed securities, and similar
securities issued by foreign governments and
corporations.
</TABLE>
17
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
PRINCIPAL Market Risk: The Fund's performance per share
INVESTMENT RISKS will change daily based on many factors,
including the quality of the instruments in
the Portfolio's investment portfolio,
national and international economic
conditions and general market conditions. You
could lose money on your investment in the
Fund or the Fund could underperform other
investments.
Credit Risk: The Fund could lose money if the
issuer of a fixed income security owned by
the Portfolio defaults on its financial
obligation.
Interest Rate Risk: Changes in interest rates
will affect the yield and value of the Fund's
investments in debt securities.
Derivatives Risk: The Fund may invest in
derivative instruments (e.g., options and
futures contracts) to help achieve its
investment objective. The Fund may do so
primarily for hedging purposes. These
investments could increase the Fund's price
volatility or reduce the return on your
investment.
High Yield Securities ('Junk Bonds'): The
Fund may invest in high-yield securities,
which are subject to higher credit risks and
are less liquid than other fixed-income
securities. The Fund could lose money if it
is unable to dispose of these investments at
an appropriate time.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF
HSBC AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
</TABLE>
18
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Looking to add a monthly income component to
your investment portfolio
Seeking higher potential returns than
provided by money market funds
Willing to accept the risks of price and
income fluctuations
Investing short-term reserves
This Fund will not be appropriate for anyone:
Investing emergency reserves
Seeking safety of principal
The investment objective and strategies of
the Fund are not fundamental and may be
changed without approval of the Fund
shareholders. If there is a change in the
investment objective or strategies of the
Fund, shareholders should consider whether
the Fund remains an appropriate investment in
light of their then current financial
position and needs. There can be no assurance
that the investment objective of the Fund or
the Portfolio will be achieved.
</TABLE>
19
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
PERFORMANCE BAR
CHART AND TABLE
The bar chart on this page shows the Republic Fixed Income Fund's annual returns
and how its performance has varied from year to year. The bar chart assumes
reinvestment of dividends and distributions.
YEAR-BY-YEAR
TOTAL RETURNS
AS OF 12/31
FOR ADVISOR (CLASS Y)
SHARES
[CHART]
1996 - 5.01%
1997 - 9.17%
1998 - 6.83%
1999 - -1.08%
Of course, past performance does not indicate how the
Fund will perform in the future.
-------------------------------
<TABLE>
<S> <C>
Best quarter: 2Q 1995 +5.96%
Worst quarter: 2Q 1999 -1.46%
</TABLE>
20
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The table compares the Fund's performance over time to that of the Salomon Broad
Investment-Grade Bond Index, a market-capitalization-based total return index
containing U.S. fixed rate issues of greater than one year and at least
$50 million outstanding, and the Lipper A Rated Bond Fund Index, an unmanaged,
equally weighted index composed of the 30 largest mutual funds with a similar
investment objective. The table assumes reinvestment of dividends and
distributions.
- ------------------------------
AVERAGE ANNUAL
TOTAL RETURNS (for
the periods ended
December 31, 1999)
- ------------------------------
<TABLE>
<CAPTION>
INCEPTION PAST SINCE
DATE YEAR INCEPTION
<S> <C> <C> <C>
---------------------------------
ADVISER (CLASS Y) SHARES Jan. 9, 1995 - 1.08% 7.35%
---------------------------------
SALOMON BIG BOND INDEX - 0.83% 7.74%*
---------------------------------
LIPPER A RATED BOND FUND INDEX - 2.04% 7.25%*
- --------------------------------------------------------------------
</TABLE>
* Since January 1, 1995.
21
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
FEES AND EXPENSES*
As an investor in the Republic Fixed Income Fund, you may pay the following fees
and expenses if you buy and hold Adviser (Class Y) Shares of the Fund.
Shareholder transaction fees are paid from your account. Annual Fund operating
expenses are paid out of Fund assets, and are reflected in the share price.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES ADVISER
(FEES PAID DIRECTLY FROM YOUR (CLASS Y)
INVESTMENT) SHARES
Maximum sales charge (load) on
purchases None
-----------------------------------------------------
Maximum deferred sales charge (load) None
ANNUAL FUND
OPERATING EXPENSES ADVISER
(EXPENSES THAT ARE DEDUCTED (CLASS Y)
FROM FUND ASSETS) SHARES
Management fee 0.40%
-----------------------------------------------------
Distribution (12b-1) fee None
-----------------------------------------------------
Other expenses 0.25%
-----------------------------------------------------
Total Fund operating expenses 0.65%
</TABLE>
* The table reflects the combined fees of both the Fixed Income Fund and the
Fixed Income Portfolio.
22
<PAGE>
REPUBLIC FIXED INCOME FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
EXAMPLE*
This Example is intended to help you compare the cost of investing in the
Adviser (Class Y) Shares of the Fund with the cost of investing in other mutual
funds. It illustrates the amount of fees and expenses you would pay, assuming
the following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
- --------------------
<TABLE>
<S> <C> <C> <C> <C>
REPUBLIC FIXED 1 3 5 10
INCOME FUND YEARS YEARS YEARS YEARS
ADVISER (CLASS Y)
SHARES $66 $208 $362 $ 810
</TABLE>
* The example reflects the combined fees of both the Fund and the Fixed Income
Portfolio.
23
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
REPUBLIC INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE 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 and
securities of issuers whose principal markets
are outside of the United States.
PRINCIPAL The Fund seeks to achieve its investment
INVESTMENT STRATEGIES objective by investing all of its assets in the
Republic International Equity Portfolio (the
'Portfolio'), which has the same investment
objective as the Fund. This two-tier fund
structure is commonly referred to as a
'master/feeder' structure because one fund (the
International Equity Fund or 'feeder fund') is
investing all its assets in a second fund (the
Portfolio or 'master fund').
The International Equity Portfolio will invest
primarily 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.
</TABLE>
24
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
PRINCIPAL Market Risk: The Fund's performance per share
INVESTMENT RISKS will change daily based on many factors,
including national and international economic
conditions and general market conditions. You
could lose money on your investment in the Fund
or the Fund could underperform other
investments.
Equity securities have greater price volatility
than fixed income instruments. The value of the
Fund will fluctuate as the market price of its
investments increases or decreases.
Foreign Investment Risk: The Fund's investments
in foreign securities are riskier than
investments in U.S. securities. Investments in
foreign securities may lose value due to
unstable international political and economic
conditions, fluctuations in currency exchange
rates, lack of adequate company information, as
well as other factors. The Fund may invest up to
20% of its total assets in emerging market
securities of issuers in countries with
developing economies. Emerging market securities
are subject to even greater price volatility
than investments in foreign securities because
there is a greater risk of political or social
upheaval in emerging markets. In addition, these
investments are often illiquid and difficult to
value accurately.
Issuer Risk: The value of a security may
fluctuate for a variety of reasons that relate
to the issuer, including, but not limited to,
management performance and reduced demand for
the issuer's products and services.
Derivatives Risk: The Fund may invest in
derivative instruments (e.g., option and futures
contracts) to help achieve its investment
objective. The Fund may do so only for hedging
purposes. These investments could increase the
Fund's price volatility or reduce the return on
your investment.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF
HSBC AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
</TABLE>
25
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Seeking a long-term goal such as retirement
Looking to add a foreign growth component to
your investment portfolio
Willing to accept higher risks of investing in
the stock market in exchange for potentially
higher long-term returns
This Fund will not be appropriate for anyone:
Seeking monthly income
Pursuing a short-term goal or investing
emergency reserves
Seeking safety of principal
The investment objective and strategies of the
Fund are not fundamental and may be changed
without approval of the Fund shareholders. If
there is a change in the investment objective or
strategies of the Fund, shareholders should
consider whether the Fund remains an appropriate
investment in light of their then current
financial position and needs. There can be no
assurance that the investment objective of the
Fund or the Portfolio will be achieved.
</TABLE>
26
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
PERFORMANCE BAR
CHART AND TABLE
The bar chart on this page shows the Republic International Equity Fund's annual
returns and how its performance has varied from year to year. The bar chart
assumes reinvestment of dividends and distributions.
YEAR-BY-YEAR
TOTAL RETURNS
AS OF 12/31
FOR ADVISOR (CLASS Y)
SHARES
[CHART]
1996 - 15.08%
1997 - 9.71%
1998 - 12.43%
1999 - 71.01%
Of course, past performance does not indicate how the
Fund will perform in the future.
------------------------------
<TABLE>
<S> <C>
Best quarter: 4Q 1999 +30.85%
Worst quarter: 3Q 1998 -15.8%
</TABLE>
27
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The table below compares the Fund's performance to that of the MSCI EAFE Index,
which includes 1,600 companies in 22 countries representing the stock markets of
Europe, Australia, New Zealand and the Far East, and the Lipper International
Equity Fund Index, an unmanaged, equally weighted index composed of the 30
largest mutual funds with a similar investment objective. The table assumes
reinvestment of dividends and distributions.
-----------------
AVERAGE ANNUAL
TOTAL RETURNS (for
the periods ended
December 31, 1999)
- -----------------------------------
<TABLE>
<CAPTION>
INCEPTION PAST SINCE
DATE YEAR INCEPTION
<S> <C> <C> <C>
ADVISER (CLASS Y) SHARES Jan. 9, 1995 71.01% 22.38%
------------------------------
MSCI EAFE INDEX 27.30% 13.15%*
------------------------------
LIPPER INTERNATIONAL EQUITY FUND INDEX 37.83% 15.96%*
- --------------------------------------------------------------------------
</TABLE>
* Since January 1, 1995.
28
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
FEES AND EXPENSES*
As an investor in the Republic International Equity Fund, you may pay the
following fees and expenses if you buy and hold Adviser (Class Y) Shares of the
Fund. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
<TABLE>
<S> <C>
----------------------------------
SHAREHOLDER
TRANSACTION EXPENSES ADVISER
(FEES PAID DIRECTLY FROM YOUR CLASS Y
INVESTMENT) SHARES
Maximum sales charge (load) on
purchases None
---------------------------------------------
Maximum deferred sales charge
(load) None
---------------------------------------------
ANNUAL FUND
OPERATING EXPENSES ADVISER
(EXPENSES THAT ARE DEDUCTED FROM CLASS Y
FUND ASSETS) SHARES
Management fee 0.69%
---------------------------------------------
Distribution (12b-1) fee None
---------------------------------------------
Other expenses 0.28%
---------------------------------------------
Total Fund
operating expenses 0.97%
---------------------------------------------
</TABLE>
* The table reflects the combined fees of both the International Equity Fund
and the International Equity Portfolio.
29
<PAGE>
REPUBLIC INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
EXAMPLE*
This Example is intended to help you compare the cost of investing in Adviser
(Class Y) Shares with the cost of investing in other mutual funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
<TABLE>
----------------------
<S> <C> <C> <C> <C>
REPUBLIC 1 3 5 10
INTERNATIONAL EQUITY FUND YEAR YEARS YEARS YEARS
ADVISER (CLASS Y) SHARES $99 $309 $536 $1,190
</TABLE>
* The example reflects the combined fees of both the International Equity Fund
and the International Equity Portfolio.
30
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
REPUBLIC SMALL CAP EQUITY FUND
INVESTMENT OBJECTIVE The investment objective of the Small Cap
Equity Fund is to seek long-term growth of
capital by investing in equity securities of
emerging small- and medium-sized companies
that are expected to show earnings growth
over time that is well above the growth rate
of the overall economy and the rate of
inflation.
PRINCIPAL The Fund seeks to achieve its investment
INVESTMENT STRATEGIES objective by investing all of its assets in
the Republic Small Cap Equity Portfolio (the
'Portfolio'), which has the same investment
objective as the Fund. This two-tier fund
structure is commonly referred to as a
'master/feeder' structure because one fund
(the Small Cap Equity Fund or 'feeder fund')
is investing all its assets in a second fund
(the Portfolio or 'master fund').
The Portfolio will invest primarily in
common stocks of small- and medium-sized
companies, but may also invest in bonds,
notes, commercial paper, U.S. Government
securities, and foreign securities. The Fund
may also invest in common stocks of larger,
more established companies if they are
expected to show increased earnings.
</TABLE>
31
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
PRINCIPAL Market Risk: The Fund's performance per
INVESTMENT RISKS share will change daily based on many
factors, including national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
Equity securities have greater price
volatility than fixed income instruments.
The value of the Fund will fluctuate as the
market price of its investments increases or
decreases.
Small Company Risk: Because emerging small-
and medium-sized companies have fewer
financial resources than larger,
well-established companies, investments in
the Fund are subject to greater price
volatility than investments in other equity
funds that invest in larger,
well-established companies, particularly
during periods of economic uncertainty or
downturns.
Foreign Investment Risk: The Fund's
investments in foreign securities are
riskier than its investments in U.S.
securities. Investments in foreign
securities may lose value due to unstable
international political and economic
conditions, fluctuations in currency
exchange rates, lack of adequate company
information, as well as other factors.
Issuer Risk: The value of a sercurity may
fluctuate for a variety of reasons that
relate to the issuer, including, but not
limited to, management performance and
reduced demand for the issuer's products and
services.
Derivatives Risk: The Fund may invest in
derivative instruments (e.g., option and
futures contracts) to help achieve its
investment objective. The Fund intends to do
so primarily for hedging purposes. These
investments could increase the Fund's price
volatility or reduce the return on your
investment.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT
OF HSBC AND IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
</TABLE>
32
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Seeking a long-term investment
Looking to add a growth component to your
investment portfolio
Willing to accept higher risks of investing
in emerging companies in exchange for
potentially higher long-term returns.
This Fund will not be appropriate for
anyone:
Seeking monthly income
Pursuing a short-term goal or investing
emergency reserves
The investment objective and strategies of
the Fund are not fundamental and may be
changed without approval of the Fund
shareholders. If there is a change in the
investment objective or strategies of the
Fund, shareholders should consider whether
the Fund remains an appropriate investment
in light of their then current financial
position and needs. There can be no
assurance that the investment objective of
the Fund or the Portfolio will be achieved.
</TABLE>
33
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
PERFORMANCE BAR
CHART AND TABLE
The bar chart on this page shows the Republic Small Cap Equity Fund's annual
returns and how its performance has varied from year to year. The bar chart
assumes reinvestment of dividends and distributions.
YEAR-BY-YEAR
TOTAL RETURNS
AS OF 12/31
FOR ADVISOR (CLASS Y)
SHARES
[CHART]
1997 - 22.76%
1998 - 13.43%
1999 - 48.20%
Of course, past performance does not indicate how the
Fund will perform in the future.
-------------------------------
<TABLE>
<S> <C>
Best quarter: 4Q 1999 +46.70%
Worst quarter: 3Q 1998 -20.10%
</TABLE>
34
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
The table below compares the Fund's performance over time with the Russell 2000
Index, an unmanaged index of the 2000 smallest companies (representing
approximately 10% of the total market capitalization) in the Russell 3000 Index
(representing 98% of the U.S. equity market by capitalization, and the Lipper
Small Company Fund Index, an unmanaged, equally weighted index composed of the
30 largest mutual funds with a similar investment objective. The table assumes
reinvestment of dividends and distributions.
-----------------
AVERAGE ANNUAL
TOTAL RETURNS (for
the periods ended
December 31, 1999)
- ----------------------------
<TABLE>
<CAPTION>
INCEPTION PAST SINCE
DATE YEAR INCEPTION
---------------------------------
<S> <C> <C> <C>
ADVISER (CLASS Y) SHARES Sept. 3, 1996 48.20% 27.47%
---------------------------------
RUSSELL 2000 INDEX 21.26% 14.72%*
LIPPER SMALL COMPANY ---------------------------------
FUND INDEX 41.54% 17.06%*
------------------------------------------------------------
</TABLE>
* Since September 1, 1996.
35
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
FEES AND EXPENSES*
As an investor in the Republic Small Cap Equity Fund, you may pay the following
fees and expenses if you buy and hold Adviser (Class Y) Shares of the Fund.
Shareholder transaction fees are paid from your account. Annual Fund operating
expenses are paid out of Fund assets, and are reflected in the share price.
<TABLE>
<S> <C>
ADVISER
SHAREHOLDER TRANSACTION EXPENSES (CLASS Y)
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) SHARES
Maximum sales charge (load) on purchases None
Maximum deferred sales charge (load) None
ANNUAL FUND OPERATING EXPENSES ADVISER
(EXPENSES THAT ARE DEDUCTED FROM FUND (CLASS Y)
ASSETS) SHARES
Management fee 0.86%
------------------------------------------------------
Distribution (12b-1) fee None
------------------------------------------------------
Other expenses 0.27%
------------------------------------------------------
Total Fund operating expenses 1.13%
------------------------------------------------------
</TABLE>
* The table reflects the combined fees of both the Small Cap Equity Fund and
the Small Cap Equity Portfolio.
36
<PAGE>
REPUBLIC SMALL CAP EQUITY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES [LOGO]
EXAMPLE*
This Example is intended to help you compare the cost of investing in Adviser
(Class Y) Shares of the Fund with the cost of investing in other mutual funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
$10,000 investment
5% annual return
redemption at the end of each period
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------
REPUBLIC SMALL CAP 1 3 5 10
EQUITY FUND YEAR YEARS YEARS YEARS
ADVISER (CLASS Y) SHARES $115 $359 $622 $1,375
- ---------------------------------------------------------
</TABLE>
* The example reflects the combined fees of both the Small Cap Equity Fund and
the Small Cap Equity Portfolio.
37
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
REPUBLIC NEW YORK TAX-FREE BOND FUND
TICKER SYMBOL: RYYXX
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Fund with income exempt from regular federal, New York State
and New York City personal income taxes. The Fund seeks to achieve its
investment objective by investing its assets primarily in a non-diversified
portfolio of municipal bonds, municipal notes, and other debt instruments, the
interest on which is exempt from regular federal, New York State and New York
City personal income taxes.
Consistent with its investment objective, the New York Tax-Free Bond Fund:
will invest at least 80% of its assets in tax exempt obligations, and at
least 65%, if not all, of its assets in New York Municipal Obligations. To
the extent that New York Municipal Obligations do not have acceptable risk-
and tax-adjusted returns, the Fund may purchase Municipal Obligations issued
by other states 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.
may invest, as a temporary defensive measure, in short-term obligations or
hold some of its assets in cash. If so, shareholders may have to pay federal
and New York State and New York City personal income taxes on the interest
received on these investments.
may invest in derivative instruments, including, but not limited to, options
and futures contracts on fixed income securities and indices of municipal
securities.
may invest in fixed income securities, which may include bonds, debentures,
mortgage securities, notes, bills, commercial paper, and U.S. Government
securities.
may engage in repurchase transactions, where the Portfolio or Fund purchases
a security and simultaneously commits to resell that security to the seller
at an agreed upon price on an agreed upon date.
may purchase and sell securities on a when-issued 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.
The investment adviser selects securities for the Portfolio based on various
factors, including the credit quality of the securities, the outlook for the
economy, and anticipated changes in interest rates and inflation. The investment
adviser may sell securities when it believes that expected risk-adjusted return
is low compared to other investment opportunities.
38
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
REPUBLIC EQUITY FUND
TICKER SYMBOL: REQYX
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Equity Fund is long-term growth of capital and
income without excessive fluctuations in market value. The Fund seeks to achieve
its objective by investing at least 65% of its assets in equity securities of
seasoned medium and large-sized companies in sound financial condition that are
expected to show above average price appreciation.
To achieve its investment objective, the Fund employs two investment sub-
advisers, each of whom pursues a different investment strategy. As investment
manager of the Fund, HSBC Bank USA ('HSBC') is responsible for allocating the
assets between the investment sub-advisers. Although HSBC usually divides the
assets in half, it may allocate a greater portion of the assets to one of the
investment sub-advisers if HSBC believes it is in the best interests of the
Fund.
The first investment sub-adviser invests its portion of the Fund's assets using
a 'growth' style of investing. The second investment sub-adviser invests the
remaining assets using a 'value' style of investing. Each approach relies on a
careful analysis of each company considered for investment, using internal
fundamental research analysis, to determine its source of earnings, competitive
edge, management strength, and level of industry dominance as measured by market
share.
'GROWTH' STRATEGY: This strategy focuses on investing 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. The
Fund's assets may be invested in companies that do not demonstrate such
characteristics if such companies are expected 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.
'VALUE' STRATEGY: This approach seeks to attain the Fund's investment objective
by investing in 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. The research focuses on two levels of analysis:
first, on understanding wealth shifts that occur within the equity market; and
second, on individual company research.
39
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
Consistent with its investment objective, the Republic Equity Fund:
may invest in a broad range of equity securities of U.S. and foreign
companies, including debt securities, warrants or rights that can be
converted into common stock.
may invest in derivative instruments, including, but not limited to, futures
contracts options on securities, securities indices, futures contracts, and
foreign currencies.
may invest up to 35% in bonds and other debt securities, including lower
rated, high-yield bonds, commonly referred to as 'junk bonds.'
may invest without limit in short-term debt and other high-quality, fixed
income securities, including U.S. and foreign government securities,
certificates of deposit and bankers' acceptances of U.S. and foreign banks,
and commercial paper of U.S. or foreign issuers.
may engage in repurchase transactions, where the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date.
may lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income.
40
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
REPUBLIC FIXED INCOME FUND
TICKER SYMBOL: RFXIX
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Fixed Income Fund is to realize above-average
total return, 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 Fund seeks to achieve
its investment objective by investing all of its assets in the Republic Fixed
Income Portfolio, which has the same investment objective as the Fund.
Consistent with the investment objective of the Fund, the Fixed Income
Portfolio:
will normally invest at least 65% of its total assets in fixed income
securities, which may include U.S. Government securities, corporate debt
securities and commercial paper, mortgage-backed and asset-backed securities,
obligations of foreign governments or international entities, and foreign
currency exchange-related securities.
may invest more than 50% of its assets in mortgage-backed securities
including mortgage pass-through securities, mortgage-backed bonds and CMOs,
that carry a guarantee of timely payment.
may lend its securities to brokers, dealers, and other financial institutions
for the purpose of realizing additional income. The Fund or Portfolio may
also borrow money for temporary or emergency purposes.
may invest in derivative instruments, including, but not limited to,
financial futures, foreign currency futures, foreign currency contracts,
options on futures contracts, options on securities, and swaps.
may invest in high yield/high risk securities ('junk bonds') as well as
floating and variable rate instruments and obligations.
may engage in repurchase transactions, where the Portfolio purchases a
security and simultaneously commits to resell that security to the seller at
an agreed upon price on an agreed upon date.
may invest in debt obligations by commercial banks and savings and loan
associations. These instruments would include certificates of deposit, time
deposits, and bankers' acceptances.
may purchase and sell securities on a when-issued 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.
The investment sub-adviser selects securities for the Portfolio based on various
factors, including the outlook for the economy and anticipated changes in
interest rates and inflation. The investment sub-adviser may sell securities
when it believes that expected risk-adjusted return is low compared to other
investment opportunities.
41
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
REPUBLIC INTERNATIONAL EQUITY FUND
TICKER SYMBOL: RINEX
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
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 and securities whose principal markets are outside of the
United States. The Fund seeks to achieve its investment objective by investing
all of its assets in the International Equity Portfolio, which has the same
investment objective as the Fund. 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.
Consistent with the investment objective of the Fund, 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, trust certificates, limited
partnership interests and equity participations.
may invest up to 20% of its assets in equity securities of companies in
emerging markets.
intends to have at least three different countries represented in its
portfolio and intends to invest primarily in companies with large market
capitalizations.
may, under exceptional circumstances, temporarily invest part or all of its
assets in fixed income securities denominated in foreign currencies, domestic
or foreign government securities, and nonconvertible preferred stock, or hold
its assets in cash or cash equivalents.
42
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
may invest in derivative instruments, including, but not limited to, foreign
currency futures contracts and options on foreign currencies and foreign
currency futures.
may engage in repurchase transactions, where the Portfolio or Fund purchases
a security and simultaneously commits to resell that security to the seller
at an agreed upon price on an agreed upon date.
may lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income.
may purchase and sell securities on a 'when-issued' 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.
The investment sub-adviser's approach to investing relies on extensive field
research and direct company contact. It is a fundamental value-oriented approach
that attempts to identify the difference between the underlying value of a
company and the price of its security in the market.
43
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
REPUBLIC SMALL CAP EQUITY FUND
TICKER SYMBOL: RESCX
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Small Cap Equity Fund is to seek long-term
growth of capital by investing 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. These companies 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 that are usually necessary to become more widely recognized. The
Fund seeks to achieve its investment objective by investing all of its assets in
the Republic Small Cap Equity Portfolio, which has the same investment objective
as the Fund.
Consistent with the investment objective of the Fund, the Small Cap Equity
Portfolio:
will invest at least 80% of its assets in equity securities, of which at
least 65% will be equity securities issued by small cap companies. Small cap
companies generally are those companies which have small (under $1 billion)
market capitalizations and have gross revenues ranging from $10 million to $1
billion.
may 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.
may invest up to 20% of its assets in foreign securities.
will invest primarily in common stocks, but may, to a limited extent, seek
appreciation in other types of securities when relative values and market
conditions make such purchases appear attractive.
may invest part or all of its assets in cash (including foreign currency) or
short-term obligations during times of international, political or economic
uncertainty or turmoil, or in order to meet anticipated redemption requests.
These investments may include certificates of deposit, commercial paper,
short-term notes and U.S. Government securities.
44
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES [LOGO]
may invest in derivative instruments, including, but not limited to,
financial and foreign currency futures contracts as well as options on
securities, foreign currencies, and foreign currency futures.
may invest in fixed income securities, which may include bonds, debentures,
mortgage securities, notes, bills, commercial paper, and U.S. Government
securities.
may engage in repurchase transactions, where the Portfolio or Fund purchases
a security and simultaneously commits to resell that security to the seller
at an agreed upon price on an agreed upon date.
may lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income.
The investment sub-adviser uses a bottom-up, as opposed to a top-down,
investment style in managing the Fund. Securities are selected based upon
fundamental analysis of a company's cash flow, industry position, potential for
high profit margins, and strength of management, as well as other factors.
45
<PAGE>
INVESTMENT RISKS [LOGO]
GENERAL RISK FACTORS: ALL FUNDS
An investment in the Funds is subject to investment risks, including the
possible loss of the principal amount invested. The Funds' performance per share
will change daily based on many factors, including fluctuation in interest
rates, the quality of the instruments in each Fund's investment portfolio,
national and international economic conditions and general market conditions.
Generally, the New York Tax-Free Bond Fund, the Equity Fund, the Fixed Income
Fund, the International Equity Fund, and the Small Cap Equity Fund and their
corresponding portfolios, will be subject to the following risks:
Fixed Income Securities: The value of investments in fixed income securities
will fluctuate as interest rates decrease or increase. In addition, these
securities may accrue income that is distributable to shareholders even though
the income may not yet have been paid to a Fund or Portfolio. If so, a Fund or
Portfolio may need to liquidate some of its holdings and forego the purchase
of additional income-producing assets.
Credit Risks: The Funds could lose money if the issuer of a fixed income
security owned by a Fund or Portfolio is unable to meet its financial
obligations.
Derivatives: The Funds may invest in various types of derivative securities.
Generally, a derivative is a financial arrangement the value of which is based
on (or 'derived' from) a traditional security, asset, or market index.
Derivative securities include, but are not limited to, options and futures
transactions, forward foreign currency exchange contracts, swaps, mortgage-
and asset-backed securities, and 'when-issued' securities. There are, in fact,
many different types of derivative securities and many different ways to use
them.
The use of derivative securities is a highly specialized activity and there
can be no guarantee that their use will increase the return of the Funds or
protect their assets from declining in value. In fact, investments in
derivative securities may actually lower a Fund's return if such investments
are timed incorrectly or are executed under adverse market conditions. In
addition, the lack of a liquid market for derivative securities may prevent
the Fund from selling unfavorable positions, which could result in adverse
consequences.
Each Fund may invest in different kinds of derivative securities. The
Statement of Additional Information contains a detailed description of the
derivative securities in which the Fund may invest and a discussion of the
risks associated with each security. To request a Statement of Additional
Information, please refer to the back cover of this Prospectus.
46
<PAGE>
INVESTMENT RISKS [LOGO]
Repurchase Agreements: 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 Portfolio or Fund may incur a loss upon
disposition of the securities. There is also the risk that the seller of the
agreement may become insolvent and subject to liquidation.
Illiquid Securities: The Funds may, at times, hold illiquid securities, by
virtue of the absence of a readily available market for certain of its
investments, or because of legal or contractual restrictions on sale. A Fund
could lose money if it is unable to dispose of an investment at a time that is
most beneficial to the Fund.
Returns Are Not Guaranteed: 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 HSBC 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.
YEAR 2000 RISK:
Like other funds and business organizations around the world, each Fund and its
service providers rely heavily on computer systems that use date fields. The
Funds could be adversely affected if the computer systems used by the Funds and
their service providers do not properly process and calculate date-related
information for the year 2000 and beyond (the 'Year 2000 Issue'). As of the date
of this Prospectus, the Year 2000 Issue has not had any adverse consequences to
the Funds, but there is no assurance that the Year 2000 Issue will not cause
problems in the future.
The Funds and their service providers have taken steps to minimize risks to
services critical to the Funds' operations associated with the Year 2000 Issue.
47
<PAGE>
INVESTMENT RISKS [LOGO]
The Funds currently have no reason to believe that the Year 2000 will have a
material adverse effect on their business or operations, but complications as
yet unidentified may arise. The Funds will continue to closely monitor
developments relating to the Year 2000 Issue.
SPECIFIC RISK FACTORS: FOREIGN AND HIGH YIELD/HIGH RISK SECURITIES
<TABLE>
<S> <C>
EQUITY FUND FIXED INCOME FUND
SMALL CAP EQUITY FUND INTERNATIONAL EQUITY FUND
</TABLE>
Foreign securities involve investment risks different from those associated with
domestic securities. Foreign investments may be riskier than U.S. investments
because of unstable international political and economic conditions, foreign
controls on investment and currency exchange rates, withholding taxes, and a
lack of adequate company information, liquidity, and government regulation.
Investments in foreign emerging markets present greater risk than investing in
foreign issuers in general. The risk of political or social upheaval is greater
in emerging markets. In addition, a number of emerging markets restrict foreign
investment in stocks. 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. Moreover, 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.
48
<PAGE>
INVESTMENT RISKS [LOGO]
High yield/high risk securities ('junk bonds') may be more susceptible to real
or perceived adverse economic and competitive industry conditions than higher
grade securities. If the issuer of high yield/high risk securities defaults, the
Fund or Portfolio may incur additional expenses to seek recovery. High
yield/high risk securities may be less liquid than the market for higher grade
securities. Less liquidity in the secondary trading markets could adversely
effect and cause large fluctuations in the daily net asset value of the Funds.
SPECIFIC RISK FACTORS: 'WHEN-ISSUED' SECURITIES
NEW YORK TAX-FREE BOND FUND
FIXED INCOME FUND
INTERNATIONAL EQUITY FUND
The price and yield of securities purchased on a 'when-issued' basis is fixed on
the date of the commitment but payment and delivery are scheduled for a future
date. Consequently, these securities present a risk of loss if the other party
to a 'when-issued' transaction fails to deliver or pay for the security. In
addition, purchasing securities on a 'when-issued' 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' security may have a lesser (or greater) value at the time of
settlement than the Fund's payment obligation with respect to that security.
SPECIFIC RISK FACTORS: MORTGAGE-BACKED SECURITIES AND SWAPS
FIXED INCOME FUND
Mortgage- and asset-backed securities are debt instruments that are secured by
interests in pools of mortgage loans or other financial assets. Mortgage- and
asset-backed securities are subject to prepayment, extension, market, and credit
risks. 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. Conversely, an extension risk is present during periods
of rising interest rates, when a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities. Market risk
reflects the risk that the price of the security may fluctuate over time as a
result of changing interest rates or the lack of liquidity. Credit risk reflects
the risk that the Fund or Portfolio may not receive all or part of its principal
because the issuer has defaulted on its obligations.
A swap is an agreement to change the return generated by one instrument for the
return generated by another instrument. The use of swaps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the other party
to the swap defaults, the Fund or Portfolio may lose interest payments that it
is contractually entitled to receive and may, in some cases, lose the entire
principal value of the investment security.
49
<PAGE>
INVESTMENT RISKS [LOGO]
SPECIFIC RISK FACTORS: CONCENTRATION
NEW YORK TAX-FREE BOND FUND
Because the Fund will concentrate its investments in New York and may
concentrate a significant portion of its assets in the securities of a single
issuer or sector, investment in this Fund may pose investment risks greater than
those posed by a more broadly diversified portfolio. Consequently, unlike a more
diversified portfolio, the value of the Fund's assets could lose significant
value due to the poor performance of a single issuer or sector.
The Fund may also be subject to credit risks. Historically, New York State and
other issuers of New York Municipal Obligations have experienced periods of
financial difficulty. Because a significant share of New York State's economy
depends on financial and business services, any change in market conditions that
adversely affect these industries could affect the ability of New York and its
localities to meet its financial obligations. The financial stability of New
York State is closely related to the financial stability of its localities,
particularly New York City, which has required and continues to require
significant financial assistance from New York. To the extent that New York City
and other New York localities require the State's assistance, the ability of the
State to meet its own obligations as they come due or to obtain additional
financing could be adversely affected. If this occurs, you could lose money on
your investment.
50
<PAGE>
FUND MANAGEMENT [LOGO]
THE INVESTMENT ADVISER
HSBC Bank USA ('HSBC'), 452 Fifth Avenue, New York, New York 10018, is the
investment adviser for the New York Tax-Free Bond Fund. HSBC is also the
investment manager for the Equity Fund, the Fixed Income Portfolio, the
International Portfolio, and the Small Cap Equity Portfolio. As investment
manager of the Equity Fund and the Portfolios, Republic provides general
supervision over the investment management functions performed by the investment
advisers.
HSBC is a wholly owned subsidiary of HSBC USA, Inc., a registered bank holding
company. HSBC currently provides investment advisory services for individuals,
trusts, estates and institutions. HSBC manages more than $80 billion in
assets including $3.2 billion in the Republic Family of Funds.
The following companies serve as investment sub-advisers of their respective
Fund and Portfolios. The investment sub-advisers make the day-to-day investment
decisions and continuously review, supervise and administer investment programs.
The Fixed Income Fund (Fixed Income Portfolio): Miller Anderson & Sherrard
('MAS'), One Tower Bridge, West Conshohocken, Pennsylvania 19428, is a
Pennsylvania limited partnership founded in 1969. MAS is wholly-owned by
indirect subsidiaries of Morgan Stanley Dean Witter & Co., and is a division of
Morgan Stanley Dean Witter Investment Management. MAS provides investment
services to employee benefit plans, endowment funds, foundations and other
institutional investors. As of December 31, 1999, MAS had approximately
$66.6 billion in assets under management.
The Equity Fund: Alliance Capital Management L.P. ('Alliance'), 1345 Avenue of
the Americas, New York, New York 10105, and Brinson Partners, Inc. ('Brinson'),
209 South LaSalle Street, Chicago, IL 60604, both serve as investment advisers
to the Equity Fund. Alliance pursues a 'growth' style of investing, while
Brinson pursues a 'value' style of investing. As investment manager, HSBC is
responsible for allocating the Fund's assets between Alliance and Brinson for
purposes of investment.
Alliance is a leading global investment adviser supervising client accounts with
assets totaling $368 billion as of December 31, 1999. Alliance's clients are
primarily major corporate employee benefit funds, public employee retirement
systems, investment companies, foundations and endowment funds.
51
<PAGE>
FUND MANAGEMENT [LOGO]
THE INVESTMENT ADVISER
CONTINUED
Brinson is an investment management firm managing, as of December 31, 1999,
approximately $390 billion, primarily for pension and profit sharing
institutional accounts. Brinson and its predecessor entities have managed
domestic and international investment assets since 1974 and global investment
assets since 1982. Brinson also serves as the investment adviser to seven other
investment companies.
The International Equity Fund (International Equity Portfolio): Capital Guardian
Trust Company ('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. As of December 31, 1999, CGTC managed $154
billion of assets primarily for large institutional clients.
The Small Cap Equity Fund (Small Cap Equity Portfolio): MFS Institutional
Advisers, Inc. ('MFSI'), together with its parent company Massachusetts
Financial Services Company ('MFS'), is America's oldest mutual fund
organization. MFSI has its principal office at 500 Boylston Street, Boston, MA
02116. As of December 31, 1999, the MFS organization had approximately $137
billion in assets under management on behalf of over two million investor
accounts. As of that date, the MFS organization managed approximately $106
billion of assets invested in equity securities and approximately $21 billion of
assets invested in fixed income securities.
For these advisory and management services, the Funds paid a management fee as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
AVERAGE NET ASSETS
AS OF 10/31/99*
<S> <C>
Fixed Income Fund 0.39%
------------------
New York Tax-Free Bond Fund 0.25%
------------------
Equity Fund 0.45%
------------------
International Equity Fund 0.72%
------------------
Small Cap Equity Fund 0.88%
- ----------------------------------------------------------------
</TABLE>
* HSBC waived a portion of its contractual fees with the New York Tax-Free Bond
Fund, International Equity Fund and Small Cap Equity Fund for the most recent
fiscal year. Actual fees paid on behalf of the Funds and Portfolios during the
previous fiscal year may be higher than the current contractual fees due to
breakpoints in the investment adviser's fee, which are based on the value of the
assets in a Fund or Portfolio.
52
<PAGE>
FUND MANAGEMENT [LOGO]
PORTFOLIO MANAGERS
THE NEW YORK TAX-FREE BOND FUND:
Peter J. Loftus, Senior Portfolio Manager with HSBC since 1997, is
primarily responsible for the day-to-day management of the New York
Tax-Free Bond Fund's portfolio. Prior to joining HSBC, Mr. Loftus was a
Senior Vice President at Dillon, Read & Co. from August, 1992 through
August, 1997, where he managed tax-exempt trading and hedging for the firm.
He also spent seven years (1984-1991) at Paine Webber as a Vice President
involved in the trading and distribution of tax-exempt securities.
THE EQUITY FUND:
John L. Blundin, Executive Vice President and Portfolio Manager and
Disciplined Growth Team Leader, and Christopher Toub, a Senior Vice
President, Equity Portfolio Manager and Director of Global Equity Research,
have primary portfolio management responsibility for the Equity Fund's
assets allocated to Alliance. In all, Mr. Blundin has 35 years of
investment experience. For 27 years, including the last five years, Mr.
Blundin has served as a portfolio manager at Alliance. Mr. Toub has 18
years of investment experience, including the last five years of experience
as a portfolio manager at Alliance.
Jeffrey J. Diermeier, Managing Partner-U.S. Equities at Brinson, has
primary portfolio management responsibility for the Fund's assets allocated
to Brinson. Including the last five years, Mr. Diermeier has 22 years of
investment experience at Brinson.
THE FIXED INCOME FUND (FIXED INCOME PORTFOLIO):
The Portfolio Manager for the Fixed Income Portfolio is Kenneth B. Dunn.
Mr. Dunn has been a Partner at MAS since prior to 1991. He has served as
the Portfolio Manager of the MAS Fixed Income and MAS Domestic Fixed Income
Portfolios since 1987; the MAS Fixed Income II Portfolio since 1990; the
MAS Mortgage-Backed Securities and Special Purpose Fixed Income Portfolios,
since 1992; and the MAS Municipal and PA Municipal Portfolios, since 1994.
53
<PAGE>
FUND MANAGEMENT [LOGO]
PORTFOLIO MANAGERS
CONTINUED
THE INTERNATIONAL EQUITY FUND (INTERNATIONAL EQUITY PORTFOLIO):
The following persons are primarily responsible for portfolio management of the
International Equity Portfolio:
David Fisher, Chairman of CGTC, has had 33 years experience as an
investment professional (29 years with CGTC or its affiliates, including
the last five years).
Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., has had 27 years experience as an investment
professional (25 years with CGTC or its affiliates, including the last five
years).
Nancy Kyle, Senior Vice President of CGTC, has had 25 years experience as
an investment professional (8 years with CGTC or its affiliates, including
the last five years). 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 29 years experience
as an investment professional (15 years with CGTC or its affiliates,
including the last five years).
Robert Ronus, President of CGTC, has had 30 years experience as an
investment professional (24 years with CGTC or its affiliates, including
the last five years).
Nilly Sikorsky, Director of The Capital Group Companies, Inc., has had 36
years experience as an investment professional, all of which was with CGTC
or its affiliates.
54
<PAGE>
FUND MANAGEMENT [LOGO]
PORTFOLIO MANAGERS
CONTINUED
SMALL CAP EQUITY FUND (SMALL CAP EQUITY PORTFOLIO):
The portfolio manager of the Small Cap Equity Portfolio is Brian Stack,
Senior Vice President of MFSI. Mr. Stack has been employed by MFSI since
1993.
THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services ('BISYS'), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Funds' administrator (the 'Administrator').
Management and administrative services of BISYS include providing office space,
equipment and clerical personnel to the Funds and supervising custodial,
auditing, valuation, bookkeeping, legal and dividend dispersing services.
BISYS also serves as the distributor (the 'Distributor') of the Funds' shares.
BISYS may provide financial assistance in connection with pre-approved seminars,
conferences and advertising to the extent permitted by applicable state or
self-regulatory agencies, such as the National Association of Securities
Dealers.
The Statement of Additional Information has more detailed information about the
Investment Adviser, Distributor and Administrator, and other service providers.
55
<PAGE>
FUND MANAGEMENT [LOGO]
THE TWO-TIER FUND STRUCTURE
The Fixed Income Fund, the International Equity Fund, and the Small Cap Equity
Fund seek to achieve their investment objectives by investing all of each Fund's
assets in the Republic Fixed Income Portfolio, Republic International Equity
Portfolio, and the Republic Small Cap Equity Portfolio, respectively, series of
a separate open-end investment company each having the same investment
objectives as their respective Funds. This is referred to as a 'master/feeder'
arrangement because one fund (the 'feeder' fund) 'feeds' its assets into another
fund (the 'master fund'). The two-tier investment fund structure has been
developed relatively recently, so shareholders should carefully consider this
investment approach. For example, other mutual funds and institutional investors
may invest in the Portfolios on the same terms and conditions as the Funds
(although they may have different sales commissions and other operating expenses
that may generate different returns). As with traditionally structured funds
which have large investors, the actions of these mutual funds and institutional
investors (or other large investors) may have a material effect on smaller
investors in the Fund. For example, if a large investor withdraws from a
portfolio (a 'master fund'), operating expenses may increase, thereby producing
lower returns for investors in the Funds ('feeder funds'). Additionally, the
portfolio may become less diverse, resulting in increased portfolio operating
expenses.
Except as permitted, whenever a Fund is requested to vote on a matter pertaining
to its corresponding Portfolio, the Fund will hold a meeting of its
shareholders. At the meeting of investors in the Portfolio, the Fund will cast
all of its votes in the same proportion as the votes of the Fund's shareholders.
The investment objectives of the Funds and the Portfolios may be changed without
approval of the shareholders. A Fund may withdraw its investment in its
corresponding Portfolio as a result of certain changes in the Portfolio's
investment objective, policies or restrictions or if it is in the best interests
of the Fund to do so.
56
<PAGE>
FUND MANAGEMENT [LOGO]
PRICING OF FUND SHARES
- ------------------------
HOW NAV IS CALCULATED
The NAV is calculated by dividing the total value of a Fund's investments and
other assets attributable to a class of shares, less any liabilities, by the
number of outstanding shares of that class:
- -----------------------------
NAV =
Total Assets - Liabilities
Number of Shares
Outstanding
- -----------------------------
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.
THE INCOME AND EQUITY FUNDS
The net asset value per share (NAV) of the Fixed Income Fund and the New York
Tax-Free Bond Fund (collectively, the 'Income Funds'), and the Equity Fund, the
International Equity Fund, and the Small Cap Equity Fund (collectively, the
'Equity Funds'), is determined once each day at the close of regular trading on
the New York Stock Exchange, normally at 4 p.m. Eastern time on days the
Exchange is open. The New York Stock Exchange is open every weekday except for
the days on which national holidays are observed.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is accepted by the Fund.
- ------------------------------------------------------------------------
PURCHASING AND ADDING TO YOUR SHARES
You may purchase Funds through the Distributor or through banks, brokers and
other investment representatives, which may charge additional fees and may
require higher minimum investments or impose other limitations on buying and
selling shares. If you purchase shares through an investment representative,
that party is responsible for transmitting orders by close of business and may
have an earlier cut-off time for purchase and sale requests. Consult your
investment representative or institution for specific information.
- -------------------------------------------------------------------------
57
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
PURCHASING AND ADDING TO YOUR SHARES
All purchases must be in
U.S. dollars. A fee will be
charged for any checks that
do not clear. Third-party
checks are not accepted.
A Fund may waive its
minimum purchase
requirement and the
Distributor may reject a
purchase order if it
considers it in the best
interest of the Fund and its
shareholders.
<TABLE>
<CAPTION>
-----------------------
MINIMUM
INITIAL MINIMUM
ACCOUNT TYPE INVESTMENT SUBSEQUENT
<S> <C> <C>
ADVISER (CLASS Y) SHARES*
Regular
(non-retirement) $1,000,000 $ N/A
* HSBC clients that
maintain an investment
management account are
not subject to the
minimun initial investment
requirements.
</TABLE>
- -----------------------------------------------------------------------
AVOID 31% TAX WITHHOLDING
The Funds are required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Funds with their certified taxpayer identification number in compliance with
IRS rules, or if you have been notified by the IRS that you are subject to
backup withholding. Backup withholding is not an additional tax; rather it is a
way in which the IRS ensures that it will collect taxes otherwise due. Any
amounts withheld may be credited against your U.S. federal income tax
liability. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- -----------------------------------------------------------------------
58
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL OR BY OVERNIGHT SERVICE
Initial Investment:
If purchasing through your financial adviser or brokerage account, simply tell
your adviser or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
1. Carefully read, complete, and sign the account application. Establishing your
account privileges now saves you the inconvenience of having to add them
later.
2. Make check, bank draft or money order payable to 'Republic Funds' and include
the name of the appropriate Fund(s) on the check.
Mail to: Republic Funds, PO Box 182845, Columbus, Ohio 43218-2845.
Subsequent:
1. Use the investment slip attached to your account statement.
Or, if unavailable,
2. Include the following information in writing:
Fund name
Share class
Amount invested
Account name
Account number
Include your account number on your check.
----------------------------
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial
institutions to send funds to
each other, almost
instantaneously. With an
electronic purchase or sale, the
transaction is made through the
Automated Clearing House (ACH)
and may take up to eight days to
clear. There is generally no fee
for ACH transactions.
Mail investment slip and check to: Republic Funds, PO Box 182845, Columbus, Ohio
43218-2845.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-782-8183. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-782-8183 to arrange a transfer from your bank account.
59
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
BY WIRE TRANSFER
For information on how to request a wire transfer, call 1-800-782-8183.
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in the Funds from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $25, once
you've invested the $250 minimum required to open the account.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application.
Make sure you note:
Your bank name, address and account number
The amount you wish to invest automatically (minimum $25)
How often you want to invest (every month, 4 times a year, twice a year or
once a year)
Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-782-8183 for an enrollment form.
-----------------------------
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in
the Account Application, you can
elect to receive your distributions
in cash (check) or have
distributions (capital gains and
dividends) reinvested in another
Republic Fund without a sales
charge. You must maintain the
minimum balance in each Fund into
which you plan to reinvest dividends
or the reinvestment will be
suspended and your dividends paid to
you. The Fund may modify or
terminate this reinvestment option
without notice. You can change or
terminate your participation in the
reinvestment option at any time.
- ----------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Capital gains are distributed at least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date, some
of your investment will be returned to you in the form of a distribution, which
may be taxable.
- ----------------------------------------------------------------------
60
<PAGE>
You may sell your shares at any SELLING YOUR SHARES
time. Your sales price will be --------------------------------------
the next NAV after your sell WITHDRAWING MONEY FROM YOUR FUND
order is received by the Fund, INVESTMENT
its transfer agent, or your As a mutual fund shareholder, you are
investment representative. technically selling shares when you
Normally you will receive your request a withdrawal in cash. This is
proceeds within a week after also known as redeeming shares or a
your request is received. See redemption of shares.
section on 'General Policies on --------------------------------------
Selling Shares' below.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through you financial adviser or broker, ask him or her
for redemption procedures. Your adviser and/or broker may have transaction
minimums and/or transaction times that will affect your redemption.
For all other sales transactions, follow the instructions below.
BY TELEPHONE
(unless you have declined telephone sales privileges)
1. Call 1-800-782-8183 with instructions as to how you wish to receive your
funds (mail, wire, electronic transfer). (See 'General Policies on
Selling Shares -- Verifying Telephone Redemptions' below)
BY MAIL OR OVERNIGHT SERVICE
(See 'General Policies on Selling Shares -- Redemptions in Writing Required'
below)
1. Call 1-800-782-8183 to request redemption forms or write a letter of
instruction indicating:
your Fund and account number
amount you wish to redeem
address where your check should be sent
account owner signature
2. Mail to: Republic Funds, PO Box 182845, Columbus, Ohio 43218-2845.
61
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
SELLING YOUR SHARES
CONTINUED
WIRE TRANSFER
You must indicate this option on your account application.
Call 1-800-782-8183 to request a wire transfer.
If you call by 4 p.m. Eastern time, your payment will normally be wired to your
bank on the same business day. Otherwise, it will normally be wired on the
second business day after your call.
The Fund may charge a wire transfer fee.
Note: Your financial institution may also charge a separate fee.
ELECTRONIC REDEMPTIONS
Call 1-800-782-8183 to request an electronic redemption.
Your bank must participate in the Automated Clearing House (ACH) and must be a
U.S. bank. If you call by 4 p.m. Eastern time, the NAV of your shares will
normally be determined on the same day and the proceeds credited within 7 days.
Your bank may charge for this service.
SYSTEMATIC WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
Make sure you have checked the appropriate box on the Account Application,
or call 1-800-782-8183.
Include a voided personal check.
Your account must have a value of $10,000 or more to start withdrawals.
If the value of your account falls below $1,000, you may be asked to add
sufficient funds to bring the account back to $1,000, or the Fund may
close your account and mail the proceeds to you.
62
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
SELLING YOUR SHARES
CONTINUED
REDEMPTIONS IN WRITING REQUIRED
You must request redemption in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ('IRAs').
2. Redemption requests requiring a signature guarantee, which include any of the
following:
Redemptions over $10,000;
Your account registration or the name(s) in your account has changed
within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
The redemption proceeds are being transferred to another Fund account with
a different registration.
You must obtain a signature guarantee from members of the STAMP (Securities
Transfer Agents Medallion Program), MSP (New York Stock Exchange Signature
Program) or SEMP (Stock Exchanges Medallion Program). Members are subject to
dollar limitations which must be considered when requesting their guarantee. The
Transfer Agent may reject any signature guarantee if it believes the transaction
would otherwise be improper.
63
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
SELLING YOUR SHARES
CONTINUED
VERIFYING TELEPHONE REDEMPTIONS
The Funds make every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders. If appropriate precautions have not been taken, the
Transfer Agent may be liable for losses due to unauthorized transactions.
REDEMPTIONS WITHIN 15 DAYS OF INITIAL INVESTMENT
When you have made your initial investment by check, you cannot redeem any
portion of it until the Transfer Agent is satisfied that the check has cleared
(which may require up to 15 business days). You can avoid this delay by
purchasing shares with a certified check.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
CLOSING OF SMALL ACCOUNTS
If your account falls below $50 due to redemptions, the Fund may ask you to
increase your balance. If it is still below $50 after 30 days, the Fund may
close your account and send you the proceeds at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash, if
distribution checks (1) are returned and marked as 'undeliverable' or (2) remain
uncashed for six months, your account will be changed automatically so that all
future distributions are reinvested in your account. Checks that remain uncashed
for six months will be canceled and the money reinvested in the Fund.
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
There is no sales charge on purchases of Adviser (Class Y) Shares. In addition,
there are no 12b-1 distribution fees paid from the Funds for Adviser (Class Y)
Class Shares.
64
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
Republic Fund, usually without paying additional sales charges (see 'Notes on
Exchanges' below). No transaction fees are charged for exchanges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable.
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to Republic Funds,
PO Box 182845, Columbus, Ohio 43218-2845 or by calling 1-800-782-8183. Please
provide the following information:
Your name and telephone number
The exact name on your account and account number
Taxpayer identification number (usually your social security number)
Dollar value or number of shares to be exchanged
The name of the Fund from which the exchange is to be made
The name of the Fund into which the exchange is being made.
See 'Selling your Shares' for important information about telephone
transactions.
To prevent disruption in the management of the Funds, due to market timing
strategies, excessive exchange activity may be limited.
NOTES ON EXCHANGES
When exchanging from a Fund that has no sales charge or a lower sales charge to
a Fund with a higher sales charge, you will pay the difference.
The registration and tax identification numbers of the two accounts must be
identical.
The Exchange Privilege (including automatic exchanges) may be changed or
eliminated at any time upon a 60-day notice to shareholders.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
65
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more
information. Because everyone's tax situation is unique, you should rely on
your own tax advisor for advice about the particular federal, state and local
tax consequences to you of investing in a Fund.
A Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they
receive.
Any income a Fund receives in the form of interest and dividends is paid out,
less expenses, to its shareholders. Shares begin accruing interest and
dividends on the day they are purchased.
Dividends on all Income Funds are paid monthly. Dividends for the Equity
Fund, the International Equity Fund, and the Small Cap Equity Fund are paid
quarterly, annually and semi-annually, respectively. Capital gains for all
Funds are distributed at least annually. Unless a shareholder elects to
receive dividends in cash, dividends will be automatically invested in
additional shares of the Fund.
Dividends and distributions are treated in the same manner for federal income
tax purposes whether you receive them in cash or in additional shares.
Dividends are generally taxable as ordinary income; however, distributions of
tax-exempt interest income by the New York Tax-Free Bond Fund are expected to
be exempt from the regular federal income tax.
If a Fund designates a dividend as a capital gain distribution (e.g., when
the Fund has a gain from the sale of an asset the Fund held for more than 12
months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
Dividends are taxable in the year in which they are paid, even if they appear
on your account statement the following year. If a Fund declares a dividend
in October, November or December of a year and distributes the dividend in
January of the next year, you may be taxed as if you received it in the year
declared rather than the year received.
There may be tax consequences to you if you dispose of your shares in a Fund,
for example, through redemption, exchange or sale. The amount of any gain or
loss and the rate of tax will depend mainly upon how much you pay for the
shares, how much you sell them for, and how long you held them.
You will be notified in January each year about the federal tax status of
distributions made by the Funds. The notice will tell you which dividends and
redemptions must be treated as taxable ordinary income and which (if any) are
short-term or long-term capital gain. Depending on your residence for tax
purposes, distributions also may be subject to state and local taxes,
including withholding taxes.
66
<PAGE>
SHAREHOLDER INFORMATION [LOGO]
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if
you fail to provide the Fund with your correct taxpayer identification number
or to make required certifications, or if you have been notified by the IRS
that you are subject to backup withholding. Backup withholding is not an
additional tax, but is a method in which the IRS ensures that it will collect
taxes otherwise due. Any amounts withheld may be credited against your U.S.
federal income tax liability.
Foreign shareholders may be subject to special withholding requirements.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends or capital gains until they
are distributed from the account. These accounts are subject to complex tax
rules, and you should consult your tax adviser about investment through a
tax-deferred account.
There is a penalty on certain pre-retirement distributions from retirement
accounts.
67
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
The financial highlights tables are intended to help you understand the Fund's
financial performance for the past five years, or, if shorter, the period of the
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned or lost on an investment in the Fund (assuming reinvestment of
all dividends and distributions for the indicated periods). This information has
been derived from information audited by KPMG LLP, whose report, along with the
Fund's financial statements, are included in the annual report, which is
available upon request.
68
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
REPUBLIC NEW YORK TAX-FREE BOND FUND
ADVISER (CLASS Y) SHARES
<TABLE>
<CAPTION>
- -----------------------------
FOR THE YEARS FOR THE PERIOD
ENDED OCTOBER 31, JULY 1, 1996
------------------------------ TO OCTOBER 31,
1999 1998 1997 1996(e)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $10.93 $10.64 $10.30 $10.18
- -------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.48 0.49 0.46 0.16
Net realized and unrealized
gains/(losses) from
investment transactions (0.84) 0.33 0.36 0.12
- -------------------------------------------------------------------------------------
Total from investment
activities (0.36) 0.82 0.82 0.28
- -------------------------------------------------------------------------------------
DIVIDENDS:
Net investment income (0.48) (0.49) (0.46) (0.16)
In excess of net investment
income (0.00)* -- -- --
Net realized gains from
investment transactions (0.02) (0.04) (0.02) --
- -------------------------------------------------------------------------------------
Total dividends (0.50) (0.53) (0.48) (0.16)
- -------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $10.07 $10.93 $10.64 $10.30
- -------------------------------------------------------------------------------------
Total return (3.45%) 7.87% 8.38% 3.52%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of
period (000's) $8,619 $8,641 $8,901 $8,233
Ratio of expenses to average
net assets 0.71% 0.70% 0.78% 0.60%(b)
Ratio of net investment income
to average net assets 4.49% 4.53% 4.66% 4.78%(b)
Ratio of expenses to average
net assets (a) 0.96% 0.95% 1.27% 2.26%(b)
Portfolio turnover (d) 46.56% 100.35% 163.46% 178.11%
- -------------------------------------------------------------------------------------
</TABLE>
* Less than $0.01 per share.
(a) During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(b) Annualized.
(c) Not annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
(e) Period from commencement of operations.
See notes to financial statements.
69
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
REPUBLIC EQUITY FUND
ADVISER (CLASS Y) SHARES
<TABLE>
<CAPTION>
- -----------------------------
FOR THE YEARS ENDED FOR THE PERIOD
OCTOBER 31, JULY 1, 1996
----------------------------- TO OCTOBER 31,
1999 1998 1997 1996(e)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 16.95 $ 15.01 $ 11.93 $ 11.49
- -----------------------------------------------------------------------------
Investment activities:
Net investment income 0.10 0.08 0.10 0.08
Net realized and unrealized
gains from investment
transactions 3.32 2.79 3.33 0.42
- -----------------------------------------------------------------------------
Total from investment
activities 3.42 2.87 3.43 0.50
- -----------------------------------------------------------------------------
DIVIDENDS:
Net investment income (0.09) (0.08) (0.13) (0.06)
Net realized gains from
investment
transactions (0.39) (0.85) (0.22) --
- -----------------------------------------------------------------------------
Total dividends (0.48) (0.93) (0.35) (0.06)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $ 19.89 $ 16.95 $ 15.01 $ 11.93
- -----------------------------------------------------------------------------
Total return 20.59% 20.16% 29.28% 4.72%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period
(000's) $245,342 $210,498 $63,060 $33,155
Ratio of expenses to average
net assets 0.69% 0.78% 0.96% 0.66%(b)
Ratio of net investment
income
to average net assets 0.51% 0.55% 0.77% 1.93%(b)
Ratio of expenses to average
net assets 0.69% 0.78% 1.03%(a) 0.97%(a),(b)
Portfolio turnover (d) 70.85% 176.34% 99.02% 86.18%
- -----------------------------------------------------------------------------
</TABLE>
(a) During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(b) Annualized.
(c) Not annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
(e) Period from commencement of operations.
See notes to financial statements.
70
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
REPUBLIC FIXED INCOME FUND
<TABLE>
<CAPTION>
- ------------------------
FOR THE PERIOD
FOR THE YEARS ENDED OCTOBER 31, JANUARY 9, 1995
-------------------------------------- TO OCTOBER 31,
1999 1998 1997 1996 1995(d)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.81 $ 10.92 $ 10.67 $ 10.96 $ 10.00
- -------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.62 0.65 0.59 0.59 0.46
Net realized and
unrealized
gains/(losses) from
investments and
futures transactions (0.51) 0.02 0.31 0.08 0.96
- -------------------------------------------------------------------------------------
Total from
investment
activities 0.11 0.67 0.90 0.67 1.42
- -------------------------------------------------------------------------------------
DIVIDENDS:
Net investment income (0.62) (0.65) (0.64) (0.59) (0.46)
Net realized gains from
investments and
futures transactions (0.28) (0.13) (0.01) (0.37) --
In excess of net
realized gains from
investments and
futures transactions (0.01) -- -- -- --
- -------------------------------------------------------------------------------------
Total dividends (0.91) (0.78) (0.65) (0.96) (0.46)
- -------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 10.01 $ 10.81 $ 10.92 $ 10.67 $ 10.96
- -------------------------------------------------------------------------------------
Total return 1.01% 6.26% 9.14% 6.51% 14.37%(c)
RATIOS/SUPPLEMENTARY
DATA:
Net assets at end of
period (000's) $114,405 $97,728 $71,686 $42,424 $26,128
Ratio of expenses to
average net assets 0.69% 0.78% 0.83% 0.83% 0.91%(b)
Ratio of net investment
income to average net
assets 6.31% 5.87% 5.92% 5.51% 5.63%(b)
Ratio of expenses to
average net assets 0.69% 0.78% 0.85%(a) 1.06%(a) 1.72%(a),(b)
Portfolio turnover(e) 433.26% 126.40% 349.00% 152.00% 100.00%
- -------------------------------------------------------------------------------------
</TABLE>
(a) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(b) Annualized.
(c) Not annualized.
(d) Period from commencement of operations.
(e) Portfolio turnover is calculated on the basis of the Portfolio.
See notes to financial statements.
71
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
REPUBLIC INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
- -------------------------
FOR THE PERIOD
FOR THE YEARS ENDED OCTOBER 31, JANUARY 9, 1995
---------------------------------------- TO OCTOBER 31,
1999 1998 1997 1996 1995(d)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 13.24 $ 13.76 $ 12.05 $ 10.80 $ 10.00
- -----------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.09 0.11 0.12 0.11 0.08
Net realized and unrealized
gains from investments
and foreign currency
transactions 5.87 0.32 1.85 1.31 0.75
- -----------------------------------------------------------------------------------------
Total from investment
activities 5.96 0.43 1.97 1.42 0.83
- -----------------------------------------------------------------------------------------
Dividends:
Net investment income (0.15) (0.27) (0.11) (0.16) (0.03)
Net realized gains from
investments and foreign
currency transactions (0.47) (0.68) (0.15) (0.01) --
- -----------------------------------------------------------------------------------------
Total dividends (0.62) (0.95) (0.26) (0.17) (0.03)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $ 18.58 $ 13.24 $ 13.76 $ 12.05 $ 10.80
- -----------------------------------------------------------------------------------------
Total return 46.92% 3.49% 16.62% 13.22% 8.31%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of
period (000's) $172,004 $120,250 $132,924 $96,977 $34,244
Ratio of expenses to
average net assets 1.05% 1.09% 0.91% 1.11% 1.14%(b)
Ratio of net investment
income to average net
assets 0.54% 0.75% 0.91% 0.99% 1.26%(b)
Ratio of expenses to
average net assets 1.05% 1.09% 0.91% 1.13%(a) 2.12%(a),(b)
Portfolio turnover(e) 34.26% 40.47% 30.00% 23.30% 3.07%
- -----------------------------------------------------------------------------------------
</TABLE>
(a) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(b) Annualized.
(c) Not annualized.
(d) Period from commencement of operations.
(e) Portfolio turnover is calculated on the basis of the Portfolio.
See notes to financial statements.
72
<PAGE>
FINANCIAL HIGHLIGHTS [LOGO]
REPUBLIC SMALL CAP EQUITY FUND
<TABLE>
<CAPTION>
- ----------------------------
FOR THE YEARS ENDED OCTOBER FOR THE PERIOD
31, SEPTEMBER 3, 1996
------------------------------ TO OCTOBER 31,
1999 1998 1997 1996(D)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 11.48 $ 13.44 $ 10.63 $ 10.00
- ------------------------------------------------------------------------------------
Investment activities:
Net investment loss (0.09) (0.09) (0.06) --
Net realized and unrealized
gains/(losses) from
investments 2.65 (0.49) 2.93 0.63
- ------------------------------------------------------------------------------------
Total from investment
activities 2.56 (0.58) 2.87 0.63
- ------------------------------------------------------------------------------------
DIVIDENDS:
In excess of net investment
income (0.03) -- -- --
Net realized gains from
investments (1.45) (1.38) (0.06) --
- ------------------------------------------------------------------------------------
Total dividends (1.48) (1.38) (0.06) --
- ------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $ 12.56 $ 11.48 $ 13.44 $ 10.63
- ------------------------------------------------------------------------------------
Total return 24.63% (4.27%) 27.18% 6.30%(c)
RATIOS/SUPPLEMENTARY DATA:
Net assets at end of period
(000's) $148,538 $112,935 $137,996 $92,842
Ratio of expenses to average
net assets 1.18% 1.14% 1.02% 0.91%(b)
Ratio of net investment loss
to average net assets (0.81%) (0.68%) (0.50%) (0.28%)(b)
Ratio of expenses to average
net assets 1.18% 1.16%(a) 1.03%(a) 1.17%(a),(b)
Portfolio turnover(e) 77.74% 154.69% 92.18% 50.55%
- ------------------------------------------------------------------------------------
</TABLE>
(a) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(b) Annualized.
(c) Not annualized.
(d) Period from commencement of operations.
(e) Portfolio turnover is calculated on the basis of the Portfolio.
See notes to financial statements.
73
<PAGE>
PRIOR PERFORMANCE OF INVESTMENT SUB-ADVISERS [LOGO]
The following tables set forth information for the Fixed Income Fund, Equity
Fund, International Equity Fund and the Small Cap Equity Fund, and information
on the prior performance of the investment advisers (the 'Sub-Advisers') for
those Funds and, where applicable, the corresponding portfolios.
The Sub-Adviser prior performance information is a composite of the average
annual total returns of all institutional separate accounts managed by the Sub-
Advisers that have investment objectives, policies and restrictions
substantially similar to the Funds (and corresponding Portfolios), and which
have been managed as the Funds (and corresponding Portfolios) have been managed.
The composite data is provided to illustrate the past performance of the
Sub-Advisers in managing substantially similar accounts with substantially
similar investment objectives, strategies and policies 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.
<TABLE>
<CAPTION>
FIXED INCOME SUB-ADVISER
ANNUALIZED RETURNS
FUND SUB-ADVISER SALOMON BIG
PERFORMANCE COMPOSITE'D' INDEX(2)
<S> <C> <C> <C>
1 Year(1) - 1.08% - 2.57% - 0.84%
Since Portfolio Inception (1/9/95) 7.35% N/A 7.77%*
5 Years(1) N/A 6.27% 7.75%
10 Years(1) N/A 6.64% 7.76%
</TABLE>
- ------------
(1) Through December 31, 1999.
(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 $50 million
outstanding. The Salomon BIG Index includes Treasury, Government-sponsored,
mortgage-backed, and investment grade corporate issues.
'D' If the expense ratio of the Fund after expense reimbursements was used as
the basis for adjustment, the Sub-Adviser composite average annual returns
would be - 1.67% for one year, 7.24% for 5 years, 7.61% for 10 years, and
N/A since inception.
* Since December 31, 1994.
74
<PAGE>
PRIOR PERFORMANCE OF INVESTMENT SUB-ADVISERS [LOGO]
<TABLE>
<CAPTION>
EQUITY SUB-ADVISERS
ANNUALIZED RETURNS
FUND ALLIANCE RUSSELL BRINSON RUSSELL RUSSELL
PERFORMANCE COMPOSITE GROWTH(2) COMPOSITE VALUE(3) 1000(4)
<S> <C> <C> <C> <C> <C> <C>
1 Year(1) 10.05% 26.21% 33.16% - 6.40% 7.35% 20.91%
Since Inception'D' 21.36% 30.33% 30.58% 16.47% 20.60% 25.41%
5 Years(1) N/A 32.15% 32.42% 19.56% 23.07% 28.04%
Since 12/31/87 N/A 20.20% 20.32% 14.67% 15.60% 18.13%
</TABLE>
- ------------
(1) Through December 31, 1999.
(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.
'D' Since Fund inception (8/1/95).
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY SUB-ADVISER
ANNUALIZED RETURNS
FUND SUB-ADVISER EAFE
PERFORMANCE COMPOSITE'D' INDEX(2)
<S> <C> <C> <C>
1 Year(1) 71.01% 67.56% 27.30%
Since Portfolio Inception (1/9/95) 22.38% N/A 13.67%
5 Years(1) N/A 21.51% 13.14%
10 Years(1) N/A 12.94% 7.33%
</TABLE>
- ------------
(1) Through December 31, 1999.
(2) The EAFE Index includes 1,600 companies in 22 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 combined market value of the stock exchanges. The EAFE Index is
capitalization weighted in U.S. dollars and includes dividends.
'D' If the expense ratio of the Fund after expense reimbursements was used as
the basis for adjustment, the Sub-Adviser composite average annual returns
would be 67.93% for one year, 26.80% for 5 years, 13.22% for 10 years and
N/A since inception.
75
<PAGE>
PRIOR PERFORMANCE OF INVESTMENT SUB-ADVISERS [LOGO]
<TABLE>
<CAPTION>
SMALL CAP EQUITY SUB-ADVISER
ANNUALIZED RETURNS
FUND SUB-ADVISER RUSSELL 2000
PERFORMANCE COMPOSITE'D' INDEX(2)
<S> <C> <C> <C>
1 Year(1) 48.20% 50.68% 21.26%
Since Portfolio Inception
(9/3/96) 27.47% N/A 14.81%
3 Years(1) N/A 27.70% 13.08%
5 Years(1) N/A 28.57% 16.69%
</TABLE>
- ------------
(1) Through December 31, 1999.
(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.
'D' If the expense ratio of the Fund after expense reimbursements was used as
the basis for adjustment, the Sub-Adviser composite average annual returns
would be 51.12% for one year, 28.62% for 3 years, 29.01% for five years,
and N/A since inception.
* Since August 31, 1996.
76
<PAGE>
TAXABLE EQUIVALENT YIELD TABLES [LOGO]
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 2000
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).
FEDERAL AND NEW YORK STATE TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX --------------------------------------------------------------
RETURN RETURN BRACKET** 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%
EQUIVALENT TAXABLE YIELD
- ----------------- ----------------- --------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 26,250 $ 0-$ 43,850 20.80% 3.16% 3.79% 4.42% 5.05% 5.68% 6.31% 6.95% 7.58%
$ 26,251-$ 63,550 $ 43,851-$105,950 32.90% 3.73% 4.47% 5.22% 5.95% 6.71% 7.46% 8.20% 8.95%
$ 63,551-$132,600 $105,951-$161,450 35.70% 3.89% 4.67% 5.44% 6.22% 7.00% 7.78% 8.56% 9.34%
$132,601-$288,350 $161,451-$288,150 40.40% 4.19% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.06%
>$288,350 >$288,150 43.70% 4.44% 5.33% 6.22% 7.11% 8.00% 8.89% 9.78% 10.66%
</TABLE>
- ------------
* 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.
77
<PAGE>
TAXABLE EQUIVALENT YIELD TABLES [LOGO]
FEDERAL, NEW YORK STATE AND NEW YORK CITY TABLE
<TABLE>
<CAPTION>
TAXABLE INCOME* TAX-EXEMPT YIELD
- ------------------------------------ ---------------------------------------------------------------
INCOME 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%
SINGLE JOINT TAX ----- ----- ----- ----- ----- ----- ------ ------
RETURN RETURN BRACKET** EQUIVALENT TAXABLE YIELD
- ----------------- ----------------- --------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 26,250 $ 0-$ 43,850 23.60% 3.27% 3.93% 4.58% .5.24% 5.89% 6.54% 7.20% 7.85%
$ 26,251-$ 63,550 $ 43,851-$105,950 35.32% 3.87% 4.64% 5.41% 6.18% 6.96% 7.73% 8.50% 9.28%
$ 63,551-$132,600 $105,951-$161,450 38.01% 4.03% 4.84% 5.65% 6.45% 7.26% 8.07% 8.87% 9.68%
$132,601-$288,350 $161,451-$288,350 42.51% 4.35% 5.22% 6.09% 6.96% 7.83% 8.70% 9.56% 10.44%
$288,350 $288,350 45.79% 4.61% 5.53% 6.45% 7.37% 8.29% 9.21% 10.14% 11.06%
</TABLE>
- ------------
* 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.
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.
78
<PAGE>
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMIANNUAL REPORTS:
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
STATEMENTS OF ADDITIONAL INFORMATION (SAIS):
The SAIs provide more detailed information about the Funds, including their
operations and investment policies. They are incorporated by reference and
legally considered a part of this prospectus.
YOU CAN GET FREE COPIES OF REPORTS AND THE SAIS, PROSPECTUSES OF OTHER MEMBERS
OF THE REPUBLIC FAMILY OF FUNDS, OR REQUEST OTHER INFORMATION AND DISCUSS YOUR
QUESTIONS ABOUT THE FUNDS, BY CONTACTING A BROKER OR REPUBLIC FINANCIAL SERVICES
AT 1-888-525-5757. OR CONTACT THE FUNDS AT:
REPUBLIC FUNDS
P.O. BOX 182845
COLUMBUS, OHIO 43218-2845
TELEPHONE: 1-800-782-8183
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
For a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-0102, or by electronic request at
[email protected]. Information on the operation of the Public Reference Room
may be obtained by calling the Commission at 1-202-942-8090.
Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-4782.
RFFRC (3/00)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
REPUBLIC NEW YORK TAX-FREE BOND FUND (ADVISER (CLASS Y) SHARES)
REPUBLIC EQUITY FUND (ADVISER (CLASS Y) SHARES)
REPUBLIC FIXED INCOME FUND
REPUBLIC INTERNATIONAL EQUITY FUND
REPUBLIC SMALL CAP EQUITY FUND
PO Box 182845
Columbus, Ohio 43218-2845
General and Account Information: (800) 782-8183 (Toll Free)
------------------------------------------------------------------
HSBC Bank USA
Investment Manager--All Funds
Investment Adviser--New York Tax-Free Bond Fund
(the "Manager" or an "Adviser")
<TABLE>
<S> <C>
Miller Anderson & Sherrard Capital Guardian Trust Company
Investment Sub-Adviser--Fixed Income Fund Investment Sub-Adviser--International Equity Fund
(an "Adviser") (an "Adviser")
Alliance Capital Management L.P. MFS Institutional Advisors, Inc.
Investment Sub-Adviser--Equity Fund Investment Sub-Adviser--Small Cap Equity Fund
(an "Adviser") (an "Adviser")
Brinson Partners Inc. BISYS Fund Services
Investment Sub-Adviser--Equity Fund Administrator, Distributor and Sponsor--All Funds
(an "Adviser") Administrator--All Portfolios
("BISYS," "Administrator," "Distributor," or "Sponsor")
</TABLE>
Republic New York Tax-Free Bond Fund (Adviser (Class Y) Shares), Republic
Equity Fund (Adviser (Class Y) Shares) are separate series of the Republic Funds
Trust, an open end management company which currently consists of eight series,
and the Republic Fixed Income Fund, Republic International Fund, and Republic
Small Cap Equity Fund (collectively the "Funds", and individually, the "Fund")
are separate series of the Republic Advisor Funds Trust (the "Trust"), an
open-end, management investment company which currently consists of three
series. The Funds are described in this Statement of Additional Information.
Shares of the Funds are continuously offered for sale by the Distributor
at net asset value with no sales charge (i) directly to the public, (ii) 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 (collectively, "Shareholder
Servicing Agents"), and (iii) to customers of a securities broker that has
entered into a dealer agreement with the Distributor.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS ONLY
AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE
ADVISER (CLASS Y) SHARES OF THE FUND, AS APPROPRIATE,
<PAGE>
EACH DATED February 29, 2000 (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 Trust at the address and telephone number
printed above.
References in this Statement of Additional Information to the "Prospectus"
are to the Prospectus, dated February 29, 2000 of the Trust 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.
February 29, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS...............................1
New York Tax-Free Bond Fund................................................1
The Equity Fund............................................................3
Fixed Income Fund..........................................................5
International Equity Fund..................................................7
Small Cap Equity Fund......................................................8
Fixed Income Securities....................................................9
U.S.Government Securities..................................................9
Convertible Securities.....................................................9
High Yield/High Risk Securities............................................9
"When-Issued" Municipal Obligations.......................................11
Variable Rate Instruments.................................................11
Inverse Floating Rate Obligations.........................................12
Foreign Securities........................................................13
Emerging Markets..........................................................13
American Depositary Receipts..............................................16
Warrants..................................................................17
Zero Coupon Obligations...................................................17
Mortgage-Related and Other Asset Backed Securities........................18
Eurodollar and Yankee Bank Obligations....................................23
Lending of Portfolio Securities...........................................24
Repurchase Agreements.....................................................24
Illiquid Investments, Rule 144A Securities and Section 4(2) Securities....25
Derivatives...............................................................26
Options and Futures.......................................................26
Forward Foreign Currency Contracts and Options on Foreign Currencies......35
Brady Bonds...............................................................37
Foreign Currency Exchange-Related Securities..............................38
Sovereign and Supranational Debt Obligations..............................39
Mortgage Dollar Roll Transactions.........................................39
Banking Industry and Savings and Loan Industry Obligations................40
Firm Commitment Agreements and When-Issued Securities.....................40
Swaps, Caps, Floors and Collars...........................................40
Participation Interests...................................................41
Portfolio Turnover........................................................42
Portfolio Management......................................................43
Portfolio Transactions....................................................44
Special Factors Affecting New York........................................46
INVESTMENT RESTRICTIONS.......................................................47
New York Tax-Free Bond Fund...............................................47
Equity Fund...............................................................51
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Fixed Income Fund.........................................................53
International Equity Fund.................................................56
Small Cap Equity Fund.....................................................58
Percentage And Rating Restrictions........................................62
PERFORMANCE INFORMATION.......................................................62
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST...............................65
Trustees And Officers.....................................................65
Compensation Table........................................................67
Investment Manager........................................................67
Fixed Income Fund Sub-Adviser.............................................69
Equity Fund Sub-Adviser...................................................69
International Equity Fund Sub-Adviser.....................................70
Small Cap Equity Fund Sub-Adviser.........................................70
Fund Administrator........................................................71
The Distributor and Sponsor...............................................72
Transfer Agent............................................................72
Custodian.................................................................72
Shareholder Servicing Agents..............................................73
Expenses..................................................................74
DETERMINATION OF NET ASSET VALUE..............................................74
PURCHASE OF SHARES............................................................76
Exchange Privilege........................................................76
Automatic Investment Plan.................................................77
REDEMPTION OF SHARES..........................................................77
Systematic Withdrawal Plan................................................78
RETIREMENT PLANS..............................................................78
Individual Retirement Accounts............................................78
Defined Contribution Plans................................................78
Section 457 Plan, 401(k) Plan, 403(b) Plan................................79
DIVIDENDS AND DISTRIBUTIONS...................................................79
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES..........................79
TAXATION .....................................................................84
Tax Status of the Funds...................................................86
The Portfolio.............................................................86
Distributions.............................................................86
Tax-Exempt Income.........................................................87
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Foreign Taxes.............................................................88
Dispositions..............................................................88
Backup Withholding........................................................89
Other Taxation............................................................89
Fund Investments..........................................................89
Alternative Minimum Tax...................................................91
Special Tax Considerations................................................91
OTHER INFORMATION.............................................................92
Capitalization............................................................92
Independent Auditors......................................................92
Counsel...................................................................92
Registration Statement....................................................92
FINANCIAL STATEMENTS..........................................................92
APPENDIX A....................................................................94
DESCRIPTION OF MUNICIPAL OBLIGATIONS..........................................94
ADDITIONAL INFORMATION CONCERNING NEW YORK MUNICIPAL OBLIGATIONS..............96
Description of Security Ratings..........................................118
</TABLE>
iii
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective policies, and risks of the Funds discussed in the Prospectus. Each of
the Fixed Income, International Equity and Small Cap Equity Funds invests all of
its assets in a master portfolio (a "Portfolio") that has a substantially
similar investment objective. For simplicity's sake, all discussion of
investment objectives, strategies and risks of the Funds refer also to the
objectives, strategies and risks of its Master Portfolio, unless otherwise
indicated.
NEW YORK TAX-FREE BOND FUND
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Funds 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 Adviser seeks to achieve the investment objective of the Fund by
investing the assets of the Funds 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
Funds 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 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 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 Fund's net assets
in tax exempt obligations. As a temporary defensive measure, the Adviser may
invest up to 20% of the 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 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 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 or AAA, AA,
A or BBB by Fitch or, if
-1-
<PAGE>
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 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 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 Fund, with a
resultant decrease in yield or increase in the proportion of taxable income.
The net asset value of the Fund's shares changes as interest rates
fluctuate. When interest rates decline, the value of the 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 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 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 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 restrictions under the Investment Company Act of 1940 (the "1940 Act")
with respect to limiting the investment of the Fund's assets in one or
relatively few issuers. This concentration may present greater risks than in the
case of a diversified company. However, the Trust intends to qualify the Fund as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In order so to qualify under current law, at
the close of each quarter of the Fund's taxable year, at least 50% of the
-2-
<PAGE>
Fund's total assets must be represented by cash, U.S. Government securities,
investment company securities and other securities limited in respect of any one
issuer to not more than 5% in value of the total assets of the Fund and not more
than 10% of the outstanding voting securities of such issuer. In addition, and
again under current law, at the close of each quarter of its taxable year, not
more than 25% of the Fund's total assets may be invested in securities of one
issuer (or two or more issuers which are controlled by the Fund and which are
determined to be engaged in the same or similar trades or businesses or related
businesses) other than U.S. Government securities.
The Adviser may invest more than 25% of the assets of the Fund in
industrial revenue bonds (i.e., bonds issued by various state and local agencies
to finance various industrial projects). Certain investors in the 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.
THE EQUITY FUND
The following information supplements the discussion of the investment
objectives, policies, and risks of the Republic Equity Fund discussed in the
Prospectus. The investment objective of the Fund is long-term growth of capital
and income without excessive fluctuations in market value. The Fund will
-3-
<PAGE>
normally invest in equity securities of seasoned companies in sound financial
condition which are expected to show above-average price appreciation.
The 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 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 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 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 and option is
written. The 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 its is in the
best interest of the Fund's shareholders. Securities rated BB/Ba by a nationally
recognized statistical rating organization are considered to have speculative
characteristics.
The Fund may lend its portfolio securities. These loans may not exceed 30%
of the value of the Fund's total assets.
The 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 Fund may
invest up to 15% of its net assets in illiquid securities.
HSBC, the Equity Fund's investment manager, will allocate the Fund's
assets between the Fund's two sub-advisers, Alliance Capital Management L.P.
("Alliance") and Brinson Partners, Inc. ("Brinson") (collectively, the
"Sub-Advisers"). While HSBC maintains complete discretion regarding the
allocation of the Fund's assets, HSBC anticipates that it typically will
allocate the Fund's assets evenly between the Sub-Advisers, each of which
pursues the Fund's investment objective in the manner described below.
Alliance. Alliance seeks the Fund's investment objective by pursuing a
"growth" style of investing in marketable equity securities, primarily of U.S.
companies. However, the Fund may purchase foreign, as well as domestic, equity
securities. Alliance normally will invest substantially all of the Fund's assets
allocated to it in common stocks which Alliance believes will appreciate in
value.
Alliance generally seeks to invest the 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 Fund's assets in companies that do not demonstrate such
characteristics if it expects such
-4-
<PAGE>
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 Fund's investment objective by pursuing a
"value" style of investment management. Brinson's approach to investing for the
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 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 Fund does not intend to
concentrate its investments in a particular industry.
FIXED INCOME FUND
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 Fund seeks to achieve its investment objective by
investing all of its assets in the Republic Fixed Income Portfolio (the
"Portfolio"), which has the same investment objective as the Fund. The Fund's
average weighted maturity will ordinarily exceed five years.
The Fund will normally invest at least 65% of its total assets in fixed
income securities. The Fund 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.
-5-
<PAGE>
Miller Anderson & Sherrerd ("MAS") (the "Adviser") will seek to achieve
the Fund's objective by investing at least 80% of the Fund 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 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.
Up to 20% of the Fund'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 or BB or B by S&P or rated comparably by
another NRSRO (or, if unrated, are deemed by the Fixed Income Adviser to be of
comparable quality). Securities rated below "investment grade," i.e., rated
below Baa by Moody's or 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.
From time to time, the Adviser may invest more than 50% of the 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. When
investing in mortgage-backed securities, it is expected that the 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 Portfolio may
invest without limit in mortgage-backed securities of private issuers when the
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 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.
A portion of the Fund assets may be invested in bonds and other fixed
income securities denominated in foreign currencies if, in the opinion of the
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 Fund may also purchase securities of developing
countries; however, the Fund 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
Adviser's judgment, unacceptable currency risk exists, currency futures,
forwards and options and swaps may be used to hedge the currency risk.
The Fund may invest in Eurodollar bank obligations and Yankee bank
obligations. The Fund 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". The Fund may also invest in the following instruments on
a
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temporary basis when economic or market conditions are such that the 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 Fund 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.
INTERNATIONAL EQUITY FUND
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 whose principal markets are
outside of the United States. The investment characteristics of the Fund
correspond to those of the International Equity Portfolio (the "Portfolio"). The
Fund 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 Fund 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 Fund 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 Fund
may invest up to 20% of its assets in equity securities of companies in emerging
markets.
The Fund intends to have at least three different countries represented in
its portfolio. It is the current intention of the Fund to invest primarily in
companies with large market capitalizations. The Fund seeks to outperform the
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index, a capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The Fund 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 Capital
Guardian Trust Company ("CGTC" or the "Adviser"), economic or market conditions
warrant, the 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 Fund will be limited to those rated, at the
time of investment, in the four highest rating categories by a nationally
recognized statistical rating organization ("NRSRO") or, if unrated, determined
by the 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 Adviser's judgment,
unacceptable currency risk exists, currency futures, forwards and options may be
used to hedge the currency risk.
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CGTC uses a system of multiple portfolio managers pursuant to which the
Fund 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 Fund 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 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 objective to the Small Cap Equity Fund is to seek long-term
growth of capital by investing in equity securities of emerging small and
medium-sized companies that are expected to show earnings growth over time that
is well above the growth rate of the overall economy and rate of inflation. The
Fund seeks to achieve its objective by investing all of its assets in the
Republic Small Cap Equity Portfolio (the "Portfolio"). The Small Cap Equity Fund
invests, 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 Fund 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 Fund may invest up to
20% (and generally expects to invest between 5% and 10%) of its assets in
foreign securities (excluding ADRs).
Although the Small Cap Equity Fund will invest primarily in common stocks,
the Fund 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.
When MFS Institutional Advisers (the "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 Fund 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. U.S.
Government Securities that the Small Cap Equity Fund may invest in includes: (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.
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FIXED INCOME SECURITIES
Each Fund may invest in fixed income securities. To the extent the Funds
invest in fixed income securities, the net asset value of each Fund 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. Each Fund's investments in fixed income securities with longer terms to
maturity or greater duration are subject to greater volatility than the Fund's
shorter-term obligations.
U.S. GOVERNMENT SECURITIES
For liquidity purposes and for temporary defensive purposes, the Funds 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 Equity and International Equity Fund may buy securities that are
convertible into common stock. 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.
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.
HIGH YIELD/HIGH RISK SECURITIES
As stated in the Prospectus, each Fund (except the New York Tax-Free Bond
Fund) may invest in lower rated, high-yield, "junk" bonds. These securities are
generally rated lower than Baa by Moody's or lower than BBB by S&P. In general,
the market for lower rated, high-yield bonds is more limited than the market for
higher rated bonds, and because their markets may be thinner and less active,
the market prices
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of lower rated, high-yield bonds may fluctuate more than the prices of higher
rated bonds, particularly in times of market stress. In addition, while the
market for high-yield, corporate debt securities has been in existence for many
years, the market in recent years experienced a dramatic increase in the
large-scale use of such securities to fund highly leveraged corporate
acquisitions and restructurings. Accordingly, past experience may not provide an
accurate indication of future performance of the high-yield bond market,
especially during periods of economic recession. Other risks that may be
associated with lower rated, high-yield bonds include their relative
insensitivity to interest-rate changes; the exercise of any of their redemption
or call provisions in a declining market which may result in their replacement
by lower yielding bonds; and legislation, from time to time, which may adversely
affect their market. Since the risk of default is higher among lower rated,
high-yield bonds, each Adviser's research and analyses are important ingredients
in the selection of lower rated, high-yield bonds. Through portfolio
diversification, good credit analysis and attention to current developments and
trends in interest rates and economic conditions, investment risk can be
reduced, although there is no assurance that losses will not occur. The Funds do
not have any minimum rating criteria applicable to the fixed-income securities
in which they invests. A description of the ratings used herein and in the
Prospectus is set forth in Appendix C to this Statement of Additional
Information.
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
each Fund 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 Fund 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, a Fund 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 a Fund. 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
Advisers do not rely solely on credit ratings when selecting securities for the
Funds, and each Adviser develops its own independent analysis of issuer
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credit quality. If a credit rating agency changes the rating of a security held
by a Fund, the Fund may retain the security if its Adviser deems it in the best
interest of investors.
"WHEN-ISSUED" MUNICIPAL OBLIGATIONS
The New York Tax-Free Bond Fund may invest in "when-issued" municipal
obligations. 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 Fund commits to the purchase, 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 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 Fund
until delivery occurs. Although the Fund only makes commitments to purchase
"when-issued" or "forward delivery" Municipal Obligations with the intention of
actually acquiring them, the Fund 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 Fund's payment
obligation with respect to that Municipal Obligation. Furthermore, if the Fund
sells the "when-issued" or "forward delivery" Municipal Obligation before the
settlement date or if the Fund sells other obligations from its 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.
Municipal Obligations purchased on a "when-issued" or "forward delivery"
basis and the securities held in the Fund's portfolio are subject to changes in
value (both generally changing in the same way, that is, both experiencing
appreciation when interest rates decline and depreciation when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. In order to
invest the Fund's assets immediately, while awaiting delivery of securities
purchased on a "when-issued" or "forward delivery" basis, short-term obligations
that offer same day settlement and earnings normally are purchased. Although
short-term investments normally are in tax-exempt securities, short-term taxable
securities may be purchased if suitable short-term tax-exempt securities are not
available. A separate account of the Fund consisting of cash, cash equivalents
or high quality debt securities equal to the amount of the "when-issued" or
"forward delivery" commitments is established at the Fund's custodian bank. For
the purpose of determining the adequacy of the securities in the account, the
deposited securities are valued at market value. If the market value of such
securities declines, additional cash or high quality debt securities are placed
in the account daily so that the value of the account equals the amount of the
Fund's commitments. On the settlement date of the "when-issued" or "forward
delivery" securities, the Fund's obligations are met from then-available cash
flow, sale of securities held in the separate account, sale of other securities
or, although not normally expected, from sale of the "when-issued" or "forward
delivery" securities themselves (which may have a value greater or lesser than
the Fund's payment obligations).
VARIABLE RATE INSTRUMENTS
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The New York Tax-Free Bond and Fixed Income Funds may invest in variable
rate instruments. Variable rate instruments that an Adviser may purchase on
behalf of a 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.
Investments in floating or variable rate securities normally involve
industrial development or revenue bonds which provide that the rate of interest
is set as a specific percentage of a designated base rate, such as rates on
Treasury bonds or bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on short notice at par plus
accrued interest. While there is usually no established secondary market for
issues of this type of security, the dealer that sells an issue of such
securities frequently also offers to repurchase such securities at any time, at
a repurchase price which varies and may be more or less than the amount the
bondholder paid for them.
Because of the variable rate nature of the instruments, during periods
when prevailing interest rates decline, 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, a 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
derivatives and the value of such instruments may be more volatile than other
floating rate Municipal Obligations.
Certain floating or variable rate obligations that may be purchased by a
Fund 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. With respect to the Fixed Income Fund, 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," below.
The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before the Fund is entitled to receive payment of the obligation
upon demand, or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed for the Fund through the demand feature, an
obligation matures on a specified date which may range up to 30 years from the
date of issuance.
INVERSE FLOATING RATE OBLIGATIONS
The Fixed Income Fund 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
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sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.
FOREIGN SECURITIES
Each Fund (except the New York Tax-Free Bond Fund) 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 Funds, 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. Currencies in
which a Fund's assets are denominated may be devalued against the U.S. dollar,
resulting in a loss to the Fund. 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 Fund 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.
EMERGING MARKETS
The International Equity and Small Cap Equity Funds may 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"), which
presents greater risk than investing in foreign issuers in general. The
International Equity Fund may invest up to 20% of its assets in the equity
securities of companies based in emerging markets. 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 Fund. 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 Fund
investments.
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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 Fund does not currently intend to invest a significant portion of its
assets in formerly communist East European countries.
With respect to the International Equity and Small Cap Equity Fund,
"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. 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.
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.
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 a
Fund. 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 a Fund
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 a Fund) may be requested to participate in
the rescheduling of such debt and to extend further
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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. A Fund 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 a Fund defaults, that Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging
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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. A Fund'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 a Fund 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. A Fund net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. An 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 Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset value.
AMERICAN DEPOSITARY RECEIPTS
The International Equity and Small Cap Equity Funds may invest in American
Depositary Receipts ("ADRs"). 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 International
Equity and Small Cap Equity Funds 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
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potential currency exchange and other difficulties. The Funds 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. A Fund 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.
The Small Cap Equity Fund also may invest in European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), and International Depositary
Receipts ("IDRs"), or other similar securities convertible into securities of
foreign issuers. 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.
WARRANTS
The Equity and International Equity Funds may each invest up to 10% of its
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 that 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. Once a warrant
expires, it has no value in the market. Warrant positions will not be used to
increase the leverage of the International Equity Fund. Consequently, with
respect to the International Equity Fund, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
ZERO COUPON OBLIGATIONS
The Fixed Income Fund 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 Fund 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 Fund's distribution obligations, in which case the
Fund 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 than 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.
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MORTGAGE-RELATED AND OTHER ASSET BACKED SECURITIES
The Fixed Income Fund 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.
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-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.
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Credit risk reflects the risk that the Fund 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.
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
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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 creditworthiness 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 Fund will not purchase mortgage-related
securities or other assets which in the Adviser's opinion are illiquid if, as a
result, more than 15% of the value of the Fund'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 Fund
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 Fund 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, 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
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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
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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 Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities ("SMBS"). 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 cash flow 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, and a rapid rate of principal
payments may have a material adverse effect on the Fund's yield to maturity from
these securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund 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 Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. The Fixed Income Fund may also 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.
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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.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Fixed Income Fund 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.
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LENDING OF PORTFOLIO SECURITIES
The Equity, International Equity and Small Cap Equity Funds may seek to
increase their income by lending portfolio securities to entities deemed
creditworthy by the Advisers. Each 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. The International Equity Fund will not lend its
portfolio securities to the extent that greater than one-third of its total
assets, at fair market value, would be committed to loans at that time. The
Equity Fund's loans will not exceed 30% of its total assets and it is not
intended that the value of the securities loaned by the Small Cap Equity Fund
will exceed 30% of the value of the its total assets.
By lending portfolio securities, each Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in permissible investments, such as U.S.
Government Securities or obtaining yield in the form of interest paid by the
borrower when such U.S. Government Securities are used as collateral. Each Fund
will comply with the following conditions whenever it loans securities: (i) the
Fund must receive at least 100% collateral from the borrower; (ii) the borrower
must increase the collateral whenever the market value of the securities loaned
rises above the level of the collateral; (iii) the Fund must be able to
terminate the loan at any time; (iv) the Fund must receive reasonable
compensation with respect to the loan, as well as any dividends, interest or
other distributions on the loaned securities; (iv) the Fund may pay only
reasonable fees in connection with the loaned securities (no fee will be paid to
affiliated persons of the Fund); and (vi) voting rights on the loaned securities
may pass to the borrower except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Trust's Board of Trustees
must terminate the loan and regain the right to vote the securities.
Although the Funds would not 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 an Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities loans
of this type justifies the attendant risk.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements, which are transactions in
which a 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.
Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized. The 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.
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,
a Fund may incur a loss upon disposition of them. If the seller of the
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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 a Fund and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that a Fund may not be able to substantiate its interest in the underlying
securities. While the management of the Funds acknowledge these risks, it is
expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
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, a Fund will have the right to liquidate the securities. If at
the time the Fund 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, a Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. Each Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after an Adviser has determined that the
seller is creditworthy, and the Adviser monitor 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 Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
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 Funds but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, a Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Board of Trustees
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 a Fund. The 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. The International
Equity Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with illiquid securities held for the
Fund exceed 15% of its net assets.
ILLIQUID INVESTMENTS, RULE 144A SECURITIES AND SECTION 4(2) SECURITIES
Each Fund may invest up to 15% of its 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 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 Board
of Trustees. There may be delays in selling these securities and sales may be
made at less favorable prices. The Fixed Income, International Equity, and Small
Cap Equity Funds have a policy that no more than 25%, 10% and 10%, respectively,
of their net assets may be invested in restricted securities which are
restricted as to resale, including Rule 144A and Section 4(2) securities.
The Advisers may determine that a particular Rule 144A or Section 4(2)
security is liquid and thus not subject to the Portfolio's limits on investment
in illiquid securities, pursuant to guidelines adopted by the Board of Trustees.
Factors that an 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).
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Investing in Rule 144A securities could have the effect of increasing the level
of the Fund's illiquidity to the extent that qualified institutions might
become, for a time, uninterested in purchasing these securities.
DERIVATIVES
The Funds 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 is 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. A
description of the derivatives that each Fund may use and some of their
associated risks follows.
OPTIONS AND FUTURES
Each Fund (except the New York Tax-Free Bond Fund) may invest in options
and futures contracts. The New York Tax-Free Bond Fund may invest in futures
contracts. 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 a Fund. While the use of these instruments
by a Fund may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If an
Adviser applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower a Fund's return.
Certain strategies limit the potential of the Fund to realize gains as well as
limit their exposure to losses. A Fund 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 a Fund seeks to close out a futures contract or a futures option
position.
Options on Securities. Funds that may invest in options may write (sell)
covered call and put options on securities and purchase call and put options. 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. A Fund may write options for the purpose
of attempting to increase its return and for hedging purposes. In particular, if
a Fund writes an option which expires unexercised or is closed out by the Fund
at a profit, the Fund 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 a Fund's position, the option may be exercised and the Fund 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.
A Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option against
that security. The exercise price of the call option
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the Fund 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 a Fund
in the same market environments in which call options are used in equivalent
buy-and-write transactions.
A Fund may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
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
Fund 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, a Fund 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, a Fund
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 a Fund 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.
A Fund may also purchase put and call options. Put options are purchased
to hedge against a decline in the value of securities held in the Fund's
portfolio. If such a decline occurs, the put options will permit the Fund to
sell the securities underlying such options at the exercise price, or to close
out the options at a profit. A Fund will purchase call options to hedge against
an increase in the price of securities that the Fund anticipates purchasing in
the future. If such an increase occurs, the call option will permit the Fund 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 Fund upon
exercise of the option, and, unless the price of the underlying security rises
or declines sufficiently, the option may expire worthless to the Fund. 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 Fund, the benefits
realized by the Fund 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 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 a Fund's assets (the
"SEC illiquidity ceiling"). The Advisers intend to limit a Fund's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, each Fund 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,
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the contracts the Fund has in place with such primary dealers will provide that
the Fund 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 Fund 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. Each Fund
will treat all or a portion of the formula as illiquid for purposes of the SEC
illiquidity ceiling imposed by the SEC staff. Each Fund 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.
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.
Options on Securities Indices. The Funds that may invest in options may
write (sell) covered call and put options and purchase call and put options on
securities indices. A Fund may cover call options on securities indices by
owning securities whose price changes, in the opinion of an 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 Fund covers a call option on a securities index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Fund 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 Fund may also cover call options on securities 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 Fund in cash or cash
equivalents in a segregated account with its custodian. The Fund may cover put
options on securities 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 Fund in
cash or cash equivalents in a segregated account with its custodian. Put and
call options on securities 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.
A Fund will receive a premium from writing a put or call option on a
securities index, which increases the Fund'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 Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion
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of any decline in the value of the securities it owns. If the value of the index
rises, however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's investment.
By writing a put option, a Fund assumes the risk of a decline in the index. To
the extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices will
increase the Fund'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.
A Fund may also purchase put options on securities indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it owns
through appreciation of the put option. If the value of the Fund's investments
does not decline as anticipated, or if the value of the option does not
increase, the Fund'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 Fund's security holdings.
The purchase of call options on securities indices may be used by a Fund
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 Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options
for this purpose, the Fund 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 securities indices when the Fund 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 Fund owns.
Futures Contracts. Funds that may invest in futures contracts for the
purchase or sale for future delivery of securities or foreign currencies or
contracts based on indices of securities as such instruments become available
for trading. 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. 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 Fund's portfolio securities or
adversely affect the prices of long-term bonds or other securities which a Fund
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.
Futures Contracts have been designed by exchanges which have been
designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
Contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange.
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. A Fund will incur
brokerage fees when it purchases and sells futures contracts. At the time such a
purchase or sale is made, the Fund 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
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received, so that each day a Fund may provide or receive cash that reflects the
decline or increase in the value of the contract. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was entered into.
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 a Fund from fluctuations in interest rates without actually buying or
selling long-term debt securities. For example, if a Fund owned long-term bonds
and interest rates were expected to increase, the Fund might enter into futures
contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the Fund would decline, but the value of the
Fund's futures contracts should increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund 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 Fund 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, a Fund 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 Fund 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 Fund could have the effect of diluting dividend
earnings. To the extent the Fund enters into futures contracts for this purpose,
the assets in the segregated asset account maintained to cover the Fund's
obligations with respect to such futures contracts will consist of liquid
instruments from the portfolio of the Fund 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. A Fund may enter into stock index futures contracts in order to protect
the Fund'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, a Fund 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 Fund'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 Fund 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
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substantial majority of these transactions, the Fund 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 indices 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.
The New York Tax-Free Bond Fund may enter in futures contracts on any
fixed income securities or indexes of municipal securities. Presently, futures
contracts are based on such debt securities as long-term U.S. Treasury bonds,
Treasury notes, three-month U.S. Treasury bills and on an index of municipal
bonds. The New York Tax-Free Bond Fund would purchase and sell futures contracts
on indexes of municipal securities for the purpose of hedging against a broad
market decline which would cause a general reduction in the value of the Fund's
portfolio of municipal securities, or in the value of a portion of such
portfolio. To the extent that municipal securities held in the New York Tax-Free
Bond Fund's portfolio are the same, or have the same characteristics, as the
securities comprising the index underlying the futures contract, changes in the
value of the index should correlate closely with changes in the value of the
Fund's portfolio securities. Under such circumstances, declines in the value of
the New York Tax-Free Bond Fund's portfolio securities may be offset through
gains on the Fund's futures position. Similarly, the Trust may purchase futures
contracts on indexes of municipal securities on behalf of the New York Tax-Free
Bond Fund where it expects to acquire a portfolio of municipal securities for
the Fund and anticipates an increase in the cost of such securities prior to
acquisition. To the extent that the securities to be acquired reflect the
composition of the index underlying the Futures Contract, such increased cost
may be offset, in whole or in part, through gains on the futures position. To
the extent that the New York Tax-Free Bond Fund enters into futures contracts on
securities other than municipal bonds, there is a possibility that the value of
such futures contracts will not correlate in direct proportion to the value of
the portfolio securities since the value of municipal bonds and other debt
securities may not react in the same manner to a general change in interest
rates and may react differently to factors other than changes in the general
level of interest rates. The New York Tax-Free Bond Fund's overall performance
would be adversely affected if the value of its futures contracts on securities
other than municipal bonds declined disproportionately to the value of the
Fund's municipal bond portfolio.
The New York Tax-Free Bond Fund has adopted the requirement that futures
contracts only be used for the Fund as a hedge and not for speculation. In
addition to this requirement, the Fund has also adopted two percentage
restrictions on the use of futures contracts. The first is that no futures
contracts will be entered into for the New York Tax-Free Bond Fund if
immediately thereafter the amount of margin deposits on all the futures
contracts of the Fund would exceed 5% of the market value of the total assets of
the Fund. The second restriction is that the aggregate market value of the
futures contracts held for the New York Tax-Free Bond Fund not exceed 50% of the
market value of the Fund's total assets. Neither of these restrictions would be
changed by the Fund's Board of Trustees without considering the policies and
concerns of the various federal and state regulatory agencies. The New York
Tax-Free Fund has no current intention of entering into any futures contract in
the foreseeable future.
The Fixed Income Fund 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 Fund 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
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which any such positions are "in-the-money," do not exceed 5% of the Fixed
Income Fund's net assets. The Fixed Income Fund will segregate assets or "cover"
its positions consistent with requirements under the 1940 Act. The Fixed Income
Fund 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.
Options on Futures Contracts. The Equity and Small Cap Equity Fund may
write and purchase options to buy or sell 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, each of
the Equity and Small Cap Equity Funds 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 Fund'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 Equity and Small Cap Equity Funds will each 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 Fund intends to
purchase. If a put or call option written by the Equity or Small Cap Equity Fund
is exercised, the Fund 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, each Fund'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 Equity and Small Cap Equity Funds 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, a Fund 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 Fund 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
Fund 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 Funds 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 Fund 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.
Risk Factors: Imperfect Correlation of Hedging Instruments with a Fund's
Portfolio. A Fund'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 Fund's hedging strategy may not be
successful and the Fund 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 Fund's overall return
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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, a Fund 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 a Fund 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 Fund 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 an 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 an Adviser's judgment as to the general direction of
interest or exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract. For example, if the
Fund has hedged against the possibility of an increase in interest rates, and
rates instead decline, the Fund 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 a Fund 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 Fund 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 a Fund 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,
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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 the United States Exchanges. The available
information on which a Fund 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 Fund 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
Fund 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 a
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. 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 a Fund 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 a Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, a Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. A Fund 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 a Fund is exercised or the Fund is unable to close out a
forward contract it has entered into. In addition, the Fund 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 Fund may hold such currencies for an
indefinite period of time if the Adviser believes that the exchange rate at the
time of delivery is unfavorable or if, for any other reason, the Adviser
anticipates favorable movements in such rates.
While the holding of currencies will permit a Fund 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
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adverse to the Fund's position. Such losses could also adversely affect the
Fund's hedging strategies. Certain tax requirements may limit the extent to
which a Fund will be able to hold currencies.
Restrictions on the Use of Options and Futures. In order to assure that a
Fund will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that a Fund 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 a
Fund's assets. In addition, a Fund must comply with the requirements of various
state securities laws in connection with such transactions.
The Small Cap Equity Fund 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 Small Cap Equity Fund's total assets. Moreover,
the Small Cap Equity Fund 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 a Fund purchases a futures contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund'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.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Funds (except the New York Tax-Free Bond Fund) may invest in forward
foreign currency exchange contracts ("forward contracts") are intended to
minimize the risk of loss to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. 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 a
Fund 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 Funds may not enter into
such contracts for speculative purposes.
The Equity and Small Cap Equity Funds may enter into forward contracts for
hedging purposes as well as for non-hedging purposes. The Equity and Small Cap
Equity Funds may also enter into forwards contracts on one currency in order to
hedge against risk of loss arising from fluctuations in the value of a second
currency (a "cross hedge") if, in the judgment of the Adviser, a reasonable
degree of correlation can be expected between movements in the value of the two
currencies. The Equity Fund 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, a Fund 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 a Fund 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, a Fund 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 Fund to forego all or a portion of the
benefits of favorable
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movements in the price of portfolio securities, and the purchase of options on
futures contracts may require the Fund 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.
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, a Fund may be required
to forego the benefits of advantageous changes in exchange rates. A Fund may
also enter into transactions in forward contracts for other than hedging
purposes, which presents greater profit potential but also involves increased
risk of losses which will reduce its gross income. For example, if the Adviser
believes that the value of a particular foreign currency will increase or
decrease relative to the value of the U.S. dollar, a 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 Fund may sustain losses
which will reduce its gross income. Such transactions, therefore, could be
considered speculative.
The Funds have no specific limitation on the percentage of assets they may
commit to forward contracts, subject to its stated investment objective and
policies, except that a Fund will not enter into a forward contract if the
amount of assets set aside to cover the contract would impede portfolio
management. By entering into transactions in forward contracts, however, a Fund
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
Portfolio 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.
The Fixed Income Fund 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 Fixed Income Fund 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
Fund 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 Fund 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 Fund's obligation under
the forward contract. On the date of maturity the Fixed Income Fund may be
exposed to some risk of loss from fluctuations in that currency. Although the
Adviser will attempt to hold such mismatching to a minimum, there can be no
assurance that the Adviser will be able to do so. When the Fixed Income Fund
enters into a forward contract for purposes of creating a synthetic security, it
will
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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.
The Funds have 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 Fund 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.
BRADY BONDS
The Fixed Income Fund may invest in 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
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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
The Fixed Income Fund may invest in the foreign currency exchange-related
securities described below.
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
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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 Fixed Income Fund has no current intention of investing in CEWs'sm',
PERLs'sm' or PIPs'sm'.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS
To the extent a Fund invests in sovereign and supranational debt
instruments issued or guaranteed by foreign governments, agencies, and
supranational entities ("sovereign debt obligations"), especially sovereign debt
obligations of developing countries, an investment in the Fund may be subject to
a high degree of risk, and the sovereign debt obligation 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 Fixed Income Fund 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 Fixed Income Fund 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 Fixed Income Fund will not be entitled to receive any interest or
principal paid on the securities sold. The Fixed Income Fund 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 Fixed Income Fund may also
be compensated by receipt of a commitment fee. When the Fixed Income Fund enters
into a mortgage dollar roll transaction, liquid assets in an amount sufficient
to pay for the future repurchase are segregated with the Fixed Income Fund's
custodian. Mortgage dollar roll transactions are considered reverse repurchase
agreements for purposes of the Fixed Income Fund 's investment restrictions.
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BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Fixed Income Fund 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 Fund may not invest in time deposits
maturing in more than seven days. The Fixed Income Fund 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 Fund 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 Sub-Adviser to
be of an investment quality comparable with other debt securities which may be
purchased by the Fixed Income Fund.
The Fixed Income Fund 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 this Statement of Additional Information.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Fixed Income Fund 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 Fund could miss a favorable price or yield
opportunity or suffer a loss. The Fixed Income Fund will not earn interest on
securities until the settlement date. The Fixed Income Fund 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.
SWAPS, CAPS, FLOORS AND COLLARS
The Fixed Income Fund 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 Fund 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 Fund may enter will generally involve an agreement to pay
interest streams calculated by reference to interest income linked to a
specified index in
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<PAGE>
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 Fund 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 Fund 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 Fixed Income Fund receiving or
paying, as the case may be, only the net amount of the two returns. The Fixed
Income Fund 's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Fixed Income Fund) 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 other
liquid securities, to avoid any potential leveraging. The Fixed Income Fund 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 Fund is contractually obligated to make. If the other party to an
interest rate swap defaults, the Fixed Income Fund 's risk of loss consists of
the net amount of interest payments that the Fixed Income Fund 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 Fund 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.
PARTICIPATION INTERESTS
The New York Tax-Free Bond Fund may purchase participation interests in
all or part of specific holdings of Municipal Obligations. The Fund has the
right to sell the participation interest back to the bank and draw on the letter
of credit or guarantee for all or any part of the full principal amount of the
participation interest in the security, plus accrued interest. In some cases,
these rights may not be exercisable in the event of a default on the underlying
Municipal Obligations; in these cases, the underlying Municipal Obligations must
meet the Fund's high credit standards at the time of purchase of the
participation interest. Each participation interest is backed by an irrevocable
letter of credit or guarantee of the selling bank. Participation interests will
be purchased only if in the opinion of counsel interest income
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on such interests will be tax-exempt when distributed as dividends to
shareholders of the Fund. The Fund will not invest more than 5% of the its
assets in participation interests.
The New York Tax-Free Bond Fund has no current intention of purchasing any
participation interest in the foreseeable future.
PORTFOLIO TURNOVER
The Advisers manage the Funds 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 Funds will not trade for
short-term profits, but when circumstances warrant, investments may be sold
without regard to the length of time held. 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. Each Adviser engages in portfolio trading
for a Fund if it believes a transaction net of costs (including custodian
charges) will help achieve the investment objective of the Fund. In managing
each Fund's portfolio, the Advisers seek to take advantage of market
developments, yield disparities and variations in the creditworthiness of
issuers. Expenses to a 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 New York Tax-Free Bond Fund may, in the future, seek to achieve its
investment objective 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
Fund. In such event, the New York Tax-Free Bond Fund's investment advisory
contract would be terminated and the administrative services fees paid by the
Fund would be reduced. Such investment would be made only if the Trustees of the
Trust believe that the aggregate per share expenses of the New York Tax-Free
Bond Fund and such other investment companies will be less than or approximately
equal to the expenses which the Fund would incur if the Trust were to continue
to retain the services of the Adviser for the Fund and the assets of the Fund
were to continue to be invested directly in portfolio securities.
For the year ended October 31, 1999, the portfolio turnover rate for the
Funds were as follows:
<TABLE>
<CAPTION>
FUND ANNUAL TURNOVER RATE
- --------------------------------------------------------------------------------
<S> <C>
New York Tax-Free Bond Fund 46.56%
Equity Fund 70.85%
Fixed Income Fund 433.26%
International Equity Fund 34.26%
Small Cap Equity Fund 77.74%
</TABLE>
It is expected that the annual turnover rate for the New York Tax-Free
Bond, Fixed Income, International Equity and Small Cap Equity Funds generally
will not exceed 300%, 250%, 40%, and 100%, respectively, in subsequent fiscal
years. If a Fund has a portfolio turnover rate of 100% or more, transaction
costs incurred by the Fund, and the realized capital gains and losses of
the Fund, may be greater than those of a fund with a lesser portfolio
turnover rate. See "Portfolio Transactions" and "Tax Matters" below.
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<PAGE>
PORTFOLIO MANAGEMENT
New York Tax-Free Bond Fund. 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 Fund's portfolio, the
Adviser seeks to maximize the return on the Fund's portfolio by taking advantage
of market developments, yield disparities and variations in the creditworthiness
of issuers, which may include use of the following strategies:
(1) shortening the average maturity of the portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of
principal;
(2) lengthening the average maturity of the portfolio in anticipation of
a decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in
the relative values of each; and
(4) changing from one debt security to an essentially similar debt
security when their respective yields are distorted due to market
factors.
Distributions of gains, if any, realized from the sale of Municipal
Obligations or other securities are subject to regular federal income taxes and
New York State and New York City personal income taxes. These strategies may
result in increases or decreases in the Fund's current income available for
distribution to the Fund's shareholders and in the holding for the Fund of
securities which sell at moderate to substantial premiums or discounts from face
value. Moreover, if the expectations of changes in interest rates or the
evaluation of the normal yield relationship between two securities proves to be
incorrect, the Fund's income, net asset value per share and potential capital
gain may be decreased or its potential capital loss may be increased.
The Fixed Income Fund. The Adviser's investment strategy for achieving the
Fixed Income Fund'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 Adviser's investment strategy
for the Portfolio is value investing, whereby the 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
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benefit from the price appreciation of individual securities during periods when
interest rates are unchanged.
PORTFOLIO TRANSACTIONS
The Advisers are primarily responsible for portfolio decisions and the
placing of portfolio transactions. The Trust has no obligation to deal with any
dealer or group of dealers in the execution of transactions in portfolio
securities for the Fund. Allocation of transactions, including their frequency,
to various dealers is determined by each Adviser in its best judgment and in a
manner deemed to be in the best interest of a Fund's shareholders rather than by
any formula. In placing orders for a Fund, the primary consideration is prompt
execution of orders in an effective manner at the most favorable price, although
the Fund 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 Adviser may place orders for the
purchase and sale of Fund investments for the Fund with a broker-dealer
affiliate of the Adviser.
An Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms. These services,
which in some cases may also be purchased for cash, include such matters as
general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Adviser in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Fund. The management fee
paid from the Fund is not reduced because the Adviser and its affiliates receive
such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each
Adviser may cause a Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in the Act) to the 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, provided the 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 Fund
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 an 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 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.
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<PAGE>
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to an 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 fiscal year ended October 31, 1999, 1998, and 1997 each Fund paid
the following aggregate brokerage commissions, all of which for the fiscal year
ended October 31, 1999, was paid to broker-dealers that provided "brokerage and
research services" to the Fund's Advisers.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
FUND ENDED 1999 ENDED 1998 ENDED 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
New York Tax-Free Bond Fund $ 523 $ N/A $ N/A
Equity Fund 352,108 257,952 108,310
Fixed Income Fund 2,371 N/A N/A
International Equity Fund 272,284 246,762 295,971
Small Cap Equity Fund 260,109 291,582 316,521
</TABLE>
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees may determine,
and subject to seeking the most favorable price and execution available, an
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
Investment decisions for the Funds and for the other investment advisory
clients of an 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 an
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 a Fund and for other clients of an 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. 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 a Fund is concerned. In other cases, however, the
Advisers believe that the Fund's ability to participate in volume transactions
will produce better executions for the Funds.
Municipal Obligations and other 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. The cost of
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<PAGE>
executing portfolio securities transactions for New York Tax-Free Bond Fund
primarily consists of dealer spreads and underwriting commissions or
concessions. Under the 1940 Act, persons affiliated with the New York Tax-Free
Bond Fund or the Distributor are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Securities and Exchange
Commission.
Because the Fixed Income Fund 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.
Specific decisions to purchase or sell securities for the Small Cap Equity
Fund are made by employees of the Sub-Adviser who are appointed and supervised
by its senior officers. Changes in the Small Cap Equity Fund's investments are
reviewed by its Board of Trustees. The Small Cap Equity Fund'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.
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 Advisers
normally seek 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 Adviser. At present no arrangements for the recapture of commission payments
are in effect.
SPECIAL FACTORS AFFECTING NEW YORK
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 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
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. Beginning in 1975, New York State, New York City and other
State entities faced serious financial difficulties which jeopardized the credit
standing and impaired the borrowing abilities of such entities and contributed
to high interest rates on, and lower market prices for, debt obligations issued
by them. In the early 1990s, New York faced additional financial difficulties
which resulted in a lowering by Moody's and S&P of their credit ratings on
certain New York
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<PAGE>
Municipal Obligations. Recurrence of such financial difficulties could result in
defaults or declines in the market values of various New York Municipal
Obligations in which the Fund may invest. 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.
The fiscal stability of New York is related, at least in part, to the
fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
On November 23, 1999, Standard & Poor's gave New York City's outstanding
general obligation bonds a rating of A-.
For further information concerning New York Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for the purpose of providing a general
description of New York State and New York City credit and financial conditions.
This summary is based on information from statements of issuers of New York
Municipal Obligations and does not purport to be complete.
INVESTMENT RESTRICTIONS
The Funds (and the Fund's corresponding Portfolio, as applicable) have
adopted the following investment restrictions which may not be changed without
approval by holders of a "majority of the outstanding voting securities" of the
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").
NEW YORK TAX-FREE BOND FUND
As a matter of fundamental policy, the Fund may not:
(1) borrow money or pledge, mortgage or hypothecate assets of the
Fund, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed
1/3 of the value of the net assets of the Fund, including the
amount borrowed, and may pledge, mortgage or hypothecate not
more than 1/3 of such assets to secure such borrowings (it is
intended that money would be borrowed only from banks and only
to accommodate requests for the redemption of shares of the
Fund while effecting an orderly liquidation of portfolio
securities), provided that collateral arrangements with
respect to Futures Contracts, including deposits of initial
and variation margin, are not considered a pledge of assets
for
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<PAGE>
purposes of this Investment Restriction; for additional
related restrictions, see clause (i) under the caption "Other
Restrictions" below;
(2) purchase any security or evidence of interest therein on
margin, except that the Trust may obtain such short-term
credit for the Fund as may be necessary for the clearance of
purchases and sales of securities and except that deposits of
initial and variation margin in connection with the purchase,
ownership, holding or sale of Futures Contracts may be made;
(3) underwrite securities issued by other persons, except insofar
as the Trust may technically be deemed an underwriter under
the Securities Act of 1933, as amended (the "1933 Act"), in
selling a portfolio security for the Fund;
(4) make loans to other persons except (a) through the lending of
securities held by the Fund, but not in excess of 1/3 of the
Fund's net assets taken at market value, (b) through the use
of fixed time deposits or repurchase agreements or the
purchase of short-term obligations, (c) by purchasing all or a
portion of an issue of debt securities of types commonly
distributed privately to financial institutions; for purposes
of this Investment Restriction (4) the purchase of short-term
commercial paper or a portion of an issue of debt securities
which are part of an issue to the public shall not be
considered the making of a loan;
(5) 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 in the ordinary course of
business (the Trust reserves the freedom of action to hold and
to sell for the Fund real estate acquired as a result of its
ownership of securities);
(6) concentrate its investments in any particular industry, but if
it is deemed appropriate for the achievement of the Fund's
investment objective, up to 25% of the assets of the Fund
(taken at market value at the time of each investment) may be
invested in any one industry, except that positions in Futures
Contracts shall not be subject to this Investment Restriction
and except that the Trust may invest 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 those with
respect to the Fund;
(7) 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,
except as appropriate to evidence a debt incurred without
violating Investment Restriction (1) above, and provided that
collateral arrangements with respect to Futures Contracts,
including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for
purposes of this Investment Restriction;
(8) write, purchase or sell any put or call option or any
combination thereof, provided that this shall not prevent the
writing, purchase, ownership, holding or sale of Futures
Contracts;
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<PAGE>
(9) invest in securities which are subject to legal or contractual
restrictions on resale (other than fixed time deposits and
repurchase agreements maturing in not more than seven days)
if, as a result thereof, more than 10% of the net assets of
the Fund would be so invested (including fixed time deposits
and repurchase agreements maturing in more than seven days);
provided, however, that this Investment Restriction shall not
apply to (a) any security if the holder thereof is permitted
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
security or by tendering or "putting" such security to a third
party, or (b) 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
those with respect to the Fund;
(10) purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of
such issuer to be held for the Fund, except that the Trust may
invest 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 those with respect to the Fund; or
(11) purchase more than 10% of all outstanding debt obligations of
any one issuer (other than obligations issued by the U.S.
Government, its agencies or instrumentalities).
For purposes of the investment restrictions described above and the state
and federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security. If, however, the
creating government or some other entity, such as an insurance company or other
corporate obligor, guarantees a security or a bank issues a letter of credit,
such a guarantee or letter of credit may, in accordance with applicable rules of
the Securities and Exchange Commission, be considered a separate security and
treated as an issue of such government, other entity or bank.
Non-Fundamental Investment Policies. New York Tax-Free Bond Fund does not,
as a matter of operating policy:
(1) borrow money for any purpose in excess of 10% of the Fund's
total assets (taken at cost) (moreover, the Trust will not
purchase any securities for the Fund's portfolio at any time
at which borrowings exceed 5% of the Fund's total assets
(taken at market value));
(2) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Fund's net assets (taken at market value) provided
that collateral arrangements with respect to Futures
Contracts, including deposits of initial and variation margin,
are not considered a pledge of assets for purposes of this
Investment Restriction;
(3) 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
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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;
(4) invest for the purpose of exercising control or management;
(5) purchase securities issued by any registered 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 the Trust will not purchase the securities of
any registered investment company for the Fund if such
purchase at the time thereof would cause more than 10% of the
Fund's total assets (taken at the greater of cost or market
value) to be invested in the securities of such issuers or
would cause more than 3% of the outstanding voting securities
of any such issuer to be held for the Fund; and provided,
further, that the Trust shall not purchase securities issued
by any open-end investment company;
(6) invest more than 15% of the Fund's net assets in securities
that are not readily marketable, including fixed time deposits
and repurchase agreements maturing in more than seven days;
(7) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund 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 Contracts shall not be subject to
this Investment Restriction,
(8) invest more than 5% of the Fund's assets in companies which,
including predecessors, have a record of less than three
years' continuous operation; or
(9) purchase or retain in the Fund'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 director of the Adviser, if after the
purchase of the securities of such issuer for the Fund 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.
These policies are not fundamental and may be changed by the Trust on
behalf of the Fund without shareholder approval in response to changes in the
various state and federal requirements.
For purposes of the investment restrictions described above, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of principal of and interest on the security. If,
however, the creating government or some other entity, such as an insurance
company or other corporate obligor, guarantees a security or a bank issues a
letter of credit, such a guarantee or letter of credit may, in accordance with
applicable rules of the Securities and Exchange
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Commission, be considered a separate security and treated as an issue of such
government, other entity or bank.
EQUITY FUND
As a matter of fundamental policy, the Fund may not (except that no
investment restriction of the Fund shall prevent the Fund from investing all of
its assets (other than assets which are not "investment securities" as defined
in the 1940 Act) in an open-end 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 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 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 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 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 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 Fund will not purchase
securities of any issuer if, as a result, more than 5% of the
Fund's total assets taken at market value would be invested in
the securities of any single issuer; and
(9) with respect to 75% of its assets, the Fund will not purchase
a security if, as a result, the Fund would hold more than 10%
of the outstanding voting securities of any issuer.
Non-Fundamental Investment Policies. The Fund is also subject to the following
restrictions which may be changed by the Board of Trustees without shareholder
approval. As a matter of non-fundamental policy, the Fund will not:
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(1) borrow money, except that the Fund may borrow for temporary or
emergency purposes up to 10% of its net assets; provided,
however, that the 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 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 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable (excluding Rule 144A
securities deemed by the Board of Trustees of the Trust to be
liquid);
(6) invest more than 15% of the Fund's total assets (taken at the
greater of cost or market value) in (a) securities (including
Rule 144A 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 Fund's total
assets are invested in securities issued by issuers which
(including predecessors) have been in operation less than
three years;
(7) invest more than 10% of the Fund's total assets (taken at the
greater of cost or market value) in securities (excluding Rule
144A securities) that are restricted as to resale under the
1933 Act;
(8) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund 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;
(9) invest for the purpose of exercising control over management
of any company;
(10) 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 Fund shall not invest in the shares of any open-end
investment company unless (a) the Sub-Adviser waives
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any investment advisory fees with respect to such assets, and
(b) the Fund pays no sales charge in connection with the
investment;
(11) 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;
(12) write or acquire options or interests in oil, gas or other
mineral explorations or development programs or leases; and
(13) 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 Fund 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 put
determined as of the date the options are sold shall not
exceed 50% of the Fund's net assets; (c) the securities
subject to the exercise of the call written by the Fund must
be owned by the Fund at the time the call is sold and must
continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing
call, and such purchase has been confirmed, thereby
extinguishing the Fund's obligation to deliver securities
pursuant to the call it as sold; and (d) at the time a put is
written, the Fund establishes a segregated account with its
custodian consisting of cash or short-term U.S. Government
securities equal in value to the amount the Fund will be
obligated to pay upon exercise of the put (this account must
be maintained until the put is exercised, has expired, or the
Fund has purchased a closing put, which is a put of the same
series as the one previously written); and
(14) 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 Fund'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 Fund's total assets.
FIXED INCOME FUND
As a matter of fundamental policy, the 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;
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(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; and provided further
that mortgage-backed securities shall not be considered a
single industry for the purposes of this investment
restriction;
(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.
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<PAGE>
Non-Fundamental Investment Policies. The Fund is also subject to the
following restrictions which may be changed by its 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 Fund will not:
(1) 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;
(2) 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;
(3) 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);
(4) 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);
(5) purchase or retain securities of an issuer if those officers
and Trustees of the Portfolio Trust or the Manager or
Sub-Adviser owning more than 1/2 of 1% of such securities
together own more than 5% of such securities;
(6) pledge, mortgage or hypothecate any of its assets to an extent
greater than one-third of its total assets at fair market
value;
(7) 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").
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<PAGE>
(8) invest more than 25% of its assets in Restricted Securities
(including Rule 144A Securities);
(9) invest for the purpose of exercising control over management
of any company;
(10) 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;
(11) 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;
(12) write or acquire options or interests in oil, gas or other
mineral explorations or development programs or leases.
INTERNATIONAL EQUITY FUND
As a matter of fundamental policy, the 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 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 Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 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 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
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<PAGE>
the U.S. Government, its agencies or instrumentalities, when
the 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 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.
Non-Fundamental Investment Policies. The Portfolio and the Fund are 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
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<PAGE>
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 of those officers
and Trustees of the Portfolio Trust or the Manager or
Sub-Adviser owning more than 1/2 of 1% of such securities
together own more than 5% of such securities.
SMALL CAP EQUITY FUND
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;
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<PAGE>
(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.
Non-Fundamental Investment Policies. The Portfolio and the Fund are 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:
(1) 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%;
(2) 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
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<PAGE>
deposit and variation margin, and reverse repurchase
agreements are not considered a pledge of assets for purposes
of this restriction;
(3) 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;
(4) 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;
(5) invest for the purpose of exercising control or management;
(6) 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;
(7) 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;
(8) 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;
(9) 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
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preferred stock of an issuer shall be deemed a single class,
except that futures or option contracts shall not be subject
to this restriction;
(10) with respect to 75% of the Portfolio's (Fund's) total assets,
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;
(11) 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;
(12) 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);
(13) 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
-61-
<PAGE>
(14) 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 a Fund or a later change in the rating of a security held by the Fund is not
considered a violation of policy, however each Adviser will consider such change
in its determination of whether to hold the security.
Subsequent to its purchase by the Trust on behalf of the New York Tax-Free
Bond Fund, a rated Municipal Obligation may cease to be rated or its rating may
be reduced below the minimum required for purchase for the Fund. Neither event
requires sale of such Municipal Obligation by the Trust (other than variable
rate instruments which must be sold if they are not "high quality"), but the
Adviser considers such event in determining whether the Trust should continue to
hold the Municipal Obligation on behalf of the Fund. To the extent that the
ratings given to the Municipal Obligations or other securities held by the Trust
on behalf of the Fund are altered due to changes in either the Moody's, Standard
& Poor's or Fitch's ratings systems the Adviser will adopt such changed ratings
as standards for its future investments in accordance with the investment
policies contained in the Prospectus. Certain Municipal Obligations issued by
instrumentalities of the U.S. Government are not backed by the full faith and
credit of the U.S. Treasury but only by the creditworthiness of the
instrumentality. The Trust's Board of Trustees has determined that any Municipal
Obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the U.S. Government
is considered to have a rating in the highest category. Where necessary to
ensure that the Municipal Obligations are of "high quality" (i.e., within the
two highest ratings assigned by any major rating service), or where the
obligations are not freely transferable, the Trust requires that the obligation
to pay the principal and accrued interest be backed by an unconditional
irrevocable bank letter of credit, a guarantee, insurance or other comparable
undertaking of an approved financial institution.
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 (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:
-62-
<PAGE>
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.
Any "tax equivalent yield" quotation for the New York Tax-Free Bond Fund
is calculated as follows: if the entire current yield quotation for such period
is tax-exempt, the tax equivalent yield will be the current yield quotation
divided by 1 minus a stated income tax rate or rates. If a portion of the
current yield quotation is not tax-exempt, the tax equivalent yield will be the
sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a
stated income tax rate or rates, and (b) the portion of the yield which is not
tax-exempt.
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 (or up to the life of
the Fund), calculated pursuant to the following formula: P (1 + T)n = 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.
Any "tax equivalent total rate of return" quotation for the New York
Tax-Free Bond Fund is calculated as follows: if the entire current total rate of
return quotation for such period is tax-exempt, the tax equivalent total rate of
return will be the current total rate of return quotation divided by 1 minus a
stated income tax rate or rates. If a portion of the current total rate of
return quotation is not tax-exempt, the tax equivalent total rate of return will
be the sum of (a) that portion of the total rate of return which is tax-exempt
divided by 1 minus a stated income tax rate or rates, and (b) the portion of the
total rate of return which is not tax-exempt.
Historical performance information for each Fund is provided below.
Historical performance information for any period or portion thereof prior to
the establishment of the Fund will be that of the Portfolio, as applicable,
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:
-63-
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield for Period Tax Equivalent Yield for Period
Ended December 31, 2000 Ended December 31, 2000
--------------------------- ----------------------------------
<S> <C> <C>
New York Tax-Free Bond Fund 4.97% 8.23%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return Since
Average Total Return for Fiscal Year Inception to Fiscal Year Ended
Ended October 31, 1999 October 31, 1999
------------------------------------ ---------------------------------
<S> <C> <C>
New York Tax-Free Bond Fund -3.45% 5.27%(1)
Equity Fund 20.59% 21.39%(2)
Fixed Income Fund 1.01% 7.67%(3)
International Equity Fund 46.92% 17.53%(4)
Small Cap Equity Fund 24.63% 16.34%(5)
</TABLE>
(1) The Fund commenced operations on July 1, 1996.
(2) The Fund commenced operations on July 1, 1996.
(3) The Fund commenced operations on January 9, 1995.
(4) The Fund commenced operations on January 9, 1995.
(5) The Fund commenced operations on September 3, 1996.
Performance information for the Funds may also be compared to various
unmanaged indices, including, but not limited to the S&P 500 Stock Index,
Australia and Far East Index, or Salomon Bond Index, as may be appropriate for
each Fund. 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 Fixed Income Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
1. Consumer Price Index. The Consumer Price Index is published by the
U.S. Department of Labor and is a measure of inflation.
2. 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.
-64-
<PAGE>
3. 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 business and affairs of the Trust and the Portfolio Trust are managed
under the direction of their respective Boards of Trustees. The principal
occupations of the Trustees and executive officers of the Trust and Portfolio
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.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FREDERICK C. CHEN Trustee Management Consultant.
126 Butternut Hollow Road, Greenwich,
Connecticut 06830
LARRY M. ROBBINS Trustee Director for the Center of Technology and
College of Arts & Sciences Learning.
University of Pennsylvania
120 Logan Hall
Philadelphia, PA 19104
ALAN S. PARSOW Trustee General Partner of Parsow Partnership, Ltd.
222 Skyline Drive (investments).
Elkhorn, NE 68022
MICHAEL SEELY Trustee President of Investor Access Corporation
405 Lexington Avenue, Suite 909 (investor relations consulting firm).
New York, New York 10174 -
LESLIE E. BAINS Trustee Senior Executive Vice President, HSBC Bank
USA, 1990-present; Senior Vice President,
The Chase Manhattan Bank, N.A., 1980-1990.
</TABLE>
-65-
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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).
ANTHONY J. FISCHER* Vice President Employee of BISYS Fund Services, Inc.,
April, 1998 to present; Employee of SEI
Investments and Merrill Lynch prior to
April 1998.
SUE A. WALTERS* Vice President Employee of BISYS Fund Services, Inc., July
1990 to present.
NADEEM YOUSAF* Treasurer Employee of BISYS Fund Services, Inc.,
August 1999 to present; Director, IBT,
Canadian Operations, May 1995 to March
1997; Assistant Manager, PriceWaterhouse,
1994 to May 1995.
LISA M. HURLEY* Secretary Senior Vice President and General Counsel
of BISYS Fund Services, May 1998 to
present; General Counsel of Moore Capital
Management, Inc.; October 1993 to May 1996,
Senior Vice President and General Counsel
of Northstar Investment Management
Corporation.
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.
</TABLE>
*Messrs. Grimm, Fischer and Yousaf and Mss. Walters, Hurley, and Metz also
are officers of certain other investment companies of which BISYS or an
affiliate is the administrator.
-66-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Aggregate Total
Compensation Aggregate Aggregate Compensation Aggregate Compensation
from New York Compensation Compensation from Compensation from Fund
Tax-Free Bond from Equity from Fixed International from Small Cap Complex to
Trustee Fund Fund Income Fund Equity Fund Equity Fund Trustees(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Frederick C. Chen $ 98 $ 839 $ 930 $ 851 $ 1,102 $ 9,600
Alan S. Parsow 98 839 930 851 1,102 9,600
Larry M. Robbins 118 1,014 1,124 1,028 1,332 11,600
Michael Seely 98 839 930 851 1,102 9,600
</TABLE>
(1) The compensation table above reflects the fees received by the Trustees from
the Fund Complex for the year ended October 31, 1999. For the fiscal year ended
October 31, 1999, the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust received from the Fund Complex an annual retainer of
$3,600 and a fee of $1,500 for each meeting of the Board of Trustees or
committee thereof attended, except that Mr. Robbins received an annual retainer
of $4,600 and a fee of $1,725 for each meeting attended. The Fund Complex
includes the Trust, Republic Advisor Funds Trust, the Portfolio Trust, offshore
feeders into the Portfolio Trust, and three stand-alone offshore funds. The fees
paid by the Fund Complex are allocated pro rata among the Funds based upon the
net assets of each Fund.
As of February 7, 2000, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding Shares 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 willful 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 willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT MANAGER
HSBC is the Funds investment manager and serves as the investment adviser
to the New York Tax-Free Bond Fund. For the management and advisory services it
provides to the Funds, HSBC receives a monthly fee from each Fund at an annual
rate based on the average daily net assets of the Funds as follows:
-67-
<PAGE>
<TABLE>
<CAPTION>
Fund Fee
- --------------------------------------------------------------------------------
<S> <C>
New York Tax-Free Bond Fund 0.25%
Equity Fund 0.45%
Fixed Income Fund 0.40%
International Equity Fund 0.69%
Small Cap Equity Fund 0.86%
</TABLE>
For the fiscal years ended October 31, 1999, 1998 and 1997, the aggregate
amount of advisory fees paid by each operational Fund was as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
New York Tax-Free Bond Fund $ 77,672 $ 75,805 $ 55,654
Equity Fund 1,225,897 331,506 94,389
Fixed Income Fund 734,220 228,913 184,724
International Equity Fund 1,762,032 562,443 466,480
Small Cap Equity Fund 1,908,984 517,892 429,442
</TABLE>
The Investment Management Contract will continue in effect with respect to
the Fund, provided such continuance is approved at least annually (i) by the
holders of a majority of the outstanding voting securities of the Fund or by the
Board of Trustees, and (ii) by a majority of the Trustees 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. The Contract
provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio transactions
for the Fund, except for willful misfeasance, bad faith or gross negligence or
of reckless disregard of its or their obligations and duties under the Contract.
HSBC is a wholly owned subsidiary of HSBC USA, Inc. ("HSBC USA"), a
registered bank holding company. No securities or instruments issued by HSBC USA
or HSBC will be purchased for a Fund.
HSBC and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Fund,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of obligations so purchased. HSBC 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.
HSBC, 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
-68-
<PAGE>
securities of any such investment company as collateral for a loan to purchase
such securities. Moreover, HSBC, its officers and employees do not express any
opinion with respect to the advisability of any purchase of such securities.
HSBC 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 HSBC or in the possession of any affiliate of HSBC.
The investment advisory services of HSBC to the Fund are not exclusive
under the terms of the Investment Management Contract. HSBC is free to and does
render investment advisory services to others.
FIXED INCOME FUND SUB-ADVISER
Miller Anderson & Sherrerd ("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% on net assets up to $50 million, 0.25% on 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% on net assets over $150 million and up to $250 million, and 0.15%
on net assets over $250 million.
For the fiscal years ended October 1997, 1998 and 1999 sub-advisory fees
aggregated $276,784, $350,214 and $ 378,414 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.
EQUITY FUND SUB-ADVISER
Alliance and Brinson, as the Republic Equity Fund's Sub-Advisers, are
responsible for the investment management of the Fund's assets, including making
investment decisions and placing orders for the purchase and sale of securities
for the Fund directly with the issuers or with brokers or dealers selected by
the Sub-Advisers in their discretion. See "Portfolio Transactions." Each
Sub-Adviser also furnishes to the Board of Trustees of the Trust, which has
overall responsibility for the business and affairs of the Trust, periodic
reports on the investment performance of the Fund. Prior to January 1, 1997, a
different investment management firm served as the Fund's sub-adviser.
For its services, each Sub-Adviser receives from the Fund a fee, computed
daily and based on the Fund's average daily net assets allocated to the
Sub-Adviser for management, at the annual rate of 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 in excess
of $200 million.
For the fiscal years ended October 31, 1997, 1998 and 1999 the
sub-advisory fees aggregated $171,691, $570,936, and $793,461 respectively.
Alliance is a Delaware limited partnership. Alliance Capital Management
Corporation ("ACMC") is the general partner of Alliance and conducts no other
active business. Units representing assignment of
-69-
<PAGE>
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, 1996, AXA, a French insurance
holding company, owned 59% of the issued and outstanding shares of the common
stock of ECI.
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.
The investment advisory services of each Sub-Adviser to the Fund are not
exclusive under the terms of its Subadvisory Agreement with Republic. Each
Sub-Adviser is free to and does render investment advisory services to others.
INTERNATIONAL EQUITY FUND 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 fiscal years ended October 31, 1997, 1998 and 1999, sub-advisory
fees aggregated $893,016, $1,057,392, and $1,142,568 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.
SMALL CAP EQUITY FUND SUB-ADVISER
MFS Institutional Advisers, Inc., as the Small Cap Equity 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.
-70-
<PAGE>
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 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 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 fiscal years ended October 31, 1997, 1998 and 1999, sub-advisory
fees aggregated $1,104,635, $1,346,644, and $1,334,611, 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.
FUND ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
including, among other responsibilities, assisting in the preparation and filing
of all documents required for compliance by the Fund with applicable laws and
regulations and arranging for the maintenance of books and records of the Fund.
For its services to the Funds, BISYS receives the following fees from each Fund:
(i) 0.05% of the Fund's average daily net assets up to $1 billion; (ii) 0.04% of
the next $1 billion of such assets; and (iii) 0.035% of such assets in excess of
$2 billion.
For the fiscal year ended October 31, 1999, the aggregate amount of
administrative fees paid by each operational Fund was as follows:
<TABLE>
<CAPTION>
Fund Fee
- --------------------------------------------------------------------------------
<S> <C>
New York Tax-Free Bond Fund $ 26,007
Equity Fund 254,825
Fixed Income Fund 51,458
International Equity Fund 67,840
Small Cap Equity Fund 62,796
</TABLE>
For the fiscal year ended October 31, 1998 and 1997, the aggregate amount
of administrative fees paid by each operational Fund (and Portfolio, as
applicable) was as follows:
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<PAGE>
<TABLE>
<CAPTION>
1998 1997
Fund Portfolio Fund Portfolio Fund
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York Tax-Free Bond Fund $ N/A $ 30,139 $ N/A $ 22,290
Equity Fund N/A 189,432 N/A 53,385
Fixed Income Fund 72,228 40,700 46,181 29,549
International Equity Fund 112,489 69,241 93,216 63,326
Small Cap Equity Fund 106,179 6,072 85,889 2,763
</TABLE>
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. Each Administration Agreement
will terminate automatically in the event of its assignment. Each Administration
Agreement also provides that neither BISYS 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.
BISYS provides persons satisfactory to the respective Boards of Trustees
to serve as officers of the Trust. Such officers, as well as certain other
employees of the Trust, may be directors, officers or employees of BISYS or its
affiliates.
THE DISTRIBUTOR AND SPONSOR
BISYS, whose address is 3435 Stelzer Road, Columbus, Ohio 43219-3035, acts
as sponsor and distributor to the Fund under a Distribution Contract with the
Trust. The Distributor may, out of its own resources, make payments to
broker-dealers for their services in distributing Shares. BISYS and its
affiliates also serve as administrator or distributor to other investment
companies. BISYS is a wholly owned subsidiary of BISYS Group, Inc.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreements with BISYS,
pursuant to which BISYS acts as transfer agent ("Transfer Agent") for shares of
the Fund, and the Portfolio Trust has entered into a Transfer Agent Agreement
with Investors Fund Services (Ireland) Limited (also a "Transfer Agent"). The
Transfer Agents maintain an account for each shareholder of the Fund and
investors in the Portfolio, performs other transfer agency functions, and act as
dividend disbursing agent for the Fund. The principal business address of BISYS
is 3435 Stelzer Road, Columbus, OH 43219.
CUSTODIAN
Pursuant to a Custodian Agreement, with respect to domestic assets, HSBC
acts as the custodian of the Fund's assets. With respect to foreign assets, IBT
serves as custodian for the Fund and the Portfolio (together, with Republic, the
"Custodian"). The Custodians' responsibilities include safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest on the Fund's
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts in order to calculate the daily
net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the
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investment policies of the Fund or decide which securities will be purchased or
sold for the Fund. For its services, the Custodians receive such compensation as
may from time to time be agreed upon by it and the Trust. BISYS serves as the
fund accounting agent for the Portfolio.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent, including HSBC, 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 of the Funds may be effected
and certain other matters pertaining to the Fund; 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, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Funds' shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Funds or the Trust; and provides such other related services as the Trust
or a shareholder may request. Although the Funds do not currently compensate
Shareholder Servicing Agents for performing these services with respect to
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 understands 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, 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. Conversely, the Trust understands that
certain Shareholder Servicing Agents may 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 the
Fund with respect to those accounts.
FEDERAL BANKING LAW
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, HSBC's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. HSBC believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of HSBC to perform these services, the Board of Trustees would review
the Trust's relationship with HSBC and consider taking all action necessary in
the circumstances, which could include recommending to
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shareholders the selection of another qualified advisor or, if that course of
action appeared impractical, that the Funds be liquidated.
EXPENSES
Except for expenses paid by the HSBC and the Distributor, each Fund bears
all the costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. In the 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 expense. Trust expenses directly related
to the Fund are charged to the Fund; other expenses are allocated proportionally
among all 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 value of each security for which readily available market quotations
exists is based on a decision as to the broadest and most representative market
for such security. The value of such security is based either on the last sale
price on a national securities exchange, or, in the absence of recorded sales,
at the readily available closing bid price on such exchanges, or at the quoted
bid price in the over-the-counter market. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the time net
assets are valued. Unlisted securities are valued at the average of the quoted
bid and asked prices in the over-the-counter market. Debt securities are valued
by a pricing service which determines valuations based upon market transactions
for normal, institutional-size trading units of similar securities. Securities
or other assets for which market quotations are not readily available are valued
at fair value in accordance with procedures established by the Trust. Such
procedures include the use of independent pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. All portfolio securities with a remaining maturity of less than 60
days are valued at amortized cost, which approximates market value.
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 Fund'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 Fund'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. 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
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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.
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. Futures contracts are normally
valued at the settlement price on the exchange on which they are traded. Fund
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.
Interest income on long-term obligations in a Fund'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.
The accounting records of each Fund are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and forward
contracts denominated in foreign currencies are translated into U.S. dollars at
the prevailing exchange rates at the end of the period. Purchases and sales of
securities, income receipts, and expense payments are translated at the exchange
rate prevailing on the respective dates of such transactions. Reported net
realized gains and losses on foreign currency transactions represent net gains
and losses from sales and maturities of forward currency contracts, disposition
of foreign currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the: Type of security involved, financial
statements, cost at date of purchase, size of holding, discount from market
value of unrestricted securities of the same class at the time of purchase,
special reports prepared by analysts, information as to any transactions or
offers with respect to the security, existence of merger proposals or tender
offers affecting the security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
To the extent that a Fund purchases securities which are restricted as to
resale or for which current market quotations are not available, the
Sub-Advisers will value such securities based upon all relevant factors as
outlined in FRR 1.
Subject to the Trust's compliance with applicable regulations, the Trust
on behalf of a Fund have reserved the right to pay the redemption or repurchase
price of shares, either totally or partially, by a distribution in kind of
portfolio securities from a Portfolio (instead of cash), as applicable. The
securities
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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 a 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.
PURCHASE OF SHARES
Shares may be purchased through the Distributor, Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are 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 intends 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 or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
Funds which do not pay some or all of such fees from their assets may
offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves 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. [Confirm]
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 purchased
by the Fund will be subject to valuation and other procedures by the Board of
Trustees.
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 Y) Class), Republic New York Tax-Free Money Market Fund (Adviser (Class
Y) Class), Republic Fixed Income Fund, Republic New York Tax-Free Bond Fund
(Adviser (Class Y) Class), Republic Equity Fund (Adviser (Class Y) 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
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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).
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments will
be automatic and will continue until such time as the Trust and the investor's
bank are notified in writing to discontinue further investments. Due to the
varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the Fund Business
Day that both the check and the bank withdrawal data are received in required
form by the Transfer Agent. Further information about the plan may be obtained
from BISYS at the telephone number listed on the back cover.
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 the Transfer Agent, with respect
to shares purchased directly through the Distributor, or to his securities
broker or 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 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
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otherwise permitted by the 1940 Act, if an emergency exists. To be in a position
to eliminate excessive expenses, the Trust reserves the right to redeem upon not
less than 30 days' notice all shares in an account which has a value below $50,
provided that such involuntary redemptions will not result from fluctuations in
the value of Fund shares. A shareholder will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
Unless shares have been purchased directly from the Distributor, a
shareholder may redeem shares only by authorizing his securities broker, if
applicable, or 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 securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
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 he redeems 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.
RETIREMENT PLANS
Shares of the Funds 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 or the Sponsor upon request. The
tax law governing tax-deferred retirement plans is complex and changes
frequently. Before investing in a Fund through one or more of these plans, an
investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of a 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 BISYS 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 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
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A Fund may be used as a vehicle 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. A Fund may also be
used as a vehicle for both 401(k) plans and 403(b) plans.
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of a Fund's net investment income daily as a
dividend to the Fund shareholders. Dividends substantially equal to a Fund's net
investment income earned during the month are distributed in that month to the
Fund's shareholders of record. Generally, a 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.
A Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to a 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
a Fund (purchased at their net asset value without a sales charge).
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 Fund's 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.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the 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. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the Fund is
divided into four classes of shares.
Each share of each class of a Fund, if applicable, 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 is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the 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. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of
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each class of a series 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 relates 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.
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.
The series of the Portfolio Trust will vote separately or together in the
same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes. 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.
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 in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the 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 Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the 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
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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 is 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 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 the 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 believe that neither Fund nor their
shareholders will be adversely affected by reason of the investment of all of
its assets in the Portfolio.
As of February 7, 2000, the following persons owned of record or
beneficially 5% or more of the Funds or, with respect to the New York Tax-Free
Bond and Equity Funds, the Adviser (Class Y) Shares:
<TABLE>
<CAPTION>
Name & Address Share Balance Percentage
-------------- ------------- ----------
<S> <C> <C>
NY TAX FREE BOND FUND
Kinco & Co. 43,493.892 5.3362%
FBO 5939
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 11243
Kinco & Co 62,217.617 7.5107%
FBO D10496
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 61,217.617 7.5107%
FBO D10497
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
FBO D10498 61,217.617 7.5107%
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 207,051.488 25.4029%
FBO D10114
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 90,618.433 11.1179%
FBO W14799
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
North Fork Bank 66,505.789 8.1595%
Trust Dept.
54375 Main Rd.
Southold, NY 11971
EQUITY FUND
Kinco & Co 3,157,532.917 23.2664%
FBO 4110
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 5,950 43.8472%
FBO 5866
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 2,134,612.011 15.7290%
FBO W14818
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
FIXED INCOME FUND
</TABLE>
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<TABLE>
<S> <C> <C>
Wachovia Bank, NA 557,860.587 5.1620%
Plan of Republic NY Corp. Subsidiaries
PO Box 3073
Winston Salem, NC 27150
Kinco & Co 898,169.584 8.3109%
FBO 85610075
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 693,341.213 6.4156%
FBO 4113
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 5,495,633.669 50.8518%
FBO 5874
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 600,988.378 5.5610%
FBO W14818
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
INTERNATIONAL EQUITY FUND
Kinco & Co 1,113,487.741 11.1003%
FBO 4112
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 2,936,697.381 28.7596%
FBO 5868
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
</TABLE>
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<TABLE>
<S> <C> <C>
Kinco & Co 905,920.341 8.8718%
FBO W14818
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
SMALL CAP EQUITY FUND
Kinco & Co 2,308,729.533 17.9654%
FBO 4111
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 905,920.341 26.8869%
FBO 5867
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
Kinco & Co 953,303.896 7.4182%
FBO W14818
Republic National Bank
One Hanson Place
Lower Level
Brooklyn, NY 1243
</TABLE>
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Funds and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. 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 ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
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TAX STATUS OF THE FUNDS
Each Fund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, each Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated investment
companies).
As a regulated investment company, a Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. Each Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, a Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year
if it is declared by a the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such a distribution will be taxable to shareholders in the
calendar year in which the distribution is declared, rather than the calendar
year in which it is received.
THE PORTFOLIO
The Portfolio has obtained a ruling from the Internal Revenue Service that
the Portfolio will be treated as a partnership for federal income tax purposes.
For purposes of determining whether a Fund satisfies the income and
diversification tests to maintain its status as a regulated investment company,
each Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's income and assets.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares (see below for
information concerning exempt-interest dividends and capital gain dividends).
Dividends paid by a Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received by the Fund from U.S.
corporations, may, subject to
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limitation, be eligible for the dividends received deduction. However, the
alternative minimum tax applicable to corporations may reduce the value of the
dividends received deduction.
The excess of net long-term capital gains over net short-term capital
losses realized, distributed and properly designated by a Fund, whether paid in
cash or reinvested in Fund shares, will generally be taxable to shareholders as
long-term capital gain, regardless of how long a shareholder has held Fund
shares. Such capital gain distributions are subject to a maximum federal income
tax rate of 20% under current law. Net capital gains from assets held for one
year or less will be taxed as ordinary income.
Shareholders will be notified annually as to the U.S. federal tax status
of distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as
a result of a distribution by a Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
TAX-EXEMPT INCOME
The New York Tax-Free Bond Fund intends to invest a sufficient amount of
its assets in municipal securities to qualify to distribute "exempt-interest
dividends" (as defined in the Code) to shareholders. Such dividends payable from
net tax-exempt interest earned from municipal securities will qualify as
exempt-interest dividends if, at the close of each quarter of such Fund's
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is exempt from the regular federal income tax
under Code section 103. Exempt-interest dividends distributed to shareholders
are not included in shareholders' gross income for regular federal income tax
purposes. Each Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If a Fund earns income which is not
eligible to be so designated, the Fund intends to distribute such income. Such
distributions will be subject to federal, state and local taxes, as applicable,
in the hands of shareholders.
Interest on certain types of private activity bonds is not exempt from
federal income tax when received by "substantial users" (as defined in the
Code). A "substantial user" includes any "nonexempt person" who regularly uses
in trade or business part of a facility financed from the proceeds of private
activity bonds. A Fund may invest periodically in private activity bonds and,
therefore, may not be an appropriate investment for entities that are
substantial users of facilities financed by private activity bonds or "related
persons' of substantial users. Generally, an individual will not be a related
person of a substantial user under the Code unless he/she or his/her immediate
family owns indirectly in aggregate more than 50% of the equity value of the
substantial user.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although a
Fund's adviser attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be exempt from federal and (as applicable) state tax,
neither the Adviser nor the Fund's counsel makes any review of proceedings
relating to the issuance of municipal securities or the bases of such opinions.
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<PAGE>
FOREIGN TAXES
A Fund may be subject to certain taxes imposed by the countries in which
it invests or operates. If the International Equity Fund qualifies as a
regulated investment company and if more than 50% of the value of the Fund's
total assets at the close of any taxable year consists of stocks or securities
of foreign corporations, the Fund may elect, for U.S. federal income tax
purposes, to treat any foreign taxes paid by the Fund that qualify as income or
similar taxes under U.S. income tax principles as having been paid by the Fund's
shareholders. For any year for which a Fund makes such an election, each
shareholder will be required to include in its gross income an amount equal to
its allocable share of such taxes paid by the Fund and the shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their U.S. federal income tax liability, if any, or to deduct
their portions from their U.S. taxable income, if any. No deduction for foreign
taxes may be claimed by individuals who do not itemize deductions. In any year
in which it elects to "pass through" foreign taxes to shareholders, the relevant
Fund will notify shareholders within 60 days after the close of the Fund's
taxable year of the amount of such taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of a
Fund's income flows through to its shareholders. With respect to the Funds,
gains from the sale of securities may have to be treated as derived from U.S.
sources and certain currency fluctuation gains, including Section 988 gains
(defined below), may have to be treated as derived from U.S. sources. The
limitation of the foreign tax credit is applied separately to foreign source
passive income, including foreign source passive income received from the Fund.
Shareholders may be unable to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by a Fund. The foreign tax credit
can be applied to offset no more than 90% of the alternative minimum tax imposed
on corporations and individuals.
The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of a Fund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. A gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands, and the rate of tax will depend upon
the shareholder's holding period for the shares. If the shareholder has held the
shares as a capital asset for more than 12 months, the maximum current federal
income tax rate is 20%. Any loss realized on a redemption, sale or exchange will
be disallowed to the extent the shares disposed of are replaced (including
through reinvestment of dividends) within a period of 61 days, beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case the
basis of the shares acquired will be adjusted to reflect the disallowed loss. If
a shareholder holds Fund shares for six months or less and during that period
receives a distribution taxable to the shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term loss to the extent of such distribution.
If, within 90 after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by
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<PAGE>
excluding all or a portion of the sales charge from the shareholder's tax basis
in the exchanged shares, and the amount excluded will be treated as an amount
paid for the new shares.
BACKUP WITHHOLDING
Each Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), 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 or social security number,
(2) the IRS notifies the shareholder or the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
FUND INVESTMENTS
MARKET DISCOUNT. If a Fund purchases a debt security at a price lower than
the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by such Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, such Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by a Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by such a Fund, original issue discount that accrues on a debt security
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
applicable to regulated investment companies. Some debt securities may be
purchased by a Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
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CMO RESIDUALS. Under certain circumstances, a Fund may be taxed on income
deemed to be earned from certain CMO residuals.
OPTIONS, FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which a Fund may invest may be "section 1256 contracts." Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by a Fund at the end
of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by a
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a Fund, and
losses realized by the Fund 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 the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a Fund may make with respect to
its straddle positions may also affect the amount, character and timing of the
recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to a Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by such a Fund, which is taxed as ordinary income when distributed to
shareholders. 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 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 transactions.
CONSTRUCTIVE SALES. Under certain circumstances, a Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund 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 Fund'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 Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
SECTION 988 GAINS OR LOSSES. Gains or losses attributable to fluctuations
in exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
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recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
PASSIVE FOREIGN INVESTMENT COMPANIES. A Fund may invest in shares of
foreign corporations that 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 a Fund 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 Fund held the PFIC shares. The Fund
will itself 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.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund 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 were 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. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be 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.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while exempt from
the regular federal income tax, constitutes a tax-preference item for taxpayers
in determining alternative minimum tax liability under the Code and income tax
provisions of several states. The interest on private activity securities could
subject a shareholder to, or increase liability under, the federal alternative
minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to or increase their liability under, the
alternative minimum tax and environmental tax because these distributions are
included in the corporation's adjusted current earnings.
The Fund will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
SPECIAL TAX CONSIDERATIONS
Exempt-interest dividends, whether received by shareholders in cash or in
additional shares, derived by New York residents from interest on qualifying New
York bonds generally are exempt from New York State and New York City personal
income taxes, but not corporate franchise taxes. Dividends and distributions
derived from taxable income and capital gains are not exempt from New York State
and
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New York City taxes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible for New
York State or New York City personal income tax purposes. Gain on the sale or
redemption of Fund shares generally is subject to New York State and New York
City personal income tax.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 5, 1999.
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) and classes of shares within each series at any time
in the future. Establishment and offering of additional class or 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.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG LLP as independent auditors of
the Trust for the fiscal year ending October 31, 1999. KPMG LLP will audit the
Fund's annual financial statements, prepare the Fund's income tax returns, and
assist in the preparation of filings with the SEC. The address of KPMG LLP is
2 Nationwide Plaza, Columbus, Ohio 43215.
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 Securities and Exchange Commission 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 Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission 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
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The current audited financial statements dated October 31, 1999 of each of
the Fund are hereby incorporated herein by reference from the Annual Report of
the Fund dated October 31, 1999 as filed with the SEC. Copies of such reports
will be provided without charge to each person receiving this Statement of
Additional Information.
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APPENDIX A
DESCRIPTION OF MUNICIPAL OBLIGATIONS
Municipal Obligations include bonds, notes and commercial paper issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
taxes (without regard to whether the interest thereon is also exempt from the
personal income taxes of any state). Municipal Obligation bonds are issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, industrial facilities, sports facilities, convention or
trade show facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities, hazardous waste treatment or disposal
facilities, and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such obligations are included within the term
Municipal Obligations if the interest paid thereon qualifies as exempt from
regular federal income tax. Other types of industrial development bonds, the
proceeds of which are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, may
constitute Municipal Obligations, although the current federal tax laws place
substantial limitations on the size of such issues.
The two principal classifications of Municipal Obligation bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its good faith, credit and taxing, power for the
payment of principal and interest. The payment of the principal of and interest
on such bonds may be dependent upon an appropriation by the issuer's legislative
body. The characteristics and enforcement of general obligation bonds vary
according to the law applicable to the particular issuer. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Industrial development bonds which are Municipal
Obligations are in most cases revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending" on numerous factors.
Municipal Obligation notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
Obligation notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
operational needs of municipalities. Generally, they are issued in
anticipation of the receipt of various tax revenues, such as
property, income, sales, use and business taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of dedicated revenues, such as state aid or
federal revenues available under federal revenue sharing programs.
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3. Tax And Revenue Anticipation Notes. Tax and Revenue Anticipation
Notes are issued by the State to fund its day-to-day operations and
certain local assistance payments to its municipalities and school
districts. Such Notes are issued in anticipation of the receipt of
various taxes and revenues, such as personal income taxes, business
taxes and user taxes and fees.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to
provide interim financing until long-term bond financing can be
arranged. Long-term bonds or renewal Bond Anticipation Notes provide
the money for the repayment of the Notes.
Issues of commercial paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by agencies of state
and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, Municipal Obligation commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions of
the Municipal Obligation market, size of a particular offering, the maturity of
the obligation and rating (if any) of the issue. The ratings of Moody's
Investors Service, Inc., Standard & Poor's Corporation and Fitch Investors
Service, Inc. represent their opinions as to the quality of various Municipal
Obligations. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, Municipal Obligations with the same
maturity, coupon and rating may have different yields while Municipal
Obligations of the same maturity and coupon with different ratings may have the
same yield.
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APPENDIX B
ADDITIONAL INFORMATION CONCERNING
NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the Annual Information
Statement ("AIS") of the State of New York dated August 24, 1999 and the Update
to the AIS dated February 3, 2000.
INTRODUCTION
New York (the "State") is the third most populous state in the nation and
has a relatively high level of personal wealth. The State's economy is diverse
with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location, air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. The
State has a declining proportion of its work force engaged in manufacturing and
an increasing proportion engaged in service industries. This transition reflects
a national trend.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than that
of the nation as a whole, resulting in the gradual erosion of its relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. New York City (the "City") has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in the following areas: Westchester
County -- headquarters for several major corporations; Buffalo -- diverse
manufacturing base; Rochester -- manufacture of photographic and optical
equipment; Syracuse and Utica-Rome area -- production of machinery and
transportation equipment; Albany-Troy-Schenectady -- government and education
center and production of electrical products; Binghamton -- original site of the
International Business Machines Corporation and continued concentration of
employment in computer and other high technology manufacturing; and New York
City -- headquarters for the nation's securities business and for a major
portion of the nation's major commercial banks, diversified financial
institutions and life insurance companies. In addition, the City houses the home
offices of three major radio and television broadcasting networks, most of the
national magazines and a substantial portion of the nation's book publishers.
The City also retains leadership in the design and manufacture of men's and
women's apparel.
ECONOMIC OUTLOOK
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. The State Financial Plan is based upon
forecasts of national and State economic activity. Economic
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forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. Many uncertainties exist in
forecasts of both the national and State economies, including consumer attitudes
toward spending, the extent of corporate and governmental restructuring, Federal
financial and monetary policies, the availability of credit, the level of
interest rates, and the condition of the world economy, which would have an
adverse effect on the State. There can be no assurance that the State economy
will not experience results in the current fiscal year that are worse than
predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
The State economy has also continued to expand, with over 600,000 jobs
added since late 1992. Employment growth has been slower than in the nation
during this period, although the State's relative performance has improved in
the last two years. Growth in average wages in New York has generally
outperformed the nation, while growth in personal income per capita has kept
pace with the nation. An expected improvement in net export performance will
partially offset the slowdown in consumption growth.
The forecast projects real Gross Domestic Product (GDP) growth of 3.5
percent in 2000, below 1999 growth of 4 percent. In 2001, real GDP growth is
expected to slow to 2.9 percent. The growth of nominal GDP is projected to
decline from 5.5 percent in 1999 to 5.1 percent in 2000 and 4.5 percent in 2001.
Inflation is expected to be slightly higher than 1999. However, inflation
remains relatively stable with growth in the Consumer Price Index (CPI) of 2.4
percent for 2000 and 2.5 percent for 2001. The annual rate of job growth is
expected to decrease from 2.2 percent in 1999 to 1.7 percent in 2000 and 1.5
percent in 2001. Growth in both personal income and wages is also expected to
slow somewhat in 2000 and again in 2001. Wages are projected to increase by 6.3
percent respectively. Corporate profits are projected to grow by 4.8 percent in
2000 and 2 percent in 2001. Personal income is estimated to have grown by 4.7
percent in 1999, fueled in part by a large increase in financial sector bonus
payments at the year's end. Personal income is projected to grow 5.5 percent in
2000 and 4.8 percent in 2001. Total bonus payments are projected to increase by
1.1 percent in 2000 and 10.5 percent in 2001. Overall employment growth is
expected to continue at a more modest pace than in 1999, reflecting the slower
growth in the national economy, continued spending restraint by government
employers, and restructuring in the manufacturing, health care, social service,
and banking sectors.
The forecast for continued growth, and any resultant impact on the State's
1999-2000 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages or in stock market prices could lead to
unanticipated strong growth in consumer spending. Also, improvements in foreign
economies may be weaker than expected and therefore, may have unanticipated
effects on the domestic economy. The inflation rate may differ significantly
from expectations due to the conflicting impacts of a tight labor market and
improved productivity growth as well as to the future direction and magnitude of
fluctuations of oil prices. In addition, the State economic forecast could over-
or underestimate the level of future bonus payments, financial sector profits or
inflation growth, resulting in unexpected economic impacts. Similarly, the State
forecast could fail to correctly estimate the amount of employment change in the
banking, financial and other business service sectors as well as the direction
of employment change that is likely to accompany telecommunications and energy
deregulation.
CURRENT FISCAL YEAR
OVERVIEW
The State's current fiscal year began on April 1, 1999 and ends on March
31, 2000. On March 31, 1999, the State adopted the debt service portion of the
State budget for the 1999-2000 fiscal year; four
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months later, on August 4, 1999, it enacted the remainder of the budget. The
Governor approved the budget as passed by the Legislature. Prior to passing the
budget in its entirety for the current fiscal year, the State enacted
appropriations that permitted the State to continue its operations.
Following enactment of the budget, the State prepared a Financial Plan for
the 1999-2000 fiscal year (the 1999-2000 Financial Plan") that sets forth
projected receipts and disbursements based on the actions taken by the
Legislature. This section provides a summary of the Financial Plan which was
released on August 20, 1999. The State expects to update the Financial Plan
quarterly. The Office of the State Comptroller is conducting a review of the
1999-2000 enacted budget and is expected to report on the enacted budget on or
before September 17, 1999.
In 1999-2000, General Fund disbursements, including transfers to support
capital projects, debt service and other funds, are estimated at $37.36 billion,
an increase of $868 million or 2.38 percent over 1998-99. Projected spending
under the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments. This change is
the net result of spending actions that occurred during negotiations on the
Budget. The increase in General Fund spending is comprised of $1.1 billion in
legislative additions to the Executive Budget (primarily in education), offset
by various actions, including reestimates of required spending based on
year-to-date results and the identification of certain other resources that
offset spending, such as $250 million from commencing the process of privatizing
the Medical Malpractice Insurance Association (MMIA), $250 million from the
retention of the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. Legislation enacted with the 1999-2000
budget initiates the process of MMIA privatization and transfers excess fund
balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000 (for a
discussion of 1998-99 operating results, see the section entitled "Prior Fiscal
Years" in this AIS).
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion
in the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund
(CRF), and $200 million in the Community Projects Fund (CPF), which finances
legislative initiatives. The State expects to close 1999-2000 with cash balances
in these funds at their highest level ever.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in this AIS, and those projections may be changed
materially and adversely from time to time. See the section entitled "Special
Considerations" below for a discussion of risks and uncertainties faced by the
State.
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1999-2000 STATE FINANCIAL PLAN
Four governmental fund types comprise the State Financial Plan: the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. The State's fund structure adheres to the accounting
standards of the Governmental Accounting Standards Board. This section discusses
significant activities in the General Fund and the other governmental funds
anticipated in 1999-2000.
The State revised the cash-basis 1999-2000 State Financial Plan on January
11, 2000, with the release of the 2000-01 Executive Budget. The State updated
the Financial Plan on January 31, 2000 to reflect the Governor's amendments to
his Executive Budget. After these changes, the Division of the Budget (DOB) now
expects the State to close the 1999-2000 fiscal year with an available cash
surplus of $758 million in the General Fund, an increase of $733 million over
the surplus estimate in the Mid-Year Update. The larger projected surplus
derives from $499 million in net higher projected receipts and $259 million in
net lower estimated disbursements. DOB revised both its projected receipts and
disbursements based on a review of actual operating results through December
1999, as well as an analysis of underlying economic and programmatic trends it
believes may affect the Financial Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make additional
deposits to reserve funds. At the close of the current fiscal year, the State
expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund - the fifth consecutive annual deposit. In the
2000-01 Executive Budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ($250 million).
Through the first nine months of 1999-2000, General Fund receipts,
including transfers from other funds, have totaled $30.07 billion. General Fund
disbursements, including transfers to other funds, totaled $25.19 billion over
the same period. The updated Financial Plan projections incorporate these
results to date.
Revisions to 1999-2000 Receipts Estimates. General Fund receipts,
including transfers from other funds, have been revised upward by $566 million
from the projections contained in the M id-Year Update, with growth concentrated
primarily in the personal income tax, the sales tax and miscellaneous receipts.
The higher estimate also includes $82 million in additional receipts from an
accounting adjustment by the State Comptroller that reclassified certain
Medicaid transactions in the General Fund (this increase is offset by an equal
amount of spending; as discussed below). As a result, the net increase in
revenues since October that contributes to the surplus is $484 million, which,
when combined with $15 million in higher receipts recognized in the M id-Year
Update, produces a net benefit of $499 million in the current year.
To make these and other funds available for use in 2000-0 1, the Governor
proposes to deposit $3.09 billion in the tax refund reserve at the close of
1999-2000. This action has the effect of decreasing reported receipts in
1999-2000, while increasing available receipts in 2000-01, as a portion of
refunds will no longer be a charge against current revenues in 2000-01.
Revisions to 1999-2000 Disbursements Estimates. DOB projects total General
Fund disbursements of $37.06 billion in 1999-2000, a decline of $282 million
from the October estimate. Of this amount, $33 million is related to the timing
of spending and accounting adjustments and therefore does not contribute to the
surplus projected by DOB. The $33 million consists of lower timing-related
spending of $65 million from the Community Projects Fund and $50 million from
the Collective Bargaining Reserve,
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offset by the Medicaid reclassification of $82 million described above.
Accordingly, lower disbursements since October contribute $249 million to the
1999-2000 surplus, which, when combined with the $ 10 million in lower
disbursements recognized in the Mid-Year Update, produce a total reduction in
estimated disbursements of $259 million for the current year.
Compared to the Mid-Year Update, the State has lowered its estimate of
disbursements for State Operations by $222 million, local assistance by $16
million, debt service by $5 million, and transfers to other funds by $89
million. Higher projected spending for General State Charges ($50 million)
partially offsets these reductions.
State Operations spending is now projected to total $6.63 billion in
1999-2000, $222 million below the October estimate. In the revised Financial
Plan, $50 million of an original $100 million for new collective bargaining
costs is set aside in a reserve to cover the cost of labor agreements in
1999-2000, and the balance is transferred to General State Charges in the
current year to pay for the recently approved labor contract with State
University employees and other labor costs. The remaining revisions to the State
Operations estimate are comprised of savings from agency efficiencies and
timing-related changes that do not affect the surplus.
Projected local assistance disbursements declined by a net total of $16
million from October and are now expected to total $25.60 billion for the year.
As with State Operations, several actions contributed to the revised local
assistance forecast. Projected disbursements have been increased as a result of
the State Comptroller's reclassification of $82 million in Medicaid
disbursements into the General Fund, higher projected spending of $31 million
for certain public health programs, and net increase of $20 million resulting
from a number of other program reestimates. These increases are more than offset
by lower projected disbursements for legislative initiatives ($65 million),
welfare ($55 million), and mental hygiene programs ($29 million).
Estimated spending for General State Charges has been increased by $50
million compared to the October estimate and is projected to reach $2.09 billion
in 1999-2000. Most of this increase is for collective bargaining costs funded
from the salary reserve. The settlement of litigation arising from the 1971
Attica Prison riot ($12 million) also contributes to the higher estimate.
Transfers for debt service, capital and other purposes are now projected
at $2.74 billion, a decline of $89 million from the M id-Year estimate. Lower
costs for debt service ($42 million), reestimates in capital projects ($25
million), and the elimination of planned payments for the Lottery Aid Guarantee
($22 million) account for the downward revision.
1999-2000 Closing Balance in the General Fund. The State projects a
closing balance of $1.17 billion in the General Fund, after the tax refund
reserve transaction. The balance is comprised of $548 million in the Tax
Stabilization Reserve Fund after a $75 million deposit in 1999-2000; $265
million in the Community Projects Fund, which pays for Legislative initiatives;
$250 million in the Debt Reduction Reserve Fund (DRRF); and $107 million in the
Contingency Reserve Fund (which guards against litigation risks).
In addition to the General Fund closing balance of $1.17 billion, the
State will have a projected $3.09 billion in the tax refund reserve account at
the end of 1999-2000. The refund reserve account is used to adjust personal
income tax collections across fiscal years to pay for tax refunds, as well as to
accomplish other Financial Plan objectives. The projected balance of $3.09
billion is comprised of $1.82 billion in tax reduction reserves from the 1998-99
surplus; $683 million from the 1999-2000 surplus; $521 million from
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LGAC that may be used to pay tax refunds during 2000-01 but must be on deposit
at the close of the fiscal year, $50 million in collective bargaining reserves
from 1999-2000; and $25 million in reserves for tax credits.
2000-01 FISCAL YEAR (EXECUTIVE BUDGET FORECAST)
The Governor presented his 2000-01 Executive Budget to the Legislature on
January 10, 2000. The Executive Budget contains financial projections for the
State's 1999-2000 through 2002-03 fiscal years, a detailed explanation of
receipts estimates and the economic forecast on which it is based, and a
proposed Capital Program and Financing Plan for the 2000-01 through 2004-05
fiscal years. On January 31, 2000, the Governor submitted amendments to his
Executive Budget, the most significant of which recommends eliminating all gross
receipts taxes on energy providers.
There can be no assurance that the Legislature will enact into law the
Governor's Executive Budget, as amended, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in this Update. For a more detailed discussion of the State's budgetary
process and uncertainties involving its forecasts and projections, see "State
Organization - State Financial Procedures" in the AIS and "Special
Considerations" below.
The 2000-01 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1999-2000 to 2000-01. Under the Governor's
Executive Budget, as amended, total General Fund receipts, including transfers
from other funds, are projected at $38.62 billion, an increase of $1.28 billion
(3.4 percent) over the current fiscal year. General Fund disbursements,
including transfers to other funds, recommended to grow by 2.3 percent to $37.93
billion, an increase of $869 million over 19992000. State Funds spending (the
portion of the budget supported exclusively by State taxes, fees, and revenues)
is projected to total $52.46 billion, an increase of $2.57 billion or 5.1
percent. Spending from All Governmental Funds is expected to grow by 5.5
percent, increasing by $4.0 billion to $76.82 billion.
GENERAL FUND
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1999-2000 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 47.1 percent of All Governmental Funds
disbursements and 69.3 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types
Total receipts and transfers from other funds are projected to be $39.31
billion in 1999-2000, an increase of $2.57 billion over 1998-99. Total General
Fund disbursements and transfers to other funds are projected to be $37.36
billion, an increase of $868 million over 1998-99.
Projected General Fund Receipts. Total General Fund receipts and transfers
in 1999-2000 are now projected to be $39.31 billion, an increase of $2.57
billion from the $36.74 billion recorded in 1998-99. This total includes $35.93
billion in tax receipts, $1.36 billion in miscellaneous receipts, and $2.02
billion in transfers from other funds. The transfer of the $1.82 billion surplus
recorded in 1998-99 to the 1999-2000 fiscal period has the effect of
exaggerating the growth in State receipts from year to year by depressing
reported 1998-99 figures and inflating 1999-2000 projections.
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The 2000-01 Financial Plan projects General Fund receipts, including
transfers from other funds, of $ 38.62 billion, an increase of $1.28 billion
over 1999-2000. After adjusting for tax law and administrative changes,
recurring growth in the General Fund tax base is projected to be approximately 5
percent during 2000-01.
The forecast of General Fund receipts in 2000-01 includes the next stage
of the School Tax Relief (STAR) program, as well as the continuing impact of
earlier enacted tax reductions totaling approximately $2.3 billion. The
Executive Budget, as amended, also proposes several new tax reductions that
would have only a modest cost in 1999-2000 and 2000-0 1, but reduce receipts by
roughly $700 million annually when they are fully phased in by the end of
2004-05. The largest component of the Governor's tax reduction package is the
proposal to eliminate all gross receipts taxes on energy companies, which will
reduce receipts an estimated $500 million when fully effective.
The new tax cut proposals in the Executive Budget are structured to avoid
any new pressures on revenue growth by becoming fully effective after current
tax cuts are fully phased in. The 2000-01 Financial Plan further mitigates the
imp act on receipts by reserving $433 million from the 1999-2000 surplus to fund
the estimated cost of new tax cuts, including the reduction of gross receipts
taxes on energy companies, in 2001-02 and 2002-03.
The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based, with certain modifications, on federal definitions of
income and deductions. Net General Fund personal income tax collections are
projected to reach $22.95 billion in 1999-2000, well over half of all General
Fund receipts and nearly $2.87 billion above the reported 1998-99 collection
total. Personal income tax collections are projected to reach $23.19 billion in
2000-01, an increase of $2.48 billion (12 percent) over 1999-2000. This increase
is due in pan to the refund reserve transaction that is expected to occur at the
close of 1999-2000. Collections also benefit from an estimated increase in
liability of 8.7 percent in 1999 and 8.1 percent in 2000. The large growth in
income tax liability in recent years has been supported by the continued surge
in taxable income attributable to the rapid growth in equity markets and the
significant growth in wages associated with financial sector bonuses. Stock
market growth, and the resulting large income gains, are expected to moderate in
2000.
Much of this growth is associated with the $1.82 billion net impact of the
transfer of the surplus from 1998-99 to the current year as partially offset by
the diversion of an additional $661 million in income tax receipts to the School
Tax Relief (STAR) fund. The STAR program was created in 1997 as a State-funded
local property tax relief program funded through the use of personal income tax
receipts. The 2000-01 deposit is recommended to total $202 billion, including an
additional $1.2 billion from the personal income tax for the 2001-02 cost of the
STAR program. In addition, $250 million of 2000-01 personal income tax receipts
is recommended to be deposited directly in the Debt Reduction Reserve Fund.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.8 billion, an increase of almost 9 percent.
This growth is largely a function of two factors: (i) the 8 percent growth
in income tax liability projected for 1999; and (ii) the impact of the 1998 tax
year settlement recorded early in this fiscal year.
The most significant statutory change made this year provides for an
increase, phased-in over two years, in the earned income tax credit from 20
percent to 25 percent of the federal credit.
User taxes and fees are comprised of three-quarters of the State's four
percent sales and use tax, cigarette, alcoholic beverage, container, and auto
rental taxes, and a portion of the motor fuel excise levies.
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This category also includes receipts from the motor vehicle registration fees
and alcoholic beverage license fees. Dedicated transportation funds outside of
the General Fund receive a portion of motor fuel tax and motor vehicle
registration fees and all of the highway use taxes.
The sales tax component of this category accounts for virtually all of the
1999-2000 growth. Growth in base sales tax yield, after adjusting for tax law
and other changes, is projected at 5.6 percent. Modest increases in motor fuel
and auto rental tax receipts over 1998-99 levels are also expected. However,
receipts from other user taxes and fees are estimated to decline by $177
million.
User taxes and fees are projected at $7.07 billion in 2000-01, a decrease
of $366 million from 1999-2000. The decline in this category reflects the
incremental impact of approximately $510 million in already -enacted tax
reductions, and the proposed additional earmarking of motor fuel tax receipts to
the Dedicated Highway and Bridge Trust Fund and the Dedicated Mass
Transportation Trust Fund. The most significant statutory change in the sales
tax for 2000-01 is the elimination of the sales tax on clothing and footwear
costing less than $110, beginning on M arch 1, 2000, which will reduce receipts,
including LGAC transfers, by $597 million. Adjusted for these changes, the
underlying growth of receipts in this category is projected at 4 percent.
User taxes and fees also include cigarette, tobacco and alcoholic beverage
taxes and fees, motor fuel taxes, and the container and auto rental levies. The
most significant change in these sources is the impact on General Fund receipts
resulting from the excise tax increase on cigarettes enacted with the Health
Care Reform Act of 2000 (HCRA 2000), and the increased earmarking to the
dedicated transportation funds mentioned above.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast; reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes made in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Beginning in 1994, a 15 percent surcharge on these levies began to be
phased out and, for most taxpayers, there is no surcharge liability for taxable
periods ending in 1997 and thereafter.
Total business tax collections in 1999-2000 are now projected to be $4.63
billion, $230 million below results for the prior fiscal year. The
year-over-year decline in projected receipts in this category is largely
attributable to statutory changes. These include the first year of a scheduled
corporation franchise tax rate reduction, the alternative minimum tax rate
reduction, the fixed dollar minimum rate reduction, and the expansion of the
investment tax credit to financial service companies. Ongoing tax reductions
include the second year of the "Power for Jobs" utility tax credit program, the
gross receipts tax rate reduction, and
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scheduled additional diversion of General Fund petroleum business and utility
tax receipts to dedicated transportation funds.
Legislation enacted this year affecting receipts in this category
includes: a phased reduction in the net income tax rate applicable to bank and
insurance companies from 9 percent to 7.5 percent; reforms to the corporation
franchise subsidiary capital tax; a further reduction in the alternative minimum
tax rate from 3 percent to 2.5 percent; doubling the economic development zone
and zone equivalent area wage tax credits; and providing further reforms to the
apportionment of income for the airline industry.
Other taxes include the estate and gift tax, the real property gains tax
and pari-mutuel taxes. Taxes in this category are now projected to total $1
billion, $137 million below last year's amount. The primary factors accounting
for most of the expected decline include: an adverse tax tribunal decision
resulting in significant refunds of the now repealed real property gains tax;
pari-mutuel tax reductions enacted with the 1999-2000 budget; and the effects of
the already enacted reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget affecting
these sources include both the extension of and an increase in certain temporary
tax reductions at the State's race tracks and conformity with new federal estate
tax provisions.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Miscellaneous
receipts are expected to total $1.36 billion, down $142 million from the prior
year amount. This reflects the loss of non-recurring receipts received in
1998-99 and the growing effects of the phase-out of the medical provider
assessments, now scheduled to be eliminated in January 2000.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, including the one percent sales
tax used to support payments to Local Government Assistance Corporation (LGAC).
Transfers from other funds are expected to total $2.02 billion, or $99
million more than total receipts from this category during 1998-99. Total
transfers of sales taxes in excess of LGAC debt service requirements are
expected to increase by approximately $93 million, while transfers from all
other funds are expected to increase by $6 million.
Projected General Fund Disbursements. DOB projects General Fund
disbursements of $37.93 billion in 2000-01, an increase of $869 million (2.3
percent) over the current year. The growth in spending is spread throughout the
Financial Plan, with the largest increase for State Operations ($449 million),
followed by Grants to Local Governments ($203 million), General State Charges
($149 million), and Transfers to Other Funds ($69 million).
The Executive Budget, as amended, includes approximately $300 million in
resources from HCRA 2000, the successor legislation to the Health Care Reform
Act of 1996. HCRA 2000 continues the negotiated reimbursement system for
non-governmental payors, and provides funding for among other things, graduate
medical education, indigent care, and the expansion of health insurance coverage
for uninsured adults and children. HCRA 2000 will help finance several
health-related programs, including prescription drug assistance for the elderly,
supplemental Medicare insurance, and other public health services that were
previously funded from the General Fund. Programs under HCRA 2000 will be
financed with revenues generated from the financing mechanisms continued from
HCRA 1996, a share of the State's tobacco settlement and revenues from an
increased excise tax on cigarettes.
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Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58 percent over
1998-99 levels (on a State fiscal year basis). Outside of education, the largest
growth in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Grants to Local Governments include financial aid to local governments and
non-profit organization, as well as entitlement payments for individuals. The
largest areas of spending in local assistance are for aid to public schools (42
percent) and for the State's share of Medicaid payments to medical providers (22
percent). Spending for higher education programs (6 percent), mental hygiene
programs (6 percent), welfare assistance (5 percent), and children and families
services (3 percent) represent the next largest areas of local aid.
Spending in local assistance is estimated at $25.81 billion in 2000-0 1,
an increase of $203 million (0.8 percent) from the current year. The change in
spending is comprised primarily of increases for school aid, health and mental
health programs, offset in part by the financing of certain health programs with
dedicated funds supported by resources from HCRA 2000. Reestimates of current
spending needs, new cost containment, and spending from the Community Projects
Fund originally planned for 1999-2000 account for most of the remaining change.
General Fund spending for school aid is projected at $10.86 billion in
2000-01 (on a State fiscal year basis) an increase of $250 million (2.4
percent). On a school-year basis, school aid will grow by $355 million and fund
operating, building, transportation, and other school aid programs, as well as
the balance of aid payable for the 1999-2000 school year. The Executive Budget,
as amended, also recommends new funding for teacher certification and high-need
districts, as well as programmatic restructuring in BOCES aid, teacher support
aid and special education.
Medicaid spending is estimated at $5.68 billion in 2000-01, an increase of
$65 million (1.2 percent) from 1999-2000. Spending growth in Medicaid is
projected at 5.5 percent, but is offset by the HCRA 2000 actions noted above,
including continuation of cost containment actions from prior fiscal years, and
efforts to maximize Federal aid that moderate spending growth. The projections
also include the use of $92 million from the tobacco settlement to help offset
the increase in Medicaid costs.
Spending on welfare is projected at $1.25 billion, a decrease of $11
million from 1999-2000. Since 1994-95, State spending on welfare has fallen by
one-third, driven by the State's strong economic performance over the past four
years, welfare changes initiated at the State and federal levels, and aggressive
fraud prevention measures. Although the number of people on welfare is expected
to decline from 1999-2000, General Fund support in 2000-01 is expected to remain
nearly unchanged primarily to satisfy federal maintenance-of-effort
requirements.
Local assistance spending for Children and Families Services is projected
at $789 million in 2000-01, down $66 million (7.7 percent) from 1999-2000. The
decline in General Fund spending masks higher programmatic spending on child
care and child welfare services that is occurring with increased Federal funds,
allowing the State to expand services in this area.
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Medicaid hygiene programs are expected to grow by $66 million to almost
$1.50 billion in 2000-01, with additional funding for the Community Reinvestment
Program, Kendra's Law, and the new community services programs initiated in
1999-2000. General Fund growth in mental hygiene is moderated by increases in
Federal aid ($65 million) and the availability of HCRA 2000 funds.
Spending for all other local assistance programs is projected to total
$5.73 billion in 2000-01. Increased funding for programs for children with
special educational needs ($16 million), county administration of welfare and
Medicaid programs ($23 million), support for the City University of New York
($50 million), and a timing adjustment for disbursements from the Community
Projects Fund ($140 million) is partially offset with decreases resulting from
utilization of HCRA 2000 revenues to fund various health programs. The
projections include spending of $24 million for the Consolidated Highway
Improvement Program (down $35 million from last year), $82 million for the
Empire State Development Corporation (down $22 million), and the creation of a
Criminal Justice Block Grant that consolidates several programs for the purpose
of increasing flexibility for local governments.
State Operations account for the cost of running the Executive,
Legislative, and Judicial branches of government. Spending in this category is
projected to increase by $449 million, or 6.8 percent above 1999-2000. Personal
service costs are projected at $5.12 billion, an increase of $308 million-,
non-personal service costs are projected at $1.96 billion, an increase of $141
million.
Higher spending for State Operations is attributable in part to a
reduction in one-time receipts from the State University that offset General
Fund spending in 1999-2000 ($61 million), and a decrease in federal grant awards
for the Department of Justice ($80 million), a portion of which is
timing-related.
Other sources of growth in State Operations include the costs of the labor
contract between the United University Professionals (UUP) and the State
University ($50 million), the development of computerized systems in the
Department of Health and the Department of Family Assistance ($45 million),
increases in the Judiciary budget ($38 million), and higher costs in the
Department of Justice in 2000-01, including the full cost of staffing two State
prisons - one recently opened and one scheduled to open in 2000 ($32 million).
The State's overall workforce is projected at approximately 196,100 persons by
the end of 2000-01, up about 1,700 from the end of 1999-2000.
General State Charges (GSCs) account for the costs of providing fringe
benefits to State employees and retirees of the Executive, Legislative and
Judicial branches. These payments, many of which are mandated by statute or
collective bargaining agreements, include employer contributions for pensions,
social security, health insurance, workers' compensation and unemployment
insurance. GSCs also cover State payments-in-lieu-of-taxes to local governments
for certain State-owned lands, and the costs of defending lawsuits against the
State and its public officers. Total spending in General State Charges is
projected to grow by $149 million (7.1 percent) over 1999-2000. The State
expects higher health insurance rates in calendar year 2000 ($115 million),
primarily to cover the increasing cost of providing prescription drug benefits
for State employees.
Transfers in support of debt service are projected to grow approximately 2
percent to $2.28 billion in 2000-01. Debt reduction initiatives include
additional deposits to DRRF, a constitutional and statutory debt reform
proposal, and other debt management strategies that expand the use of short-term
instruments to reduce financing costs and broaden the market base for
State-supported debt.
Transfers in support of capital projects in 2000-01 are projected at $238
million, a $95 million increase over the 1999-2000 estimate of $143 million. The
increase is primarily due to an adjustment
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related to DRRF that artificially lowers transfers by $50 million in 1999-2000.
Also, reimbursements for SUNY advance capital spending return to a more
traditional level in 2000-01 after $44 million of delayed reimbursements for
1998-99 spending was received in 1999-2000.
All other transfers. decline in 2000-01 primarily as a result of the
State's subsidy for the Roswell Park Cancer Institute ($90 million) being
financed under HCRA 2000.
NON-RECURRING RESOURCES
DOB estimates that the 2000-01 Financial Plan utilizes $32 million in new
non-recurring resources to finance operations. The largest one-time resource
consists of receipts from a one-time assessment amnesty program for medical
providers ($20 million). The remaining amounts represent various fund sweeps and
transfers to the General Fund that occur each year.
2000-01 CLOSING BALANCE IN THE GENERAL FUND
The State projects a closing balance of $1.61 billion in the General Fund
at the end of 2000-01. This balance is comprised of a $433 million reserve set
aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in 2001-02 and 2002-03, $475 million
in cumulative reserves for collective bargaining ($425 million from 2000-01 plus
$50 million from 1999-2000), $548 million in the Tax Stabilization Reserve Fund,
and $150 million in the Contingency Reserve Fund after a proposed $43 million
deposit in 2000-01. The change in the closing fund balance compared to 1999-2000
results from the planned use in 2000-01 of $265 million for existing legislative
initiatives financed from the Community Projects Fund and the reclassification
of DRRF into the Capital Projects Fund, offset by increased reserves for
collective bargaining tax reduction, and litigation discussed above.
In addition to the General Fund closing balance of $1.61 billion, the
State will have a projected $567 million in the tax refund reserve at the end of
2000-01. Also, $1.2 billion is proposed to be on deposit in the Star Special
Revenue Fund to be used in 2001-02 for State-funded local tax reductions and
$250 million is proposed to be on deposit in the DRRF. The balance in the DRRF
is projected to be used in 2001-02 to retire existing high-cost State-supported
debt and increase pay-as-you-go financing of capital projects.
On November 23, 1998, the attorney s general for forty-six states
(including New York) entered into a master settlement agreement (MSA) with the
nation's largest tobacco manufacturers. Under the terms of the MSA, the states
agreed to release the manufacturers from all smoking-related claims in exchange
for specified payments and the imposition of restrictions on tobacco advertising
and marketing. New York is projected to receive $25 billion over 25 years under
the MSA, with payments apportioned among the State (51 percent), counties (22
percent), and New York City (27 percent), The projected payments are an estimate
and subject to adjustments for, among other things, the annual change in the
volume of cigarette shipments and the rate of inflation.
From 1999-2000 through 2002-03, the State expects to receive $1.54 billion
under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, will receive settlement payments of $1.47 billion over
the same period.
The State plans to use $1.29 billion in tobacco money over the next three
years to finance health programs under HCRA 2000 ($1.01 billion) and projected
new costs in Medicaid ($274 million). The
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remaining $250 million in one-time tobacco payments from 1999-2000 is proposed
to be deposited to the Debt Reduction Reserve Fund (DRRF) and used to lower
State debt.
SPECIAL REVENUE FUNDS
For 2000-01, the Financial Plan projects disbursements of $33.55 billion
from Special Revenue Funds ("SRFs") derived from both State and federal sources,
an increase of $2.82 billion or 9.2 percent over 1999-2000. Disbursements from
State SRFs are projected at $10.54 billion, an increase of $1.42 billion or 15.6
percent from 1999-2000. The STAR program, disbursements for which increase by
$815 million from 1999-2000, accounts for most of the year-to-year growth in
State SRF spending Disbursements from federal SRFs, which account for
approximately three-quarters of all special revenue spending, are estimated at
$23-01 billion in 2000-01, an increase of $1.39 billion or 6.4 percent from
1999-00. The year-to-year growth in federal SRF spending is primarily due to
increases in federal contributions for Medicaid ($791 million), Children and
Families ($269 million), Education ($123 million) and the expanded Child Health
Plus program ($103 million).
CAPITAL PROJECTS FUNDS
Disbursements from Capital Projects funds in 2000-01 are estimated at
$4.33 billion, or $156 million higher than 1999-2000. The proposed spending plan
includes: $2.59 billion in disbursements for transportation purposes, including
State and local highway and bridge programs; $722 million for environmental
activities; $261 million for public protection; $401 million for education,
including SUNY and CUNY; and $134 million for mental hygiene projects.
Approximately 54 percent of capital projects spending in 2000-01 is
proposed to be financed with State (23 percent) and federal (31 percent)
"pay-as-you-go" resources. State-supported bond issuances are projected to,
finance 46 percent of capital projects spending, with 8 percent of the total
financed with General Obligation bonds and the balance (46 percent) from lease
purchase contractual obligations.
DEBT SERVICE FUNDS
Disbursements from Debt Service Funds are estimated at $3.81 billion in
2000-01, an increase of $234 million from 1999-2000. The increase in debt
service is primarily attributable to bonds issued in prior fiscal years in
support of the following projects: $131 million for State and local highway and
bridge programs financed by the Dedicated Highway and Bridge Trust Fund; $39
million for SUNY and CUNY higher education purposes, and $22 million for the
mental hygiene programs financed through the Mental Health Services Fund.
OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS
DOB projects cash-basis General Fund budget gaps of $1.23 billion in
2000-01 and $2.65 billion in 2002-03. These gaps assume that the Legislature
will enact the 2000-01 Executive Budget, as amended, and accompanying
legislation in its entirety, and that reserves proposed by the Governor for
current and proposed tax reductions are used to offset these costs in the
outyears.
The Financial Plan estimates include the use of the $1.2 billion STAR tax
reduction reserve to offset the cost of that program in 2001-02. The Financial
Plan also assumes that a new $433 million tax production serve will be created
to pay for the estimated costs of the Governor's proposed 20000 1 tax reduction
program, with $123 million applied in 2001-02 and the remaining $310 million in
2002-03.
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These projections also assume that the Debt Reduction Reserve Fund will be
used to decrease high-cost State-supported debt and increase pay-as-you-go
spending for capital projects, which will produce recurring debt service savings
of $70 million annually. Finally, the gap projections contain reserves for a
possible collective bargaining agreement, and do not assume any annual spending
efficiencies to reduce the size of the gaps. If the projected budget gap for
2001-02 is closed with recurring actions, the 2002-03 budget gap would be
reduced to $1.42 billion. In recent years, the State has closed projected budget
gaps which DOB estimates at $5.0 billion (1995-96), $3.9 billion (1996-97), $2.3
billion (1997-98), and less than $1 billion (1998-99).
RECEIPTS
General Fund receipts increase to an estimated $39.42 billion in 2001-02
reflecting a projection of continued economic growth, the incremental impact of
already enacted tax reductions, the impact of prior refund reserve transactions
and the continued earmarking of receipts for dedicated highway purposes.
Receipts are projected to grow modestly to $39.83 billion in 2002-03, again
reflecting the impact of enacted tax cuts on normal receipts growth, as well as
the incremental impact of new tax reductions recommended with the Executive
Budget, as amended.
Overall, both the national and New York economies are expected to continue
to expand, at modestly lower rates through 2003. There is no forecast of
recession during the outyear projection period.
Personal income tax receipts are projected to increase to $24.06 billion
in 2001-02. The increase from 2000-01 reflects the positive impact of refund
reserve transactions on 2000-01 receipts, use of the $1.2 billion in STAR
reserves deposited in 2000-01, and a modest reduction in the growth in
underlying liability. In addition, receipts are reduced by the incremental value
of the STAR tax reduction plan and the required deposit of personal income tax
receipts into the School Tax Relief Fund. Personal income tax receipts for
2002-03 are projected to increase to $24.35 billion. The modest increase results
from continued normal growth in liability offset by increasing deposits to the
School Tax Relief Fund.
In general, income tax growth for 2001-02 and 2002-03 is governed by
projections of growth in taxable personal income and its major components,
including wages, interest and dividend earnings, realized capital gains, and
business income.
Wages are estimated to continue to grow at a relatively rapid rate by
historical standards over the 2001-02 and 2002-03 period reflecting continued
above-average employment growth over the projection period. Wage growth does
moderate from the atypical large wage gains of 1998 and 1999 as bonus growth (an
imp ort ant component of wages) is expected to slow to the 7 to 10 percent range
over the 2001 to 2003 period.
Growth in realized capital gains is projected to gradually slow from the
rapid increases experienced over the past several years. This rapid growth has
been fueled by the significant "run-up" in the value of equities since 1995.
Additionally, changes in the federal tax treatment of capital gains income in
1997 have made the realization of gains more attractive in recent years. The
2001-02 and 2002-03 projections assume a slow-down in the sharp run up in equity
markets and a gradual reduction in gains realized in response to the 1997
federal law change as the original unlocking effect of lower tax rates on
long-held assets subsides.
The 2001-02 and 2002-03 projections assume increases in the other major
components of income consistent with continued growth in the overall economy. In
particular, interest dividend and business
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income are expected to grow at rates very close to the average growth in these
components over the 1995 to 1999 period.
It should be noted that growth in income tax receipts in recent years has
been heavily influenced by special factors including the rapid growth in the
stock market noted above. The outyear projections assume a moderation in the
special factors that have produced the rapid receipts growth of recent years.
However, there is no forecast of a reduction in any of the major income
components influencing outyear income tax results.
Receipts from user taxes and fees are estimated to total $7.28 billion in
2001-02, an increase of $202 million from 2000-01. This increase is due almost
exclusively to growth in the sales tax and motor vehicle fees as partly offset
by increased earmarking of motor fuel taxes and motor vehicle fees to the
dedicated transportation funds.
User taxes and fees are expected to grow to $7.42 billion in 2002-03.
Continuing economic growth is projected over the next several years in the
factors which influence sales tax collections. These factors include estimates
of continued above-average growth in employment and modest increases in personal
income. These assumptions result in underlying growth in the sales tax base in
the 5 percent range. The overall growth in this category results from the growth
in the sales tax offset by the continued increase in the earmarking of motor
fuel taxes and motor vehicle fees to the dedicated transportation funds.
Business tax receipts are estimated to decline to $3.95 billion in 2001-02
as the impact of recently-enacted tax reductions becomes more pronounced.
Receipts are projected to fall to $3.76 billion in 2002-03, reflecting the
ongoing effect of already-enacted and proposed business tax reductions becoming
effective.
Other taxes are projected to increase to $800 million in 2001-02 as the
impact of estate tax reform and the elimination of the gift tax are fully
recognized in 2000-01 receipts. In 2002-03, other tax receipts increase by $51
million to an estimated $851 million.
Miscellaneous receipts are estimated to total $1.26 billion in 2001-02, a
decline of $77 million from the prior year. Receipts in this category are
projected at $1.23 billion in 2002-03.
Transfers from other funds are estimated to grow to $2.07 billion in
2001-02 and to $2.22 billion in 2002-03, as revenues associated with transfers
that support LGAC and other debt programs continue to grow in concert with the
overall economy.
Disbursements. The State currently projects spending to grow by $2.34
billion (6.2 percent) in 2001-02 and $1.80 billion (4.5 percent) in 2002-03.
General Fund spending increases at a higher rate in 2001-02 than in 2002-03
primarily because of the loss or assumed decline in certain funding sources
(including federal funds) that offset General Fund spending, as described below.
Local assistance spending accounts for most of the projected growth in
General Fund spending in the outyears, increasing by $1.48 billion (5.7 percent)
in 2001-02 and $1.44 billion (5.3 percent) in 2002-03.
School aid, the largest category of General Fund spending, is projected to
grow by $945 million in 2001-02 and $802 million in 2002-03. The estimated
growth in school aid on a school year basis ($867 million 2001-02 and $789
million in 2002-03) reflects the reforms proposed in the 2000-01 Executive
Budget. These increases are primarily attributable to continuing building aid
growth (over $300 million in
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both 2001-02 and 2002-03); textbook and computer aids ($120 million growth in
2001-02); transportation and special education ($165 million growth annually);
and operating aid growth ($170 million in 2001-02; $200 million in 2002-03).
Spending for pre-school handicapped programs is expected to grow at roughly 7
percent annually in each of the two projection years.
Medicaid, the next largest General Fund program, is expected to grow by
$557 million in 200102 and another $426 million in 2002-03. Spending growth in
Medicaid is projected at 7.5 percent annually, consistent with the estimates of
the Congressional Budget Office. Medicaid growth is slowed by savings from HCRA
2000 that limit provider inflationary increases to the Consumer Price Index ($11
million in 2000-01 growing to $38 million and then to nearly $ 100 million), and
the use of $91 million annually from tobacco settlement funds to partially
finance new Medicaid costs.
The continued strength in the State economy and the success of welfare
reforms are expected to help keep State spending for welfare programs
essentially flat throughout the projection period. State support for Children
and Family Services programs is expected to increase significantly in 2001-02 as
additional investments in child care, coupled with the projected loss of federal
funds currently used to offset General Fund spending, combine to increase
spending by $83 million (10.6 percent) in that year. Mental hygiene programs
also grow faster than inflation as a result of the expansion of programs for the
mentally ill. Most other programs in local assistance are expected to grow at or
below inflation. Revenue sharing programs are assumed to be held flat over the
projection period.
State Operations spending is expected to increase by 5.0 percent, or $351
million, in 2001-02 and another 2.5 percent, or $188 million, in 2002-03. These
estimates do not include spending for new collective bargaining agreements
(other than for the State University system, as discussed below). These costs
are carried as a separate reserve in the Financial Plan during these years.
Most of the growth in State Operations reflects the loss of Federal money
used to offset General Fund spending in mental hygiene agencies ($126 million in
2001-02; $31 million in 2002-03), inflationary increases for non-personal
service costs of roughly $70 million annually, and funding for the new SUNY
collective bargaining agreements concluded with United University Professionals
(UUP). Also contributing to growth over the outyears is continued investment in
technology for health and social services agencies ($18 million), normal salary
increases ($50 million annually), and cost increases in the Department of
Justice, including continued prison expansion ($23 million annually).
General State Charges are projected to increase by $397 million `in
2001-02 and $142 million in 2002-03. The significant growth in 2001-02 is
primarily due to the loss of $250 million in offset funding that provided
General Fund savings in 1999-2000 and 2000-01. Health insurance costs that grow
at roughly 8 percent ($105 million annually) and modest increases in other
benefits and fixed costs account for the balance of the annual increase.
Transfers to other funds increase by a combined $142 million across the
projection period. Debt service transfers are nearly flat due to the assumed use
of $750 million in debt reduction reserves deposited to DRRF. Capital projects
transfers also remain relatively flat with the exception of the proposed annual
transfer of $69 million beginning in 2001-02 to the Remedial Program Transfer
Fund to finance the clean-up of hazardous waste sites. Other transfers show
growth in the outyears primarily due to the assumed decline in HCRA 2000 offset
funding for the State's subsidy to the Roswell Park Cancer Institute.
YEAR 2000 COMPLIANCE
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To date, the State has experienced no significant Year 2000 computer
disruptions. Monitoring will continue over the next few months to identify and
correct any problems that may arise. However, there can be no assurance that
outside parties who provide goods and services to the State will not experience
computer problems related to Year 2000 programming in the future, or that such
disruptions, if they occur, will not have an adverse impact on State operations
or finances.
PRIOR FISCAL YEARS
GENERAL FUND 1996-97 THROUGH 1998-99
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives most State
taxes and other resources not dedicated to particular purposes. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
New York State's financial operations have improved during recent fiscal
years. During its last seven fiscal years, the State has recorded balanced
budgets on a cash basis, with positive year-end fund balances.
1998-99 Fiscal Year. The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus as reported by
the DOB of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000 of which $521 million was made available as a result of the
Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.74 billion, an
increase of 6.34 percent from 1997-98 levels. General Fund disbursements and
transfers to other funds totaled $36.49 billion for the 1998-99 fiscal year, an
increase of 6.23 percent from 1997-98 levels,
1997-98 Fiscal Year. The State ended its 1997-98 fiscal year in balance on
a cash basis, with a General Fund cash surplus as reported by DOB of
approximately $2.04 billion. The cash surplus was derived primarily from
higher-than-anticipated receipts and lower spending on welfare, Medicaid, and
other entitlement programs.
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The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an additional deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a $27 million
deposit from the surplus. The CPF closed the fiscal year with a balance of $170
million. The General Fund closing balance did not include $2.39 billion in the
tax refund reserve account, of which $521 million was made available as a result
of the LGAC financing program and was required to be on deposit on March 31,
1998.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.55 billion, an
annual increase of 4.57 percent over 1996-97. General Fund disbursements and
transfers to other funds were $34.35 billion, an annual increase of 4.41
percent.
1996-97 Fiscal Year. The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported by
DOB of approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million (repaying a transfer made in
1991-92) and an additional deposit of $65 million in 1996-97. In addition, $41
million remained on deposit in the CRF. The remaining $75 million reflected
amounts then on deposit in the CPF. The General Fund closing balance did not
include $1.86 billion in the tax refund reserve account; of which $521 million
was made available as a result of the LGAC financing program and was required to
be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1996-97 fiscal year totaled $33.04 billion, an
increase of 0.7 percent from the previous fiscal year. General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
LOCALITIES AND AUTHORITIES
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal health
of New York City, which continues to receive significant financial assistance
from the State. State aid contributes to the City's ability to balance its
budget and meet its cash requirements. The State may also be affected by the
ability of the City and certain entities issuing debt for the benefit of the
City to market their securities successfully in the public credit markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan annually and updates it periodically,
and prepares a comprehensive annual financial report each October describing its
most recent fiscal year. For current information on the City's Financial Plan
and its most recent financial disclosure, contact the Office of the Comptroller,
Municipal Building, Room 517, One Centre Street, New York, NY 10007, Attention:
Deputy Comptroller for Public Finance.
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To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the capital
program, two entities were created to issue debt to increase the City's capital
financing capacity: (i) the State Legislature created the Transitional Finance
Authority ("TFA") in 1997, and (ii) the City created the Tobacco Settlement
Asset Securitization Corporation in 1999. Despite these actions, the City, in
order to continue its capital program, will need additional financing capacity
in fiscal year 2002, which could be provided through increasing the borrowing
authority of the TFA or amending the State constitutional debt limit.
Fiscal Oversight. In response to the City's fiscal crisis in 1975, the
State took action to assist the City in returning to fiscal stability. Among
those actions, the State established the Municipal Assistance Corporation for
the City of New York (NYC MAC) to provide financing assistance to the City; the
New York State Financial Control Board (the Control Board) to oversee the City's
financial affairs; and the Office of the State Deputy Comptroller for the City
of New York (OSDC) to assist the Control Board in exercising its powers and
responsibilities. A "control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily-prescribed fiscal controls. The Control
Board terminated the control period in 1986 when certain statutory conditions
were met. State law requires the Control Board to reimpose a control period upon
the occurrence, or "substantial likelihood and imminence" of the occurrence, of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the City's Financial Plan. The City's
Financial Plan summarizes its capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps. The
City's projections set forth in its Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In City fiscal year 1997-98, the State constitutional debt limit would have
prevented the City from entering into new capital contracts. Therefore, in 1997,
the State created the New York City Transitional Finance Authority (TFA) in
order to finance a portion of the City's capital program. Despite this
additional financing mechanism, the City currently projects that, if no further
action is taken, it will reach its debt limit in City's current fiscal year
1999-2000. To continue its capital plan without interruption, the City is
proposing an amendment to the State Constitution to change the methodology used
to calculate the debt limit. Since an amendment to the Constitution to raise the
debt limit could not take effect until City fiscal year 2001-02 at the earliest,
the City has decided to securitize a portion of its share of the proceeds from
the settlement with the nation's tobacco companies. However, a number of
potential developments may affect both the availability and level of funding
that the City will receive from the tobacco settlement. City officials have
indicated that, should their efforts to securitize a portion of City tobacco
settlement proceeds fail or not be accomplished in a timely manner, the City
will request that the State increase the borrowing authority of the TFA.
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OTHER LOCALITIES
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional oversight or financial assistance is not
included in the projections of the State's receipts and disbursements for the
State's 1999-2000 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have been
determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to agree
on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings, In 1997, the total indebtedness
of all localities in the State, other than New York City, was approximately
$21.0 billion. A small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
(other than New York City) authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
METROPOLITAN TRANSPORTATION AUTHORITY
The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the TA). The MTA operates
certain commuter rail and bus services in the New York metropolitan area through
the MTA's subsidiaries, the Long Island Rail Road Company, the Metro-North
Commuter Railroad Company, and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (TBTA), the MTA
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operates certain intrastate toll bridges and tunnels. Because fare revenues are
not sufficient to finance the mass transit portion of these operations, the MTA
has depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes-including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax-that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987, State law also has required that the proceeds of a one-quarter of I
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. The 1999-2000 enacted budget provides State assistance to the MTA
totaling approximately $1.4 billion, an increase of $55 million over the 1998-99
fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the 1995-99 Capital Program). In July 1997, the Capital Program
Review Board (CPRB) approved the 1995-99 Capital Program and subsequently
amended it in August 1997 and in March 1999. The MTA plan now totals $12.55
billion. The 1995-99 Capital Program is the fourth capital plan since the
Legislature authorized procedures for the adoption, approval and amendment of
MTA capital programs and is designed to upgrade the performance of the MTA's
transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The currently approved 1995-99 Capital Program assumes the
issuance of an estimated $5.2 billion in bonds under this $6.5 billion aggregate
bonding authority. The remainder of the plan is projected to be financed with
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.
The MTA is expected to submit a proposed capital plan for 2000 through
2004 by October 1, 1999 for consideration by the CPRB. There can be no assurance
that the proposed capital plan will be approved by the CPRB without significant
modifications, that the plan as adopted will be adequate to finance the MTA's
capital needs over the plan period, or that funding sources identified in the
approved plan will not be reduced or eliminated.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 and 2000-04 Capital
Programs or parts thereof, will not be delayed or reduced. Should funding levels
fall below current projections, the MTA would have to revise its 1995-99 and
2000-04 Capital Programs accordingly. If the 1995-99 and 2000-04 Capital
Programs are delayed or reduced, ridership and fare revenues may decline, which
could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
The MTA has proposed a $17.5 billion capital program for 2000 through
2004. There can be no assurance that the proposed capital plan will be approved
by the Capital Program Review Board without significant modifications, that the
plan as adopted will be adequate to finance the MTA's capital needs over the
plan period, or that funding sources identified in the approved plan will not be
reduced or eliminated.
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LITIGATION
The State is involved in various legal proceedings which involve State
finances and programs and miscellaneous civil rights, real property, contract
and other tort claims in which the State is a defendant and the potential
monetary claims against the State are substantial, generally in excess of $100
million. These proceedings could adversely affect the financial condition of the
State `in the 1999-2000 fiscal year or thereafter. The State will describe newly
initiated proceedings which the State believes to be material, as well as any
material and adverse developments in these proceedings, in updates or
supplements to the AIS.
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APPENDIX C
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a 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
debt 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 for debt
in higher rated categories.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also
used for debt subordinated to senior debt that is assigned an actual
or implied "BBB-" rating.
Plus(+) or
Minus(-) The ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Commercial Paper, including Tax Exempt
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
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MOODY'S
Corporate and Municipal Bonds
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 edged". 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 risk 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;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
Note Moody's applies numerical modifiers, 1,2, and 3 in each generic
rating classification from Aa through Bb in its corporate bond
rating system. The modifier 1 indicates that the security rates in
the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. Those
municipal bonds within the Aa, A, Baa, and Ba categories that
Moody's believes possess the strongest credit attributes within
those categories are designated by the symbols Aa1, A1, Baa1, and
Ba1.
Commercial Paper
Prime-1 Issuers rated P-1 (or supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
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Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE
Corporate Bond Ratings
AAA Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation
other than through changes in the money rate. The factor last named
is of importance varying with the length of maturity. Such
securities are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some
industrial obligations have this rating. The prime feature of an AAA
rating is showing of earnings several times or many times interest
requirements with such stability of applicable earnings that safety
is beyond reasonable question whatever changes occur in conditions.
Other features may enter in, such as a wide margin of protection
through collateral security or direct lien on specific property as
in the case of high class equipment certificates or bonds that are
first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt by call or purchase are often factors, while
guarantee or assumption by parties other than the original debtor
may also influence the rating.
AA Securities in this group are of safety virtually beyond question,
and as a class are readily salable while many are highly active.
Their merits are not greatly unlike those of the AAA class, but a
security so rated may be of junior though strong lien -- in many
cases directly following an AAA security -- or the margin of safety
is less strikingly broad. The issue may be the obligation of a small
company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
A Securities of this rating are 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
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be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Securities of this rating are 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.
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 "AAA" category.
Commercial Paper Ratings
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the
strongest issue.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
DUFF & PHELPS RATINGS
Corporate Bond Ratings
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
AA+
AA, AA- High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic
conditions. A+ A, A- Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB+
BBB, BBB- Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
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Commercial Paper Ratings
Duff 1+ Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk free U.S.
Treasury short term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors qualify issue as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
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STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as.................................... 'D'
