REPUBLIC FIXED INCOME FUND
6 St. James Avenue
Boston, MA 02116
(800) 782-8183
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Miller Anderson & Sherrerd - Sub-Adviser
("MAS" or the "Sub-Adviser")
Signature Broker-Dealer Services, Inc. -
Administrator, Distributor and Sponsor
("SBDS" or the "Administrator of the Fund" or the "Distributor" or the
"Sponsor")
Signature Financial Group (Grand Cayman) Limited -
Administrator of the Portfolio
("Signature (Cayman)")
Signature Financial Services, Inc. -
Fund Accounting Agent
("Signature")
STATEMENT OF ADDITIONAL INFORMATION
Republic Fixed Income Fund (the "Fund") is a separate series of
Republic Funds (the "Trust"), an open-end, management investment company which
currently consists of six portfolios, each of which has different and distinct
investment objectives and policies. The Trust seeks to achieve the Fund's
investment objective by investing all of the Fund's investable assets ("Assets")
in the Fixed Income Portfolio (the "Portfolio") which has the same investment
objective as the Fund. The Portfolio is a series of the Republic Portfolios (the
"Portfolio Trust") which is an open-end management investment company. The Fund
is described in this Statement of Additional Information.
Shares of the Fund are offered only to clients of Republic and its
affiliates for which Republic or its affiliates exercises investment discretion.
This Statement of Additional Information is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Prospectus
for the Fund, dated January 26, 1996 (the "Prospectus"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
January 26, 1996
FT4133G
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TABLE OF CONTENTS
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Page
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS........................................................ 1
Mortgage-Related and Other Asset-Backed Securities............................................ 1
Brady Bonds................................................................................... 6
Foreign Currency Exchange-Related Securities.................................................. 7
Eurodollar and Yankee Obligations............................................................. 8
Portfolio Management.......................................................................... 9
Investment Restrictions....................................................................... 9
Percentage and Rating Restrictions............................................................ 12
PORTFOLIO TRANSACTIONS................................................................................. 12
PERFORMANCE INFORMATION................................................................................ 13
Consumer Price Index.......................................................................... 13
Lehman Brothers Government/Corporate Index.................................................... 13
Salomon Broad Index........................................................................... 14
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST........................................................ 14
Trustees and Officers......................................................................... 14
Investment Manager............................................................................ 17
Sub-Adviser............................................................................................ 17
Administrator................................................................................. 18
Fund Accounting Agent.................................................................................. 18
Reimbursement Expenses and Fee Waivers................................................................. 18
Custodian and Transfer Agent........................................................................... 19
DETERMINATION OF NET ASSET VALUE....................................................................... 19
TAXATION............................................................................................... 20
Options, Futures, Forward Contracts and Swap Contracts........................................ 21
OTHER INFORMATION...................................................................................... 23
Capitalization................................................................................ 23
Voting Rights................................................................................. 24
Independent Auditors................................................................................... 24
Counsel....................................................................................... 25
Registration Statement........................................................................ 25
Financial Statements................................................................................... 25
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References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 26, 1996, of the Fund by which
shares of the Fund are offered. Unless the context otherwise requires, terms
defined in the Prospectus have the same meaning in this Statement of Additional
Information as in the Prospectus.
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Portfolio discussed under the caption "Investment
Objective and Policies" in the Prospectus.
Mortgage-Related and Other Asset-Backed Securities
Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Portfolio may also invest in debt securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations") and in other types of mortgage-related
securities.
Mortgage Pass-Through Securities. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers. Pass-
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through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the 12 Federal Home Loan Banks and now
owned entirely by private stockholders. FHLMC issues participation certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but Pcs are not backed by the full faith and credit of
the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Portfolio will not
purchase mortgage-related securities or other assets which in the Sub-Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the
Portfolio's net assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical
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region, the security may be subject to a greater risk of default than other
comparable securities in the event of adverse economic, political or business
developments that may affect such region and, ultimately, the ability of
residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC CMOs. FHLMC CMOs are debt obligations of FHLMC issued in multiple
classes having different maturity dates which are secured by the pledge of a
pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC Pcs,
payments of principal and interest on the CMOs are made semiannually, as opposed
to monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which, in
turn, is equal to approximately 100% of FHA prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments
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received on the collateral pool in excess of FHLMC's minimum sinking fund
requirement, the rate at which principal of the CMOs is actually repaid is
likely to be such that each class of bonds will be retired in advance of its
scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC Pcs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities --Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
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CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability and may be deemed "illiquid"
and subject to the Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-Adviser expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors, such as Certificates for Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARSSM are passed through monthly to certificate holders and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
trust. An investor's return on CARSSM may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted,
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the trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with the Portfolio's investment objective and policies, the
Sub-Adviser also may invest in other types of asset-backed securities.
Brady Bonds
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity,
(ii) the collateralized interest payments, (iii) the uncollateralized payments,
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
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 are to be viewed as speculative.
Brady Plan debt restructurings totalling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
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Foreign Currency Exchange-Related Securities
Foreign Currency Warrants. Foreign currency warrants such as Currency
Exchange Warrants SM ("CEWs"SM) are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese yen or German deutsche mark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required to either sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unaccrued obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation (the "OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
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Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities ("PERLs"SM) are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that time.
The return on "standard" PERLS is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S. dollar;
"reverse" PERLS are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). PERLS may in limited cases be subject to acceleration of
maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be
made at maturity.
Performance Indexed Paper. Performance indexed paper ("PIPs"SM) is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on PIPs is
established at maturity as a function of the spot exchange rates between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity. The Portfolio has no current intention
of investing in CEWsSM, PERLsSM or PIPsSM.
Eurodollar and Yankee Obligations
Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of 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) 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 flowing
across its borders. Other risks include: adverse political and economic
development, the extent and quality of government regulation of financial
markets and institutions, the imposition of foreign withholding taxes and the
expropriation or nationalization of foreign issuers.
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Portfolio Management
The Sub-Adviser's investment strategy for achieving the Portfolio's
investment objective has two basic components: maturity and duration management
and value investing.
Maturity and Duration Management. Maturity and duration management
decisions are made in the context of an intermediate maturity orientation. The
maturity structure of the Portfolio is adjusted in anticipation of cyclical
interest rate changes. Such adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of longer term, secular shifts in the levels of interest rates
(i.e., shifts transcending and/or not inherent to the business cycle).
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Sub-Adviser's maturity and duration strategy lies in analysis
of the U.S. and global economies, focusing on levels of real interest rates,
monetary and fiscal policy actions, and cyclical indicators.
Value Investing. The second component of the Sub-Adviser's investment
strategy for the Portfolio is value investing, whereby the Sub-Adviser seeks to
identify undervalued sectors and securities through analysis of credit quality,
option characteristics and liquidity. Quantitative models are used in
conjunction with judgment and experience to evaluate and select securities with
embedded put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit the portfolio to benefit from the
price appreciation of individual securities during periods when interest rates
are unchanged.
Investment Restrictions
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities". The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940, as amended (the "1940
Act").
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
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(2) purchase or sell real estate, although it may purchase and
sell securities of companies which deal in real estate, other
than real estate limited partnerships, and may purchase and
sell marketable securities which are secured by interests in
real estate;
(3) make loans except: (i) by purchasing debt securities in
accordance with its investment objective and policies, or
entering into repurchase agreements, and (ii) by lending its
portfolio securities;
(4) with respect to 75% of its assets, purchase a security if, as
a result, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any
issuer;
(5) with respect to 75% of its assets, purchase securities of any
issuer if, as the result, more than 5% of the Portfolio's
(Fund's) total assets, taken at market value at the time of
such investment, would be invested in the securities of such
issuer, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(6) underwrite the securities of other issuers (except to the
extent that the Portfolio (Fund) may be deemed to be an
underwriter within the meaning of the 1933 Act in the
disposition of restricted securities);
(7) acquire any securities of companies within one industry,
except for mortgage-backed securities, if as a result of such
acquisition, more than 25% of the value of the Portfolio's
(Fund's) total assets would be invested in securities of
companies within such industry; provided, however, that there
shall be no limitation on the purchase of obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a
temporary defensive position.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by their respective Boards of Trustees without
investor approval (except that none of the following investment policies shall
prevent the Trust from investing all of the Assets of the Fund in a separate
registered investment company with substantially the same investment
objectives).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(a) borrow money (including through reverse repurchase agreements
or forward dollar roll transactions involving mortgage-backed
securities or similar investment techniques entered into for
leveraging purposes), except that the Portfolio (Fund) may
borrow for temporary or emergency purposes up to 10% of its
net assets; provided, however, that the Portfolio (Fund) may
not purchase any security while outstanding borrowings exceed
5% of net assets;
(b) invest in futures and/or options on futures to the extent that
its outstanding obligations to purchase securities under any
future
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<PAGE>
contracts in combination with its outstanding obligations with
respect to options transactions would exceed 35% of its total
assets;
(c) invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of its total assets (included within
that amount, but not to exceed 2% of the value of the
Portfolio's (Fund's) net assets, may be warrants that are not
listed on the New York Stock Exchange, the American Stock
Exchange or an exchange with comparable listing requirements;
warrants attached to securities are not subject to this
limitation);
(d) purchase on margin, except for use of short-term credit as may
be necessary for the clearance of purchases and sales of
securities, but it may make margin deposits in connection with
transactions in options, futures, and options on futures; or
sell short unless, by virtue of its ownership of other
securities, it has the right to obtain securities equivalent
in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions
(transactions in futures contracts and options are not deemed
to constitute selling securities short);
(e) purchase or retain securities of an issuer if those officers
and Trustees of the Portfolio Trust or the Manager or
Sub-Adviser owning more than 1/2 of 1% of such securities
together own more than 5% of such securities;
(f) pledge, mortgage or hypothecate any of its assets to an extent
greater than one-third of its total assets at fair market
value;
(g) invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund), determined at the time of investment, in
securities that are illiquid because their disposition is
restricted under the federal securities laws or securities for
which there is no readily available market; provided, however
that this policy does not limit the acquisition of (i)
securities that have legal or contractual restrictions on
resale but have a readily available market or (ii) securities
that are not registered under the 1933 Act, but which can be
sold to qualified institutional investors in accordance with
Rule 144A under the 1933 Act and which are deemed to be liquid
pursuant to guidelines adopted by the Board of Trustees
("Restricted Securities").
(h) invest more than 10% of its assets in Restricted Securities
(including Rule 144A Securities);
(i) invest for the purpose of exercising control over management
of any company;
(j) invest its assets in securities of any investment company,
except by purchase in the open market involving only customary
brokers' commissions or in connection with mergers,
acquisitions of assets or
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<PAGE>
consolidations and except as may otherwise be permitted by the
1940 Act; provided, however, that the Portfolio shall not
invest in the shares of any open-end investment company unless
(1) the Portfolio's Sub-Adviser waives any investment advisory
fees with respect to such assets and (2) the Portfolio pays no
sales charge in connection with the investment;
(k) invest more than 5% of its total assets in securities of
issuers (other than securities issued or guaranteed by U.S. or
foreign government or political subdivisions thereof) which
have (with predecessors) a record of less than three years'
continuous operations;
(l) write or acquire options or interests in oil, gas or other
mineral explorations or development programs or leases.
Percentage and Rating Restrictions
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Portfolio or a later change in the rating of a security held by the
Portfolio is not considered a violation of policy; however, the Sub-Adviser will
consider such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is primarily responsible for portfolio decisions and
the placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of the Portfolio's
investments with Republic New York Securities Corporation, an affiliate of the
Manager.
Because the Portfolio invests primarily in fixed-income securities, it
is anticipated that most purchases and sales will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
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<PAGE>
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return for the
Fund, computed in accordance with formulas prescribed by the Securities and
Exchange Commission (the "SEC"), in advertisements or reports to shareholders or
prospective investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: P (1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The Fund also may, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accomplished by standardized total return information.
The total return of the Fund for the period from January 9, 1995 (commencement
of operations) to October 31, 1995 was 14.37%.
Performance information for the Fund may also be compared to various
unmanaged indices, described below. Unmanaged indices (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs and
expenses. Comparative information may be compiled or provided by independent
ratings services or by news organizations. Any performance information should be
considered in light of the Fund's investment objective and policies,
characteristics and quality of the Fund, and the market conditions during the
given time period, and should not be considered to be representative of what may
be achieved in the future.
The Fund may from time to time use one or more of the following
unmanaged indices for performance comparison purposes:
Consumer Price Index
The Consumer Price Index is published by the U.S. Department of Labor
and is a measure of inflation.
Lehman Brothers Government/Corporate Index
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U.S. Treasury, issues of government agencies, and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds and nonconvertible
debt issued by or guaranteed by foreign or international governments and
agencies. All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for others. Any security downgraded during the
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<PAGE>
month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
Salomon Broad Index
The Salomon Bond Index, also known as the Broad Investment Grade (BIG)
Index, is a fixed income market capitalization-weighted index, including U.S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U.S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the index is published monthly.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
Trustees and Officers
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust and the Portfolio Trust. The address of each, unless otherwise
indicated, is 6 St. James Avenue, Boston, Massachusetts 02116.
FREDERICK C. CHEN, Trustee
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW*, Trustee
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of Parsow
Partnership, Ltd. (investments).
LARRY M. ROBBINS, Trustee
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104 -
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, Trustee
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
PHILIP W. COOLIDGE*, President
Chairman, President and Chief Executive Officer, Signature Financial
Group, Inc. ("SFG"); Chairman, President and Chief Executive Officer,
SBDS (since April, 1989), Chairman, President and Chief Executive
Officer, Signature (May, 1993); Director, Chairman and President,
Signature (Cayman) (since March, 1992).
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<PAGE>
JOHN R. ELDER*, Treasurer
Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of
Mutual Funds (prior to April, 1995).
LINDA T. GIBSON*, Assistant Secretary
Legal Counsel and Assistant Secretary, SFG (since June, 1991);
Assistant Secretary, SBDS (since October, 1992); Assistant Secretary,
Signature (since March, 1993); law student, Boston University School of
Law (prior to May, 1992).
JAMES E. HOOLAHAN*, Vice President
Senior Vice President, SFG (since December, 1989).
SUSAN JAKUBOSKI*, Assistant Secretary and Assistant Treasurer P.O. Box 2494,
Elizabethan Square, George Town, Grand Cayman, Cayman Islands, B.W.I. -
Manager and Senior Fund Administrator, SFG and Signature (Cayman)
(since August 1994); Assistant Treasurer, SBDS (since September 1994);
Fund Compliance Administrator, Concord Financial Group, Inc. (from
November 1990 to August 1994); Senior Fund Accountant, Neuberger &
Berman Management Incorporated (from February 1988 to November 1990).
THOMAS M. LENZ*, Secretary
Senior Vice President and Associate General Counsel, SFG (since
November, 1989); Assistant Secretary, SBDS (since February, 1991);
Assistant Secretary, Signature (since March, 1993).
MOLLY S. MUGLER*, Assistant Secretary
Legal Counsel and Assistant Secretary, SFG; Assistant Secretary, SBDS
(since April, 1989); Assistant Secretary, Signature (since March,
1993).
BARBARA M. O'DETTE*, Assistant Treasurer
Assistant Treasurer, SFG; Assistant Treasurer, SBDS (since April,
1989); Assistant Treasurer, Signature (since March, 1993).
ANDRES E. SALDANA*, Assistant Secretary
Legal Counsel and Assistant Secretary, SFG (since November, 1992);
Assistant Secretary, SBDS (since September, 1993); Assistant Secretary,
Signature (since March, 1993); Attorney, Ropes & Gray (September, 1990
to November, 1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson, Jakuboski,
Mugler and O'Dette are also Trustees and/or officers of certain other investment
companies of which SBDS or an affiliate is the administrator.
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<PAGE>
COMPENSATION TABLE
Pension
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* Paid
Trustee from Trust Expenses Retirement to Trustees
Frederick C.
Chen $4,096.42 none none $4,873.21
Alan S. Parsow $4,096.42 none none $4,873.21
Larry M.
Robbins $3,696.43 none none $4,373.22
Michael Seely $4,096.42 none none $4,873.21
*The Fund Complex consists of the Trust and the Portfolio Trust.
The compensation table above reflects the fees received by the Trustees
from the Trust and Portfolio Trust for the period from January 9, 1995
(commencement of operations) to October 31, 1995. The Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and the Portfolio
Trust will receive an annual retainer of $3,600 and a fee of $1,000 for each
meeting of the Board of Trustees or committee thereof attended.
As of January 22, 1996, the Trustees and officers of the Trust and the
Portfolio Trust, as a group, owned less than 1% of the outstanding shares of the
Fund. As of the same date, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund (the Trust has no knowledge of the
beneficial ownership of such shares): Republic NY Securities Co., FBO Republic
Bank of New York, Miller Anderson, 452 Fifth Avenue, 14th Floor, New York, New
York, 10018 - 39.1%; Republic National Bank of New York, 452 Fifth Avenue, New
York, New York, 10018 - 25.5%; Kinco & Co., c/o RNB Securities Services, One
Hanson Place - Lower Level, Brooklyn, New York, 11243 - 17.0%. Shareholders who
own more than 25% of the outstanding voting securities of the Fund may take
action without the approval of other shareholders of the Fund.
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
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<PAGE>
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
Investment Manager
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the investment manager receives no
compensation from the Portfolio.
The Investment Management Contract will remain in effect until November
21, 1996, and will continue in effect thereafter from year to year with respect
to the Portfolio, provided such continuance is approved annually (i) by the
holders of a majority of the outstanding voting securities of the Portfolio or
by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. 'Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
Sub-Adviser
MAS, as the Portfolio's Sub-Adviser, is responsible for the investment
management of the Portfolio's assets, including making investment decisions and
placing orders for the purchase and sale of securities for the Portfolio
directly with the issuers or with brokers or dealers selected by MAS or Republic
in its discretion. See "Portfolio Transactions." MAS also furnishes to the Board
of
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<PAGE>
Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
For its services, MAS receives from the Portfolio a fee, computed daily
and based on the Portfolio's average daily net assets, equal on an annual basis
to 0.375% on net assets up to $50 million, 0.25% on net assets over $50 million
and up to $95 million, $300,000 on net assets over $95 million and up to $150
million, 0.20% on net assets over $150 million and up to $250 million, and 0.15%
on net assets over $250 million. For the period from January 9, 1995
(commencement of operations) to October 31, 1995, sub-advisory fees aggregated
$53,963.
The investment advisory services of MAS to the Portfolio are not
exclusive under the terms of the Sub-Advisory Agreement. MAS is free to and does
render investment advisory services to others.
Administrator
Each Administrative Services Agreement is terminable with respect to
the Fund or the Portfolio, as the case may be, without penalty at any time by
vote of a majority of the respective Trustees, or by the respective
Administrator, upon not less than 60 days' written notice to the Fund or the
Portfolio, as the case may be. Each Agreement provides that neither the
respective Administrator nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Fund or the Portfolio, as the case may be, except for willful misfeasance,
bad faith or gross negligence in the performance of its or their duties or by
reason of reckless disregard of its or their obligations and duties under the
respective Administrative Services Agreement. The minimum annual administrative
services fees paid by the Fund shall be $25,000. For the period from January 9,
1995 (commencement of operations) to October 31, 1995, the Fund accrued
administrative services fees of $20,274 to SBDS, of which $6,672 was waived.
Fund Accounting Agent
Pursuant to respective fund accounting agreements, 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.
Reimbursement Expenses and Fee Waivers
Republic and Signature have voluntarily agreed to waive a portion of
their fees, and to the extent necessary, reimburse the Fund for additional
expenses during the period January 9, 1995 through October 31, 1995. For the
period ended October 31, 1995, expenses of the Fund were voluntarily limited to
no more that 0.91% of the average daily net assets on an annualized basis,
accordingly, the Manager and Sponsor waived fees and reimbursed expenses
aggregating $50,723. Republic and Signature have also voluntarily agreed to
waive a portion of their fees, and to the extent necessary, reimburse the
Portfolio for additional
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<PAGE>
expenses during the period January 9, 1995 through October 31, 1995. At October
31, 1995, expenses of the Portfolio were voluntarily limited to no more that
0.46% of the average daily net assets on an annualized basis. For the period
ended October 31, 1995, the Manager and SFSI waived fees and reimbursed expenses
aggregating $77,292.
Custodian and Transfer Agent
Investors Bank & Trust Company ("IBT") serves as custodian and transfer
agent for each of the Fund and the Portfolio pursuant to Custodian Agreements
and Transfer Agency Agreements, respectively. The Custodian may use the services
of sub-custodians with respect to the Portfolio.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of the Fund is determined on
each day on which the New York Stock Exchange ("NYSE") is open for trading. As
of the date of this Statement of Additional Information, the NYSE is open every
weekday except for the days on which the following holidays are observed: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Bonds and other fixed income securities listed on a foreign exchange
are valued at the latest quoted sales price available before the time when
assets are valued. For purposes of determining the Portfolio's net asset value,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by any major bank.
Bonds and other fixed-income securities which are traded
over-the-counter and on a stock exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds and
other fixed-income securities this ordinarily will be the over-the-counter
market. Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Portfolio's portfolio may be
valued on the basis of valuations furnished by a pricing service, use of which
has been approved by the Board of Trustees of the Portfolio Trust. In making
such valuations, the pricing service utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or exchange
or over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Portfolio Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such valuations are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of the Portfolio Trust.
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<PAGE>
Interest income on long-term obligations in the Portfolio's portfolio
is determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued plus amortization of
premium.
Subject to the Trust's compliance with applicable regulations, the
Trust has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash.
TAXATION
Each year, to qualify as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), at least 90%
of the Fund's investment company taxable income (which includes, among other
items, interest, dividends and the excess of net short-term capital gains over
net long-term capital losses) must be distributed to Fund shareholders and the
Fund must meet certain diversification of assets, source of income, and other
requirements. If the Fund does not so qualify, it will be taxed as an ordinary
corporation.
The Fund intends to apply to the Internal Revenue Service for rulings
including, among others, rulings to the effect that, (1) the Portfolio will be
treated for federal income tax purposes as a partnership and (2) for purposes of
determining whether the Fund satisfies the income and diversification
requirements to maintain its status as a RIC, the Fund, as an investor in its
corresponding Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share. While the IRS has issued
substantially similar rulings in the past and SBDS anticipates that the Fund
will receive the rulings it seeks, the IRS has complete discretion in granting
rulings and complete assurance cannot be given that such rulings will be
obtained. The Portfolio has advised its corresponding Fund that it intends to
conduct its operations so as to enable its investors, including the Fund, to
satisfy those requirements.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed equal to the sum of (1) at least 98% of the Fund's
ordinary income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of the Fund's capital gain net income for the
12-month period ending, as a general rule, on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years.
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<PAGE>
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
Under certain circumstances, the Fund may be taxed on income deemed to
be earned from certain CMO residuals.
Options, Futures, Forward Contracts and Swap Contracts
Some of the options, futures contracts, forward contracts and swap
contracts entered into by the Portfolio may be "Section 1256 contracts." Section
1256 contracts held by the Portfolio at the end of its taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
Code) are "marked-to-market" with unrealized gains or losses being treated as
though they were realized. Any gains or losses, including "marked-to-market"
gains or losses, on Section 1256 contracts are generally 60% long-term and 40%
short-term capital gains or losses ("60/40") although all foreign currency gains
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<PAGE>
and losses from such contracts may be treated as ordinary in character absent a
special election.
Generally, hedging transactions and certain other transactions in
options, futures, forward contracts and swap contracts undertaken by the
Portfolio may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gain or loss realized by the
Portfolio. In addition, losses realized by the Portfolio on positions that are
part of a straddle may be deferred under the straddle rules, rather than being
taken into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures, forward contracts and swap contracts to the Portfolio are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Portfolio. Short-term gain is taxed as ordinary income when
distributed to Fund shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options,
futures, forward contracts and swap contracts held less than three months, and
the qualifying income and diversification requirements applicable to the
Portfolio assets, may limit the extent to which the Portfolio will be able to
engage in these transactions.
Rules governing the tax aspects of swap contracts are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner deemed to be
appropriate, the Internal Revenue Service might not necessarily accept such
treatment. If it does not, the status of the Fund as a regulated investment
company might be affected. The Fund intends to monitor developments in this
area. Certain requirements that must be met under the Code in order for the Fund
to qualify as a regulated investment company may limit the extent to which the
Fund will be able to engage in swap agreements.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
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<PAGE>
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
Earnings derived by the Portfolio from sources outside the U.S. may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty and the
Portfolio would undertake any procedural steps required to claim the benefits of
such a treaty. With respect to any non-U.S. taxes actually paid by the
Portfolio, if more than 50% in value of the Portfolio's total assets at the
close of any taxable year consists of securities of foreign corporations, the
Fund will elect to treat its share of any non-U.S. income and similar taxes the
Portfolio pays as though the taxes were paid by the Fund's shareholders.
Upon the sale or exchange of shares of the Fund, a shareholder generally
will realize a taxable gain or loss depending upon his basis in the shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands, and will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange of Fund shares will be
disallowed to the extent that the shares disposed of are replaced (including
replacement through reinvesting of dividends and capital gain distributions in
the Fund) within a period of 61 days beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
The information above is only a summary of some of the tax
considerations affecting the Fund and its shareholders. The Portfolio, the Fund,
and the Fund's distributions may also be subject to state, local, foreign or
other taxes not discussed above. A prospective investor may wish to consult a
tax advisor to determine the suitability of an investment in the Fund based on
the prospective investor's tax situation.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
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<PAGE>
and fundamental policies) at any time in the future. Establishment and offering
of additional series will not alter the rights of the Fund's shareholders. When
issued, shares are fully paid, nonassessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
liquidation of the Fund, each shareholder is entitled to receive his pro rata
share of the net assets of the Fund.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Interests in the Portfolio have no preference, preemptive, conversion
or similar rights, and are fully paid and non-assessable. The Portfolio Trust is
not required to hold annual meetings of investors, but will hold special
meetings of investors when, in the judgment of the Portfolio Trust's Trustees,
it is necessary or desirable to submit matters for an investor vote. Each
investor is entitled to a vote in proportion to the share of its investment in
the Portfolio.
Except as described below, whenever the Trust is requested to vote on a
matter pertaining to the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast all of its votes on each matter at a meeting of
investors in the Portfolio proportionately as instructed by the Fund's
shareholders. However, subject to applicable statutory and regulatory
requirements, the Trust would not request a vote of the Fund's shareholders with
respect to any proposal relating to the Portfolio which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund.
Independent Auditors
For the fiscal year ended October 31, 1995, Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116, served as independent auditors of
the Funds of the Trust, and Ernst & Young, One Capital Place, George Town, Grand
Cayman, Cayman Islands, served as independent auditors of the Portfolio.
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<PAGE>
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Funds of the Trust for the fiscal year ended
October 31, 1996. KPMG Peat Marwick LLP will audit the Trust's annual financial
statements, prepare the Trust's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02108. The Portfolio has appointed KPMG
Peat Marwick, Grand Cayman, Cayman Islands as its independent account for the
fiscal year ended October 31, 1996, who will audit its financial statements.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the 1933 Act with respect to
shares of the Fund, certain portions of which have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
Financial Statements
The Fund's current audited financial statements dated October 31, 1995
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1995 as filed with the SEC pursuant to Rule 30b2-1 under the
1940 Act. A copy of such report will be provided without charge to each person
receiving this Statement of Additional Information.
FT4133G
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