RF039A
REPUBLIC U.S.
GOVERNMENT MONEY MARKET FUND
6 St. James Avenue
Boston, Massachusetts 02116
General
and Account
Information (800) 782-8183 (Toll Free)
Republic National Bank of New York - Investment Adviser
("Republic" or the "Adviser")
Signature Broker-Dealer Services, Inc. -
Administrator, Distributor and Sponsor
("Signature" or the "Distributor")
STATEMENT OF ADDITIONAL INFORMATION
Republic U.S. Government Money Market Fund (the "Fund") is a separate
series (portfolio) of the Republic Funds (the "Trust"), an open-end diversified
management investment company which currently consists of six separate
portfolios, each of which has different and distinct investment objectives and
policies. The Fund is described in this Statement of Additional Information.
Shares of the Fund are divided into two separate classes, the Retail Class and
the Adviser Class.
The investment objective of the Fund is to provide shareholders of the
Fund with liquidity and as high a level of current income as is consistent with
the preservation of capital. The Trust seeks to achieve the investment objective
of the Fund by investing the assets of the Fund in debt obligations issued or
guaranteed by the United States, its agencies or instrumentalities, and
commitments to purchase such obligations ("U.S. Government-backed obligations").
The Fund may invest in U.S. Government-backed obligations subject to repurchase
agreements with recognized securities dealers and banks. There can be no
assurance that the investment objective of the Fund will be achieved.
Shares of the Fund are continuously offered for sale by the Distributor
at net asset value (normally $1.00 per share) 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 RETAIL CLASS OR THE ADVISER CLASS OF THE FUND, AS APPROPRIATE, EACH
DATED MAY 22, 1996 (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.
May 22, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective, Policies and Restrictions . . . . 1
Portfolio Transactions . . . . . . . . . . . . . . . . . 1
Investment Restrictions . . . . . . . . . . . . . . . . 2
Percentage and Rating Restrictions . . . . . . . . . . . . 5
Performance Information . . . . . . . . . . . . . . 5
Management of the Trust . . . . . . . . . . . . . . . . . 6
Trustees and Officers . . . . . . . . . . . . . 6
Investment Adviser . . . . . . . . . . . . . . .9
Administrator, Distributor and Sponsor . . . . . 10
Shareholder Servicing Agents . . . . . . . . . .11
Transfer Agent and Custodian . . . . . . . . . . 12
Expenses and Expense Limits. . . . . . . . . . . 12
Determination of Net Asset Value . . . . . . . . . . . . . 12
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Information . . . . . . . . . . . . . . . . . . . . 16
Capitalization . . . . . . . . . . . . . . . . .16
Voting Rights . . . . . . . . . . . . . . . . .16
Independent Auditors . . . . . . . . . . . . . .17
Counsel . . . . . . . . . . . . . . . . . . . .17
Registration Statement . . . . . . . . . . . . .17
Financial Statements . . . . . . . . . . . . . .17
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated May 22, 1996, 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.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective and Policies" in the Prospectus.
The investment objective of the Fund is to provide shareholders of the
Fund with liquidity and as high a level of current income as is consistent with
the preservation of capital. The Trust seeks to achieve the investment objective
of the Fund by investing the assets of the Fund in U.S. Government-backed
obligations which have, or are deemed to have, remaining maturities not
exceeding 397 days, and in repurchase agreements collateralized by U.S.
Government-backed obligations.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed by the Board of Trustees of
the Trust without the approval of Fund shareholders.
PORTFOLIO TRANSACTIONS. Purchases and sales of securities will usually
be principal transactions. Portfolio securities normally will be purchased or
sold from or to issuers directly or from or to dealers serving as market makers
for the securities at a net price. Generally, money market securities are traded
on a net basis and do not involve brokerage commissions. The cost of executing
portfolio securities transactions for the Fund primarily consists of dealer
spreads and underwriting commissions. Under the 1940 Act, persons affiliated
with the Fund or the Sponsor 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.
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, except
that portfolio transactions for the Fund will not be executed through the
Sponsor and the Fund will not deal with the Sponsor as agent or principal.
Subject to policies established by the Trust's Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of Fund shareholders rather than by any formula. In
placing orders for the 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. The policy of the Fund of
investing in securities with short maturities will result in high portfolio
turnover, generally exceeding 100% per year.
The 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
- 1 -
<PAGE>
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 by 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,
the Adviser may cause the 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.
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, the 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 Fund and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought for certain clients even though it could have
been sold for other clients at the same time, and a particular security may be
sold for certain clients even though it could have been bought for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. In some
instances, one client may sell a particular security to another client. Two or
more clients may simultaneously purchase or sell the same security, in which
event each day's transactions in that security are, insofar as practicable,
averaged as to price and allocated between such clients in a manner which in the
Adviser's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. In addition, when purchases or sales of the same
security for the Fund and for other clients of the 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.
INVESTMENT RESTRICTIONS. The Trust has adopted the following investment
restrictions with respect to the Fund which may not be changed without approval
by holders of a "majority of the outstanding shares" 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
- 2 -
<PAGE>
meeting, if the holders of more than 50% of the outstanding "voting securities"
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding "voting securities" of the Fund. The term "voting securities" as
used in this paragraph has the same meaning as in the 1940 Act.
The Trust, on behalf of the Fund, may not:
(1) borrow money, except that as a temporary measure for
extraordinary or emergency purposes, the Fund may borrow from banks in
an amount not to exceed 1/3 of the value of the net assets of the Fund
including the amount borrowed (moreover, the Trust (on behalf of the
Fund) may not purchase any securities at any time at which borrowings
exceed 5% of the total assets of the Fund) taken in each case at market
value;
(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;
(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 (except
for obligations of the U.S. Government and domestic banks), 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;
(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;
- 3 -
<PAGE>
(8) pledge, mortgage or hypothecate for any purpose in excess of
10% of the net assets of the Fund (taken at market value);
(9) 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;
(10) invest for the purpose of exercising control or management;
(11) 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 and 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 (on behalf of the Fund) will not
purchase the securities of any registered investment company if such
purchase at the time thereof would cause more than 10% of the total
assets of the Fund (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 by
the Fund; and provided, further, that the Fund shall not purchase
securities issued by any open-end investment company (for purposes of
this clause (11), securities of foreign banks shall be treated as
investment company securities except that debt securities and nonvoting
preferred stock of foreign banks are not subject to the 10% limitation
described herein). (The Trust, on behalf of the Fund, has no current
intention of investing in the obligations of foreign banks.);
(12) taken together with any investments described in clause (15)
below, invest more than 10% of the net assets of the Fund in securities
that are not readily marketable, including debt securities for which
there is no established market and fixed time deposits and repurchase
agreements maturing in more than seven days;
(13) purchase or retain 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 by the Trust, on
behalf of 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;
(14) write, purchase or sell any put or call option or any
combination thereof;
(15) taken together with any investments described in clause (12)
above, invest in securities which are subject to legal or contractual
restrictions on resale (other than fixed time deposits and repurchase
- 4 -
<PAGE>
agreements maturing in not more than seven days) if, as a result
thereof, more than 10% of the net assets of the Fund, (taken at market
value) would be so invested (including fixed time deposits and
repurchase agreements maturing in more than seven days);
(16) 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; or
(17) make short sales of securities or maintain a short position,
unless at all times when a short position is open the Fund 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 as, and equal in amount to, the securities
sold short, and unless not more than 10% of the net assets of the Fund
(taken at market value) is held as collateral for such sales at any one
time.
NON-FUNDAMENTAL STATE AND FEDERAL RESTRICTIONS. In order to comply with
certain state and federal statutes and regulatory policies, the Fund will not as
a matter of operating policy:
(i) invest more than 15% of the net assets of the Fund (taken at the
greater of cost or market value) in securities that are issued by
issuers which (including the period of operation of any predecessor
company or unconditional guarantor of such issuer) have been in
operation less than three years (including predecessors) or in
securities that are restricted as to resale by the 1933 Act (including
Rule 144A securities).
PERCENTAGE AND RATING RESTRICTIONS. If a percentage restriction or a
rating restriction on investment or utilization of assets set forth above or
referred to in the Prospectus is adhered to at the time an investment is made or
assets are so utilized, a later change in percentage resulting from changes in
the value of the securities held by the Fund or a later change in the rating of
a security held by the Fund is not considered a violation of policy, however the
Adviser will consider such change in its determination of whether to hold the
security. To the extent the ratings given by Moody's Investors Service, Inc. or
Standard & Poor's Corporation may change as a result of changes in such
organizations or their rating systems, the Adviser will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies set forth in the Prospectus.
PERFORMANCE INFORMATION
Any current "yield" quotation of the Fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
consists of an annualized historical yield, carried at least to the nearest
hundredth of one percent, based on a specific seven calendar day period and is
calculated by dividing the net change in the value of an account having a
balance of one share at the beginning of the period by the value of the account
at the beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of additional
shares purchased
- 5 -
<PAGE>
with dividends declared on the original share and dividends declared on both the
original share and any such additional shares, but would not reflect any
realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
"effective yield" quotation of the Fund so used is calculated by compounding the
current yield quotation for such period by multiplying such quotation by 7/365,
adding 1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result.
The annualized yield of the Fund for the seven-day period ended
September 30, 1995 was 5.30%. The effective annualized yield of the Fund for
such period was 5.45%.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities markets in general, (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies
(including IBC/Donoghue's Money Fund Reports), publications, or persons who rank
mutual funds on overall performance or other criteria; and (iii) the Consumer
Price Index (measure for inflation) to assess the real rate of return from an
investment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolios and the market conditions during the given time
period, and should not be considered as a representation of future results.
Investors who purchase and redeem shares of the Fund through a
Shareholder Servicing Agent may be charged one or more of the following types of
fees as agreed upon by the Shareholder Servicing Agent and the investor, with
respect to the customer services provided by the Shareholder Servicing Agent:
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 upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and
effective yield of the Fund for those investors.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
- 6 -
<PAGE>
the Trust. The address of each, unless otherwise indicated, is 6 St. James
Avenue, Boston, Massachusetts 02116.
FREDERICK C. CHEN, TRUSTEE
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW*, TRUSTEE
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, TRUSTEE
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, TRUSTEE
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
PHILIP W. COOLIDGE*, PRESIDENT
Chairman and Chief Executive Officer, Signature Financial Group, Inc.
("SFG"); Chairman and Chief Executive Officer, Signature (since April,
1989).
JOHN R. ELDER*, TREASURER
Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of
Mutual Funds (prior to April, 1995).
LINDA T. GIBSON*, ASSISTANT SECRETARY Legal Counsel and Assistant
Secretary, SFG (since June, 1991); Assistant Secretary,
Signature (since October, 1992); law student, Boston University
School of Law (prior to May, 1992).
JAMES E. HOOLAHAN*, VICE PRESIDENT
Senior Vice President, SFG (since December, 1989).
THOMAS M. LENZ*, SECRETARY
Senior Vice President and Associate General Counsel, SFG (since
November, 1989); Assistant Secretary, Signature (since February, 1991).
MOLLY S. MUGLER*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG; Assistant Secretary,
Signature (since April, 1989).
BARBARA M. O'DETTE*, ASSISTANT TREASURER
Assistant Treasurer, SFG; Assistant Treasurer, Signature (since April,
1989).
- 7 -
<PAGE>
ANDRES E. SALDANA*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since November, 1992);
Attorney, Ropes & Gray (September, 1990 to November, 1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson, Mugler and
O'Dette are also Trustees and/or officers of certain other investment companies
of which Signature or an affiliate is the administrator.
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Trust
Name of Compensation Part of Fund Benefits Upon Paid to
TRUSTEE From Trust Expenses Retirement Trustees
Frederick C. $4,096 none none $5,650
Chen
Alan S. Parsow $4,096 none none $5,650
Larry M. $3,696 none none $5,050
Robbins
Michael Seely $4,096 none none $5,650
The compensation table above reflects the fees received by the Trustees
from the Trust for the year ended September 30, 1995. The Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust will receive an
annual retainer of $3,600 and a fee of $1,0001 for each meeting of the Board of
Trustees or committee thereof attended.
As of May 22, 1996, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of the Fund. As of the same date,
the following shareholders of record owned 5% or more of the outstanding shares
of the Fund (the Trust has no knowledge of the beneficial ownership of such
shares): Republic National Bank of New York, 10 East 40th Street, New York, New
York, 10016 - 76.9%; Kinco & Co. c/o Securities Services, One Hanson Place,
Brooklyn, New York, 11243 - 6.3%. Shareholders who own more than 25% of the
outstanding voting securities of the Fund may be deemed to control the Fund by
virtue of such share ownership.
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 officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
- --------
1 As of November 1, 1995, Trustee fee for each meeting of the Board of Trustees
or committee thereof attended increased from $600 to $1,000.
- 8 -
<PAGE>
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Contract, Republic is responsible
for the investment management of the Fund's assets, including the responsibility
for 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 Republic in its discretion, not including the Distributor. See
"Portfolio Transactions". Republic also furnishes to the Board of Trustees,
which has overall responsibility for the business and affairs of the Trust,
periodic reports on the investment performance of the Fund.
Republic is a wholly-owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Fund are not
exclusive under the terms of the Investment Advisory Contract. Republic is free
to and does render investment advisory services to others.
The Investment Advisory Contract will remain in effect until October
14, 1996, and will continue in effect thereafter from year to year with respect
to the Fund, provided such continuance is approved 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 such
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Contract may be terminated with respect to the Fund without penalty by
either
- 9 -
<PAGE>
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.
For the year ended September 30, 1993, of which M.D. Hirsch Investment
Management, Inc. was investment adviser until August 30, 1993, and Republic
Asset Management Corporation was investment adviser from September 1, 1993
through September 30, 1993 the fee received was $4,970 net of fee waivers and
reimbursements. For the year ended September 30, 1994, Republic Asset Management
Corporation received fees of $30,201 net of fee waivers and reimbursement. For
the year ended September 30, 1995, the Fund accrued investment advisory fees of
$221,919 to Republic (formerly Republic Asset Management Corporation), of which
$110,959 was waived.
ADMINISTRATOR AND SPONSOR
The Administrative Services Contract is terminable with respect to the
Fund without penalty at any time by vote of a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Administrative Services Contract, upon not more than
60 days' written notice to the Sponsor or by vote of the holders of a majority
of the shares of the Fund or upon 15 days' notice by the Sponsor. The
Administrative Services Contract will terminate automatically in the event of
its assignment. The Administrative Services Contract also provides that neither
the Administrator 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, 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 Administrative Services Contract.
For the fiscal year ended September 30, 1993, Signature was paid an
administrative services fee of $79,856 before the fee waiver of $74,886. For the
fiscal year ended September 30, 1994, Signature waived administrative services
fees of $180,875 and reimbursed expenses of $54,090. For the fiscal year ended
September 30, 1995, the Fund accrued administrative services fees of $221,919 to
Signature, of which $104,924 was waived.
DISTRIBUTION PLAN - RETAIL CLASS SHARES ONLY
A Distribution Plan has been adopted by the Trust (the "Distribution
Plan") with respect to the Retail Class shares only, and provides that it may
not be amended to increase materially the costs which the Retail Class shares
may bear pursuant to the Distribution Plan without approval by shareholders of
the Retail Class shares, and that any material amendments of the Distribution
Plan must be approved by the Board of Trustees, and by the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any related agreement ("Qualified Trustees"), by vote cast in person at a
meeting called for the purpose of considering such amendments. The selection and
nomination of the
- 10 -
<PAGE>
Trustees who are not "interested persons" of the Trust (the "Independent
Trustees") has been committed to the discretion of the Independent Trustees. The
Distribution Plan has been approved, and is subject to annual approval, by the
Board of Trustees and by the Qualified Trustees, by vote cast in person at a
meeting called for the purpose of voting on the Distribution Plan. In adopting
the Distribution Plan, the Trustees considered alternative methods to distribute
the Retail Class shares and to reduce the Retail Class shares' per share expense
ratio and concluded that there was a reasonable likelihood that the Distribution
Plan will benefit that class and its shareholders. The Distribution Plan is
terminable with respect to the Retail Class shares at any time by a vote of a
majority of the Qualified Trustees or by vote of the holders of a majority of
the Retail Class shares.
Prior to the adoption by the Trustees of a multiple class structure,
effective January 15, 1996, a predecessor distribution plan was in effect with
respect to all shares of the Fund. Pursuant to the predecessor distribution
plan, during the fiscal year ended September 30, 1995, the Fund spent a total of
$198,745 on the following pursuant to the Distribution Plan: advertising, $0;
printing and mailing of prospectuses and annual reports to other than current
shareholders, $98,839; compensation to underwriters, $0; compensation to
broker-dealers, $99,906; compensation to sales personnel, $0; interest, carrying
or other financing charges, $0; and other marketing expenses, $0. Total
expenditures pursuant to the Distribution Plan as a percentage of average daily
net assets during the same period were 0.18%.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Retail Class and the Adviser Class, and continues in effect
indefinitely if such continuance is specifically approved at least annually by a
vote of both a majority of the Trustees and a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Administrative Services Plan or in
any agreement related to such Plan ("Qualified Trustees"). The Administrative
Services Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or with respect to the Retail Class or the Adviser Class by a
majority vote of shareholders of that class. The Administrative Services Plan
may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Retail Class or the Adviser Class without the
approval of a majority of shareholders of that class, and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Retail Class shares, see "Management of the Trust - Shareholder Servicing
Agents" in the Prospectus describing the Retail Class shares.
- 11 -
<PAGE>
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has also approved a Custodian
Agreement and a Transfer Agency Agreement between the Trust and Investors Bank &
Trust Company ("IBT") pursuant to which IBT will provide custodial, fund
accounting, transfer agency, dividend disbursing and shareholder servicing
services to the Trust and the Fund. The principal business address of IBT is 24
Federal Street, Boston, Massachusetts 02110.
EXPENSES AND EXPENSE LIMITS
Certain of the states in which shares of the Fund are expected to be
qualified for sale impose limitations on the expenses of the Fund. If, in any
fiscal year, the total expenses of the Fund (excluding taxes, interest, expenses
under the Plan, brokerage commissions and other portfolio transaction expenses,
other expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative fees) exceed the expense limitations applicable to the Fund
imposed by the securities regulations of any state, the Distributor and the
Adviser each will reimburse the Fund for 50% of the excess. The effective
limitation on an annual basis with respect to the Fund is expected to be 2.5% on
the first $30 million of the Fund's net assets, 2.0% on the next $70 million of
such assets, and 1.5% on any excess above $100 million.
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Retail Class shares must include payments made pursuant to the Distribution
Plan and the Administrative Services Plan. 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 share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
As discussed under the caption "Dividends and Distributions" in the
Prospectus, the Trust uses the amortized cost method to determine the value of
the Fund's portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing an obligation at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. During these
periods the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund which utilizes a method of valuation based upon
- 12 -
<PAGE>
market prices. Thus, during periods of declining interest rates, if the use of
the amortized cost method resulted in a lower value of the Fund's portfolio on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Fund's dollar-weighted average portfolio maturity of
90 days or less must be maintained, and only securities having remaining
maturities of 397 days or less which are determined by the Trust's Board of
Trustees to be of high quality with minimal credit risks may be purchased.
Pursuant to Rule 2a-7, the Board has established procedures designed to
stabilize, to the extent reasonably possible, the price per share of the Fund,
as computed for the purpose of sales and redemptions, at $1.00. Such procedures
include review of the Fund's portfolio holdings by the Board of Trustees, at
such intervals as it may deem appropriate, to determine whether the net asset
value of the Fund calculated by using available market quotations deviates from
the $1.00 per share valuation based on amortized cost. The extent of any
deviation is examined by the Board of Trustees. If such deviation exceeds
$0.003, the Board promptly considers what action, if any, will be initiated. In
the event the Board determines that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
the Board will take such corrective action as it regards as necessary and
appropriate, which may include selling portfolio instruments prior to maturity
to realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends or establishing a net asset value per share by using
available market quotations.
TAXATION
Each year, the Trust intends to qualify the Fund and elect that the
Fund be treated as a separate "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify,
the Fund must distribute to shareholders at least 90% of its investment company
taxable income (which includes, among other items, interest, dividends and the
excess of net short-term capital gains over net long-term capital losses) and
must meet certain diversification of assets, source of income, and other
requirements of the Code. By so doing, the Fund will not be subject to federal
income tax on that portion of its net investment income and net realized capital
gains (the excess of any net long-term capital gains over net short-term capital
losses), if any, distributed to shareholders. If the Fund does not meet all of
these Code requirements, it will be taxed as an ordinary corporation.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute for each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income
(excluding any capital gains or losses) for the calendar year, (2) at least 98%
of the excess of its capital gains over capital losses for the 12-month period
ending October 31 of the calendar year, and (3) all such ordinary income and
capital gains for previous years that were not distributed during such years.
- 13 -
<PAGE>
A distribution will be treated as paid during the calendar year if it is
declared by the Fund in October, November or December of that year with a record
date in such month and paid by the Fund during January of the following year.
Such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. It is not expected that such
distributions will be eligible for the dividends-received deduction for
corporations. Distributions of net capital gains, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time the
Fund shares have been held by a shareholder. Long-term capital gains, including
distributions of net capital gains, are currently subject to a maximum federal
tax rate of 28% which is less than the maximum rate imposed on other types of
taxable income. All distributions are taxable to the shareholder whether
reinvested in additional shares or received in cash. Shareholders receiving
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share received equal to the net asset value
of a share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the federal tax status of distributions.
Upon disposition (by redemption, repurchase, sale or exchange) of Fund
shares, a shareholder may realize a taxable gain or loss depending upon his
basis in his shares. Realization of such a gain or loss is considered unlikely
because of the Fund's policy to attempt to maintain a $1.00 per share net asset
value. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. Such gain or loss will generally
be long-term or short-term depending upon the shareholder's holding period for
the shares. However, a loss realized by a shareholder on the disposition of Fund
shares with respect to which long-term capital gain dividends have been received
will, to the extent of such long-term capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) 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.
The Trust will be required to report to the Internal Revenue Service
(the "IRS") all distributions by the Fund except in the case of certain exempt
shareholders. All such distributions generally will be subject to withholding of
federal income tax at a rate of 31% ("backup withholding") in the case of
nonexempt shareholders if (1) the shareholder fails to furnish the Fund with and
to certify the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies 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 is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions whether
reinvested in additional shares or taken in cash, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against the
shareholder's
- 14 -
<PAGE>
federal income tax liability. Investors may wish to consult their tax advisors
about the applicability of the backup withholding provisions.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the Commonwealth
of Massachusetts as long as each series of the Trust (including the Fund)
qualifies as a regulated investment company under the Code.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. persons (I.E., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes, and their treatment under state and
local income tax laws may differ from the federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. and foreign tax
consequences of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
- 15 -
<PAGE>
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
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 classes 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.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
- 16 -
<PAGE>
INDEPENDENT AUDITORS
For the fiscal year ended September 30, 1995, Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116, served as independent auditors of
the Funds of the Trust.
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Funds of the Trust for the fiscal year ending
September 30, 1996. KPMG Peat Marwick LLP will audit the Trust's annual
financial statements, prepare the Trust's income tax returns, and assist in the
filings with the Securities and Exchange Commission. KPMG Peat Marwick LLP's
address is 99 High Street, Boston, Massachusetts 02108.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the 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
The Fund's audited financial statements dated September 30, 1995 are
hereby incorporated herein by reference from the Annual Report of the Fund dated
September 30, 1995 as filed with the Securities and Exchange Commission pursuant
to Rule 30b2-1 under the 1940 Act. A copy of such report will be provided
without charge to each person receiving this Statement of Additional
Information.
RF039A
- 17 -
<PAGE>
RF040A
REPUBLIC EQUITY FUND
6 St. James Avenue
Boston, Massachusetts 02116
General
and
Account Information (800) 782-8183 (Toll Free)
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Lord, Abbett & Co. - Investment Sub-Adviser
("Lord Abbett" or the "Sub-Adviser")
Signature Broker-Dealer Services, Inc. -
Administrator, Distributor and Sponsor
("Signature" or the "Distributor" or the "Sponsor")
STATEMENT OF ADDITIONAL INFORMATION
Republic Equity Fund (the "Fund") is a separate series (portfolio) of
the Republic Funds (the "Trust"), an open-end, management investment company
which currently consists of six portfolios, each of which has different and
distinct investment objectives and policies. The Fund is described in this
Statement of Additional Information. Shares of the Fund are divided into two
separate classes, the Retail Class and the Adviser Class.
The investment objective of the Fund is long-term growth of capital and
income without excessive fluctuations in market value. The Fund seeks its
objective by investing in securities selling at reasonable prices in relation to
value. The Fund will normally invest in common stocks of large, seasoned
companies in sound financial condition which are expected to show above-average
price appreciation. There can be no assurance that the investment objective of
the Fund will be achieved.
Shares of the Fund 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 RETAIL CLASS OR THE ADVISER CLASS OF THE FUND, AS APPROPRIATE, EACH
DATED MAY 22, 1996 (each a "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.
Dated: May 22, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective, Policies, Risks and Restrictions 1
Convertible Securities ..................................1
Portfolio Securities Loans...............................1
Rule 144A Securities.....................................2
Portfolio Transactions...................................2
Risk Factors.............................................3
Investment Restrictions .................................4
Percentage and Rating Restrictions ......................7
Performance Information ..........................................7
Management of the Trust ..........................................8
Trustees and Officers ...................................8
Investment Manager ....... ..............................10
Investment Sub-Adviser ..................................11
Distributor, Administrator and Sponsor ..................11
Shareholder Servicing Agents, Transfer Agent and
Custodian ..........................................13
Expenses and Expense Limits .............................13
Valuation of Securities, Redemption in Kind ......................14
Taxation .........................................................15
Federal Income Tax ......................................15
Options .................................................16
Investment in Passive Foreign Investment Companies.......17
Effect of Foreign Currencies ............................18
Disposition of Shares ...................................18
Other Information ................................................19
Capitalization ..........................................19
Voting Rights ...........................................19
Independent Auditors ....................................19
Counsel .................................................20
Registration Statement ..................................20
Financial Statements .............................................20
Appendix .........................................................A-1
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated May 22, 1996, 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.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective, Risks and Policies" and the discussion of risks described under
"Additional Risk Factors and Policies" 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 seeks its
objective by investing in securities selling at reasonable prices in relation to
value. The Fund will normally invest in common stocks of large, seasoned
companies in sound financial condition which are expected to show above-average
price appreciation.
CONVERTIBLE SECURITIES
The Fund may buy securities that are convertible into common stock. The
following is a brief description of the various types of convertible securities
in which the Fund may invest.
CONVERTIBLE BONDS are issued with lower coupons than non-convertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to common
shares becomes more valuable.
CONVERTIBLE PREFERRED STOCKS are non-voting equity securities that pay
a fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific
price for a specific period of time. The price of a warrant tends to be more
volatile than, and does not always track, the price of its underlying stock.
Warrants are issued with expiration dates. Once a warrant expires, it has no
value in the market.
RIGHTS represent a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public.
PORTFOLIO SECURITIES LOANS
The Fund may lend portfolio securities to registered broker-dealers.
These loans may not exceed 30% of the Fund's total assets. The Fund's loans of
securities will be collateralized by cash or marketable securities issued or
guaranteed by the U.S. Government or its agencies ("U.S. Government Securities")
- 1 -
<PAGE>
or other permissible means. The cash or instruments collateralizing the Fund's
loans of securities will be maintained at all times in an amount at least equal
to the current market value of the loaned securities. From time to time, the
Fund may allow a part of the interest received with respect to the investment of
collateral received for securities loaned to the borrower and/or a third party
that is not affiliated with the Fund and is acting as a "placing broker." No fee
will be paid to affiliated persons of the Fund.
By lending portfolio securities, the 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. The 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 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
Fund's Board of Trustees must terminate the loan and regain the right to vote
the securities.
RULE 144A SECURITIES
The Fund may invest in securities qualifying for resale to "qualified
institutional buyers" under Securities and Exchange Commission ("SEC") Rule 144A
that are determined by the Board, or by the Sub-Adviser pursuant to the Board's
delegation, to be liquid securities. The Board will review quarterly the
liquidity of the investments the Fund makes in such securities.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is 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. In placing orders for the 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 Sub-Adviser may
place orders for the purchase and sale of Fund investments for the Fund with
Republic New York Securities Corporation, an affiliate of the Manager.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), the Sub-Adviser may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Sub-Adviser an amount of commission for effecting a securities transaction
for the Fund in excess of the commission which another broker-dealer would have
charged for effecting that transaction. For the period August 1, 1995 to October
31, 1995, no brokerage commissions were paid from the Fund.
- 2 -
<PAGE>
Investment decisions for the Fund and for the other investment advisory
clients of the Sub-Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought for certain clients even though it could have
been sold for other clients at the same time, and a particular security may be
sold for certain clients even though it could have been bought for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. In some
instances, one client may sell a particular security to another client. Two or
more clients may simultaneously purchase or sell the same security, in which
event each day's transactions in that security are, insofar as practicable,
averaged as to price and allocated between such clients in a manner which in the
Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. In addition, when purchases or sales of the
same security for the Fund and for other clients of the Sub-Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantage available to large denomination purchases or sales.
There may be circumstances when purchases or sales of portfolio securities for
one or more clients will have an adverse effect on other clients in terms of the
price paid or received or of the size of the position obtainable.
RISK FACTORS
As stated in the Prospectus, the Fund may invest in lower rated,
high-yield, "junk" bonds. 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 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 which 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, the Sub-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 Fund does not have any
minimum rating criteria applicable to the fixed-income securities in which it
invests. A description of the ratings used herein and in the Prospectus is set
forth in the Appendix to this Statement of Additional Information.
- 3 -
<PAGE>
INVESTMENT RESTRICTIONS
The Trust (with respect to the Fund) has adopted the following
investment restrictions which may not be changed without approval by holders of
a "majority of the outstanding voting securities" of the 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 Fund's outstanding
"voting securities." The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940 ("1940 Act").
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
- 4 -
<PAGE>
(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.
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:
(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
- 5 -
<PAGE>
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 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
(14) 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 has 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
(15) 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
- 6 -
<PAGE>
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.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Fund or a later change in the rating of a security held by the Fund is
not considered a violation of policy, however the Sub-Adviser will consider such
change in its determination of whether to hold the security.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and total return
for the Fund, both computed in accordance with formulas prescribed by the 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:
YIELD = 2[( A-B + 1)6-1]
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.
For the 30-day period ending October 31, 1995, the yield of the Fund
was 1.80%.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: 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
- 7 -
<PAGE>
year, provide total return information for that period that is unannualized. Any
such information would be accompanied by standardized total return information.
The total return of the Fund for the period from August 1, 1995 (commencement of
operations) to October 31, 1995 was 2.75%.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Standard & Poor's Stock Index. Unmanaged indices
(I.E., other than Lipper) generally do not reflect deductions for administrative
and management costs and expenses. Comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information should be considered in light of the Fund's investment
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.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust. The address of each, unless otherwise indicated, is 6 St. James
Avenue, Boston, Massachusetts 02116.
FREDERICK C. CHEN, TRUSTEE
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW*, TRUSTEE
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, TRUSTEE
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, TRUSTEE
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
PHILIP W. COOLIDGE*, PRESIDENT
Chairman and Chief Executive Officer, Signature Financial Group, Inc.
("SFG"); Chairman and Chief Executive Officer, Signature (since
April, 1989).
JOHN R. ELDER*, TREASURER
Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of
Mutual Funds (prior to April, 1995).
- 8 -
<PAGE>
LINDA T. GIBSON*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since June, 1991); Assistant
Secretary, Signature (since October, 1992); law student, Boston University
School of Law (prior to May, 1992).
JAMES E. HOOLAHAN*, VICE PRESIDENT
Senior Vice President, SFG (since December, 1989).
THOMAS M. LENZ*, SECRETARY
Senior Vice President and Associate General Counsel, SFG (since
November, 1989); Assistant Secretary, Signature (since February, 1991).
MOLLY S. MUGLER*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG; Assistant Secretary,
Signature (since April, 1989).
BARBARA M. O'DETTE*, ASSISTANT TREASURER
Assistant Treasurer, SFG; Assistant Treasurer, Signature (since
April, 1989).
ANDRES E. SALDANA*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since November, 1992);
Attorney, Ropes & Gray (September, 1990 to November, 1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson, Mugler and
O'Dette are also Trustees and/or officers of certain other investment companies
of which Signature or an affiliate is the administrator.
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Trust
Name of Compensation Part of Fund Benefits Upon Paid to
TRUSTEE From Trust Expenses Retirement Trustees
Frederick C. $4,096 none none $5,650
Chen
Alan S. Parsow $4,096 none none $5,650
Larry M. $3,696 none none $5,050
Robbins
Michael Seely $4,096 none none $5,650
The compensation table above reflects the fees received by the Trustees
from the Trust for the period from August 1, 1995 (commencement of operations)
- 9 -
<PAGE>
to October 31, 1995. The Trustees who are not "interested persons" (as defined
in the 1940 Act) of the Trust will receive an annual retainer of $3,600 and a
fee of $1,0002 for each meeting of the Board of Trustees or committee thereof
attended.
As of May 22, 1996, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of the Fund. As of the same date,
the following shareholders of record owned 5% or more of the outstanding shares
of the Fund (the Trust has no knowledge of the beneficial ownership of such
shares): Kinco & Co. c/o RNB Securities Services, One Hanson Place, Brooklyn,
New York, 11243 - 94.7%. Shareholders who own more than 25% of the outstanding
voting securities of the Fund may be deemed to control the Fund by virtue of
such share ownership
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 officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT MANAGER
Republic is the investment manager to the Fund pursuant to an
investment management agreement (the "Investment Management Contract") with the
Trust. For its services, the Manager is paid a fee by the Fund, computed daily
and based on the Fund's average daily net assets, equal on the annual basis to
0.175% of net assets. For the period from August 1, 1995 (commencement of
operations) to October 31, 1995, investment management fees aggregated $6,118,
of which the entire amount was waived.
The Investment Management Contract will remain in effect until April 7,
1997, and will continue in effect thereafter from year to year with respect to
the Fund, provided such continuance is approved annually (i) by the holders of a
majority of the outstanding voting securities of the Fund or by the Trust's
Board of Trustees, and (ii) by a majority of the Trustees of the Trust who are
not parties to the Investment Management Contract or "interested persons" (as
defined in the 1940 Act) of any such party. The Investment Management Contract
may be terminated with respect to the Fund without penalty by either party on 60
days' written notice and will terminate automatically if assigned.
- --------
1 As of November 1, 1995, Trustee fee for each meeting of the Board of Trustees
or committee thereof attended increased from $600 to $1,000.
- 10 -
<PAGE>
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws, regulations, and rulings of the
U.S. Comptroller of the Currency relating to fiduciary powers of national banks.
These regulations provide, in general, that assets managed by a national bank as
fiduciary shall not be invested in stock or obligations of, or property acquired
from, the bank, its affiliates or their directors, officers or employees or
other persons with substantial connections with the bank. The regulations
further provide that fiduciary assets shall not be sold or transferred, by loan
or otherwise, to the bank or persons connected with the bank as described above.
Republic, in accordance with federal banking laws, may not purchase for its own
account securities of any investment company the investment adviser of which it
controls, extend credit to any such investment company, or accept the securities
of any such investment company as collateral for a loan to purchase such
securities. Moreover, Republic, its officers and employees do not express any
opinion with respect to the advisability of any purchase of such securities.
The investment management services of Republic to the Fund are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment management and advisory services to others.
INVESTMENT SUB-ADVISER
Lord Abbett, as the Fund's Sub-Adviser, is 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-Adviser in its discretion. See "Portfolio Transactions." Lord Abbett 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.
For its services, Lord Abbett receives from the Fund a fee, computed
daily and based on the Fund's average daily net assets, 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 period from August 1,
1995 (commencement of operations) to October 31, 1995, sub-advisory fees
aggregated $11,363, of which the entire amount was reimbursed.
The investment advisory services of Lord Abbett to the Fund are not
exclusive under the terms of Lord Abbett's Subadvisory Agreement with Republic.
Lord Abbett is free to and does render investment advisory services to others.
ADMINISTRATOR AND SPONSOR
The Administrative Services Contract is terminable with respect to the
Fund without penalty at any time by vote of a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Administrative Services Contract, upon not more than
60 days'
- 11 -
<PAGE>
written notice to the Sponsor or by vote of the holders of a majority of the
shares of the Fund or upon 15 days' notice by the Sponsor. The Administrative
Services Contract will terminate automatically in the event of its assignment.
The Administrative Services Contract also provides that neither the
Administrator 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, 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 Administrative Services Contract.
For the period from August 1, 1995 (commencement of operations) to
October 31, 1995, the Fund accrued administrative services fees of $6,992 to
Signature, of which the entire amount was waived.
DISTRIBUTION PLAN - RETAIL CLASS SHARES ONLY
A Distribution Plan has been adopted by the Trust (the "Distribution
Plan") with respect to the Retail Class shares only, and provides that it may
not be amended to increase materially the costs which the Retail Class shares
may bear pursuant to the Distribution Plan without approval by shareholders of
the Retail Class shares, and that any material amendments of the Distribution
Plan must be approved by the Board of Trustees, and by the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any related agreement ("Qualified Trustees"), by vote cast in person at a
meeting called for the purpose of considering such amendments. The selection and
nomination of the Trustees who are not "interested persons" of the Trust (the
"Independent Trustees") has been committed to the discretion of the Independent
Trustees. The Distribution Plan has been approved, and is subject to annual
approval, by a majority vote of the Board of Trustees and by a majority vote of
the Qualified Trustees, by vote cast in person at a meeting called for the
purpose of voting on the Distribution Plan. In adopting the Distribution Plan,
the Trustees considered alternative methods to distribute Retail Class shares
and to reduce the Retail Class shares' per share expense ratio and concluded
that there was a reasonable likelihood that the Distribution Plan will benefit
that class and its shareholders. The Distribution Plan is terminable with
respect to the Retail Class shares at any time by a vote of a majority of the
Qualified Trustees or by vote of the holders of a majority of the Retail Class
shares.
Prior to the adoption by the Trustees of a multiple class structure,
effective January 15, 1996, a predecessor distribution plan was in effect with
respect to all shares of the Fund. Pursuant to the predecessor distribution
plan, during the period from August 1, 1995 (commencement of operations) to
October 31, 1995, the Fund spent a total of $6,835 on the following pursuant to
the Distribution Plan: advertising, $0; printing and mailing of prospectuses to
other than current shareholders, $6,835; compensation to underwriters, $0;
compensation to broker-dealers, $0; compensation to sales personnel, $0;
interest, carrying or other financing charges, $0; and other marketing expenses,
$0. Total expenditures pursuant to the Distribution Plan as a percentage of
average daily net assets during the same period were 0.20%.
- 12 -
<PAGE>
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Retail Class and the Adviser Class, and continues in effect
indefinitely if such continuance is specifically approved at least annually by a
vote of both a majority of the Trustees and a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Administrative Services Plan or in
any agreement related to such Plan ("Qualified Trustees"). The Administrative
Services Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or with respect to the Retail Class or the Adviser Class by a
majority vote of shareholders of that class. The Administrative Services Plan
may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Retail Class or the Adviser Class without the
approval of a majority of shareholders of that class, and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Retail Class shares, see "Management of the Trust - Shareholder Servicing
Agents" in the Prospectus describing the Retail Class shares.
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has also approved a Custodian
Agreement and a Transfer Agency Agreement between the Trust and Investors Bank &
Trust Company ("IBT") pursuant to which IBT will provide custodial, fund
accounting, transfer agency, dividend disbursing and shareholder servicing
services to the Trust and the Fund. The principal business address of IBT is 24
Federal Street, Boston, Massachusetts 02110.
EXPENSES AND EXPENSE LIMITS
Certain of the states in which shares of the Fund are expected to be
qualified for sale impose limitations on the expenses of the Fund. If, in any
fiscal year, the total expenses of the Fund (excluding taxes, interest, expenses
under the Plan, brokerage commissions and other portfolio transaction expenses,
other expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative fees) exceed the expense limitations applicable to the Fund
imposed by the securities regulations of any state, the Distributor and the
Manager each will reimburse the Fund for 50% of the excess. The effective
limitation on an annual basis with respect to the Fund is expected to be 2.5% on
the first $30 million of the Fund's net assets, 2.0% on the next $70 million of
such assets, and 1.5% on any excess above $100 million.
Except for the expenses paid by the Manager and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect
- 13 -
<PAGE>
to the Retail Class shares must include payments made pursuant to the
Distribution Plan and the Administrative Services Plan. 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.
VALUATION OF SECURITIES; REDEMPTION IN KIND
The net asset value of each share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's 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 Portfolio 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.
The accounting records of the 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.
- 14 -
<PAGE>
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 the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Advisor 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 has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in kind of the
Fund's portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in kind, the shareholder could incur brokerage or other charges in
converting the securities to cash.
TAXATION
FEDERAL INCOME TAX
The Fund intends to qualify annually as a separate "regulated
investment company" (a "RIC") under the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify, at least 90% of the Fund's investment
company taxable income (which includes, among other items, interest, dividends
and the excess of net short-term capital gains over net long-term capital
losses) must be distributed to Fund shareholders, and the Fund must meet certain
diversification of assets, source of income, and other requirements. If the Fund
does not so qualify, it will be taxed as an ordinary corporation.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed that is equal to the sum of (a) at least 98% of the
Fund's ordinary income (excluding any capital gains or losses) for the calendar
year, (b) at least 98% of the Fund's capital gain net income for the 12-month
period ending, as a general rule, on October 31 of the calendar year, and (c)
all such ordinary income and capital gains for previous years that were not
distributed during such years.
- 15 -
<PAGE>
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described in the Prospectus, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (1)
the date such stock became ex-dividend with respect to such dividends (I.E., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (2) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Some of the debt securities that may be acquired by the Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
Generally, the gain realized on the disposition of any debt security acquired by
the Fund will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security.
OPTIONS
Some of the options entered into by the Fund may be "Section 1256
contracts." Section 1256 contracts held by the Fund at the end of its taxable
year (and, for purposes of the 4% excise tax, on certain other dates as
prescribed under the Code) are "marked-to-market" with unrealized gains or
losses being treated as though they were realized. Any gains or losses,
including "marked-to-market" gains or losses, on Section 1256 contracts are
generally treated as 60% long-term and 40% short-term capital gains or losses
("60/40"), although all foreign currency gains and losses from such contracts
may be treated as ordinary in character absent a special election.
Generally, certain options transactions undertaken by the Fund may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred
- 16 -
<PAGE>
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options to the Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Fund, which generally would increase the amount of
dividends. Short-term gain is taxed as ordinary income when distributed to Fund
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such transactions.
The Fund's intention to qualify as a RIC may limit the extent to which
the Fund will be able to engage in these transactions.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the 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 itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares held by the Fund. Under an election that currently is
available in some circumstances, the Fund generally would be required to include
in its gross income its share of the earnings of a PFIC on a current basis,
regardless of whether distributions are received from the PFIC in a given year.
If this election were made, the special rules, discussed above, relating to the
taxation
- 17 -
<PAGE>
of excess distributions, would not apply. In addition, another election may be
available that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
EFFECT OF FOREIGN CURRENCIES
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the 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 loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
DISPOSITION OF SHARES
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, and will be long-term if the
shareholder's holding period for the shares is more than one year and generally
otherwise will be short-term. Any loss realized on a sale or exchange of Fund
shares will be disallowed to the extent that the shares disposed of are replaced
(including replacement through reinvesting of dividends and capital gain
distributions in the Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
The information above is only a summary of some of the tax
considerations affecting the Fund and its shareholders. The Fund's distributions
may also be subject to state, local, foreign or other taxes not discussed above.
A prospective investor may wish to consult a tax advisor to determine the
suitability of an investment in the Fund based on the prospective investor's tax
situation.
- 18 -
<PAGE>
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994, the name of the Trust was
"FundTrust."
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 classes 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.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees has 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.
INDEPENDENT AUDITORS
For the fiscal year ended October 31, 1995, Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116, served as independent auditors of
the Funds of the Trust.
- 19 -
<PAGE>
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Funds of the Trust for the fiscal year ending
October 31, 1996. KPMG Peat Marwick LLP will audit the Trust's annual financial
statements, prepare the Trust's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02108.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the SEC under the 1933 Act with respect to shares of the Fund, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund's current audited financial statements dated October 31, 1995
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1995 as filed with the SEC pursuant to Rule 30b2-1 under the
1940 Act. A copy of such report will be provided without charge to each person
receiving this Statement of Additional Information.
- 20 -
<PAGE>
APPENDIX
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
<PAGE>
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.
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.
<PAGE>
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.
- - 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
<PAGE>
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 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
or timely payment.
<PAGE>
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.
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.
<PAGE>
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.
RF040A
<PAGE>
RF038A
REPUBLIC NEW YORK
TAX FREE MONEY MARKET FUND
6 St. James Avenue
Boston, Massachusetts 02116
General
and
Account Information
(800) 782-8183 (Toll Free)
Republic National Bank of New York - Investment Adviser
("Republic" or the "Adviser")
Signature Broker-Dealer Services, Inc. -
Administrator, Distributor and Sponsor
("Signature" or the "Distributor")
STATEMENT OF ADDITIONAL INFORMATION
Republic New York Tax Free Money Market Fund (the "Fund") is a
separate series (portfolio) of the Republic Funds (the "Trust"), an open-end,
management investment company which currently consists of six portfolios, each
of which has different and distinct investment objectives and policies. The Fund
is described in this Statement of Additional Information. Shares of the Fund are
divided into two separate classes, the Retail Class and the Adviser Class.
The investment objective of the Fund is to provide shareholders
of the Fund with liquidity and as high a level of current income exempt from
federal, New York State and New York City personal income taxes as is consistent
with the preservation of capital. The Trust seeks to achieve the investment
objective of the Fund by investing the assets of the Fund primarily in a
non-diversified portfolio of short-term, high quality, tax-exempt money market
instruments with maturities of 397 days or less, including obligations of the
State of New York and its political subdivisions, and in participation interests
issued by banks or other financial institutions with respect to such
obligations. There can be no assurance that the investment objective of the Fund
will be achieved.
Shares of the Fund are continuously offered for sale by the
Distributor at net asset value (normally $1.00 per share) 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 RETAIL CLASS OR THE ADVISER CLASS OF THE FUND, AS APPROPRIATE, EACH
DATED MAY 22, 1996 (EACH A "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
<PAGE>
and Statement of Additional Information may be obtained without charge by
writing or calling the Trust at the address and telephone number printed above.
May 22, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective, Policies and Restrictions . . . . . . . . . . . . 1
Variable Rate Instruments and Participation Interests . .1
"When-Issued" Municipal Obligations . . . . . . . . . . .2
Stand-by Commitments . . . . . . . . . . . . . . . . . . .3
Taxable Securities . . . . . . . . . . . . . . . . . . . .3
Repurchase Agreements . . . . . . . . . . . . . . . . . .3
Portfolio Transactions . . . . . . . . . . . . . . . . . .4
Special Factors Affecting New York . . . . . . . . . . . .5
Investment Restrictions . . . . . . . . . . . . . . . . .6
State and Federal Restrictions . . . . . . . . . . . . .8
Percentage and Rating Restrictions . . . . . . . . . . . .9
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . 10
Management of the Trust . . . . . . . . . . . . . . . . . . . . . . . . 11
Trustees and Officers . . . . . . . . . . . . . . . . . .11
Investment Adviser . . . . . . . . . . . . . . . . . . . .13
Administrator, Distributor and Sponsor . . . . . . . . . .14
Shareholder Servicing Agents, Transfer Agent and
Custodian . . . . . . . . . . . . . . . . . . . . . . 16
Expenses and Expense Limits . . . . . . . . . . . . . . .16
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . .17
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Federal Income Tax . . . . . . . . . . . . . . . . . . . . . 18
Alternative Minimum Tax . . . . . . . . . . . . . . . . . . . . . 19
Special Tax Considerations . . . . . . . . . . . . . . . . . . . 20
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Capitalization . . . . . . . . . . . . . . . . . . . . . . 20
Voting Rights . . . . . . . . . . . . . . . . . . . . . . 20
Independent Auditors . . . . . . . . . . . . . . . . . . . 21
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 21
Registration Statement . . . . . . . . . . . . . . . . . . 21
Financial Statements . . . . . . . . . . . . . . . . . . . 21
Appendix - Additional Information Concerning New York
Municipal Obligations . . . . . . . . . . . . . . . . . . . . . . . A-1
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated May 22, 1996, 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.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the
investment objective and policies of the Fund discussed under the caption
"Investment Objective and Policies" in the Prospectus.
The investment objective of the Fund is to provide shareholders
of the Fund with liquidity and as high a level of current income exempt from
Federal, New York State and New York City personal income taxes as is consistent
with the preservation of capital.
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 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.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. The
variable rate instruments in which the Fund's assets may be invested are payable
upon a specified period of notice which may range from one day up to one year.
The terms of the instruments provide that interest rates are adjustable at
intervals ranging from daily to up to one year and the adjustments are based
upon an appropriate interest rate adjustment index as provided in the respective
instruments. The Trust decides which variable rate instruments it will purchase
on behalf of the Fund in accordance with procedures prescribed by its Board of
Trustees to minimize credit risks. An unrated variable rate instrument may be
determined to meet the Fund's high quality criteria if it is backed by a letter
of credit or guarantee or a right to tender or put the instrument to a third
party or is insured by an insurer that meets the high quality criteria for the
Fund discussed above or on the basis of a credit evaluation of the underlying
obligor. If the credit of the obligor is of "high quality", no credit support
from a bank or other financial institution is necessary. Each unrated variable
rate instrument is evaluated on a quarterly basis to determine that it continues
to meet the Fund's high quality criteria. If an instrument is ever deemed to be
of less than high quality, the Trust either will sell it in the market or
exercise the liquidity feature described below.
Although the rate of the underlying Municipal Obligations may be
fixed, the terms of the participation interest may result in the Fund receiving
a
- 1 -
<PAGE>
variable rate on its investment. The bank to which a participation interest may
be "put" for the Fund, as well as the bank which issues an irrevocable letter of
credit or guarantee, may be the bank issuing the participation interest, a bank
issuing a confirming letter of credit to that of the issuing bank, or a bank
serving as agent of the issuing bank with respect to the possible repurchase of
the participation interest. The Trust intends to exercise the liquidity feature
on behalf of the Fund only (1) upon a default under terms of the bond documents,
(2) as needed to provide liquidity to the Fund in order to make redemptions of
Fund shares, or (3) to maintain a high quality investment portfolio. Issuers of
participation interests retain a service and letter of credit fee and a fee for
providing the liquidity feature, in an amount equal to the excess of the
interest paid on the instruments over the negotiated yield at which the
participations were purchased on behalf of the Fund. The total fees generally
range from 5% to 15% of the applicable prime rate or other interest rate index.
With respect to insurance, the Trust attempts to have the issuer of the
participation interest bear the cost of the insurance, although the Trust
retains the option to purchase insurance if necessary, in which case the cost of
insurance will be an expense of the Fund. The Adviser has been instructed by the
Trust's Board of Trustees to monitor continually the pricing, quality and
liquidity of the variable rate instruments held for the Fund, including the
participation interests, on the basis of published financial information and
reports of the rating agencies and other bank analytical services to which the
Adviser may subscribe.
While the value of the underlying variable rate instruments may
change with changes in interest rates generally, the variable rate nature of the
underlying variable rate instruments should minimize changes in value of the
instruments. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation and the risk of potential capital depreciation is less
than would be the case with a portfolio of fixed income securities. The
portfolio may contain variable rate instruments on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such variable rate instruments may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the variable
rate instruments is made in relation to movements of various interest rate
adjustment indices, the variable rate instruments are not comparable to
long-term fixed rate securities. Accordingly, interest rates on the variable
rate instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
"WHEN-ISSUED" MUNICIPAL OBLIGATIONS. 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. 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
- 2 -
<PAGE>
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).
STAND-BY COMMITMENTS. The amount payable to the Fund upon the
exercise of a stand-by commitment normally is (1) the acquisition cost of the
Municipal Obligation (excluding any accrued interest paid on the acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the security, plus (2) all interest
accrued on the security since the last interest payment date during the period
the security was owned by the Fund. Absent unusual circumstances relating to a
change in market value, the underlying Municipal Obligation is valued at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation. Stand-by commitments are
valued at zero for purposes of computing the net asset value per share of the
Fund.
TAXABLE SECURITIES. Although the Trust attempts to invest 100% of
the Fund's net assets in Municipal Obligations, the Trust may invest up to 20%
of the Fund's net assets in securities of the kind described below, the interest
income on which is subject to federal income tax, under any one or more of the
following circumstances: (a) pending investment of proceeds of sales of Fund
shares or of portfolio securities; (b) pending settlement of purchases of
portfolio securities; and (c) to maintain liquidity for the purpose of meeting
anticipated redemptions. In addition, the Trust may temporarily invest more than
20% of the Fund's assets in such taxable securities when, in the opinion of the
Adviser, it is advisable to do so because of adverse market conditions affecting
the market for Municipal Obligations. The kinds of taxable securities in which
the Fund's assets may be invested are limited to the following short-term, fixed
income securities (maturing in 397 days or less from the time of purchase): (1)
obligations of the U.S. Government or its agencies, instrumentalities or
authorities; (2) commercial paper rated Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's"), A-1+, A-1 or A-2 by Standard & Poor's Corporation
("Standard & Poor's") or F-1+, F-1 or F-2 by Fitch Investors Service, Inc.
("Fitch"); (3) certificates of deposit of domestic banks with assets of $1
billion or more; and (4) repurchase agreements with respect to Municipal
Obligations or other securities which the Fund is permitted to own. The Fund's
assets may also be invested in Municipal Obligations which are subject to an
alternative minimum tax.
REPURCHASE AGREEMENTS. The Trust may invest the Fund's assets in
instruments subject to repurchase agreements only with member banks of the
Federal Reserve System or "primary dealers" (as designated by the Federal
Reserve Bank of New York) in U.S. Government securities. Under the terms of a
typical repurchase agreement, an underlying debt instrument would be acquired
for a relatively short period (usually not more than one week) subject to an
obligation
- 3 -
<PAGE>
of the seller to repurchase the instrument at a fixed price and time, thereby
determining the yield during the Fund's holding period. This results in a fixed
rate of return insulated from market fluctuations during such period. A
repurchase agreement is subject to the risk that the seller may fail to
repurchase the security. Repurchase agreements may be deemed to be loans under
the 1940 Act. All repurchase agreements entered into on behalf of the Fund are
fully collateralized at all times during the period of the agreement in that the
value of the underlying security is at least equal to the amount of the loan,
including the accrued interest thereon, and the Trust or its custodian bank has
possession of the collateral, which the Trust's Board of Trustees believes gives
the Fund a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been definitively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs in connection
with the disposition of the collateral. The Trust's 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
the Fund. Repurchase agreements give rise to income which does not qualify as
tax-exempt income when distributed to Fund shareholders. The Trust will not
invest on behalf of the Fund in a repurchase agreement maturing in more than
seven days if any such investment together with illiquid securities held for the
Fund exceed 10% of the Fund's net assets.
PORTFOLIO TRANSACTIONS. 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
executing portfolio securities transactions for the Fund primarily consists of
dealer spreads and underwriting commissions or concessions. Under the 1940 Act,
persons affiliated with the 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.
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.
Subject to policies established by the Trust's Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of Fund shareholders rather than by any formula. In
placing orders for the 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.
- 4 -
<PAGE>
The 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, the Adviser may cause the 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.
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, the 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 Fund and for the other investment
advisory clients of the Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security may be sold for certain clients even though it could have been bought
for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Fund and for other clients of the 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.
SPECIAL FACTORS AFFECTING NEW YORK. The fiscal stability of
New York is related, at least in part, to the fiscal stability of its
localities and
- 5 -
<PAGE>
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 July 10, 1995, Standard & Poor's downgraded its rating on New
York city's outstanding general obligation bonds to BBB+ from A-, citing the
city's chronic structural budget problems and weak economic outlook. Other
factors contributing to Standard & Poor's downgrade include the city's reliance
on one-time revenue measures to close annual budget gaps, a dependence on
unrealized labor savings, overly optimistic estimates of revenues and of state
and federal aid, and the city's continued high debt levels.
For further information concerning New York Municipal
Obligations, see the Appendix to this Statement of Additional Information. The
summary set forth above and in the Appendix 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 Trust has adopted the following
investment restrictions with respect to the Fund which may not be changed
without approval by holders of a "majority of the outstanding shares" 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" of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding "voting securities" of the Fund. The term
"voting securities" as used in this paragraph has the same meaning as in the
1940 Act.
The Trust, on behalf of 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); for additional
related restrictions, see clause (i) under the caption "State and
Federal Restrictions" below;
- 6 -
<PAGE>
(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;
(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 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;
(8) write, purchase or sell any put or call option or any
combination thereof;
(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
- 7 -
<PAGE>
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) make short sales of securities or maintain a short
position, unless at all times when a short position is open the
Fund 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 as, and equal in
amount to, the securities sold short, and unless not more than
10% of the net assets of the Fund (taken at market value) is held
as collateral for such sales at any one time (it is the present
intention of management to make such sales only for the purpose
of deferring realization of gain or loss for federal income tax
purposes).
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.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain
state and federal statutes and policies, the Trust on behalf of the Fund does
not, as a matter of operating policy: (i) 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)), (ii) pledge,
mortgage or hypothecate for any purpose in excess of 10% of the Fund's net
assets (taken at market value), (iii) 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, (iv) invest for
the purpose of exercising control or management, (v) 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
- 8 -
<PAGE>
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, (vi) invest more than 10% 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, (vii) 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, (viii) 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 (ix) 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 Commission, be
considered a separate security and treated as an issue of such government, other
entity or bank.
PERCENTAGE AND RATING RESTRICTIONS. If a percentage restriction
or a rating restriction on investment or utilization of assets set forth above
or referred to in the Prospectus is adhered to at the time an investment is made
or assets are so utilized, a later change in percentage resulting from changes
in the value of the securities held by the Fund or a later change in the rating
of a security held by the Fund is not considered a violation of policy, however
the 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 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
- 9 -
<PAGE>
are altered due to changes in either the Moody's, Standard & Poor's or Fitch's
ratings systems (see "Description of Ratings" in Appendix A to the Prospectus
for an explanation of Standard & Poor's, Moody's and Fitch ratings), 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
Any current "yield" quotation of the Fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
consists of an annualized historical yield, carried at least to the nearest
hundredth of one percent, based on a specific seven calendar day period and is
calculated by dividing the net change in the value of an account having a
balance of one share at the beginning of the period by the value of the account
at the beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of additional
shares purchased with dividends declared on the original share and dividends
declared on both the original share and any such additional shares, but would
not reflect any realized gains or losses from the sale of securities or any
unrealized appreciation or depreciation on portfolio securities. In addition,
any "effective yield" quotation of the Fund so used is calculated by compounding
the current yield quotation for such period by multiplying such quotation by
7/365, adding 1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. For the 7-day period ended October 31, 1995, the
yield of the Fund was 3.28%. For the 7-day period ended October 31, 1995, the
effective yield of the Fund was 3.34%.
Any "tax equivalent yield" quotation for the 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. For the 7-day
period ended October 31, 1995, the tax equivalent yield of the Fund was 6.17%.
For the 7-day period ended October 31, 1995, the tax equivalent effective yield
of the Fund was 6.29%.
A "total rate of return" quotation for the Fund is calculated for
any period by (a) dividing (i) the sum of the net asset value per share on the
last
- 10 -
<PAGE>
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the net asset value on the first day of such
period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. The total return of the Fund for the period from November 17,
1995 (commencement of operations) to October 31, 1995 was 3.31%.
Any "tax equivalent total rate of return" quotation for the 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. The tax equivalent total rate of return of the
Fund for the period from November 17, 1995 (commencement of operations) to
October 31, 1995 was 6.23%.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers
of the Trust for the past five years are listed below. Asterisks indicate that
those Trustees and officers are "interested persons" (as defined in the 1940
Act) of the Trust. The address of each, unless otherwise indicated, is 6 St.
James Avenue, Boston, Massachusetts 02116.
FREDERICK C. CHEN, TRUSTEE
126 Butternut Hollow Road, Greenwich, Connecticut 06830 -
Management Consultant.
ALAN S. PARSOW*, TRUSTEE
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of
Parsow Partnership, Ltd. (investments).
LARRY M. ROBBINS, TRUSTEE
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104
Director of the Wharton Communication Program and Adjunct
Professor of Management at the Wharton School of the University
of Pennsylvania.
MICHAEL SEELY, TRUSTEE
405 Lexington Avenue, Suite 909, New York, New York 10174 -
President of Investor Access Corporation (investor relations
consulting firm).
- 11 -
<PAGE>
PHILIP W. COOLIDGE*, PRESIDENT
Chairman and Chief Executive Officer, Signature Financial Group,
Inc. ("SFG"); Chairman and Chief Executive Officer, Signature
(since April, 1989).
JOHN R. ELDER*, TREASURER
Vice President, SFG (since April, 1995); Treasurer, Phoenix
Family of Mutual Funds (prior to April, 1995).
LINDA T. GIBSON*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since June, 1991);
Assistant Secretary, Signature (since October, 1992); law
student, Boston University School of Law (prior to May, 1992).
JAMES E. HOOLAHAN*, VICE PRESIDENT
Senior Vice President, SFG (since December, 1989).
THOMAS M. LENZ*, SECRETARY
Senior Vice President and Associate General Counsel, SFG (since
November, 1989); Assistant Secretary, Signature (since February,
1991).
MOLLY S. MUGLER*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG; Assistant Secretary,
Signature (since April, 1989).
BARBARA M. O'DETTE*, ASSISTANT TREASURER
Assistant Treasurer, SFG; Assistant Treasurer, Signature (since
April, 1989).
ANDRES E. SALDANA*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since November,
1992); Attorney, Ropes & Gray (September, 1990 to November,
1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson,
Mugler and O'Dette are also Trustees and/or officers of
certain other investment companies of which Signature or an
affiliate is the administrator.
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Trust
Name of Compensation Part of Fund Benefits Upon Paid to
TRUSTEE From Trust Expenses Retirement Trustees
Frederick C. $4,096 none none $5,650
Chen
Alan S. Parsow $4,096 none none $5,650
Larry M. $3,696 none none $5,050
Robbins
Michael Seely $4,096 none none $5,650
- 12 -
<PAGE>
The compensation table above reflects the fees received by the Trustees
from the Trust for the period from November 17, 1995 (commencement of
operations) to October 31, 1995. The Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust will receive an annual retainer of
$3,600 and a fee of $1,0003 for each meeting of the Board of Trustees or
committee thereof attended.
As of May 22, 1996, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of the Fund. As of the same date,
the following shareholders of record owned 5% or more of the outstanding shares
of the Fund (the Trust has no knowledge of the beneficial ownership of such
shares): Republic National Bank of New York, 10 East 40th Street, New York, New
York, 10016 - 75.3%; Kinco & Co. c/o Securities Services, One Hanson Place,
Brooklyn, New York, 11243 - 10.0%. Shareholders who own more than 25% of the
outstanding voting securities of the Fund may be deemed to control the Fund by
virtue of such share ownership.
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 officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Contract, Republic is responsible
for the investment management of the Fund's assets, including the responsibility
for 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 Republic in its discretion, not including the Distributor. See
"Portfolio Transactions". Republic also furnishes to the Board of Trustees,
- --------
1 As of November 1, 1995, Trustee fee for each meeting of the Board of Trustees
or committee thereof attended increased from $600 to $1,000.
- 13 -
<PAGE>
which has overall responsibility for the business and affairs of the Trust,
periodic reports on the investment performance of the Fund.
Republic is a wholly-owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Fund are not
exclusive under the terms of the Investment Advisory Contract. Republic is free
to and does render investment advisory services to others.
The Investment Advisory Contract will remain in effect until September
.., 1996, and will continue in effect thereafter from year to year with respect
to the Fund, provided such continuance is approved 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 such
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Contract may be terminated with respect to the Fund 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.
For the period November 17, 1995 (commencement of operations) to
October 31, 1995, investment advisory fees aggregated $77,177, of which the
entire amount was waived.
ADMINISTRATOR AND SPONSOR
The Administrative Services Contract is terminable with respect to the
Fund without penalty at any time by vote of a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Administrative Services Contract, upon not more than
60 days' written notice to the Sponsor or by vote of the holders of a majority
of the
- 14 -
<PAGE>
shares of the Fund or upon 15 days' notice by the Sponsor. The Administrative
Services Contract will terminate automatically in the event of its assignment.
The Administrative Services Contract also provides that neither the
Administrator 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, 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 Administrative Services Contract.
For the period from November 17, 1995 (commencement of operations) to
October 31, 1995, the Fund accrued administration fees of $77,177 to Signature,
of which $46,053 was waived.
DISTRIBUTION PLAN - RETAIL CLASS SHARES ONLY
A Distribution Plan has been adopted by the Trust (the "Distribution
Plan") with respect to the Retail Class shares only, and provides that it may
not be amended to increase materially the costs which the Retail Class shares
may bear pursuant to the Distribution Plan without approval by shareholders of
the Retail Class shares, and that any material amendments of the Distribution
Plan must be approved by the Board of Trustees, and by the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any related agreement ("Qualified Trustees"), by vote cast in person at a
meeting called for the purpose of considering such amendments. The selection and
nomination of the Trustees who are not "interested persons" of the Trust (the
"Independent Trustees") has been committed to the discretion of the Independent
Trustees. The Distribution Plan has been approved, and is subject to annual
approval, by the Board of Trustees and by the Qualified Trustees, by vote cast
in person at a meeting called for the purpose of voting on the Distribution
Plan. In adopting the Distribution Plan, the Trustees considered alternative
methods to distribute the Retail Class shares and to reduce the Retail Class
shares' per share expense ratio and concluded that there was a reasonable
likelihood that the Distribution Plan will benefit that class and its
shareholders. The Distribution Plan is terminable with respect to the Retail
Class shares at any time by a vote of a majority of the Qualified Trustees or by
vote of the holders of a majority of the Retail Class shares.
Prior to the adoption by the Trustees of a multiple class structure,
effective January 15, 1996, a predecessor distribution plan was in effect with
respect to all shares of the Fund. Pursuant to the predecessor distribution
plan, during the period from November 17, 1995 (commencement of operations) to
October 31, 1995, the Fund spent a total of $48,825, on the following pursuant
to the Distribution Plan: advertising, $0; printing and mailing of prospectuses
and annual reports to other than current shareholders, $48,550; compensation to
underwriters, $0; compensation to broker-dealers, $0; compensation to sales
personnel, $0; interest, carrying or other financing charges, $0; and other
marketing expenses, $275. Total expenditures pursuant to the Distribution Plan
as a percentage of average daily net assets during the same period were 0.10%.
- 15 -
<PAGE>
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Retail Class and the Adviser Class, and continues in effect
indefinitely if such continuance is specifically approved at least annually by a
vote of both a majority of the Trustees and a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Administrative Services Plan or in
any agreement related to such Plan ("Qualified Trustees"). The Administrative
Services Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or with respect to the Retail Class or the Adviser Class by a
majority vote of shareholders of that class. The Administrative Services Plan
may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Retail Class or the Adviser Class without the
approval of a majority of shareholders of that class, and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Retail Class shares, see "Management of the Trust - Shareholder Servicing
Agents" in the Prospectus describing the Retail Class shares.
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has approved a Custodian Agreement
and a Transfer Agency Agreement between the Trust and Investors Bank & Trust
Company ("IBT") pursuant to which IBT will provide custodial, fund accounting,
transfer agency, dividend disbursing and shareholder servicing services to the
Trust and the Fund. The principal business address of IBT is 24 Federal Street,
Boston, Massachusetts 02110.
EXPENSES AND EXPENSE LIMITS
Certain of the states in which shares of the Fund are expected to be
qualified for sale impose limitations on the expenses of the Fund. If, in any
fiscal year, the total expenses of the Fund (excluding taxes, interest, expenses
under the Plan, brokerage commissions and other portfolio transaction expenses,
other expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative fees) exceed the expense limitations applicable to the Fund
imposed by the securities regulations of any state, the Distributor and the
Adviser each will reimburse the Fund for 50% of the excess. The effective
limitation on an annual basis with respect to the Fund is expected to be 2.5% on
the first $30 million of the Fund's net assets, 2.0% on the next $70 million of
such assets, and 1.5% on any excess above $100 million.
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Retail Class shares must include payments made pursuant to the Distribution
Plan and the Administrative Services Plan. In the event a
- 16 -
<PAGE>
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 share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
As discussed under the caption "Dividends and Distributions" in the
Prospectus, the Trust uses the amortized cost method to determine the value of
the Fund's portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing an obligation at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. During these
periods the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund which utilizes a method of valuation based upon
market prices. Thus, during periods of declining interest rates, if the use of
the amortized cost method resulted in a lower value of the Fund's portfolio on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Fund's dollar-weighted average portfolio maturity of
90 days or less must be maintained, and only securities having remaining
maturities of 397 days or less which are determined by the Trust's Board of
Trustees to be of high quality with minimal credit risks may be purchased.
Pursuant to Rule 2a-7, the Board has established procedures designed to
stabilize, to the extent reasonably possible, the price per share of the Fund,
as computed for the purpose of sales and redemptions, at $1.00. Such procedures
include review of the Fund's portfolio holdings by the Board of Trustees, at
such intervals as it may deem appropriate, to determine whether the net asset
value of the Fund calculated by using available market quotations deviates from
the $1.00 per share valuation based on amortized cost. The extent of any
deviation is examined by the Board of Trustees. If such deviation exceeds
$0.003, the Board promptly considers what action, if any, will be initiated. In
the event the Board determines that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
the Board will take such corrective action as it regards as necessary and
appropriate, which may include selling portfolio instruments prior to maturity
to realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends or establishing a net asset value per share by using
available market quotations.
- 17 -
<PAGE>
TAXATION
FEDERAL INCOME TAX
The Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code (the "Code"). By so
qualifying, the Fund will be exempt from federal income taxes to the extent that
it distributes substantially all of its net investment income and net realized
capital gains to shareholders.
It is intended that the Fund's assets will be sufficiently invested in
municipal securities to qualify to pay "exempt-interest dividends" (as defined
in the Code) to shareholders. The Fund's 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 its 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.
The Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If the Fund earns income which is not
eligible to be so designated, the Fund, nonetheless, intends to distribute such
income. Such distributions will be subject to federal, state, and local state
taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by the Fund from
investment in taxable debt securities, or ordinary income realized upon the
disposition of market discount bonds (including tax-exempt market discount
bonds), and of any net realized short-term capital gains will be taxable to
shareholders as ordinary income. Because the Fund's investment income is derived
from interest rather than dividends, no portion of such distributions is
expected to be eligible for the dividends-received deduction available to
corporations.
Under the Code, any distribution designated as being made from the
Fund's net realized long-term capital gains is taxable to shareholders as
long-term capital gains, regardless of the length of time shares are held.
Distributions by the Fund other than exempt-interest dividends and
redemption proceeds may be subject to backup withholding at the rate of 31%.
Backup withholding generally applies to shareholders who have failed to properly
certify their taxpayer identification numbers, who fail to provide other
required tax-related certifications, and with respect to whom the Fund has
received certain notifications from the Internal Revenue Service requiring or
permitting the Fund to apply backup withholding is not an additional tax and
amounts so withheld generally may be applied by affected shareholders as a
credit against their federal income tax liability.
Interest on certain types of private activity bonds is not exempt from
federal income tax when received by "substantial users" or persons related to
substantial users as defined in the Code. The term "substantial user" includes
- 18 -
<PAGE>
any "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of private activity bonds. The Fund may
invest periodically in private activity bonds and, therefore, may not be
appropriate investments 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 (spouse, brothers,
sisters, and lineal descendants) owns indirectly in aggregate more than 50% in
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 the
Fund's advisor 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 federal and (as applicable) state tax-exempt, neither
the advisor nor the Fund's counsel makes any review of proceedings relating to
the issuance of municipal securities or the bases of such opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund and the Trust or their dissolution.
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.
The information above is only a summary of some of the tax
considerations affecting the Fund and its shareholders; no attempt has been made
to discuss individual tax consequences. A prospective investor should consult
his or her tax advisor or state or local tax authorities to determine whether
the Fund is a suitable investment based on his or her tax situation.
- 19 -
<PAGE>
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 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 of 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 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
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 classes 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.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
- 20 -
<PAGE>
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.
INDEPENDENT AUDITORS
For the fiscal year ended October 31, 1995, Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116, served as independent auditors of
the Funds of the Trust.
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Funds of the Trust for the fiscal year ending
October 31, 1996. KPMG Peat Marwick LLP will audit the Trust's annual financial
statements, prepare the Trust's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02108.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the 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
The Fund's current audited financial statements dated October 31, 1995
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1995 as filed with the Securities and Exchange Commission
pursuant to Rule 30b2-1 under the 1940 Act. A copy of such report will be
provided without charge to each person receiving this Statement of Additional
Information.
- 21 -
<PAGE>
APPENDIX
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 of the State of New York dated June 23, 1995.
GENERAL
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; Binghampton -- 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.
A-1
<PAGE>
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 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 national economy began to expand in 1991, although the growth rate
for the first two years of the expansion was modest by historical standards. The
State economy remained in recession until 1993, when employment growth resumed.
Since November 1992, the State has added approximately 185,000 jobs. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and defense industries. Personal
income increased substantially in 1992 and 1993, aided significantly by large
bonus payments in banking and financial industries.
The national economy performed better in 1994 than in any year since
the recovery began in 1991. National job and income growth were substantial. In
response, the Federal Reserve Board shifted to a policy of monetary tightening
by raising interest rates throughout the year. As a result, the national
economic growth is expected to weaken, but not turn negative, during the course
of 1995 before beginning to rebound by the end of the year. This dynamic is
often described as a "soft landing." The overall rate of growth of the national
economy during calendar year 1995 will be slightly below the "consensus" of a
widely followed survey of national economic forecasters. Growth in the real
gross domestic product during 1995 is projected to be moderate (3.0 percent),
with declines in defense spending and net exports more than offset by increases
in consumption and investment. Continuing efforts by business and government to
reduce costs are expected to exert a drag on economic growth. Inflation, as
measured by the Consumer Price Index, is projected to remain about 3 percent due
to moderate wage growth and foreign competition. Personal income and wages are
projected to increase by about 6 percent or more.
The State economy had a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. New York's economy is expected to continue to expand modestly
during 1995, but there will be a pronounced slow-down during the course of the
year. Although industries that export goods and services abroad are expected to
benefit from the lower dollar, growth will be slowed by government cutbacks at
all
A-2
<PAGE>
levels. On an average annual basis, employment growth will be about the same as
1994. Both personal income and wages are expected to record moderate gains in
1995. Bonus payments in the securities industry are expected to increase from
last year's depressed level. Personal income rose 4.0 percent in 1994.
The State has for many years had a very high State and local tax burden
relative to other States. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits, the burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
To stimulate the State's economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. Local industrial development agencies
raised an aggregate of approximately $7.8 billion in separate tax-exempt bond
issues through December 31, 1993. There are currently over 100 county, city,
town and village agencies. In addition, the New York State Urban Development
Corporation is empowered to issue, subject to certain State constitutional
restrictions and to approval by the Public Authorities Control Board, bonds and
notes on behalf of private corporations for economic development projects. The
State has also taken advantage of changes in Federal bank regulations to
establish a free international banking zone in the City.
In addition, the State has provided various tax incentives to encourage
business relocation and expansion. These programs include direct tax abatements
from local property taxes for new facilities (subject to locality approval) and
investment tax credits that are applied against the State corporation franchise
tax. Furthermore, legislation passed in 1986 authorizes the creation of up to 40
"economic development zones" in economically distressed regions of the State.
Businesses in these zones are provided a variety of tax and other incentives to
create jobs and make investments in the zones.
STATE FINANCIAL PLAN
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the Executive Budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
A-3
<PAGE>
The State's fiscal year, which commenced on April 1, 1995, and ends on
March 31, 1996, is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995, and
is based on the State's budget as enacted by the Legislature and signed into law
by the Governor. The State Financial Plan will be updated quarterly pursuant to
law in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
the Governor, who assumed office on January 1. It is the first budget in over
half a century which proposed and, as enacted, projects an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (I.E., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low- and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State work force, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
A-4
<PAGE>
The Executive Budget indicates that for years State revenues have grown
at a slower rate than State spending, producing an increasing structural
deficit, and that as the Executive Budget is enacted, the State will start to
eliminate the structural imbalance that has characterized the State's fiscal
record. There can, however, be no assurances that the tax and spending cuts will
eliminate potential imbalances in future fiscal years. The Governor's
recommended multi-year personal income tax cuts are designed to reduce the yield
on that tax by about one-third by 1998, and could require significant additional
spending cuts in those years, increased economic growth to provide additional
revenues, additional revenue measures, or a combination of those factors.
GOVERNMENT FUNDS
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
GENERAL FUND RECEIPTS
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 1995-96 fiscal year, the General Fund is expected to account for
approximately 49 percent of total governmental-funded disbursements and 71
percent of total State-funded disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service on long-term bonds, where these costs are not funded from other
sources.
The Financial Plan for the 1995-96 fiscal year released on February 1,
1995, projects General Fund receipts, including transfers from other funds, of
$33.110 billion, a reduction of $48 million from the total receipts in the 1994-
95 fiscal year. Tax receipts are projected at $29.793 billion for the 1995-96
fiscal year. Although growth in the base for tax receipts is expected to
accelerate during the 1995-96 fiscal year, tax receipts are expected to fall by
3.5 percent, principally due to the combined effect of implementing during the
1995-96 fiscal year (1) a portion of the tax reductions originally enacted in
1987 and deferred each year since 1990, (2) additional tax cuts to prevent tax
increases also originally enacted in 1987 from taking effect and (3) the
proposed employer day care credit ($5 million), together with the incremental
cost of the tax reductions enacted in 1994 (more than $500 million), which
effectively negate the effect of projected growth in the recurring revenue base.
In addition, certain nonrecurring revenues in the 1994-95 receipts base,
including the 1993-94 surplus of $1.026 billion, additional earmarking to
dedicated funds (more than $210 million) and other miscellaneous one-time
receipts (more than $100 million) are not available in the 1995-96 fiscal year,
thereby reducing potential year-over-year growth by another 4 percentage points.
The projected yield of personal income tax in the 1995-96 fiscal year
of $17.285 billion is a decrease of $305 million from reported collections in
the State's 1994-95 fiscal year. The decrease reflects both the effects of the
tax reductions and the fact that reported collections in the preceding year were
A-5
<PAGE>
affected by net refund reserve transactions that buoyed collections in that year
by $862 million that will be unavailable in the current year. Without these
changes, the yield of the tax would have grown by more than $1.0 billion (6
percent), reflecting liability growth for the 1995 tax year projected at
approximately the same rate. The income base for the tax is projected to rise
approximately 5 percent for the 1995 tax year. Personal income tax receipts
showed a sharp increase in 1994-95 and are expected to decline in 1995-96.
Personal income tax reductions recommended in the Executive Budget are projected
to produce taxpayer savings of $720 million in calendar year 1995 reflecting the
scheduled implementation of the 1987 tax reductions. The tax reductions
recommended by the Governor are part of a multi-year program designed to reduce
the yield of the income tax by about one-third by 1998.
Receipts in user taxes and fees in the State's 1995-96 fiscal year are
expected to total $6.697 billion, an increase of $73 million from reported 1994-
95 results. Growth in user taxes and fees is expected to slow to about 1 percent
in 1995-96, reflecting nearly $70 million of additional tax relief in this
category in the coming year resulting from tax reductions enacted in 1994, the
absence of extraordinary audit collections received in 1994-95, and a slowdown
in the underlying growth rate of sales and use tax collections, offset by a
projected improvement of $41 million as a result of recommended legislation to
enhance sales tax collection procedures. Business tax receipts are projected at
$4.709 billion, a decline of $360 million from reported 1994-95 results. The
decline in the 1995-96 fiscal year largely reflecting the effect of tax
reductions enacted in 1994.
Total receipts from other taxes in the State's 1995-96 fiscal year are
projected at $1.102 billion, $6 million less than in the preceding year. The
estimates reflect 1994 and 1995 legislation reducing the burden of the real
property gains tax and the estate tax as well as diversion of a portion of the
real estate transfer tax proceeds to the Environmental Protection Fund.
Miscellaneous receipts in the State's 1995-96 fiscal year are expected to total
$1.596 billion, an increase of $335 million above the amount received in the
prior State fiscal year. Growth in overall collections from miscellaneous
receipts in the coming fiscal year is expected to result largely from several
discrete actions involving settlement of environmental litigation, the
recommended merger of public authorities, and transactions with the Power
Authority, which together account for over $200 million of projected
miscellaneous receipts anticipated in 1995-96. Transfers from other funds
continue at prior year levels, with the addition of the transfer of $220 million
in excess funds from the Metropolitan Mass Transportation Operating Assistance
Fund.
GENERAL FUND DISBURSEMENTS
General Fund disbursements are projected to total $33.055 billion in
1995-96, a decrease of $344 million from the total amount disbursed in the prior
fiscal year. This decline reflects a broad agenda of cost containment actions,
more than offsetting modest increases for fixed costs, such as pensions, debt
service on bonds sold during the current year and capital projects under
construction.
A-6
<PAGE>
Disbursements from grants to local governments are projected to total
$22.910 billion in the 1995-96 State Financial Plan, a decrease of $392 million
from 1994-95 levels. Although spending in this category is reduced, direct
payments to local governments, including school aid and revenue sharing are
maintained largely at last year's levels. This category of the State Financial
Plan includes $10.823 billion in aid for elementary, secondary, and higher
education. Costs for social services, such as Medicaid, income maintenance and
child support services account for $8.706 billion. Remaining disbursements
primarily support community-based mental hygiene programs, community and public
health programs, local transportation programs, and revenue sharing.
Significant decreases from the prior year result largely from cost
containment initiatives in Medicaid and other social welfare programs. Payments
for Medicaid from the General Fund are projected to be $506 million lower than
in 1994-95. $128 Million in operating aid to the New York City Transit Authority
will be eliminated, matching the reduction in New York City support of the
Authority.
Spending for State operations is projected at $6.020 billion, a
decrease of $288 million. Recommendations in the Executive Budget reduce the
work force by approximately 3,200 positions (most of which reduce disbursements
in this category).
Spending for general State charges is projected at $2.080 billion in
the 1995-96 State Financial Plan, and are virtually unchanged from the 1994-95
level. The budgeted amount for general State charges assumes the use of $110
million from a special reserve for pension supplementation, established in 1970
and funded through State and local employer contributions in the early 1970's,
to offset the State's pension contribution. The Comptroller, as sole trustee of
the Common Retirement Fund and administrative head of the Retirement System, is
in the process of reviewing the legislation that directs the use of these
reserves to determine whether or not to commence legal proceedings to prevent
such proposed use in the enacted 1995-96 State budget as a violation of the
State Constitution, and there is a substantial likelihood that he will do so.
The Executive considers the proposed use of these reserves to be a credit for
prior-year supplementation payments and, therefore, in compliance with the State
Constitution.
Debt service in the General Fund for 1995-96 reflects only the $9
million interest cost of the State's commercial paper program. No cost is
included for a TRAN borrowing, since none is expected to be undertaken. General
Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to total $1.583 billion, and increase of $157 million.
This increase is heightened by the use of one-time reimbursements from other
funds in the 1994-95 fiscal year. Transfers in support of capital projects are
projected to total $375 million, an increase of $169 million, which reflects
significant investments in both new and ongoing capital programs. All other
transfers are projected to total $78 million, an increase of $9 million from
1994-95 levels.
The 1995-96 opening fund balance of $158 million includes $157 million
which is reserved in the Tax Stabilization Reserve Fund, as well as $1 million
A-7
<PAGE>
which is reserved in the Contingency Reserve Fund. The Contingency Reserve Fund
was established in 1993-94 to set aside moneys to address adverse judgments or
settlements resulting from litigation against the State. The closing fund
balance in the General Fund of $213 million reflects a balance of $172 million
in the Tax Stabilization Reserve Fund, following an additional payment of $15
million during the year, and a balance of $41 million in the Contingency Reserve
Fund.
The 1995-96 Financial Plan includes over $600 million in non-recurring
resources. These actions include items discussed above, as well as retroactive
Federal reimbursements and some non-recurring social welfare cost containment
actions. The Budget Division believes that recommendations included in the
Executive Budget will provide fully annualized savings in 1996-97 that more than
offset the non-recurring resources used in 1995-96.
SPECIAL REVENUE FUNDS
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes. For
1995-96, the State Financial Plan projects disbursements of $26.002 billion from
these funds, an increase of $1.641 billion over 1994-95 levels. Disbursements
from Federal funds, primarily the Federal share of Medicaid and other social
services programs, are projected to total $19.209 billion in the 1995-96 fiscal
year. Remaining projected spending of $6.793 billion primarily reflects aid to
SUNY supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
funded from the proceeds of dedicated transportation taxes, and costs of a
variety of self-supporting programs which deliver services financed by user
fees.
CAPITAL PROJECTS FUNDS
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major state capital
facilities and for capital assistance grants to certain local government or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Disbursements from the Capital Projects Funds in 1995-96 are projected
at $4.160 billion, an increase of $541 million over prior-year levels. Spending
for capital projects will be financed through a combination of sources: Federal
grants, public authority bond proceeds, general obligation bond proceeds, and
current revenues. Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be available from the proceeds
of general obligation bonds.
DEBT SERVICE FUNDS
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements.
Disbursements
A-8
<PAGE>
are estimated at $2.506 billion in the 1995-96 fiscal year, an increase of $303
million from 1994-95. The transfer from the General Fund of $1.583 billion is
expected to finance 63 percent of these payments. The remaining payments are
expected to be financed by pledged revenues, including $1.794 billion in taxes,
$228 million in dedicated fees, and $2.200 billion in patient revenues,
including transfers of Federal reimbursements. After impoundment for debt
service, as required, $3.481 billion is expected to be transferred to the
General Fund and other funds in support of State operations. The largest
transfer - $1.761 billion - is made to the Special Revenue Fund type, in support
of operations of the mental hygiene agencies. Another $1.341 billion in excess
sales taxes is expected to be transferred to the General Fund, following payment
of projected debt service on bonds of LGAC.
The increase in debt service costs recommended in the Executive Budget
primarily reflects prior capital commitments financed by bonds issued by the
State and State-supported debt issued by its public authorities, and the
completion of the LGAC program. The increase has been moderated by the
reductions to bond-financed capital spending as discussed above, and reflects
debt issuances in 1994-95 and 1995-96 which are lower than they would have been,
absent the Governor's review of capital spending.
CASH FLOW
For the second time in many years, the State will meet its cash flow
needs without relying on a spring borrowing. However, this achievement is
predicated on two actions: the issuance of all remaining LGAC bonds authorized
in the 1990 statute; and the passage of proposed legislation permitting the
State to use, for cash flow purposes only, balances in the Lottery Fund.
Temporary transfers will be returned within five months so that all available
Lottery moneys as well as advances of additional aid can be paid to school
districts in September.
The lingering impact of the 1994-95 receipts shortfall -- as well as
the impact of the potential $5 billion 1995-96 imbalance on cash operations --
exerts substantial pressures on the State's cash balance position in the first
three months of the fiscal year. These pressures are expected to abate later in
the 1995-96 fiscal year, as cash outlays decline from previous levels consistent
with cost-savings initiatives proposed in the Executive Budget.
PRIOR FISCAL YEARS
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
A-9
<PAGE>
1994-95 FISCAL YEAR
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service.
The 1994-95 budget contained a significant investment in efforts to
spur economic growth. The budget included provisions to reduce the level of
business taxation in New York, with cuts in the corporate tax surcharge, the
alternative minimum tax imposed on business and the petroleum business tax,
repeal of the State's hotel occupancy tax, and reductions in the real property
gains tax to stimulate construction and facilitate the real estate industry's
access to capital. Complementing the elimination of the hotel tax was a $10
million investment of State funds in the "I Love New York" program designed to
spur tourism activity throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget
also included more than $200 million in additional funding for economic
development programs. Special emphasis was placed on programs intended to enable
New York State to: (i) invest in high technology industries; (ii) expand access
to foreign markets; (iii) strengthen assistance to small businesses,
particularly those owned by women and minorities; (iv) retain and attract new
manufacturing jobs; (v) help companies and communities impacted by continued
cutbacks in Federal defense spending and ongoing corporate downsizings; and (vi)
bolster the tourism industry. In addition, the budget included increased levels
of support for programs to rebuild and maintain State infrastructure, and
provisions to create 21 new economic development zones.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State Fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
A-10
<PAGE>
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC which raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the category of grants to
local governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
nonessential capital projects. These actions, together with $71 million in other
measures comprised the Governor's $259 million gap-closing plan, submitted to
the Legislature in connection with the 1995-96 Executive Budget.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its Contingency
Reserve Fund and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income tax
refund reserve have the effect of reducing reported personal income tax receipts
in the fiscal year when made and withdrawals from such reserve increase receipts
in the fiscal year when made. The balance in the tax refund reserve account will
be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund. The State's 1992-93 fiscal year was characterized by performance
that was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax. There
A-11
<PAGE>
were, however, large and mainly offsetting variances in other categories of
receipts.
CERTAIN LITIGATION
Certain litigation pending against New York or its officers or
employees could have a substantial or long-term adverse effect on New York
finances. Among the more significant of these cases are those that involve: (i)
the validity of agreements and treaties by which various Indian tribes
transferred to New York title to certain land in New York; (ii) certain aspects
of New York's Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services, and the eligibility for
and nature of home care services; (iii) challenges to provisions of Section
2807-C of the Public Health Law, which impose a 13% surcharge on inpatient
hospital bills paid by commercial insurers and employee welfare benefit plans
and portions of Chapter 55 of the laws of 1992, which require hospitals to
impose and remit to the State an 11% surcharge on hospital bills paid by
commercial insurers and which require health maintenance organizations to remit
to the State a surcharge of up to 9%; (iv) an action against the State of New
York and New York City officials alleging that the present level of shelter
allowance for public assistance recipients is inadequate under statutory
standards to maintain proper housing; (v) challenges to the practice of
reimbursing certain Office of Mental Health patient care expenses from the
client's Social Security benefits; (vi) alleged responsibility of New York
officials to assist in remedying racial segregation in the City of Yonkers;
(vii) a challenge to the constitutionality of financing programs of the Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991; and (viii) a
claim that the State's Department of Environmental Conservation prevented the
completion of a cogeneration facility by the projected date by failing to
provide data in a timely manner and that the plaintiff thereby suffered damages.
In addition, aspects of petroleum business taxes are the subject of
administrative claims and litigation.
THE CITY OF NEW YORK
The fiscal health of the State of New York is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from New York. The City's
independently audited operating results for each of its 1981 through 1993 fiscal
years showed a General Fund surplus reported in accordance with GAAP. In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City received such an opinion.
The 1996-1999 Financial Plan reflects a program of proposed actions by
the City to close the gaps between projected revenues and expenditures of $888
million, $1.5 billion and $1.4 billion for the 1997, 1998 and 1999 fiscal years,
respectively. These actions, a substantial number of which are not specified in
detail, include additional agency spending reductions, reduction in
entitlements, government procurement initiatives, revenue initiatives and the
availability of the general reserve.
A-12
<PAGE>
The Office of the State Deputy Comptroller for the City of New York
(the "OSDC") and the State Financial Control Board continue their respective
budgetary oversight activities.
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
(the "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; the Office of the State Deputy Comptroller for the City of New York to
assist the Control Board in exercising its powers and responsibilities; and a
"Control Period" from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board, MAC
and OSDC continue to exercise various fiscal-monitoring functions over the City,
and 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, the Control Board is required by law
to reimpose a Control Period. Currently, the City and its Covered Organizations
(I.E., those which receive or may receive monies from the City directly,
indirectly or contingently) operate under a four-year financial plan which the
City prepares annually and periodically updates.
The staffs of the OSDC and the Control Board issue periodic reports on
the City's financial plans, as modified, analyzing forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered Organizations.
OSDC staff reports issued during the mid-1980's noted that the City's budgets
benefitted from a rapid rise in the City's economy, which boosted the City's
collection of property, business and income taxes. These resources were used to
increase the City's work force and the scope of discretionary and mandated City
services. Subsequent OSDC staff reports examined the 1987 stock market crash and
the 1989-92 recession, which affected the New York City region more severely
than the nation, and attributed an erosion of City revenues and increasing
strain on City expenditures to that recession. According to a recent OSDC staff
report, the City's economy is now slowly recovering, but the scope of that
recovery is uncertain and unlikely, in the foreseeable future, to match the
expansion of the mid-1980's. Also, staff reports of OSDC and the Control Board
have indicated that the City's recent balanced budgets have been accomplished,
in part, through the use of non-recurring resources, tax increases and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; and that the City is therefore
likely to continue to face future projected budget gaps requiring the City to
increase revenues and/or reduce expenditures. According to the most recent staff
reports of OSDC and the Control Board, during the four-year period covered by
the current financial plan, the City is relying on obtaining substantial
resources from initiatives needing approval and cooperation of its municipal
labor unions, Covered Organizations, and City Council, as well as the State and
Federal governments, among others.
A-13
<PAGE>
The City requires significant amounts of financing for seasonal and
capital purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during its fiscal year ending June 30, 1994. The City's capital
financing program projects long-term financing requirements of approximately $17
billion for the City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water supply and sewage
disposal systems, roads, bridges, mass transit, schools, hospitals and housing.
OTHER LOCALITIES
In addition to the City, certain localities, including the City of
Yonkers, could have financial problems leading to requests for additional State
assistance during the State's 1995-96 fiscal year and thereafter. Municipalities
and school districts have engaged in substantial short-term and long-term
borrowings. In 1993, the total indebtedness of all localities in the State other
than New York City was approximately $17.7 billion.
From time to time, Federal expenditure reductions could reduce, or in
some cases, eliminate, Federal funding of some local programs, and, accordingly,
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorization. As of September 30, 1994, there
were 18 public authorities that had aggregate outstanding debt of $70.3 billion.
Some authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs.
The Metropolitan Transit Authority (the "MTA"), which receives the bulk
of the appropriated moneys from the State, oversees the operation of the City's
bus and subway system by its affiliates, the New York City Transit Authority and
Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). The MTA has depended and will continue to depend upon Federal, state and
local government support to operate the transit system because fare revenues are
insufficient.
Over the past several years, 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 region served by
the MTA and a special one-quarter of one percent regional sales and use tax)
that provide
A-14
<PAGE>
additional revenues for mass transit purposes, including assistance to the MTA.
In addition, a one-quarter of one percent regional mortgages recording tax paid
on certain mortgages creates an additional source of recurring revenues for the
MTA. Further, in 1993, the State dedicated a portion of the State petroleum
business tax to assist the MTA. For the 1995-96 State fiscal year, total State
assistance to the MTA is estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-
96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the Triborough Bridge and Tunnel Authority,
and the TA are collectively authorized to issue an aggregate of $3.1 billion of
bonds (net of certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be financed in
significant part through dedication of State petroleum business taxes referred
to above.
There can be no assurance that all the necessary governmental actions
for the Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1992-96 Capital Program, or
parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA
to issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is 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 State assistance.
A-15
RF038A
<PAGE>
RF035A
REPUBLIC NEW YORK
TAX FREE BOND FUND
6 St. James Avenue
Boston, Massachusetts 02116
General
and
Account Information (800) 782-8183 (Toll Free)
Republic National Bank of New York - Investment Adviser
("Republic" or the "Adviser")
Signature Broker-Dealer Services, Inc. -
Administrator, Distributor and Sponsor
("Signature" or the "Distributor")
STATEMENT OF ADDITIONAL INFORMATION
Republic New York Tax Free Bond Fund (the "Fund") is a separate series
(portfolio) of the Republic Funds (the "Trust"), an open-end, management
investment company which currently consists of six portfolios, each of which has
different and distinct investment objectives and policies. The Fund is described
in this Statement of Additional Information. Shares of the Fund are divided into
two separate classes, the Retail Class and the Adviser Class.
The investment objective of the Fund is to provide shareholders of the
Fund with monthly dividends exempt from regular federal, New York State and New
York City personal income taxes as well as to protect the value of its
shareholders' investment. The Trust seeks to achieve the investment objective of
the Fund by investing the assets of the Fund primarily in a non-diversified
portfolio of municipal bonds and notes and other debt instruments the interest
on which is exempt from regular federal, New York State and New York City
personal income taxes. There can be no assurance that the investment objective
of the Fund will be achieved.
Shares of the Fund 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
RETAIL CLASS OR THE ADVISER CLASS OF THE FUND, AS APPROPRIATE, EACH DATED MAY
22, 1996 (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.
May 22, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective, Policies and Restrictions . . . . . . . . .1
"When-Issued" Municipal Obligations . . . . . . . . . . 1
Variable Rate Instruments . . . . . . . . . . . . . . . 2
Repurchase Agreements . . . . . . . . . . . . . . . . . 2
Participation Interests . . . . . . . . . . . . . . . . 3
Futures Contracts . . . . . . . . . . . . . . . . . . . 3
Portfolio Management . . . . . . . . . . . . . . . . . . 7
Portfolio Transactions . . . . . . . . . . . . . . . . . 8
Special Factors Affecting New York . . . . . . . . . . . 9
Investment Restrictions . . . . . . . . . . . . . . . . 10
State and Federal Restrictions . . . . . . . . . . . . 12
Percentage and Rating Restrictions . . . . . . . . . . . 13
Performance Information . . . . . . . . . . . . . . . . . . . . .14
Management of the Trust . . . . . . . . . . . . . . . . . . . . .15
Trustees and Officers . . . . . . . . . . . . . . . . . 15
Investment Adviser . . . . . . . . . . . . . . . . . . . 17
Administrator, Distributor and Sponsor . . . . . . . . . 18
Shareholder Servicing Agents, Transfer Agent and
Custodian . . . . . . . . . . . . . . . . . . .19
Expenses and Expense Limits . . . . . . . . . . . . . . 19
Determination of Net Asset Value . . . . . . . . . . . . . . . .20
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Federal Income Tax . . . . . . . . . . . . . . . . . . . 21
Alternative Minimum Tax . . . . . . . . . . . . . . . . 23
Special Tax Considerations . . . . . . . . . . . . . . . 24
Other Information . . . . . . . . . . . . . . . . . . . . . . . 24
Capitalization . . . . . . . . . . . . . . . . . . . . . 24
Voting Rights . . . . . . . . . . . . . . . . . . . . . 24
Independent Auditors . . . . . . . . . . . . . . . . . . 25
Counsel . . . . . . . . . . . . . . . . . . . . . . . . 25
Registration Statement . . . . . . . . . . . . . . . . . 25
Financial Statements . . . . . . . . . . . . . . . . . . 25
Appendix A - Description of Municipal Obligations . . . . . . . A-1
Appendix B - Additional Information Concerning New York
Municipal Obligations . . . . . . . . . . . . . . . . . . B-1
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated May 22, 1996, of the Trust by which
shares of the
<PAGE>
Fund are offered. Unless the context otherwise requires, terms defined in the
Prospectus have the same meaning in this Statement of Additional Information as
in the Prospectus.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective and Policies" in the Prospectus.
The investment objective of the Fund is to provide shareholders of the
Fund with monthly dividends exempt from regular federal, New York State and New
York City personal income taxes as well as to protect the value of its
shareholders' investment.
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 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.
"WHEN-ISSUED" MUNICIPAL OBLIGATIONS. 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
- 1 -
<PAGE>
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or lesser than the Fund's payment obligations).
VARIABLE RATE INSTRUMENTS. 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.
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.
REPURCHASE AGREEMENTS. The Trust may invest the Fund's assets in
instruments subject to repurchase agreements only with member banks of the
Federal Reserve System or "primary dealers" (as designated by the Federal
Reserve Bank of New York) in U.S. Government securities. Under the terms of a
typical repurchase agreement, an underlying debt instrument would be acquired
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument at a fixed price and time,
thereby determining the yield during the Fund's holding period. This results in
a fixed rate of return insulated from market fluctuations during such period. A
repurchase agreement is subject to the risk that the seller may fail to
repurchase the security. Repurchase agreements may be deemed to be loans under
the 1940 Act. All repurchase agreements entered into on behalf of the Fund are
fully collateralized at all times during the period of the agreement in that the
value of the underlying security is at least equal to the amount of the loan,
including the accrued interest thereon, and the Trust or its custodian bank has
possession of the collateral, which the Trust's Board of Trustees believes gives
the Fund a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been definitively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs in connection
with the disposition of the collateral. The Trust's 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
the Fund. Repurchase agreements give rise to income which does not qualify as
tax-exempt income when distributed to Fund shareholders. The Trust will not
invest on
- 2 -
<PAGE>
behalf of the Fund in a repurchase agreement maturing in more than seven days if
any such investment together with illiquid securities held for the Fund exceed
10% of the Fund's net assets.
PARTICIPATION INTERESTS. The Trust may purchase from banks on behalf of
the Fund participation interests in all or part of specific holdings of
Municipal Obligations. The Trust 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 on such interests will be tax-exempt when
distributed as dividends to shareholders of the Fund. The Trust will not invest
more than 5% of the Fund's assets in participation interests.
The Trust has no current intention of purchasing any participation
interest for the Fund in the foreseeable future.
FUTURES CONTRACTS. A Futures Contract is an agreement between two
parties for the purchase or sale for future delivery of fixed income securities
or for the payment or acceptance of a cash settlement based upon changes in the
value of an index of securities. A "sale" of a Futures Contract means the
acquisition of a contractual obligation to deliver the securities or to make or
accept the cash settlement called for by the contract at a specified price on a
specified date. A "purchase" of a Futures Contract means the acquisition of a
contractual obligation to acquire the securities or to make or accept the cash
settlement called for by the contract at a specified price on a specified date.
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.
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 Trust may enter into transactions in Futures Contracts on any fixed
income securities and indexes of municipal securities to hedge the Fund's
portfolio, I.E., to protect the Fund from fluctuations in interest rates without
the risks and transaction costs of actually buying or selling long-term debt
securities. For example, if the Fund owns long-term bonds, and interest rates
were expected to increase, the Trust might enter into Futures Contracts on
behalf of the Fund for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the long-term bonds owned by
the Fund. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of the Fund's Futures Contracts would
- 3 -
<PAGE>
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. When the Fund is not
fully invested, and a decline in interest rates is anticipated, which would
increase the cost of fixed income securities which the Trust intends to acquire
for the Fund, the Trust may purchase Futures Contracts on behalf of the Fund. In
the event that the projected decline in interest rates occurs, the increased
cost to the Fund of the securities acquired should be offset, in whole or in
part, by gains on the Futures Contracts. As portfolio securities are purchased,
the Trust will close out the Fund's Futures Contracts by entering into
offsetting transactions on the contract market on which the initial purchase was
effected. In a substantial majority of these transactions, the Trust will
purchase fixed income securities for the Fund upon termination of the long
futures positions, but under unusual market conditions, a long futures position
may be terminated without a corresponding purchase of securities.
While Futures Contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a Futures Contract is terminated by entering into an
offsetting transaction. The Trust will incur brokerage fees on behalf of the
Fund when it purchases and sells Futures Contracts. At the time a purchase or
sale is made, cash or securities must be provided as an initial deposit known as
"margin". The initial deposit required will vary, but may be as low as 2% or
less of a contract's face value. Daily thereafter, the Futures Contract is
valued through a process known as "marking to market", and the Trust may receive
or be required to pay additional "variation margin" on behalf of the Fund as the
Futures Contract becomes more or less valuable. 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 Trust would purchase and sell Futures Contracts on indexes of
municipal securities on behalf of the Fund 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 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 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 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 Trust on behalf of the 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
- 4 -
<PAGE>
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 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.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund may be
protected, in whole or in part, against the increased cost of acquiring bonds
resulting from a decline in interest rates. Similar results could be
accomplished by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase. However, since
the futures market is more liquid than the cash market, the use of Futures
Contracts as an investment technique allows action in anticipation of such an
interest rate decline without having to sell the Fund's portfolio securities. To
the extent Futures Contracts are entered into for this purpose, the assets in
the segregated asset accounts maintained on behalf of the Fund will consist of
cash, cash equivalents or high quality debt securities 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 deposit and
variation margin payments made for the Fund with respect to such Futures
Contracts.
The ability to hedge effectively all or a portion of the Fund's
portfolio through transactions in Futures Contracts depends on the degree to
which movements in the value of the fixed income securities or index underlying
such contracts correlate with movements in the value of securities held in the
Fund's portfolio. If the security, or the securities comprising the index,
underlying a Futures Contract is different than the portfolio securities being
hedged, they may not move to the same extent or in the same direction. In that
event, the hedging strategy might not be successful and the Fund could sustain
losses on the hedging transactions which would not be offset by gains on its
portfolio. It is also possible that there may be a negative correlation between
the index or security underlying a Futures Contract 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 could be
less than if the hedging transactions had not been undertaken.
The trading of Futures Contracts on an index of fixed income securities
entails the additional risk of imperfect correlation between movements in the
futures price and the value of the underlying index. The anticipated spread
between the prices 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 futures market. The risk of
imperfect correlation, however, generally tends to diminish as the maturity date
of the Futures Contract approaches.
The Trust would purchase or sell Futures Contracts for the Fund only
if, in the judgment of the Adviser, there is expected to be a sufficient degree
of
- 5 -
<PAGE>
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. This could require the Trust to post additional
cash or cash equivalents on behalf of the Fund as the value of the position
fluctuates. Further, rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a Futures Contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the Futures Contract
was originally entered into. While the Trust will establish a futures position
for the Fund only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
Futures Contract at any specific time. In that event, it may not be possible to
close out a position held for the Fund, which could require the Trust on behalf
of the Fund to purchase or sell the instrument underlying the Futures Contract,
make or receive a cash settlement, or meet ongoing variation margin
requirements. The inability to close out futures positions also could have an
adverse impact on the Trust's ability to hedge effectively the Fund's portfolio.
The liquidity of a secondary market in a 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 Futures
Contract during a single trading day and prohibit trading beyond such limits
once they have been reached. The trading of Futures Contracts also is subject to
the risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of the brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times make
it difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in Futures Contracts also entail the risk that if the
Adviser's investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance may be poorer than if the Trust had
not entered into any such contract for the Fund. For example, if the Fund has
been hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in the Fund's portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which are hedged because there will be offsetting
losses in the Fund's futures positions. In addition, in such situations, if the
Fund has insufficient cash, bonds may have to be sold from the Fund's portfolio
to meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
- 6 -
<PAGE>
Each contract market on which Futures Contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
The Adviser does not believe that these trading and position limits will have an
adverse impact on the hedging strategies regarding the Fund's portfolio.
Regulations of the CFTC require that transactions in Futures Contracts
may be entered into for the Fund for hedging purposes only, in order to assure
that the Fund is not deemed to be a "commodity pool" under such regulations. In
particular, CFTC regulations require that all short futures positions be entered
into in order to hedge the value of securities held in the Fund's portfolio, and
that all long futures positions either constitute BONA FIDE hedge transactions,
as defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, such instruments
may not be entered into for the Fund if, immediately thereafter, the sum of the
amount of initial deposits on the Fund's existing futures positions would exceed
5% of the market value of the Fund's total assets.
When a Futures Contract is purchased, an amount of cash or cash
equivalents will be deposited in a segregated account with the Fund's custodian
bank so that the amount so segregated, plus the initial and variation margin
held in the account of its broker, will at all times equal the value of the
Futures Contract, thereby insuring that the use of such futures is unleveraged.
The ability to engage in the hedging transactions described herein may
be limited by the current federal income tax requirement that less than 30% of
the Fund's gross income be derived from the sale or other disposition of stock
or securities held for less than three months.
The Trustees have 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 Board of Trustees has also adopted two percentage restrictions
on the use of Futures Contracts. The first is that no Futures Contract will be
entered into for the 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 Fund not exceed 50%
of the market value of the Fund's total assets. Neither of these restrictions
would be changed by the Board of Trustees without considering the policies and
concerns of the various federal and state regulatory agencies.
The Trust has no current intention of entering into any Futures
Contract for the Fund in the foreseeable future.
PORTFOLIO MANAGEMENT. The Trust intends that the Adviser fully manage
the 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:
- 7 -
<PAGE>
(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. (See "Tax Matters" in
the Prospectus.) 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.
PORTFOLIO TRANSACTIONS. 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 executing
portfolio securities transactions for the Fund primarily consists of dealer
spreads and underwriting commissions or concessions. Under the 1940 Act, persons
affiliated with the 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.
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. Subject
to policies established by the Trust's Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of Fund shareholders rather than by any formula. In
placing orders for the 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.
The 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
- 8 -
<PAGE>
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,
the Adviser may cause the 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.
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, the 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 Fund and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought for certain clients even though it could have
been sold for other clients at the same time, and a particular security may be
sold for certain clients even though it could have been bought for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. In some
instances, one client may sell a particular security to another client. Two or
more clients may simultaneously purchase or sell the same security, in which
event each day's transactions in that security are, insofar as practicable,
averaged as to price and allocated between such clients in a manner which in the
Adviser's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. In addition, when purchases or sales of the same
security for the Fund and for other clients of the 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.
SPECIAL FACTORS AFFECTING NEW YORK. 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
- 9 -
<PAGE>
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 July 10, 1995, Standard & Poor's downgraded its rating on New York
city's outstanding general obligation bonds to BBB+ from A-, citing the city's
chronic structural budget problems and weak economic outlook. Other factors
contributing to Standard & Poor's downgrade include the city's reliance on
one-time revenue measures to close annual budget gaps, a dependence on
unrealized labor savings, overly optimistic estimates of revenues and of state
and federal aid, and the city's continued high debt levels.
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 Trust has adopted the following investment
restrictions with respect to the Fund which may not be changed without approval
by holders of a "majority of the outstanding shares" 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"
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding "voting securities" of the Fund. The term "voting securities" as
used in this paragraph has the same meaning as in the 1940 Act.
The Trust, on behalf of 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 purposes of this Investment
Restriction; for additional related restrictions, see clause (i) under
the caption "State and Federal 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
- 10 -
<PAGE>
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;
- 11 -
<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.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state
and federal statutes and policies, the Trust on behalf of the Fund does not, as
a matter of operating policy: (i) 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)), (ii) 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, (iii) 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
- 12 -
<PAGE>
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, (iv) invest for the purpose of exercising control or
management, (v) 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, (vi) 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, (vii) 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, (viii) 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 (ix) 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 Commission, be
considered a separate security and treated as an issue of such government, other
entity or bank.
PERCENTAGE AND RATING RESTRICTIONS. If a percentage restriction or a
rating restriction on investment or utilization of assets set forth above or
referred to in the Prospectus is adhered to at the time an investment is made or
assets are so utilized, a later change in percentage resulting from changes in
the value of the securities held by the Fund or a later change in the rating of
a security held by the Fund is not considered a violation of policy, however the
- 13 -
<PAGE>
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 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 (see "Description of Ratings" in Appendix A to the
Prospectus for an explanation of Standard & Poor's, Moody's and Fitch ratings),
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
Any current "yield" quotation of the Fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act is
calculated by (a) dividing (i) the dividends and interest earned during the
period (as calculated in accordance with the requirements of the Securities and
Exchange Commission) minus the expenses accrued for the period (net of
reimbursements), by (ii) the average daily number of shares outstanding during
the period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period, (b) adding 1 to the
quotient, (c) raising the sum to the sixth power, (d) subtracting 1 from the
result, and (e) multiplying that result by 2. For the 30-day period ended
October 31, 1995, the yield of the Fund was 4.74%.
Any "tax equivalent yield" quotation for the 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. For the 30-day
period ended October 31, 1995, the tax equivalent yield of the Fund was 8.92%.
- 14 -
<PAGE>
A "total rate of return" quotation for the Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the net asset value on the first day of such
period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. The total return of the Fund for the period from May 1, 1995
(commencement of operations) to October 31, 1995 was 6.39%.
Any "tax equivalent total rate of return" quotation for the 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. The tax equivalent total rate of return of the Fund for
the period from May 1, 1995 (commencement of operations) to October 31, 1995 was
12.03%.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust. The address of each, unless otherwise indicated, is 6 St. James
Avenue, Boston, Massachusetts 02116.
FREDERICK C. CHEN, TRUSTEE
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW*, TRUSTEE
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, TRUSTEE
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
- 15 -
<PAGE>
MICHAEL SEELY, TRUSTEE
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
PHILIP W. COOLIDGE*, PRESIDENT
Chairman and Chief Executive Officer, Signature Financial Group, Inc.
("SFG"); Chairman and Chief Executive Officer, Signature (since
April, 1989).
JOHN R. ELDER*, TREASURER
Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of
Mutual Funds (prior to April, 1995).
LINDA T. GIBSON*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since June, 1991);
Assistant Secretary, Signature (since October, 1992); law student,
Boston University School of Law (prior to May, 1992).
JAMES E. HOOLAHAN*, VICE PRESIDENT
Senior Vice President, SFG (since December, 1989).
THOMAS M. LENZ*, SECRETARY
Senior Vice President and Associate General Counsel, SFG (since
November, 1989); Assistant Secretary, Signature (since February, 1991).
MOLLY S. MUGLER*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG; Assistant Secretary,
Signature (since April, 1989).
BARBARA M. O'DETTE*, ASSISTANT TREASURER
Assistant Treasurer, SFG; Assistant Treasurer, Signature (since
April, 1989).
ANDRES E. SALDANA*, ASSISTANT SECRETARY
Legal Counsel and Assistant Secretary, SFG (since November, 1992);
Attorney, Ropes & Gray (September, 1990 to November, 1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson, Mugler and
O'Dette are also Trustees and/or officers of certain other investment companies
of which Signature or an affiliate is the administrator.
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Trust
Name of Compensation Part of Fund Benefits Upon Paid to
TRUSTEE From Trust Expenses Retirement Trustees
Frederick C. $4,096 none none $5,650
Chen
Alan S. Parsow $4,096 none none $5,650
Larry M. $3,696 none none $5,050
Robbins
Michael Seely $4,096 none none $5,650
- 16 -
<PAGE>
The compensation table above reflects the fees received by the Trustees
from the Trust for the period from May 1, 1995 (commencement of operations) to
October 31, 1995. The Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust will receive an annual retainer of $3,600 and a fee
of $1,0004 for each meeting of the Board of Trustees or committee thereof
attended.
As of May 22, 1996, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of the Fund. As of the same date,
the following shareholders of record owned 5% or more of the outstanding shares
of the Fund (the Trust has no knowledge of the beneficial ownership of such
shares): Kinco & Co. c/o Republic Bank of New York, One Hanson Place, Brooklyn,
New York, 11243 - 76.2%; BHC Securities Inc., Trade House Account, Attn: Mutual
Funds, One Commerce Square, 2005 Market Square, Philadelphia, PA 19103 - 5.1%.
Shareholders who own more than 25% of the outstanding voting securities of the
Fund may be deemed to control the Fund by virtue of such share ownership.
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 officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Contract, Republic is responsible
for the investment management of the Fund's assets, including the responsibility
for 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 Republic in its discretion, not including the Distributor. See
"Portfolio Transactions". Republic also furnishes to the Board of Trustees,
- --------
1 As of November 1, 1995, Trustee fee for each meeting of the Board of Trustees
or committee thereof attended increased from $600 to $1,000.
- 17 -
<PAGE>
which has overall responsibility for the business and affairs of the Trust,
periodic reports on the investment performance of the Fund.
Republic is a wholly-owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Fund are not
exclusive under the terms of the Investment Advisory Contract. Republic is free
to and does render investment advisory services to others.
The Investment Advisory Contract will remain in effect until September
26, 1996, and will continue in effect thereafter from year to year with respect
to the Fund, provided such continuance is approved 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 such
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Contract may be terminated with respect to the Fund 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.
For the period from May 1, 1995 (commencement of operations) to October
31, 1995, investment advisory fees aggregated $9,063, of which the entire amount
was waived.
ADMINISTRATOR AND SPONSOR
The Administrative Services Contract is terminable with respect to the
Fund without penalty at any time by vote of a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Administrative Services Contract, upon not more than
60 days' written notice to the Sponsor or by vote of the holders of a majority
of the
- 18 -
<PAGE>
shares of the Fund or upon 15 days' notice by the Sponsor. The Administrative
Services Contract will terminate automatically in the event of its assignment.
The Administrative Services Contract also provides that neither the
Administrator 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, 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 Administrative Services Contract.
For the period ended October 31, 1995, the Fund accrued administrative
services fees of $7,250 to Signature, of which the entire amount was waived.
DISTRIBUTION PLAN - RETAIL CLASS SHARES ONLY
A Distribution Plan has been adopted by the Trust (the "Distribution
Plan") with respect to the Retail Class shares only, and provides that the
Distribution Plan may not be amended to increase materially the costs which the
Retail Class shares may bear pursuant to the Distribution Plan without approval
by shareholders of the Retail Class shares, and that any material amendments to
the Distribution Plan must be approved by the Board of Trustees, and by the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust and have no direct or indirect financial interest in the operation of the
Distribution Plan or in any related agreement ("Qualified Trustees"), by vote
cast in person at a meeting called for the purpose of considering such
amendments. The selection and nomination of the Trustees who are not "interested
persons" of the Trust (the "Independent Trustees") has been committed to the
discretion of the Independent Trustees. The Distribution Plan has been approved,
and is subject to annual approval, by the Board of Trustees and by the Qualified
Trustees, by vote cast in person at a meeting called for the purpose of voting
on the Distribution Plan. In adopting the Distribution Plan, the Trustees
considered alternative methods to distribute the Retail Class shares and to
reduce the Retail Class shares' per share expense ratio and concluded that there
was a reasonable likelihood that the Distribution Plan will benefit that class
and its shareholders. The Distribution Plan is terminable with respect to the
Retail Class shares at any time by a vote of a majority of the Qualified
Trustees or by vote of the holders of a majority of the Retail Class shares.
Prior to the adoption by the Trustees of a multiple class structure,
effective January 15, 1996, a predecessor distribution plan was in effect with
respect to all shares of the Fund. Pursuant to the predecessor distribution
plan, during the period from May 1, 1995 (commencement of operations) to October
31, 1995, the Fund incurred a total of $1,947 in distribution expenses, as
follows: advertising, $0; printing and mailing of prospectuses to other than
current shareholders, $1,947; compensation to underwriters, $0; compensation to
broker-dealers, $0; compensation to sales personnel, $0; interest, carrying or
other financing charges, $0; and other marketing expenses, $0. Total
expenditures pursuant to the predecessor distribution plan as a percentage of
average daily net assets during the same period were 0.05%.
- 19 -
<PAGE>
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Retail Class and the Adviser Class, and continues in effect
indefinitely if such continuance is specifically approved at least annually by a
vote of both a majority of the Trustees and a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Administrative Services Plan or in
any agreement related to such Plan ("Qualified Trustees"). The Administrative
Services Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or with respect to the Retail Class or the Adviser Class by a
majority vote of shareholders of that class. The Administrative Services Plan
may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Retail Class or the Adviser Class without the
approval of a majority of shareholders of that class, and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Retail Class shares, see "Management of the Trust - Shareholder Servicing
Agents" in the Prospectus describing the Retail Class shares.
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has approved a Custodian Agreement
and a Transfer Agency Agreement between the Trust and Investors Bank & Trust
Company ("IBT") pursuant to which IBT will provide custodial, fund accounting,
transfer agency, dividend disbursing and shareholder servicing services to the
Trust and the Fund. The principal business address of IBT is 24 Federal Street,
Boston, Massachusetts 02110.
EXPENSES AND EXPENSE LIMITS
Certain of the states in which shares of the Fund are expected to be
qualified for sale impose limitations on the expenses of the Fund. If, in any
fiscal year, the total expenses of the Fund (excluding taxes, interest, expenses
under the Plan, brokerage commissions and other portfolio transaction expenses,
other expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative fees) exceed the expense limitations applicable to the Fund
imposed by the securities regulations of any state, the Distributor and the
Adviser each will reimburse the Fund for 50% of the excess. The effective
limitation on an annual basis with respect to the Fund is expected to be 2.5% on
the first $30 million of the Fund's net assets, 2.0% on the next $70 million of
such assets, and 1.5% on any excess above $100 million.
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class expenses with respect to
the Retail Class shares must include payments made pursuant to the Distribution
Plan and the Administrative Services Plan. In the event a particular expense is
- 20 -
<PAGE>
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 share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service, use of which has been
approved by the Board of Trustees. 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. Portfolio securities (other than short-term
obligations) for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in the 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.
Subject to the Trust's compliance with applicable regulations, the
Trust has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in kind of the
Fund's portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in kind, the shareholder could incur brokerage or other charges in
converting the securities to cash.
- 21 -
<PAGE>
TAXATION
FEDERAL INCOME TAX
The Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code (the "Code"). By so
qualifying, the Fund will be exempt from regular federal income taxes to the
extent that it distributes substantially all of its net investment income and
net realized capital gains to shareholders.
It is intended that the Fund's assets will be sufficiently invested in
municipal securities to qualify to pay "exempt-interest dividends" (as defined
in the Code) to shareholders. The Fund's 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 its 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.
The Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If the Fund earns income which is not
eligible to be so designated, the Fund, nonetheless, intends to distribute such
income. Such distributions will be subject to federal, state, and local state
taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by the Fund from
investment in taxable debt securities, or ordinary income realized upon the
disposition of market discount bonds (including tax-exempt market discount
bonds), and of any net realized short-term capital gains will be taxable to
shareholders as ordinary income. Because the Fund's investment income is derived
from interest rather than dividends, no portion of such distributions is
expected to be eligible for the dividends-received deduction available to
corporations.
Upon the sale or exchange of shares, a shareholder generally will
realize a taxable gain or loss depending upon his or her basis in the shares.
Such gain or loss will be treated as a capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term if the
shareholder's holding period for the shares is more than one year and,
generally, will otherwise be short-term. If a capital gain distribution
designated as a capital gain dividend is paid with respect to any shares of the
Fund sold at a loss after being held for six months or less, the loss will be
treated as a long-term capital loss for tax purposes.
Any loss realized from a disposition of Fund shares that were held for
six months or less will be disallowed, to the extent that dividends received
from the Fund are designated as exempt-interest dividends. Any loss realized on
a sale or exchange of Fund shares also will be disallowed to the extent that the
shares disposed of are replaced (including replacement through reinvesting of
dividends and capital gain distributions in the Fund) within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of the shares.
In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss, to the extent not disallowed, realized on a
disposition of shares of the Fund with respect to which long-term capital gain
distributions have been paid will, to the extent of those dividends, be treated
- 22 -
<PAGE>
as a long-term capital loss if your shares have been held for six months or less
at the time of their disposition.
Under the Code, any distribution designated as being made from the
Fund's net realized long-term capital gains is taxable to shareholders as
long-term capital gains, regardless of the length of time shares are held.
Distributions by the Fund (other than exempt-interest dividends) and
redemption proceeds may be subject to backup withholding at the rate of 31%.
Backup withholding generally applies to shareholders who have failed to properly
certify their taxpayer identification numbers, who fail to provide other
required tax-related certifications, and with respect to whom the Fund has
received certain notifications from the Internal Revenue Service requiring or
permitting the Fund to apply backup withholding. Backup withholding is not an
additional tax and amounts so withheld generally may be applied by affected
shareholders as a credit against their federal income tax liability.
Interest on certain types of private activity bonds is not exempt from
regular federal income tax when received by "substantial users" or persons
related to substantial users as defined in the Code. The term "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. The Fund may
invest periodically in private activity bonds and, therefore, may not be
appropriate investments 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 (spouse, brothers,
sisters, and lineal descendants) owns indirectly in aggregate more than 50% in
the equity value of the substantial user.
Certain futures contracts in which the Fund may invest are "section
1256 contracts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses (60-40).
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and, in some cases, for purposes of the 4% excise tax, on October 31 of each
year) are marked to market with the result that unrealized gains or losses are
treated as though they were realized.
The hedging transactions undertaken by the Fund may result in straddles
for regular federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, 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 such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gains realized by the Fund, which are taxed as ordinary income when
distributed to shareholders.
The Fund may make one or more of the elections available under the Code
that are applicable to straddles. If the Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
- 23 -
<PAGE>
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the 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 that must be distributed
to shareholders and that will be taxed to shareholders as ordinary income or a
long-term capital gain may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although the
Fund's advisor 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 federal and (as applicable) state tax-exempt, neither
the advisor nor the Fund's counsel makes any review of proceedings relating to
the issuance of municipal securities or the bases of such opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the regular federal income tax exemption
for interest on municipal securities, and similar proposals may be introduced in
the future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund and the Trust or their dissolution.
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.
The information above is only a summary of some of the tax
considerations affecting the Fund and its shareholders; no attempt has been made
to discuss individual tax consequences. A prospective investor should consult
his or her
- 24 -
<PAGE>
tax advisor or state or local tax authorities to determine whether the Fund is a
suitable investment based on his or her tax situation.
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 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 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
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 classes 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.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested
- 25 -
<PAGE>
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.
INDEPENDENT AUDITORS
For the fiscal year ended October 31, 1995, Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116, served as independent auditors of
the Funds of the Trust.
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Funds of the Trust for the fiscal year ending
October 31, 1996. KPMG Peat Marwick LLP will audit the Trust's annual financial
statements, prepare the Trust's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02108.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the 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
The Fund's current audited financial statements dated October 31, 1995
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1995 as filed with the Securities and Exchange Commission
pursuant to Rule 30b2-1 under the 1940 Act. A copy of such report will be
provided without charge to each person receiving this Statement of Additional
Information.
- 26 -
<PAGE>
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
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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 of the State of New York dated June 23, 1995.
GENERAL
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; Binghampton -- 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.
B-1
<PAGE>
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 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 national economy began to expand in 1991, although the growth rate
for the first two years of the expansion was modest by historical standards. The
State economy remained in recession until 1993, when employment growth resumed.
Since November 1992, the State has added approximately 185,000 jobs. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and defense industries. Personal
income increased substantially in 1992 and 1993, aided significantly by large
bonus payments in banking and financial industries.
The national economy performed better in 1994 than in any year since
the recovery began in 1991. National job and income growth were substantial. In
response, the Federal Reserve Board shifted to a policy of monetary tightening
by raising interest rates throughout the year. As a result, the national
economic growth is expected to weaken, but not turn negative, during the course
of 1995 before beginning to rebound by the end of the year. This dynamic is
often described as a "soft landing." The overall rate of growth of the national
economy during calendar year 1995 will be slightly below the "consensus" of a
widely followed survey of national economic forecasters. Growth in the real
gross domestic product during 1995 is projected to be moderate (3.0 percent),
with declines in defense spending and net exports more than offset by increases
in consumption and investment. Continuing efforts by business and government to
reduce costs are expected to exert a drag on economic growth. Inflation, as
measured by the Consumer Price Index, is projected to remain about 3 percent due
to moderate wage growth and foreign competition. Personal income and wages are
projected to increase by about 6 percent or more.
The State economy had a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. New York's economy is expected to continue to expand modestly
during 1995, but there will be a pronounced slow-down during the course of the
year. Although industries that export goods and services abroad are expected to
benefit from the lower dollar, growth will be slowed by government cutbacks at
all
B-2
<PAGE>
levels. On an average annual basis, employment growth will be about the same as
1994. Both personal income and wages are expected to record moderate gains in
1995. Bonus payments in the securities industry are expected to increase from
last year's depressed level. Personal income rose 4.0 percent in 1994.
The State has for many years had a very high State and local tax burden
relative to other States. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits, the burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
To stimulate the State's economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. Local industrial development agencies
raised an aggregate of approximately $7.8 billion in separate tax-exempt bond
issues through December 31, 1993. There are currently over 100 county, city,
town and village agencies. In addition, the New York State Urban Development
Corporation is empowered to issue, subject to certain State constitutional
restrictions and to approval by the Public Authorities Control Board, bonds and
notes on behalf of private corporations for economic development projects. The
State has also taken advantage of changes in Federal bank regulations to
establish a free international banking zone in the City.
In addition, the State has provided various tax incentives to encourage
business relocation and expansion. These programs include direct tax abatements
from local property taxes for new facilities (subject to locality approval) and
investment tax credits that are applied against the State corporation franchise
tax. Furthermore, legislation passed in 1986 authorizes the creation of up to 40
"economic development zones" in economically distressed regions of the State.
Businesses in these zones are provided a variety of tax and other incentives to
create jobs and make investments in the zones.
STATE FINANCIAL PLAN
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the Executive Budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
B-3
<PAGE>
The State's fiscal year, which commenced on April 1, 1995, and ends on
March 31, 1996, is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995, and
is based on the State's budget as enacted by the Legislature and signed into law
by the Governor. The State Financial Plan will be updated quarterly pursuant to
law in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
the Governor, who assumed office on January 1. It is the first budget in over
half a century which proposed and, as enacted, projects an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (I.E., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low- and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State work force, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
B-4
<PAGE>
The Executive Budget indicates that for years State revenues have grown
at a slower rate than State spending, producing an increasing structural
deficit, and that as the Executive Budget is enacted, the State will start to
eliminate the structural imbalance that has characterized the State's fiscal
record. There can, however, be no assurances that the tax and spending cuts will
eliminate potential imbalances in future fiscal years. The Governor's
recommended multi-year personal income tax cuts are designed to reduce the yield
on that tax by about one-third by 1998, and could require significant additional
spending cuts in those years, increased economic growth to provide additional
revenues, additional revenue measures, or a combination of those factors.
GOVERNMENT FUNDS
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
GENERAL FUND RECEIPTS
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 1995-96 fiscal year, the General Fund is expected to account for
approximately 49 percent of total governmental-funded disbursements and 71
percent of total State-funded disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service on long-term bonds, where these costs are not funded from other
sources.
The Financial Plan for the 1995-96 fiscal year released on February 1,
1995, projects General Fund receipts, including transfers from other funds, of
$33.110 billion, a reduction of $48 million from the total receipts in the 1994-
95 fiscal year. Tax receipts are projected at $29.793 billion for the 1995-96
fiscal year. Although growth in the base for tax receipts is expected to
accelerate during the 1995-96 fiscal year, tax receipts are expected to fall by
3.5 percent, principally due to the combined effect of implementing during the
1995-96 fiscal year (1) a portion of the tax reductions originally enacted in
1987 and deferred each year since 1990, (2) additional tax cuts to prevent tax
increases also originally enacted in 1987 from taking effect and (3) the
proposed employer day care credit ($5 million), together with the incremental
cost of the tax reductions enacted in 1994 (more than $500 million), which
effectively negate the effect of projected growth in the recurring revenue base.
In addition, certain nonrecurring revenues in the 1994-95 receipts base,
including the 1993-94 surplus of $1.026 billion, additional earmarking to
dedicated funds (more than $210 million) and other miscellaneous one-time
receipts (more than $100 million) are not available in the 1995-96 fiscal year,
thereby reducing potential year-over-year growth by another 4 percentage points.
The projected yield of personal income tax in the 1995-96 fiscal year
of $17.285 billion is a decrease of $305 million from reported collections in
the State's 1994-95 fiscal year. The decrease reflects both the effects of the
tax reductions and the fact that reported collections in the preceding year were
B-5
<PAGE>
affected by net refund reserve transactions that buoyed collections in that year
by $862 million that will be unavailable in the current year. Without these
changes, the yield of the tax would have grown by more than $1.0 billion (6
percent), reflecting liability growth for the 1995 tax year projected at
approximately the same rate. The income base for the tax is projected to rise
approximately 5 percent for the 1995 tax year. Personal income tax receipts
showed a sharp increase in 1994-95 and are expected to decline in 1995-96.
Personal income tax reductions recommended in the Executive Budget are projected
to produce taxpayer savings of $720 million in calendar year 1995 reflecting the
scheduled implementation of the 1987 tax reductions. The tax reductions
recommended by the Governor are part of a multi-year program designed to reduce
the yield of the income tax by about one-third by 1998.
Receipts in user taxes and fees in the State's 1995-96 fiscal year are
expected to total $6.697 billion, an increase of $73 million from reported 1994-
95 results. Growth in user taxes and fees is expected to slow to about 1 percent
in 1995-96, reflecting nearly $70 million of additional tax relief in this
category in the coming year resulting from tax reductions enacted in 1994, the
absence of extraordinary audit collections received in 1994-95, and a slowdown
in the underlying growth rate of sales and use tax collections, offset by a
projected improvement of $41 million as a result of recommended legislation to
enhance sales tax collection procedures. Business tax receipts are projected at
$4.709 billion, a decline of $360 million from reported 1994-95 results. The
decline in the 1995-96 fiscal year largely reflecting the effect of tax
reductions enacted in 1994.
Total receipts from other taxes in the State's 1995-96 fiscal year are
projected at $1.102 billion, $6 million less than in the preceding year. The
estimates reflect 1994 and 1995 legislation reducing the burden of the real
property gains tax and the estate tax as well as diversion of a portion of the
real estate transfer tax proceeds to the Environmental Protection Fund.
Miscellaneous receipts in the State's 1995-96 fiscal year are expected to total
$1.596 billion, an increase of $335 million above the amount received in the
prior State fiscal year. Growth in overall collections from miscellaneous
receipts in the coming fiscal year is expected to result largely from several
discrete actions involving settlement of environmental litigation, the
recommended merger of public authorities, and transactions with the Power
Authority, which together account for over $200 million of projected
miscellaneous receipts anticipated in 1995-96. Transfers from other funds
continue at prior year levels, with the addition of the transfer of $220 million
in excess funds from the Metropolitan Mass Transportation Operating Assistance
Fund.
GENERAL FUND DISBURSEMENTS
General Fund disbursements are projected to total $33.055 billion in
1995-96, a decrease of $344 million from the total amount disbursed in the prior
fiscal year. This decline reflects a broad agenda of cost containment actions,
more than offsetting modest increases for fixed costs, such as pensions, debt
service on bonds sold during the current year and capital projects under
construction.
B-6
<PAGE>
Disbursements from grants to local governments are projected to total
$22.910 billion in the 1995-96 State Financial Plan, a decrease of $392 million
from 1994-95 levels. Although spending in this category is reduced, direct
payments to local governments, including school aid and revenue sharing are
maintained largely at last year's levels. This category of the State Financial
Plan includes $10.823 billion in aid for elementary, secondary, and higher
education. Costs for social services, such as Medicaid, income maintenance and
child support services account for $8.706 billion. Remaining disbursements
primarily support community-based mental hygiene programs, community and public
health programs, local transportation programs, and revenue sharing.
Significant decreases from the prior year result largely from cost
containment initiatives in Medicaid and other social welfare programs. Payments
for Medicaid from the General Fund are projected to be $506 million lower than
in 1994-95. $128 Million in operating aid to the New York City Transit Authority
will be eliminated, matching the reduction in New York City support of the
Authority.
Spending for State operations is projected at $6.020 billion, a
decrease of $288 million. Recommendations in the Executive Budget reduce the
work force by approximately 3,200 positions (most of which reduce disbursements
in this category).
Spending for general State charges is projected at $2.080 billion in
the 1995-96 State Financial Plan, and are virtually unchanged from the 1994-95
level. The budgeted amount for general State charges assumes the use of $110
million from a special reserve for pension supplementation, established in 1970
and funded through State and local employer contributions in the early 1970's,
to offset the State's pension contribution. The Comptroller, as sole trustee of
the Common Retirement Fund and administrative head of the Retirement System, is
in the process of reviewing the legislation that directs the use of these
reserves to determine whether or not to commence legal proceedings to prevent
such proposed use in the enacted 1995-96 State budget as a violation of the
State Constitution, and there is a substantial likelihood that he will do so.
The Executive considers the proposed use of these reserves to be a credit for
prior-year supplementation payments and, therefore, in compliance with the State
Constitution.
Debt service in the General Fund for 1995-96 reflects only the $9
million interest cost of the State's commercial paper program. No cost is
included for a TRAN borrowing, since none is expected to be undertaken. General
Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to total $1.583 billion, and increase of $157 million.
This increase is heightened by the use of one-time reimbursements from other
funds in the 1994-95 fiscal year. Transfers in support of capital projects are
projected to total $375 million, an increase of $169 million, which reflects
significant investments in both new and ongoing capital programs. All other
transfers are projected to total $78 million, an increase of $9 million from
1994-95 levels.
The 1995-96 opening fund balance of $158 million includes $157 million
which is reserved in the Tax Stabilization Reserve Fund, as well as $1 million
B-7
<PAGE>
which is reserved in the Contingency Reserve Fund. The Contingency Reserve Fund
was established in 1993-94 to set aside moneys to address adverse judgments or
settlements resulting from litigation against the State. The closing fund
balance in the General Fund of $213 million reflects a balance of $172 million
in the Tax Stabilization Reserve Fund, following an additional payment of $15
million during the year, and a balance of $41 million in the Contingency Reserve
Fund.
The 1995-96 Financial Plan includes over $600 million in non-recurring
resources. These actions include items discussed above, as well as retroactive
Federal reimbursements and some non-recurring social welfare cost containment
actions. The Budget Division believes that recommendations included in the
Executive Budget will provide fully annualized savings in 1996-97 that more than
offset the non-recurring resources used in 1995-96.
SPECIAL REVENUE FUNDS
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes. For
1995-96, the State Financial Plan projects disbursements of $26.002 billion from
these funds, an increase of $1.641 billion over 1994-95 levels. Disbursements
from Federal funds, primarily the Federal share of Medicaid and other social
services programs, are projected to total $19.209 billion in the 1995-96 fiscal
year. Remaining projected spending of $6.793 billion primarily reflects aid to
SUNY supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
funded from the proceeds of dedicated transportation taxes, and costs of a
variety of self-supporting programs which deliver services financed by user
fees.
CAPITAL PROJECTS FUNDS
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major state capital
facilities and for capital assistance grants to certain local government or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Disbursements from the Capital Projects Funds in 1995-96 are projected
at $4.160 billion, an increase of $541 million over prior-year levels. Spending
for capital projects will be financed through a combination of sources: Federal
grants, public authority bond proceeds, general obligation bond proceeds, and
current revenues. Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be available from the proceeds
of general obligation bonds.
DEBT SERVICE FUNDS
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements.
B-8
<PAGE>
Disbursements are estimated at $2.506 billion in the 1995-96 fiscal
year, an ncrease of $303 million from 1994-95. The transfer from the General
Fund of $1.583 billion is expected to finance 63 percent of these payments. The
remaining payments are expected to be financed by pledged revenues, including
$1.794 billion in taxes, $228 million in dedicated fees, and $2.200 billion in
patient revenues, including transfers of Federal reimbursements. After
impoundment for debt service, as required, $3.481 billion is expected to be
transferred to the General Fund and other funds in support of State operations.
The largest transfer - $1.761 billion - is made to the Special Revenue Fund
type, in support of operations of the mental hygiene agencies. Another $1.341
billion in excess sales taxes is expected to be transferred to the General Fund,
following payment of projected debt service on bonds of LGAC.
The increase in debt service costs recommended in the Executive Budget
primarily reflects prior capital commitments financed by bonds issued by the
State and State-supported debt issued by its public authorities, and the
completion of the LGAC program. The increase has been moderated by the
reductions to bond-financed capital spending as discussed above, and reflects
debt issuances in 1994-95 and 1995-96 which are lower than they would have been,
absent the Governor's review of capital spending.
CASH FLOW
For the second time in many years, the State will meet its cash flow
needs without relying on a spring borrowing. However, this achievement is
predicated on two actions: the issuance of all remaining LGAC bonds authorized
in the 1990 statute; and the passage of proposed legislation permitting the
State to use, for cash flow purposes only, balances in the Lottery Fund.
Temporary transfers will be returned within five months so that all available
Lottery moneys as well as advances of additional aid can be paid to school
districts in September.
The lingering impact of the 1994-95 receipts shortfall -- as well as
the impact of the potential $5 billion 1995-96 imbalance on cash operations --
exerts substantial pressures on the State's cash balance position in the first
three months of the fiscal year. These pressures are expected to abate later in
the 1995-96 fiscal year, as cash outlays decline from previous levels consistent
with cost-savings initiatives proposed in the Executive Budget.
PRIOR FISCAL YEARS
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
B-9
<PAGE>
1994-95 FISCAL YEAR
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service.
The 1994-95 budget contained a significant investment in efforts to
spur economic growth. The budget included provisions to reduce the level of
business taxation in New York, with cuts in the corporate tax surcharge, the
alternative minimum tax imposed on business and the petroleum business tax,
repeal of the State's hotel occupancy tax, and reductions in the real property
gains tax to stimulate construction and facilitate the real estate industry's
access to capital. Complementing the elimination of the hotel tax was a $10
million investment of State funds in the "I Love New York" program designed to
spur tourism activity throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget
also included more than $200 million in additional funding for economic
development programs. Special emphasis was placed on programs intended to enable
New York State to: (i) invest in high technology industries; (ii) expand access
to foreign markets; (iii) strengthen assistance to small businesses,
particularly those owned by women and minorities; (iv) retain and attract new
manufacturing jobs; (v) help companies and communities impacted by continued
cutbacks in Federal defense spending and ongoing corporate downsizings; and (vi)
bolster the tourism industry. In addition, the budget included increased levels
of support for programs to rebuild and maintain State infrastructure, and
provisions to create 21 new economic development zones.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State Fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
B-10
<PAGE>
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC which raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the category of grants to
local governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
nonessential capital projects. These actions, together with $71 million in other
measures comprised the Governor's $259 million gap-closing plan, submitted to
the Legislature in connection with the 1995-96 Executive Budget.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its Contingency
Reserve Fund and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income tax
refund reserve have the effect of reducing reported personal income tax receipts
in the fiscal year when made and withdrawals from such reserve increase receipts
in the fiscal year when made. The balance in the tax refund reserve account will
be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund. The State's 1992-93 fiscal year was characterized by performance
that was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax. There
B-11
<PAGE>
were, however, large and mainly offsetting variances in other categories of
receipts.
CERTAIN LITIGATION
Certain litigation pending against New York or its officers or
employees could have a substantial or long-term adverse effect on New York
finances. Among the more significant of these cases are those that involve: (i)
the validity of agreements and treaties by which various Indian tribes
transferred to New York title to certain land in New York; (ii) certain aspects
of New York's Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services, and the eligibility for
and nature of home care services; (iii) challenges to provisions of Section
2807-C of the Public Health Law, which impose a 13% surcharge on inpatient
hospital bills paid by commercial insurers and employee welfare benefit plans
and portions of Chapter 55 of the laws of 1992, which require hospitals to
impose and remit to the State an 11% surcharge on hospital bills paid by
commercial insurers and which require health maintenance organizations to remit
to the State a surcharge of up to 9%; (iv) an action against the State of New
York and New York City officials alleging that the present level of shelter
allowance for public assistance recipients is inadequate under statutory
standards to maintain proper housing; (v) challenges to the practice of
reimbursing certain Office of Mental Health patient care expenses from the
client's Social Security benefits; (vi) alleged responsibility of New York
officials to assist in remedying racial segregation in the City of Yonkers;
(vii) a challenge to the constitutionality of financing programs of the Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991; and (viii) a
claim that the State's Department of Environmental Conservation prevented the
completion of a cogeneration facility by the projected date by failing to
provide data in a timely manner and that the plaintiff thereby suffered damages.
In addition, aspects of petroleum business taxes are the subject of
administrative claims and litigation.
THE CITY OF NEW YORK
The fiscal health of the State of New York is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from New York. The City's
independently audited operating results for each of its 1981 through 1993 fiscal
years showed a General Fund surplus reported in accordance with GAAP. In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City received such an opinion.
The 1996-1999 Financial Plan reflects a program of proposed actions by
the City to close the gaps between projected revenues and expenditures of $888
million, $1.5 billion and $1.4 billion for the 1997, 1998 and 1999 fiscal years,
respectively. These actions, a substantial number of which are not specified in
detail, include additional agency spending reductions, reduction in
entitlements, government procurement initiatives, revenue initiatives and the
availability of the general reserve.
B-12
<PAGE>
The Office of the State Deputy Comptroller for the City of New York
(the "OSDC") and the State Financial Control Board continue their respective
budgetary oversight activities.
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
(the "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; the Office of the State Deputy Comptroller for the City of New York to
assist the Control Board in exercising its powers and responsibilities; and a
"Control Period" from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board, MAC
and OSDC continue to exercise various fiscal-monitoring functions over the City,
and 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, the Control Board is required by law
to reimpose a Control Period. Currently, the City and its Covered Organizations
(I.E., those which receive or may receive monies from the City directly,
indirectly or contingently) operate under a four-year financial plan which the
City prepares annually and periodically updates.
The staffs of the OSDC and the Control Board issue periodic reports on
the City's financial plans, as modified, analyzing forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered Organizations.
OSDC staff reports issued during the mid-1980's noted that the City's budgets
benefitted from a rapid rise in the City's economy, which boosted the City's
collection of property, business and income taxes. These resources were used to
increase the City's work force and the scope of discretionary and mandated City
services. Subsequent OSDC staff reports examined the 1987 stock market crash and
the 1989-92 recession, which affected the New York City region more severely
than the nation, and attributed an erosion of City revenues and increasing
strain on City expenditures to that recession. According to a recent OSDC staff
report, the City's economy is now slowly recovering, but the scope of that
recovery is uncertain and unlikely, in the foreseeable future, to match the
expansion of the mid-1980's. Also, staff reports of OSDC and the Control Board
have indicated that the City's recent balanced budgets have been accomplished,
in part, through the use of non-recurring resources, tax increases and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; and that the City is therefore
likely to continue to face future projected budget gaps requiring the City to
increase revenues and/or reduce expenditures. According to the most recent staff
reports of OSDC and the Control Board, during the four-year period covered by
the current financial plan, the City is relying on obtaining substantial
resources from initiatives needing approval and cooperation of its municipal
labor unions, Covered Organizations, and City Council, as well as the State and
Federal governments, among others.
B-13
<PAGE>
The City requires significant amounts of financing for seasonal and
capital purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during its fiscal year ending June 30, 1994. The City's capital
financing program projects long-term financing requirements of approximately $17
billion for the City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water supply and sewage
disposal systems, roads, bridges, mass transit, schools, hospitals and housing.
OTHER LOCALITIES
In addition to the City, certain localities, including the City of
Yonkers, could have financial problems leading to requests for additional State
assistance during the State's 1995-96 fiscal year and thereafter. Municipalities
and school districts have engaged in substantial short-term and long-term
borrowings. In 1993, the total indebtedness of all localities in the State other
than New York City was approximately $17.7 billion.
From time to time, Federal expenditure reductions could reduce, or in
some cases, eliminate, Federal funding of some local programs, and, accordingly,
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorization. As of September 30, 1994, there
were 18 public authorities that had aggregate outstanding debt of $70.3 billion.
Some authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs.
The Metropolitan Transit Authority (the "MTA"), which receives the bulk
of the appropriated moneys from the State, oversees the operation of the City's
bus and subway system by its affiliates, the New York City Transit Authority and
Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). The MTA has depended and will continue to depend upon Federal, state and
local government support to operate the transit system because fare revenues are
insufficient.
Over the past several years, 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 region served by
the MTA and a special one-quarter of one percent regional sales and use tax)
that provide
B-14
<PAGE>
additional revenues for mass transit purposes, including assistance to the MTA.
In addition, a one-quarter of one percent regional mortgages recording tax paid
on certain mortgages creates an additional source of recurring revenues for the
MTA. Further, in 1993, the State dedicated a portion of the State petroleum
business tax to assist the MTA. For the 1995-96 State fiscal year, total State
assistance to the MTA is estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-
96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the Triborough Bridge and Tunnel Authority,
and the TA are collectively authorized to issue an aggregate of $3.1 billion of
bonds (net of certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be financed in
significant part through dedication of State petroleum business taxes referred
to above.
There can be no assurance that all the necessary governmental actions
for the Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1992-96 Capital Program, or
parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA
to issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is 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 State assistance. RF035A
B-15
