REPUBLIC
BOND
FUND
PROSPECTUS
AUGUST 1, 1996
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REPUBLIC BOND FUND
SIX ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116
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ACCOUNT AND GENERAL INFORMATION: (800) 782-8183 (TOLL FREE)
Republic Bond Fund (the "Fund") is a diversified series of Republic Funds (the
"Trust"), an open-end management investment company which currently consists of
seven funds, each of which has different and distinct investment objectives and
policies. Only shares of the Fund (the "Shares") are being offered by this
Prospectus. Republic National Bank of New York ("Republic" or the "Manager") is
the investment manager of Fixed Income Portfolio (the "Portfolio"). Miller
Anderson & Sherrerd ("MAS" or the "Sub-Adviser") continuously manages the
investments of the Portfolio.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS) WHICH
DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, THE TRUST SEEKS
TO ACHIEVE THE INVESTMENT OBJECTIVE OF THE FUND BY INVESTING ALL OF THE FUND'S
INVESTABLE ASSETS ("ASSETS") IN THE PORTFOLIO, WHICH HAS THE SAME INVESTMENT
OBJECTIVE AS THE FUND. THE INVESTMENT EXPERIENCE OF THE FUND WILL CORRESPOND
DIRECTLY WITH THE INVESTMENT EXPERIENCE OF THE PORTFOLIO. THE PORTFOLIO IS A
DIVERSIFIED SERIES OF THE REPUBLIC PORTFOLIOS, WHICH IS AN OPEN-END MANAGEMENT
INVESTMENT COMPANY. SEE "SPECIAL INFORMATION CONCERNING THE TWO-TIER FUND
STRUCTURE".
The investment objective of the Fund is to seek to realize above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, through investment primarily in a diversified portfolio of U.S. Government
securities, corporate bonds, mortgage-backed securities and other fixed-income
securities. The Portfolio's average weighted maturity will ordinarily exceed
five years.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, REPUBLIC OR ANY OTHER BANK, AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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Investors should read this Prospectus and retain it for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 1, 1996
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Shares are continuously offered for sale at net asset value with no sales
charge by Signature Broker-Dealer Services, Inc. ("SBDS" or the "Distributor" or
the "Sponsor") (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.
AN INVESTOR WHO IS NOT PURCHASING DIRECTLY FROM THE DISTRIBUTOR SHOULD OBTAIN
FROM HIS SECURITIES BROKER OR SHAREHOLDER SERVICING AGENT, AND SHOULD READ IN
CONJUNCTION WITH THIS PROSPECTUS, THE MATERIALS PROVIDED BY THE SECURITIES
BROKER OR SHAREHOLDER SERVICING AGENT DESCRIBING THE PROCEDURES UNDER WHICH
SHARES MAY BE PURCHASED AND REDEEMED THROUGH SUCH SECURITIES BROKER OR
SHAREHOLDER SERVICING AGENT.
This Prospectus sets forth concisely the information concerning the Fund that
a prospective investor should know before investing. The Trust has filed with
the Securities and Exchange Commission a Statement of Additional Information,
dated August 1, 1996, with respect to the Fund, containing additional and more
detailed information about the Fund, which is hereby incorporated by reference
into this Prospectus. An investor may obtain a copy of the Statement of
Additional Information without charge by contacting the Fund at the address and
telephone number printed above.
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HIGHLIGHTS
THE FUND PAGE 1
Republic Bond Fund (the "Fund") is a separate series of Republic Funds (the
"Trust"), a Massachusetts business trust organized on April 22, 1987, which
currently consists of seven funds, each of which has different and distinct
investment objectives and policies.
INVESTMENT OBJECTIVE, RISKS AND POLICIES PAGES 6 AND 9
The investment objective of the Fund is to seek to realize above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, through investment primarily in a diversified portfolio of U.S. Government
securities, corporate bonds, mortgage-backed securities and other fixed-income
securities. The Trust seeks to achieve the investment objective of the Fund by
investing all of the Fund's Assets in Fixed Income Portfolio (the "Portfolio"),
which has the same investment objective as the Fund. The Portfolio is a series
of Republic Portfolios (the "Portfolio Trust"), a master trust fund established
under the law of the State of New York and organized on November 1, 1994. The
Portfolio's average weighted maturity will ordinarily exceed five years. There
can be no assurance that the investment objective of the Fund or the Portfolio
will be achieved.
MANAGEMENT OF THE TRUST AND
THE PORTFOLIO TRUST PAGE 24
Republic acts as investment manager to the Portfolio pursuant to an Investment
Management Contract with the Portfolio Trust. For its services, the Manager is
entitled to receive from the Portfolio a fee at the annual rate of 0.20% of the
Portfolio's average daily net assets. The Manager is currently waiving this fee.
MAS continuously manages the investment portfolio of the Portfolio pursuant to
a Sub-Advisory Agreement with the Manager. For its services, the Sub- Adviser is
paid a fee by the Portfolio, computed daily and based on the Portfolio's average
daily net assets, equal on an annual basis to 0.375% on net assets up to $50
million, 0.25% on net assets over $50 million and up to $95 million, $300,000 on
net assets over $95 million and up to $150 million, 0.20% on net assets over
$150 million and up to $250 million, and 0.15% on net assets over $250 million.
See "Management of the Trust and the Portfolio Trust."
SBDS acts as sponsor and as administrator of the Fund (the "Fund
Administrator") and distributor of shares of the Fund (the "Shares"). For its
services to the Fund, the Fund Administrator receives from the Fund a fee
payable monthly equal on an annual basis to 0.05% of the Fund's average daily
net assets up to $100 million. Signature Financial Group (Cayman) Limited
("Signature (Cayman)") acts as administrator of the Portfolio (the "Portfolio
Administrator"). For its services to the Portfolio, the Portfolio Administrator
receives from the Portfolio a fee payable monthly equal on an annual basis to
0.05% of the average daily net assets of the Portfolio.
The Trust also has retained SBDS to distribute shares of the Fund (the
"Shares") pursuant to a distribution plan (the "Distribution Plan") adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"). Pursuant to the terms of the Distribution Plan, the Distributor is
reimbursed from the Fund for marketing costs and payments to other organizations
for services rendered in distributing the Shares. This fee may not exceed 0.25%
of the average daily net assets of the Fund represented by Shares outstanding
and is expected to be limited to an amount such that the aggregate fees paid to
the Distributor pursuant to the Distribution Plan and to the Shareholder
Servicing Agents pursuant to the Administrative Services Plan do not exceed
0.25% of such assets. See "Management of the Trust."
PURCHASES AND REDEMPTIONS PAGES 30 AND 34
Shares 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. For investors who
purchase Shares directly from the Distributor, the minimum initial investment is
$1,000 and the minimum subsequent investment is $100. The Trust offers to buy
back (redeem) Shares from shareholders of the Fund at any time at net asset
value. See "Purchase of Shares" and "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS PAGE 36
The Trust declares all of the Fund's net investment income daily as a dividend
to Fund shareholders and distributes all such dividends monthly. Any net
realized capital gains are distributed at least annually. All Fund distributions
will be invested in additional Fund shares, unless the shareholder instructs the
Fund otherwise. See "Dividends and Distributions."
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FEE TABLE
The following table summarizes an investor's maximum transaction costs from
investing in the Fund and the estimated aggregate annual operating expenses of
the Fund and the Portfolio as a percentage of the average daily net assets of
the Fund during the Fund's initial fiscal period. The fiscal year ends of the
Fund and the Portfolio are both October 31. The example illustrates the dollar
cost of such estimated expenses on a $1,000 investment in the Fund. The Trustees
of the Trust believe that the aggregate per share expenses of the Fund and the
Portfolio will be less than or approximately equal to the expenses which the
Fund would incur if the Trust retained the services of an investment adviser on
behalf of the Fund and the Assets of the Fund were invested directly in the type
of securities being held by the Portfolio.
Shareholder Transaction Expenses ............................. None
Annual Fund Operating Expenses
Investment Advisory Fee after waiver* .................... 0.33%
Distribution Fees (Rule 12b-1 fees) ...................... 0.15%
Other Expenses ........................................... 0.62%
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-- Shareholder Servicing Fee ..................... 0.10%
-- Administrative Services Fee ..................... 0.10%
-- Other Operating Expenses ........................ 0.42%
Total Operating Expenses after waiver**....................... 1.10%
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*Reflects a waiver of the investment management fee payable to Republic and an
investment sub-advisory fee payable to MAS equal on an annual basis to 0.33%
of the Fund's average daily net assets. Without such waiver, the Investment
Advisory Fee would be equal on an annual basis to 0.53% of the Fund's average
net assets. See "Management of the Trust and the Portfolio Trust".
**Total Operating Expenses are shown net of investment management fee waiver.
Without such fee waiver, Total Operating Expenses would be equal on an annual
basis to 1.30% of the Fund's average net assets.
EXAMPLE
A shareholder of the Fund would pay the following expenses on a $1,000
investment in Fund shares, assuming (1) 5% annual return and (2) redemption at
the end of:
1 year ................................................. $11
3 years ................................................. $35
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE AGGREGATE EXPENSES OF THE FUND AND THE PORTFOLIO, AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table provided above is to assist investors in
understanding the expenses of investing in the Fund and an investor's share of
the aggregate operating expenses of the Fund and the Portfolio. The information
is based on the expenses the Fund and the Portfolio expect to incur for the
current fiscal year.** The expense table shows the expected investment
management fee, investment subadvisory fee, distribution (Rule 12b- 1) fee,
administrative services fee and shareholder servicing fee. For a more detailed
discussion of the costs and expenses of investing in the Fund, see "Management
of the Trust and the Portfolio Trust."
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**Assuming average daily net assets of $25 million in the Fund and $75 million
in the Portfolio for the current fiscal year.
The fees paid from the Fund to each Shareholder Servicing Agent are determined
by a formula based upon the number of accounts serviced by such Shareholder
Servicing Agent during the period for which payment is being made, the level of
activity in such accounts during such period, and the expenses incurred by such
Shareholder Servicing Agent. Similarly, the fee from the Fund to the Distributor
is in anticipation of, or as reimbursement for, expenses incurred by the
Distributor in connection with the sale of Shares. The aggregate fees paid to
the Distributor pursuant to the Distribution Plan and to the Shareholder
Servicing Agents pursuant to the Administrative Services Plan may not exceed
0.25% of the average daily net assets of the Fund represented by Shares
outstanding during the period for which payment is being made. Long-term
shareholders may pay more than the economic equivalent of the maximum
distribution charges permitted by the National Association of Securities
Dealers, Inc.
Some Shareholder Servicing Agents and securities brokers may impose certain
conditions on their customers, subject to the terms of this Prospectus, in
addition to or different from those imposed by the Trust with respect to the
Fund, such as requiring a minimum initial investment or charging their customers
a direct fee for their services. The effect of any such fees will be to reduce
the net return on the investment of customers of that Shareholder Servicing
Agent or securities broker. Each Shareholder Servicing Agent and securities
broker has agreed to transmit to shareholders who are its customers appropriate
written disclosure of any transaction fees that it may charge them directly at
least 30 days before the imposition of any such charge.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to realize above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, through investment in a diversified portfolio of U.S. Government
securities, corporate bonds (including bonds rated below investment grade
commonly referred to as "junk bonds"), foreign fixed income securities,
mortgage-backed securities of domestic issuers and other fixed-income
securities. The Portfolio's average weighted maturity will ordinarily exceed
five years. The investment objective of the Portfolio is the same as the
investment objective of the Fund.
There can be no assurance that the investment objective of the Fund will be
achieved. The investment objective of each of the Fund and the Portfolio may be
changed without investor approval. If there is a change in the investment
objective of the Fund, shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial position and
needs. Shareholders of the Fund shall receive 30 days' prior written notice of
any change in the investment objective of the Fund or the Portfolio.
Since the investment characteristics of the Fund will correspond to those of
the Portfolio, the following is a discussion of the various investment policies
of the Portfolio.
INVESTMENT POLICIES
The Portfolio will normally invest at least 65% of its total assets in fixed
income securities. The Portfolio may invest in the following securities, which
may be issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies: securities issued, sponsored or guaranteed by the U.S.
government, its agencies or instrumentalities (U.S. Government securities);
corporate debt securities; corporate commercial paper; mortgage pass-throughs,
mortgage-backed bonds, collateralized mortgage obligations ("CMOs") and other
asset-backed securities; variable and floating rate debt securities; obligations
of foreign governments or their subdivisions, agencies and instrumentalities;
obligations of international agencies or supranational entities; and foreign
currency exchange-related securities.
The Sub-Adviser will seek to achieve the Portfolio's objective by investing at
least 80% of the Portfolio's assets in investment grade debt or fixed income
securities. Investment grade debt securities are those rated by one or more
nationally recognized statistical rating organizations ("NRSROs") within one of
the four highest quality grades at the time of purchase (e.g., AAA, AA, A or BBB
by Standard & Poor's Ratings Group, Inc. ("S&P") or Fitch Investors Service,
Inc. ("Fitch") or Aaa, Aa, A or Baa by Moody's Investors Service, Inc.
("Moody's")), or in the case of unrated securities, determined by the
Sub-Adviser to be of comparable quality. Securities rated by a NRSRO in the
fourth highest rating category have speculative characteristics and are subject
to greater credit and market risks than higher-rated bonds. See the Appendix to
this Prospectus for a description of the ratings assigned by Moody's, S&P, and
Fitch.
Up to 20% of the Portfolio's assets may be invested in preferred stock,
convertible securities, and in fixed income securities that at the time of
purchase are rated Ba or B by Moody's or BB or B by S&P or rated comparably by
another NRSRO (or, if unrated, are deemed by the Sub-Adviser to be of comparable
quality). Securities rated below "investment grade," i.e., rated below Baa by
Moody's or BBB by S&P, are described as "speculative" by both Moody's and S&P.
Such securities are sometimes referred to as "junk bonds," and may be subject to
greater market fluctuations, less liquidity and greater risk. For a complete
discussion of the special risks associated with investments in lower rated
securities, see "Additional Risk Factors and Policies: High Yield/High Risk
Securities."
From time to time, the Sub-Adviser may invest more than 50% of the Portfolio's
assets in mortgage-backed securities including mortgage pass-through securities,
mortgage-backed bonds and CMOs, that carry a guarantee from a U.S. government
agency or a private issuer of the timely payment of principal and interest. For
a description of the risks associated with mortgage-backed securities, see
"Additional Risk Factors and Policies: Mortgage Related Securities." When
investing in mortgage-backed securities, it is expected that the Portfolio's
primary emphasis will be in mortgage-backed securities issued by governmental
and government-related organizations such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Association ("FHLMC"). However, the Portfolio may
invest without limit in mortgage-backed securities of private issuers when the
Sub-Adviser determines that the quality of the investment, the quality of the
issuer, and market conditions warrant such investments. Mortgage-backed
securities issued by private issuers will be rated investment grade by Moody's
or S&P or, if unrated, deemed by the Sub-Adviser to be of comparable quality.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. The bondholder has a first priority perfected security
interest in collateral consisting usually of agency mortgage pass-through
securities, although other assets including U.S. Treasury securities (including
zero coupon Treasury bonds), agency securities, cash equivalent securities,
whole loans and corporate bonds may qualify. The amount of collateral must be
continuously maintained at levels from 115% to 150% of the principal amount of
the bonds issued, depending on the specific issue structure and collateral type.
For a complete discussion of mortgage-backed securities, see "Additional Risk
Factors and Policies: Mortgage-Related Securities."
A portion of the Portfolio's assets may be invested in bonds and other fixed
income securities denominated in foreign currencies if, in the opinion of the
Sub-Adviser, the combination of current yield and currency value offer
attractive expected returns. These holdings may be in as few as one foreign
currency bond market (such as the United Kingdom gilt market), or may be spread
across several foreign bond markets. The Portfolio may also purchase securities
of developing countries; however, the Portfolio does not intend to invest in the
securities of Eastern European countries. When the total return opportunities in
a foreign bond market appear attractive in local currency terms, but where, in
the Sub-Adviser's judgment, unacceptable currency risk exists, currency futures,
forwards and options and swaps may be used to hedge the currency risk. See
"Additional Risk Factors and Policies: Foreign Securities" below and the
Statement of Additional Information.
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. See "Additional Risk Factors and Policies -- Eurodollar and Yankee
Bank Obligations" below. The Portfolio may also invest in Brady Bonds, which are
issued as a result of a restructuring of a country's debt obligations to
commercial banks under the "Brady Plan". See "Additional Risk Factors and
Policies -- Brady Bonds" below. The Portfolio may also invest in the following
instruments on a temporary basis when economic or market conditions are such
that the Sub-Adviser deems a temporary defensive position to be appropriate:
time deposits, certificates of deposit and bankers' acceptances issued by a
commercial bank or savings and loan association; commercial paper rated at the
time of purchase by one or more NRSRO in one of the two highest categories or,
if not rated, issued by a corporation having an outstanding unsecured debt issue
rated high-grade by a NRSRO; short-term corporate obligations rated high-grade
by a NRSRO; U.S. Government obligations; Government agency securities issued or
guaranteed by U.S. Government-sponsored instrumentalities and federal agencies;
and repurchase agreements collateralized by the securities listed above. The
Portfolio may also purchase securities on a when-issued basis, lend its
securities to brokers, dealers, and other financial institutions to earn income
and borrow money for temporary or emergency purposes.
ADDITIONAL RISK FACTORS AND POLICIES
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile or
less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There are a
range of risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Portfolio may use derivatives for hedging purposes, cash management purposes, as
a substitute for investing directly in fixed income instruments, and to enhance
return when the Sub-Adviser believes the investment will assist the Portfolio in
achieving its investment objective. A description of the derivatives that the
Portfolio may use and some of their associated risks follows.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may use financial futures contracts, options on futures
contracts and options on securities (collectively, "futures and options"). In
addition, the Portfolio may invest in foreign currency futures contracts and
options on foreign currencies and foreign currency futures. Futures contracts
provide for the sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and price. An option is
a legal contract that gives the holder the right to buy or sell a specified
amount of the underlying security, currency or futures contract at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy and a put option conveys the right to sell a specified quantity of
the underlying instrument.
The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase the Portfolio's return. While the use of these instruments by the
Portfolio may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Sub-Adviser applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's potential to
realize gains as well as limit its exposure to losses. The Portfolio could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments. There can be no assurance that a liquid
market will exist at a time when the Portfolio seeks to close out a futures
contract or a futures option position. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract prices
during a single day; once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed. In addition, the Portfolio will incur transaction costs,
including trading commissions and options premiums, in connection with its
futures and options transactions, and these transactions could significantly
increase the Portfolio's turnover rate.
The Portfolio will not enter into futures contracts or options thereon to the
extent that its outstanding obligations to purchase securities under these
contracts in combination with its outstanding obligations with respect to
options transactions would exceed 35% of its total assets. The Portfolio will
use financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission, or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such non-hedging positions only to the extent that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Portfolio's net assets. The Portfolio
will segregate assets or "cover" its positions consistent with requirements
under the Investment Company Act of 1940, as amended ("1940 Act"). The Portfolio
may also purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired.
FOREIGN SECURITIES
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, other taxes imposed by the foreign
country on the Fund's earnings, assets, or transactions, limitation on the
removal of cash or other assets of the Portfolio, political or financial
instability, or diplomatic and other developments which could affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Furthermore, dividends and
interest payments from foreign securities may be withheld at the source.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements, and
transaction costs of foreign currency conversions.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. The Portfolio has no
specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except that
the Portfolio will not enter into a forward contract if the amount of assets set
aside to cover the contract would impede portfolio management.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract may
be used, for example, when the Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security.
The Portfolio may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, the Portfolio may
purchase a U.S. dollar-denominated security and at the same time enter into a
forward contract to exchange U.S. dollars for the contract's underlying currency
at a future date. By matching the amount of U.S. dollars to be exchanged with
the anticipated value of the U.S. dollar-denominated security, the Portfolio may
be able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S.
dollar-denominated security.
There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency is
not exactly matched with the Portfolio's obligation under the forward contract.
On the date of maturity the Portfolio may be exposed to some risk of loss from
fluctuations in that currency. Although the Sub-Adviser will attempt to hold
such mismatching to a minimum, there can be no assurance that the Sub-Adviser
will be able to do so. When the Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to hold
high-grade, liquid securities or cash in a segregated account with a daily value
at least equal to its obligation under the forward contract.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
securities may be regarded as predominately speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt securities, and the ability of the
Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were investing
in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield securities
defaults, the Portfolio may incur additional expenses to seek recovery. In the
case of high yield securities structured as zero coupon or payment-in-kind
securities, the market prices of such securities are affected to a greater
extent by interest rate changes and, therefore, tend to be more volatile than
securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Sub-Adviser does not rely solely on credit ratings when selecting securities for
the Portfolio, and develops its own independent analysis of issuer credit
quality. If a credit rating agency changes the rating of a security held by the
Portfolio, the Portfolio may retain the security if the Sub-Adviser deems it in
the best interest of investors.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon obligations, which are fixed-income
securities that do not make regular interest payments. Instead, zero coupon
obligations are sold at substantial discounts from their face value. The
Portfolio accrues income on these investments for tax and accounting purposes,
which is distributable to shareholders and which, because no cash is received at
the time of accrual, may require the liquidation of other portfolio securities
to satisfy the Portfolio's distribution obligations, in which case the Portfolio
will forego the purchase of additional income-producing assets with these funds.
The difference between a zero coupon obligation's issue or purchase price and
its face value represents the imputed interest an investor will earn if the
obligation is held until maturity. Zero coupon obligations may offer investors
the opportunity to earn higher yields that those available on ordinary
interest-paying obligations of similar credit quality and maturity. However,
zero coupon obligation prices may also exhibit greater price volatility than
ordinary fixed-income securities because of the manner in which their principal
and interest are returned to the investor.
MORTGAGE-RELATED SECURITIES
Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed
certificates and other securities representing ownership interests in mortgage
pools, including CMOs. Interest and principal payments on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities,
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. Generally,
prepayment rates increase if interest rates fall and decrease if interest rates
rise. For many types of mortgage-backed securities, this can result in
unfavorable changes in price and yield characteristics in response to changes in
interest rates and other market conditions. For example, as a result of their
prepayment aspects, the Portfolio's mortgage-backed securities may have less
potential for capital appreciation during periods of declining interest rates
than other fixed income securities of comparable maturities, although such
obligations may have a comparable risk of decline in market value during periods
of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly sensitive
to prevailing interest rates, the length of time the security is expected to be
outstanding, and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of mortgage-backed
securities, and a fund invested in such securities wishing to sell them may find
it difficult to find a buyer, which may in turn decrease the price at which they
may be sold.
Credit risk reflects the risk that the Portfolio may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
For further information, see the Statement of Additional Information.
Stripped Mortgage-Backed Securities. The Portfolio may invest in Stripped
Mortgage-Backed Securities ("SMBS") which are derivative multi-class mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
Government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. The Portfolio's
investments in SMBS will be limited to 10% of net assets.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest (the interest-only or IO class),
while the other class will receive all of the principal (the principal-only or
PO class). The cash flows and yields on IO and PO classes can be extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the yield to maturity
of IOs or POs, respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor may fail to
recoup fully its initial investment in an IO class of a stripped mortgage-backed
security. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the yield on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to the Portfolio's limitations on investment in illiquid
securities. For further information on these securities, see the Statement of
Additional Information.
Other Asset-Backed Securities. The Portfolio may invest in securities
representing interests in other types of financial assets, such as credit card
receivables, automobile loan and lease receivables, aircraft lease receivables,
home equity loan receivables, manufactured housing receivables, equipment loan
and lease receivables, and student loan receivables. Such securities are subject
to many of the same risks as are mortgage-backed securities, including
prepayment risks and risks of foreclosure. They may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. For
further information on these securities, see the Statement of Additional
Information.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee bank obligations are
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent Yankee bank) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from freely
flowing across its borders. Other risks include: adverse political and economic
developments, the extent and quality of government regulation of financial
markets and institutions, the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers' acceptances.
Repurchase agreements are transactions by which the Portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. The Sub- Adviser will
continually monitor the value of the underlying securities to ensure that their
value, including accrued interest, always equals or exceeds the repurchase
price. Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, the
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its interest in the
underlying securities. While the Portfolio Trust's management acknowledges these
risks, it is expected that they can be controlled through stringent security
selection criteria and careful monitoring procedures.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities (i) eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial
paper issued pursuant to Section 4(2) under the Securities Act of 1933 that are
determined to be liquid in accordance with guidelines established by the
Portfolio Trust's Board of Trustees. There may be delays in selling these
securities and sales may be made at less favorable prices. The Portfolio has a
separate policy that no more than 10% of its net assets may be invested in
securities which are restricted as to resale, including Rule 144A and Section
4(2) securities.
The Sub-Adviser may determine that a particular Rule 144A security is liquid
and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that the Sub-Adviser must consider in determining whether a particular Rule 144A
security is liquid include the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and the nature of the market for the
security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's
illiquidity to the extent that qualified institutions might become, for a time,
uninterested in purchasing these securities.
BRADY BONDS
A portion of the Portfolio's assets may be invested in certain debt
obligations customarily referred to as Brady Bonds, which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds have
been issued only recently and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated) and are actively traded in the
over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light of
the risk characteristics of Brady Bonds (including uncollateralized repayment of
principal at maturity for some instruments) and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds should be
viewed as speculative. For further information on these securities, see the
Statement of Additional Information.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Portfolio may purchase may have a floating or
variable rate of interest, i.e., the rate of interest varies with changes in
specified market rates or indices, such as the prime rates, and at specified
intervals. Certain floating or variable rate obligations that may be purchased
by the Portfolio may carry a demand feature that would permit the holder to
tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. The demand features of certain floating
or variable rate obligations may permit the holder to tender the obligations to
foreign banks, in which case the ability to receive payment under the demand
feature will be subject to certain risks, as described under "Foreign
Securities," above.
INVERSE FLOATING RATE OBLIGATIONS
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate, such as LIBOR (London Inter-Bank Offered Rate).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of inverse
floaters will generally decrease as interest rates increase. Inverse floaters
may exhibit substantially greater price volatility than fixed rate obligations
having similar credit quality, redemption provisions and maturity, and inverse
floater CMOs exhibit greater price volatility than the majority of mortgage
pass-through securities or CMOs. In addition, some inverse floater CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Portfolio may invest in certificates of
deposit, time deposits, bankers' acceptances, and other short-term debt
obligations issued by commercial banks and savings and loan associations
("S&Ls"). Certificates of deposit are receipts from a bank or S&L for funds
deposited for a specified period of time at a specified rate of return. Time
deposits in banks or S&Ls are generally similar to certificates of deposit but
are uncertificated. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international commercial
transactions. The Portfolio may not invest in time deposits maturing in more
than seven days. The Portfolio will limit its investment in time deposits
maturing from two business days through seven calendar days to 15% of its total
assets.
The Portfolio will not invest in any obligation of a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal amount of such investment is insured in
full by the Federal Deposit Insurance Corporation (the "FDIC"), (ii) in the case
of U.S. banks, it is a member of the FDIC and (iii) in the case of foreign
branches of U.S. banks, the security is deemed by the Sub- Adviser to be of an
investment quality comparable with other debt securities which may be purchased
by the Portfolio.
The Portfolio may also invest in obligations of U.S. banks, foreign branches
of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee dollars)
as a temporary defensive measure. Euro and Yankee dollar investments will
involve some of the same risks as investing in foreign securities, as described
above and in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its securities to qualified brokers, dealers, banks and
other financial institutions for the purpose of realizing additional income.
Loans of securities will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not lend its portfolio securities to
the extent that greater than one-third of its total assets, at fair market
value, would be committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or firm-
commitment basis, in which a security's price and yield are fixed on the date of
the commitment but payment and delivery are scheduled for a future date. On the
settlement date, the market value of the security may be higher or lower than
its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid, high-grade debt securities equal (on a daily marked-
to-market basis) to the amount of its commitment to purchase the securities on a
when-issued basis.
SWAPS, CAPS, FLOORS AND COLLARS
The Portfolio may enter into swap contracts and other similar instruments in
accordance with its policies. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
payment streams are calculated by reference to a specified index and agreed upon
notional amount. The term specified index includes currencies, fixed interest
rates, prices and total return on interest rate indices, fixed-income indices,
stock indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, the Portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the Portfolio may enter will
generally involve an agreement to pay interest streams calculated by reference
to interest income linked to a specified index in one currency in exchange for a
specified index in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
The swaps in which the Portfolio may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium) and the other party pays periodic amounts based on the movement of a
specified index.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. The Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high-grade debt obligations,
to avoid any potential leveraging. The Portfolio will not enter into any swap
agreement unless the unsecured commercial paper, senior debt or the
claims-paying ability of the counterparty is rated AA or A-1 or better by S&P or
Aa or P-1 or better by Moody's, rated comparably by another NRSRO or determined
by the Sub-Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been if
this investment technique were not used.
PORTFOLIO TURNOVER
The Sub-Adviser manages the Portfolio generally without regard to restrictions
on portfolio turnover, except those imposed by provisions of the federal tax
laws regarding short-term trading. In general, the Portfolio will not trade for
short-term profits, but when circumstances warrant, investments may be sold
without regard to the length of time held. The Portfolio's annual turnover rate
may exceed 100% due to changes in portfolio duration, yield curve strategy or
commitments to forward delivery mortgage-backed securities. However, it is
expected that the annual turnover rate for the Portfolio will not exceed 250%.
For the period from January 9, 1995 (commencement of operations) to October 31,
1995, the portfolio turnover rate was 100%. Because the Portfolio may have a
portfolio turnover rate of 100% or more, transaction costs incurred by the
Portfolio, and the realized capital gains and losses of the Portfolio, may be
greater than those of a fund with a lesser portfolio turnover rate. See
"Portfolio Transactions" and "Tax Matters" below.
INVESTMENT RESTRICTIONS
Each of the Portfolio and the Fund has adopted certain investment restrictions
designed to reduce exposure to specific situations (except that none of these
investment restrictions shall prevent the Fund from investing all of its Assets
in a registered investment company with substantially the same investment
objective). Some of these investment restrictions are:
(1) with respect to 75% of its assets, the Portfolio (Fund) will not purchase
securities of any issuer if, as a result, more than 5% of the Portfolio's
(Fund's) total assets taken at market value would be invested in the
securities of any single issuer, except that this restriction does not
apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(2) with respect to 75% of its assets, the Portfolio (Fund) will not purchase
a security if, as a result, the Portfolio (Fund) would hold more than 10%
of the outstanding voting securities of any issuer;
(3) the Portfolio (Fund) will not invest more than 5% of its total assets in
the securities of issuers (other than securities issued or guaranteed by
U.S. or foreign governments or political subdivisions thereof) which have
(with predecessors) a record of less than three years of continuous
operation;
(4) the Portfolio (Fund) will not acquire any securities of companies within
one industry if, as a result of such acquisition, more than 25% of the
value of the Portfolio's (Fund's) total assets would be invested in
securities of companies within such industry; provided, however, that
there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or
instruments issued by U.S. banks when the Portfolio (Fund) adopts a
temporary defensive position;
(5) the Portfolio (Fund) will not make loans except (i) by purchasing debt
securities in accordance with its investment objective and policies, or
entering into repurchase agreements and (ii) by lending its portfolio
securities;
(6) the Portfolio (Fund) will not borrow money (including from a bank or
through reverse repurchase agreements or forward dollar roll transactions
involving mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Portfolio (Fund)
may borrow as a temporary measure to satisfy redemption requests or for
extraordinary or emergency purposes, provided that the Portfolio (Fund)
maintains asset coverage of at least 300% for all such borrowings;
(7) the Portfolio (Fund) will not issue senior securities, except as
permitted under the 1940 Act; and,
(8) the Portfolio (Fund) will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions
of assets or consolidations and except as may otherwise be permitted by
the 1940 Act; provided, however, that the Portfolio shall not invest in
the shares of any open-end investment company unless (1) the Portfolio's
Sub-Adviser waives any investment advisory fees with respect to such
assets and (2) the Portfolio pays no sales charge in connection with the
investment.
Limitations (1), (2), (4), (5), (6) and (7) and certain other limitations
described in the Statement of Additional Information are fundamental and may be
changed only with the approval of the holders of a "majority of the outstanding
voting securities" (as defined in the 1940 Act) of the Portfolio or the Fund, as
the case may be. The other investment restrictions described here and in the
Statement of Additional Information are not fundamental policies meaning that
the Board of Trustees of the Portfolio Trust may change them without investor
approval. If a percentage limitation on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value or total cost of the
Portfolio's assets will not be considered a violation of the restriction, and
the sale of securities will not be required.
SPECIAL INFORMATION CONCERNING THE TWO-TIER FUND STRUCTURE
The Trust, which is an open-end investment company, seeks to achieve the
investment objective of the Fund by investing all of the Fund's Assets in the
Portfolio, a series of a separate open-end investment company with the same
investment objective as the Fund. Other mutual funds or institutional investors
may invest in the Portfolio on the same terms and conditions as the Fund.
However, these other investors may have different sales commissions and other
operating expenses which may generate different aggregate performance results.
Information concerning other investors in the Portfolio is available by calling
the Sponsor at (617) 423-0800. The two-tier investment fund structure has been
developed relatively recently, so shareholders should carefully consider this
investment approach.
The investment objective of the Fund may be changed without the approval of
the shareholders of the Fund and the investment objective of the Portfolio may
be changed without the approval of the investors in the Portfolio. Shareholders
of the Fund shall receive 30 days prior written notice of any change in the
investment objective of the Fund or the Portfolio. For a description of the
investment objective, policies and restrictions of the Portfolio, see
"Investment Objective and Policies" above.
Except as permitted by the Securities and Exchange Commission, whenever the
Trust is requested to vote on a matter pertaining to the Portfolio, the Trust
will hold a meeting of the shareholders of the Fund and, at the meeting of
investors in the Portfolio, the Trust will cast all of its votes in the same
proportion as the votes of the Fund's shareholders even if all Fund shareholders
did not vote. Even if the Trust votes all its shares at the Portfolio meeting,
other investors with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio.
The Trust may withdraw the Fund's investment in the Portfolio as a result of
certain changes in the Portfolio's investment objective, policies or
restrictions or if the Board of Trustees of the Trust determines that it is
otherwise in the best interests of the Fund to do so. Upon any such withdrawal,
the Board of Trustees of the Trust would consider what action might be taken,
including the investment of all of the assets of the Fund in another pooled
investment entity or the retaining of an investment adviser to manage the Fund's
assets in accordance with the investment policies described above with respect
to the Portfolio. In the event the Trustees of the Trust were unable to
accomplish either, the Trustees will determine the best course of action.
As with traditionally structured funds which have large investors, the actions
of such large investors may have a material affect on smaller investors. For
example, if a large investor withdraws from the Portfolio, a small remaining
fund may experience higher pro rata operating expenses, thereby producing lower
returns. Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk.
For descriptions of the management and expenses of the Portfolio, see
"Management of the Trust and the Portfolio Trust" below and in the Statement of
Additional Information.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
The business and affairs of the Trust and the Portfolio Trust are managed
under the direction of their respective Boards of Trustees. The Trustees of each
of the Trust and the Portfolio Trust are Frederick C. Chen, Alan S. Parsow,
Larry M. Robbins and Michael Seely. Additional information about the Trustees,
as well as the executive officers of the Trust and the Portfolio Trust, may be
found in the Statement of Additional Information under the caption "Management
of the Trust and the Portfolio Trust -- Trustees and Officers".
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust and of the
Portfolio Trust. Under the conflicts of interest procedures, the Trustees will
review on a quarterly basis any potential conflicts of interests after
consulting with Fund counsel, the Manager and the Fund Administrator. If a
potential conflict of interest arises, the Board of Trustees of the entity that
may be adversely affected will take such action as is reasonably appropriate to
resolve the conflict, up to and including establishing a new Board of Trustees
for such entity. See "Management of the Trust and the Portfolio Trust" in the
Statement of Additional Information for more information about the Trustees and
the executive officers of the Trust and the Portfolio Trust.
INVESTMENT MANAGER
Republic, whose address is 452 Fifth Avenue, New York, New York 10018, serves
as investment manager to the Portfolio pursuant to an Investment Management
Contract with the Portfolio Trust. Subject to the general guidance and the
policies set by the Trustees of the Portfolio Trust, Republic provides general
supervision over the investment management functions performed by the
Sub-Adviser. For its services under the Investment Management Contract, the
Manager is entitled to receive from the Portfolio Trust a fee, payable monthly,
at the annual rate of 0.20% of the Portfolio's average daily net assets. The
Manager is currently waiving this fee.
Republic is a wholly owned subsidiary of Republic New York Corporation, a
registered bank holding company. As of December 31, 1995, Republic was the 20th
largest commercial bank in the United States measured by deposits and the 19th
largest commercial bank measured by shareholder equity.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased.
Based upon the advice of counsel, Republic believes that the performance of
investment advisory and other services for the Portfolio will not violate the
Glass-Steagall Act or other applicable banking laws or regulations. However,
future statutory or regulatory changes, as well as future judicial or
administrative decisions and interpretations of present and future statutes and
regulations, could prevent Republic from continuing to perform such services for
the Portfolio. If Republic were prohibited from acting as investment manager to
the Portfolio, it is expected that the Trust's Board of Trustees would recommend
to Fund shareholders approval of a new investment advisory agreement with
another qualified investment adviser selected by the Board or that the Board
would recommend other appropriate action.
SUB-ADVISER
MAS continuously manages the investment portfolio of the Portfolio pursuant to
a Sub-Advisory Agreement with the Manager. For its services, the Sub- Adviser is
paid a fee by the Portfolio, computed daily and based on the Portfolio's average
daily net assets, equal to 0.375% of net assets up to $50 million, 0.25% of net
assets over $50 million up to $95 million, $300,000 of net assets over $95
million up to $150 million, 0.20% of net assets over $150 million up to $250
million, and 0.15% of net assets over $250 million. It is the responsibility of
the Sub-Adviser not only to make investment decisions for the Portfolio, but
also to place purchase and sale orders for the portfolio transactions of the
Portfolio. See "Portfolio Transactions."
MAS, whose address is One Tower Bridge, West Conshohocken, Pennsylvania 19428,
is a Pennsylvania limited partnership founded in 1969. MAS provides investment
services to employee benefit plans, endowment funds, foundations and other
institutional investors. As of March 31, 1996, MAS had in excess of $36.2
billion in assets under management.
On January 3, 1996, Morgan Stanley Group Inc. acquired MAS in a transaction
in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly
owned subsidiary of Morgan Stanley Group Inc., became the sole general partner
of MAS. Morgan Stanley Asset Management Holdings Inc. and two other wholly
owned subsidiaries of Morgan Stanley Group Inc. became the limited partners of
MAS. Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries are engaged in a wide range of financial services.
Kenneth B. Dunn, whose business experience for the past five years is provided
below, is the individual portfolio manager responsible for management of the
Portfolio.
Partner, MAS, since prior to 1991. Portfolio Manager, MAS Fixed Income
and MAS Domestic Fixed Income Portfolios, since 1987; MAS Fixed Income
II Portfolio, since 1990; MAS Mortgage- Backed Securities and Special
Purpose Fixed Income Portfolios, since 1992; and, MAS Municipal and PA
Municipal Portfolios,
since 1994.
DISTRIBUTOR AND SPONSOR
SBDS whose address is 6 St. James Avenue, Boston, Massachusetts 02116, acts as
sponsor and principal underwriter and distributor of the Fund's shares pursuant
to a Distribution Contract with the Trust. The Distributor may, out of its own
resources, make payments to broker-dealers for their services in distributing
Shares. SBDS and its affiliates also serve as administrator or distributor to
other investment companies. SBDS is a wholly owned subsidiary of Signature
Financial Group, Inc.
Pursuant to a Distribution Plan adopted by the Trust (the "Plan"), the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Fund Shares and for
the provision of certain shareholder services with respect to Shares. The amount
of this reimbursement may not exceed on an annual basis 0.25% of the average
daily net assets of the Fund represented by Shares outstanding during the period
for which payment is being made. Payments to the Distributor are for various
types of activities, including: (1) payments to broker-dealers who advise
shareholders regarding the purchase, sale or retention of Shares and who provide
shareholders with personal services and account maintenance services ("service
fees"), (2) payments to employees of the Distributor, and (3) printing and
advertising expenses. It is currently intended that the aggregate fees paid to
the Distributor pursuant to the Plan and to Shareholder Servicing Agents
pursuant to the Administrative Services Plan will not exceed on an annual basis
0.25% of the Fund's average daily net assets represented by Shares outstanding
during the period for which payment is being made. Salary expense of SBDS
personnel who are responsible for marketing shares of the various portfolios of
the Trust may be allocated to such portfolios on the basis of average net
assets; travel expense is allocated to, or divided among, the particular
portfolios for which it is incurred.
Any payment by the Distributor or reimbursement of the Distributor from the
Fund made pursuant to the Plan is contingent upon the Board of Trustees'
approval. The Fund is not liable for distribution and shareholder servicing
expenditures made by the Distributor in any given year in excess of the maximum
amount (0.25% per annum of the Fund's average daily net assets represented by
Shares outstanding) payable under the Plan in that year.
ADMINISTRATIVE SERVICES PLAN
The Trust has adopted an Administrative Services Plan (the "Administrative
Services Plan") with respect to Fund Shares which provides that the Trust may
obtain the services of an administrator, transfer agent, custodian and one or
more Shareholder Servicing Agents, and may enter into agreements providing for
the payment of fees for such services.
FUND ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Pursuant to Administrative Services Agreements, SBDS and Signature (Cayman)
provide each of the Fund and the Portfolio, respectively, with general office
facilities, and supervise the overall administration of the Fund and the
Portfolio including, among other responsibilities, the preparation and filing of
all documents required for compliance by the Fund and the Portfolio with
applicable laws and regulations and arranging for the maintenance of books and
records of the Fund and the Portfolio. For its services to the Fund, SBDS
receives from the Fund fees payable monthly equal on an annual basis (for the
Fund's then-current fiscal year) to 0.05% of the Fund's average daily net assets
up to $100 million. The Fund Administrator receives no compensation from the
Fund with respect to the Fund's assets over $100 million. The administrative
services fees of the Fund are subject to an annual minimum fee. See the
Statement of Additional Information. For its services to the Portfolio,
Signature (Cayman) receives from the Portfolio fees payable monthly equal on an
annual basis (for the Portfolio's then-current fiscal year) to 0.05% of the
Portfolio's average daily net assets.
SBDS and Signature (Cayman) provide persons satisfactory to the respective
Boards of Trustees to serve as officers of the Trust and the Portfolio Trust.
Such officers, as well as certain other employees of the Trust and of the
Portfolio Trust, may be directors, officers or employees of SBDS, Signature
(Cayman) or their affiliates.
SBDS, Signature (Cayman) and their affiliates also serve as administrator and
distributor of other investment companies. SBDS and Signature (Cayman) are
wholly owned subsidiaries of Signature Financial Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to respective fund accounting agreements, Signature Financial
Services, Inc. ("Signature") serves as fund accounting agent to each of the Fund
and the Portfolio. For its services to the Fund, Signature receives from the
Fund fees payable monthly equal on an annual basis to $12,000. For its services
to the Portfolio, Signature receives fees payable monthly equal on an annual
basis to $40,000.
TRANSFER AGENT AND CUSTODIAN
Each of the Trust and the Portfolio Trust has entered into a Transfer Agency
Agreement with Investors Bank & Trust Company ("IBT") pursuant to which IBT acts
as transfer agent (the "Transfer Agent") for the Fund and the Portfolio. The
Transfer Agent maintains an account for each shareholder of the Fund and
investor in the Portfolio, performs other transfer agency functions, and acts as
dividend disbursing agent for the Fund. Pursuant to respective Custodian
Agreements, IBT also acts as the custodian (the "Custodian") of the assets of
the Fund and the Portfolio. The Portfolio Trust's Custodian Agreement provides
that the Custodian may use the services of sub-custodians with respect to the
Portfolio. The Custodian's responsibilities include safeguarding and controlling
the Fund's cash and the Portfolio's cash and securities, and handling the
receipt and delivery of securities, determining income and collecting interest
on the Portfolio's investments, maintaining books of original entry for
portfolio accounting and other required books and accounts, and calculating the
daily net asset value of the Portfolio. Securities held for the Portfolio may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depositary Trust Company. The Custodian does not determine the investment
policies of the Fund or the Portfolio or decide which securities will be
purchased or sold for the Portfolio. Assets of the Portfolio may, however, be
invested in securities of the Custodian and the Portfolio Trust may deal with
the Custodian as principal in securities transactions for the Portfolio. For its
services, IBT receives such compensation as may from time to time be agreed upon
by it and the Trust or the Portfolio Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent, including Republic, pursuant
to which a Shareholder Servicing Agent, as agent for its customers, among other
things: answers customer inquiries regarding account status and history, the
manner in which purchases and redemptions of Shares may be effected and certain
other matters pertaining to the Fund; assists shareholders in designating and
changing dividend options, account designations and addresses; provides
necessary personnel and facilities to establish and maintain shareholder
accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Fund's shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Fund or the Trust; and provides such other related services as the Trust
or a shareholder may request. For these services, each Shareholder Servicing
Agent receives a fee from the Fund, which may be paid periodically, determined
by a formula based upon the number of accounts serviced by such Shareholder
Servicing Agent during the period for which payment is being made, the level of
activity in accounts serviced by such Shareholder Servicing Agent during such
period, and the expenses incurred by such Shareholder Servicing Agent. It is
currently intended that the aggregate fees paid to the Distributor pursuant to
the Plan and to Shareholder Servicing Agents pursuant to the Administrative
Services Plan will not exceed on an annual basis 0.25% of the Fund's average
daily net assets represented by Shares outstanding during the period for which
payment is being made.
The Trust understands that some Shareholder Servicing Agents also may impose
certain conditions on their customers, subject to the terms of this Prospectus,
in addition to or different from those imposed by the Trust, such as requiring a
different minimum initial or subsequent investment, account fees (a fixed amount
per transaction processed), compensating balance requirements (a minimum dollar
amount a customer must maintain in order to obtain the services offered), or
account maintenance fees (a periodic charge based on a percentage of the assets
in the account or of the dividends paid on those assets). Each Shareholder
Servicing Agent has agreed to transmit to its customers who are holders of
Shares appropriate prior written disclosure of any fees that it may charge them
directly and to provide written notice at least 30 days prior to the imposition
of any transaction fees.
The Glass-Steagall Act prohibits certain financial institutions from engaging
in the business of underwriting securities of open-end investment companies,
such as shares of the Fund. The Trust engages banks as Shareholder Servicing
Agents on behalf of the Fund only to perform administrative and shareholder
servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do not expect that
shareholders of the Fund would suffer any adverse financial consequences as a
result of these occurrences.
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by the Distributor, Manager or the Sub-Adviser. See "Management of the
Trust -- Expenses and Expense Limits" in the Statement of Additional
Information. Trust expenses directly attributable to the Fund are charged to the
Fund; other expenses are allocated proportionately among all the portfolios in
the Trust in relation to the net assets of each portfolio.
PORTFOLIO TRANSACTIONS
To the extent consistent with applicable legal requirements, the Sub-Adviser
may place orders for the purchase and sale of portfolio investments for the
Portfolio with Republic New York Securities Corporation, subject to obtaining
best price and execution for a particular transaction. See the Statement of
Additional Information.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Shares is determined on each day on which the New
York Stock Exchange is open for regular trading ("Fund Business Day"). This
determination is made once during each such day as of 4:00 p.m., New York time,
by dividing the value of the Fund's net assets (i.e., the value of its
investment in the Portfolio and other assets less its liabilities, including
expenses payable or accrued) by the number of Shares outstanding at the time the
determination is made.
The value of the Fund's investment in the Portfolio is also determined once
daily at 4:00 p.m., New York time, on each day the New York Stock Exchange is
open for regular trading ("Portfolio Business Day").
The determination of the value of the Fund's investment in the Portfolio is
made by subtracting from the value of the total assets of the Portfolio the
amount of the Portfolio's liabilities and multiplying the difference by the
percentage, effective for that day, which represents the Fund's share of the
aggregate beneficial interests in the Portfolio.
Values of assets held by the Portfolio are determined on the basis of their
market or other fair value, as described in the Statement of Additional
Information.
PURCHASE OF SHARES
Shares may be purchased through Shareholder Servicing Agents or through
securities brokers that have entered into a dealer agreement with the Distibutor
("Securities Brokers"). Shares may be purchased without a sales load at their
net asset value next determined after an order is transmitted to and accepted by
the Distributor or is received by a Shareholder Servicing Agent or a Securities
Broker if it is transmitted to and accepted by the Distributor. Purchases are
therefore effected on the same day the purchase order is received by the
Distributor provided such order is received prior to 4:00 p.m., New York time,
on any Fund Business Day. The Trust intends the Fund to be as fully invested at
all times as is reasonably practicable in order to enhance the yield on its
assets. Each Shareholder Servicing Agent or Securities Broker is responsible for
and required to promptly forward orders for shares to the Distributor.
While there is no sales load on purchases of Shares, the Distributor may
receive fees from the Fund. See "Management of the Trust -- Distributor and
Sponsor." Other funds which have investment objectives similar to those of the
Fund but which do not pay some or all of such fees from their assets may offer a
higher yield.
All purchase payments are invested in full and fractional Shares. The Trust
reserves the right to cease offering Shares for sale at any time or to reject
any order for the purchase of Shares.
An investor may purchase Shares through the Distributor directly or by
authorizing his Shareholder Servicing Agent or his securities broker to purchase
such Shares on his behalf through the Distributor.
Exchange Privilege. By contacting the Transfer Agent or his Shareholder
Servicing Agent or his securities broker, a shareholder may exchange some or all
of his Shares for shares of one or more of the following investment companies
(or series thereof) at net asset value without a sales charge: Republic U.S.
Government Money Market Fund, Republic New York Tax Free Money Market Fund,
Republic New York Tax Free Bond Fund, Republic Equity Fund, Republic Overseas
Equity Fund, Republic Opportunity Fund and such other Republic Funds or other
registered investment companies (or series thereof) for which Republic serves as
investment adviser as Republic may determine. An exchange may result in a change
in the number of Shares held, but not in the value of such Shares immediately
after the exchange. Each exchange involves the redemption of the Shares to be
exchanged and the purchase of the shares of the other Republic Fund which may
produce a gain or loss for tax purposes.
The exchange privilege (or any aspect of it) may be changed or discontinued
upon 60 days' written notice to shareholders and is available only to
shareholders in states in which such exchanges legally may be made. A
shareholder considering an exchange should obtain and read the prospectus of the
other Republic Fund and consider the differences in investment objectives and
policies before making any exchange.
DIRECTLY THROUGH THE DISTRIBUTOR
For each shareholder who purchases Shares directly through the Distributor,
the Trust, as the shareholder's agent, establishes an open account to which all
Shares purchased are credited together with any dividends and capital gains
distributions which are paid in additional Shares. See "Dividends and
Distributions." The minimum initial investment is $1,000, except the minimum
initial investment for an Individual Retirement Account is $250. The minimum
subsequent investment is $100. Initial and subsequent purchases may be made by
writing a check (in U.S. dollars) payable to the Republic Funds -- Bond Fund and
mailing it to:
Republic Funds
c/o Investors Bank & Trust Company
P.O. Box 1537 MFD23
Boston, Massachusetts 02205-1537
In the case of an initial purchase, the check must be accompanied by a
completed Purchase Application.
In the case of subsequent purchases, a shareholder may transmit purchase
payments by wire directly to the Fund's custodian bank at the following address:
Investors Bank & Trust Company
Boston, Massachusetts
Attn: Transfer Agent
ABA # 011001438
Acct. # 5999-99451
For further credit to the Republic Funds
(Republic Bond Fund, account name, account #)
The wire order must specify the Fund, the account name, number, confirmation
number, address, amount to be wired, name of the wiring bank and name and
telephone number of the person to be contacted in connection with the order.
Automatic Investment Plan. The Trust offers a plan for regularly investing
specified dollar amounts ($25.00 minimum in monthly, quarterly, semi-annual or
annual intervals) in the Fund. If an Automatic Investment Plan is selected,
subsequent investments will be automatic and will continue until such time as
the Trust and the investor's bank are notified in writing to discontinue further
investments. Due to the varying procedures to prepare, process and forward the
bank withdrawal information to the Trust, there may be a delay between the time
of bank withdrawal and the time the money reaches the Fund. The investment in
the Fund will be made at the net asset value per share determined on the Fund
Business Day that both the check and the bank withdrawal data are received in
required form by the Transfer Agent. Further information about the plan may be
obtained from IBT at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor, an
investor should contact the Distributor directly (see back cover for address and
phone number).
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder Servicing Agents and
securities brokers may offer services to their customers, including specialized
procedures for the purchase and redemption of Shares, such as pre-authorized or
automatic purchase and redemption programs. Each Shareholder Servicing Agent and
securities broker may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees will
be to reduce the net return on the investment of customers of that Shareholder
Servicing Agent or securities broker. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from the Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit purchase
payments on behalf of their customers by wire directly to the Fund's custodian
bank by following the procedures described above.
For further information on how to direct a securities broker or a Shareholder
Servicing Agent to purchase Shares, an investor should contact his securities
broker or his Shareholder Servicing Agent (see back cover for address and phone
number).
RETIREMENT PLANS
Shares are offered in connection with tax-deferred retirement plans.
Application forms and further information about these plans, including
applicable fees, are available from the Trust or the Sponsor upon request.
Recently enacted federal tax legislation has substantially affected the tax
treatment of contributions to certain retirement plans. Before investing in the
Fund through one or more of these plans, an investor should consult his or her
tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares may be used as a funding medium for an IRA. An Internal Revenue
Service-approved IRA plan may be available from an investor's Shareholder
Servicing Agent. In any event, such a plan is available from the Sponsor naming
IBT, as custodian. The minimum initial investment for an IRA is $250; the
minimum subsequent investment is $100. IRAs are available to individuals who
receive compensation or earned income and their spouses whether or not they are
active participants in a tax-qualified or Government-approved retirement plan.
An IRA contribution by an individual who participates, or whose spouse
participates, in a tax-qualified or Government-approved retirement plan may not
be deductible depending upon the individual's income. Individuals also may
establish an IRA to receive a "rollover" contribution of distributions from
another IRA or a qualified plan. Tax advice should be obtained before planning a
rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase Shares for retirement plans for
self-employed persons which are known as Defined Contribution Plans (formerly
Keogh or H.R. 10 Plans). Republic offers a prototype plan for Money Purchase and
Profit Sharing Plans.
SECTION 457 PLAN, 401(K) PLAN, 403(B) PLAN
The Fund may be used as a vehicle for certain deferred compensation plans
provided for by Section 457 of the Code with respect to service for state
governments, local governments, rural electric cooperatives and political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities. The Fund may also be used as a vehicle for both 401(k) plans and 403
(b) plans.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his account at
any time at the net asset value next determined after a redemption order in
proper form is furnished by the shareholder to the Transfer Agent, with respect
to Shares purchased directly through the Distributor, or to his securities
broker or his Shareholder Servicing Agent, and is transmitted to and received by
the Transfer Agent. Redemptions are effected on the same day the redemption
order is received by the Transfer Agent provided such order is received prior to
4:00 p.m., New York time, on any Fund Business Day. Shares redeemed earn
dividends up to and including the Fund Business Day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal funds
on the next Fund Business Day on which the redemption is effected, but in any
event within seven days. The right of any shareholder to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the New York Stock Exchange is
closed (other than weekends or holidays) or trading on such Exchange is
restricted or, to the extent otherwise permitted by the 1940 Act, if an
emergency exists. To be in a position to eliminate excessive expenses, the Trust
reserves the right to redeem upon not less than 30 days' notice all Shares in an
account which has a value below $50. However, a shareholder will be allowed to
make additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
Unless Shares have been purchased directly from the Distributor, a shareholder
may redeem Shares only by authorizing his securities broker or his Shareholder
Servicing Agent to redeem such Shares on his behalf (since the account and
records of such a shareholder are established and maintained by his securities
broker or his Shareholder Servicing Agent). For further information as to how to
direct a securities broker or a Shareholder Servicing Agent to redeem Shares, a
shareholder should contact his securities broker or his Shareholder Servicing
Agent (see back cover for address and phone number).
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or more may
establish a Systematic Withdrawal Plan under which they redeem at net asset
value the number of full and fractional shares which will produce the monthly,
quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Shares to be redeemed, account
number and the Fund. The letter must be signed in exactly the same way the
account is registered (if there is more than one owner of the Shares all must
sign). In connection with a written redemption request, all signatures of all
registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
An investor may redeem Shares in any amount by written request mailed to the
Transfer Agent at the following address:
The Republic Funds
c/o Investors Bank & Trust Company
P.O. Box 1537 MFD23
Boston, Massachusetts 02205-1537
Checks for redemption proceeds normally will be mailed within seven days, but
will not be mailed until all checks in payment for the purchase of the Shares to
be redeemed have been cleared, which may take up to 15 days or more. Unless
other instructions are given in proper form, a check for the proceeds of a
redemption will be sent to the shareholder's address of record.
Redemption by Wire or Telephone. An investor may redeem Shares by wire or by
telephone if he has checked the appropriate box on the Purchase Application or
has filed a Telephone Authorization Form with the Trust. These redemptions may
be paid from the Fund by wire or by check. The Trust reserves the right to
refuse telephone and wire redemptions and may limit the amount involved or the
number of telephone redemptions. The telephone redemption procedure may be
modified or discontinued at any time by the Trust. Instructions for wire
redemptions are set forth in the Purchase Application. The Trust employs
reasonable procedures to confirm that instructions communicated by telephone are
genuine. For instance, the following information must be verified by the
shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities dealer or bank. If the Trust fails to follow these or
other established procedures, it may be liable for any losses due to
unauthorized or fraudulent instructions.
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of the Fund's net investment income daily as a dividend
to Fund shareholders. Dividends substantially equal to all of the Fund's net
investment income earned during the month are distributed in that month to Fund
shareholders of record. Generally, the Fund's net investment income consists of
the interest and dividend income it earns, less expenses. In computing interest
income, premiums are not amortized nor are discounts accrued on long-term debt
securities in the Portfolio, except as required for federal income tax purposes.
The Fund's net realized short-term and long-term capital gains, if any, are
distributed to shareholders annually. Additional distributions are also made to
the Fund's shareholders to the extent necessary to avoid application of the 4%
non-deductible federal excise tax on certain undistributed income and net
capital gains of regulated investment companies.
Unless a shareholder elects to receive dividends in cash, dividends are
distributed in the form of additional shares of the Fund (purchased at their net
asset value without a sales charge).
Certain mortgage-backed securities may provide for periodic or unscheduled
payments of principal and interest as the mortgages underlying the securities
are paid or prepaid. However, such principal payments (not otherwise
characterized as ordinary discount income or bond premium expense) will not
normally be considered as income to the Portfolio and therefore will not be
distributed as dividends to Fund shareholders. Rather, these payments on
mortgage-backed securities generally will be reinvested by the Portfolio in
accordance with its investment objective and policies.
TAX MATTERS
This discussion is intended for general information only. An investor should
consult with his own tax advisor as to the tax consequences of an investment in
the Fund, including the status of distributions from the Fund under applicable
state or local law.
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 meet certain income, distribution and diversification requirements.
Provided such requirements are met and all investment company taxable income and
net realized capital gains of the Fund are distributed to shareholders in
accordance with the timing requirements imposed by the Code, generally no
federal income or excise taxes will be paid by the Fund on amounts so
distributed.
Dividends and capital gains distributions, if any, paid to shareholders are
treated in the same manner for federal income tax purposes whether received in
cash or reinvested in additional shares of the Fund. Shareholders must treat
dividends, other than long-term capital gain dividends, as ordinary income.
Dividends designated by the Fund as long-term capital gain dividends are taxable
to shareholders as long-term capital gain regardless of the length of time the
shares of the Fund have been held by the shareholders. Certain dividends
declared in October, November, or December of a calendar year to shareholders of
record on a date in such a month are taxable to shareholders (who otherwise are
subject to tax on dividends) as though received on December 31 of that year if
paid to shareholders during January of the following calendar year.
Foreign Tax Withholding. Income received by the Portfolio from sources within
foreign countries may be subject to withholding and other income or similar
taxes imposed by such countries. If more than 50% of the value of the
Portfolio's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible and intends to elect to treat
its share of any non-U.S. income and similar taxes it pays (or which are paid by
the Portfolio) as though the taxes were paid by the Fund's shareholders.
Pursuant to this election, a shareholder will be required to include in gross
income (in addition to taxable dividends actually received) his pro rata share
of the foreign taxes paid by the Fund or Portfolio, and will be entitled either
to deduct (as an itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions, but such a shareholder may be eligible to claim the foreign tax
credit. Shareholders will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund or Portfolio will
be treated as paid by the Fund's shareholders for that year. Furthermore,
foreign shareholders may be subject to U.S. tax at the rate of 30% (or lower
treaty rate) of the income resulting from the Fund's election to treat any
foreign taxes paid by it as paid by its shareholders, but will not be able to
claim a credit or deduction for the foreign taxes treated as having been paid by
them.
The Fund generally will be required to withhold federal income tax at a rate
of 31% ("backup withholding") from dividends paid, capital gain distributions,
and redemption proceeds to shareholders if (1) the shareholder fails to furnish
the Fund with the shareholder's correct taxpayer identification number ("TIN")
or social security number and to make such certifications as the Fund may
require, (2) the Internal Revenue Service notifies the shareholder or the Fund
that the shareholder has failed to report properly certain interest and dividend
income to the Internal Revenue Service and to respond to notices to that effect,
or (3) when required to do so, the shareholder fails to certify that he is not
subject to backup withholding. Backup withholding is not an additional tax and
any amounts withheld may be credited against the shareholder's federal income
tax liability. Dividends from the Fund attributable to the Fund's net investment
income and short-term capital gains generally will be subject to U.S.
withholding tax when paid to shareholders treated under U.S. tax law as
nonresident alien individuals or foreign corporations, estates, partnerships or
trusts.
The Trust 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.
For additional information relating to the tax aspects of investing in the
Fund, see the Statement of Additional Information.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (par value $0.001
per share) and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial interests in the
Trust. The shares of each series participate equally in the earnings, dividends
and assets of the particular series. Currently, the Trust has seven series of
shares, each of which constitutes a separately managed fund. The Trust reserves
the right to create additional series of shares.
Each share of the Fund represents an equal proportionate interest in the Fund
with each other share. Shares have no preference, preemptive, conversion or
similar rights. Shares when issued are fully paid and non-assessable, except as
set forth below. Shareholders are entitled to one vote for each share held on
matters on which they are entitled to vote. The Trust is not required and has no
current intention to hold annual meetings of shareholders, although the Trust
will hold special meetings of Fund shareholders when in the judgment of the
Trustees of the Trust it is necessary or desirable to submit matters for a
shareholder vote. Shareholders of each series generally vote separately, for
example, to approve investment advisory agreements or changes in fundamental
investment policies or restrictions, but shareholders of all series may vote
together to the extent required under the 1940 Act, such as in the election or
selection of Trustees, principal underwriters and accountants for the Trust.
Under certain circumstances the shareholders of one or more series could control
the outcome of these votes.
The series of the Portfolio Trust will vote separately or together in the same
manner as the series of the Trust. Under certain circumstances, the investors in
one or more series of the Portfolio Trust could control the outcome of these
votes.
Shareholders of the Fund have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of the Fund,
shareholders of the Fund would be entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust is organized as a master trust fund under the laws of the
State of New York. The Portfolio is a separate series of the Portfolio Trust,
which currently has two other series. The Portfolio Trust's Declaration of Trust
provides that the Fund and other entities investing in the Portfolio (e.g.,
other investment companies, insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of the Portfolio.
However, the risk of the Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance existed
and the Portfolio itself was unable to meet its obligations. Accordingly, the
Trustees of the Trust believe that neither the Fund nor its shareholders will be
adversely affected by reason of the investment of all of the Assets of the Fund
in the Portfolio.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each Portfolio Business Day. At 4:00 p.m., New
York time on each Portfolio Business Day, the value of each investor's
beneficial interest in the Portfolio is determined by multiplying the net asset
value of the Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, which are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m., New York time on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of 4:00 p.m., New York time on the following Portfolio Business Day.
PERFORMANCE INFORMATION
Yield and total return data for the Fund may from time to time be included in
advertisements about the Trust. "Total return" is 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. All total return figures reflect the
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. "Yield"
refers to the income generated by an investment in the Fund over the 30-day (or
one month) period ended on the date of the most recent balance sheet of the Fund
included in the Trust's registration statement with respect to the Fund. See the
Statement of Additional Information for further information concerning the
calculation of yield and total return data.
Historical total return information for any period or portion thereof prior to
the establishment of the Fund will be that of the Portfolio, adjusted to assume
that all charges, expenses and fees of the Fund and the Portfolio which are
presently in effect were deducted during such period.
Since these total return and yield quotations are based on historical earnings
and since the Fund's total return and yield fluctuate from day to day, these
quotations should not be considered as an indication or representation of the
Fund's total return or yield in the future. Any performance information should
be considered in light of the Fund's investment objective and policies,
characteristics and quality of the Fund's portfolio and the market conditions
during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. From time to time the
Trust may also use comparative performance information in such advertisements,
including the performance of unmanaged indices, the performance of the Consumer
Price Index (as a measure for inflation), and data from Lipper Analytical
Services, Inc. and other industry publications.
A Shareholder Servicing Agent or a securities broker may charge its customers
direct fees in connection with an investment in the Fund, which will have the
effect of reducing the net return on the investment of customers of that
Shareholder Servicing Agent or that securities broker. Such customers may be
able to obtain through their Shareholder Servicing Agent or securities broker
quotations reflecting such decreased return.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust, 6 St. James
Avenue, Boston, Massachusetts 02116.
GENERAL AND ACCOUNT INFORMATION (800) 782-8183 (TOLL FREE)
--------------------
The Trust's Statement of Additional Information, dated August 1, 1996, with
respect to the Fund contains more detailed information about the Fund, including
information related to (i) the Fund's investment restrictions, (ii) the Trustees
and officers of the Trust and the Manager, Sub-Adviser and Sponsor of the Fund,
(iii) portfolio transactions, (iv) the Fund's shares, including rights and
liabilities of shareholders, and (v) additional yield information, including the
method used to calculate the total return and yield of the Fund.
<PAGE>
APPENDIX
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements. The
future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded as
having extremely poor prospects.
The characteristics of corporate debt obligations rated by S&P are generally
as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB is predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with terms of the obligation. BB
indicates the lowest degree of speculation; CC indicates the highest degree of
speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with terms
of the obligation. BB indicates the lowest degree of speculation and CC the
highest.
A bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider reliable.
The ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are generally
as follows:
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "- +".
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payments of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D-- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; the issuer's long-term debt is
rated A or better; the issuer has access to at least two additional channels of
borrowing; and basic earnings and cash flow have an upward trend with allowances
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial paper
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and consumer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determine how the issuer's commercial paper is
rated with various categories.
<PAGE>
REPUBLIC
BOND
FUND
INVESTMENT MANAGER
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
ADMINISTRATOR, DISTRIBUTOR AND SPONSOR
Signature Broker-Dealer Services, Inc.
6 St. James Avenue
Boston, MA 02116
(617) 423-0800
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
(800) 782-8183
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
SHAREHOLDER SERVICING AGENTS
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
(800) 782-8183
FOR NON-REPUBLIC CLIENTS
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
(800) 782-8183
RF5C Class (7/96)
