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REPUBLIC OPPORTUNITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
MFS Institutional Advisors, Inc. - Sub-Adviser
("Sub-Adviser")
BISYS Fund Services -
Administrator of the Fund Distributor and Sponsor
("BISYS" or the "Administrator of the Fund" or the
"Distributor" or the "Sponsor")
BISYS Fund Services (Ireland), Limited -
Administrator of the Portfolio
("BISYS (Ireland)")
STATEMENT OF ADDITIONAL INFORMATION
Republic Opportunity Fund (the "Fund") is a separate series of Republic
Funds (the "Trust"), an open-end, management investment company which currently
consists of seven series, each of which has different and distinct investment
objectives and policies. The Trust seeks to achieve the Fund's investment
objective by investing all of the Fund's investable assets ("Assets") in the
Small Cap Equity Portfolio (the "Portfolio"), which has the same investment
objective as the Fund. The Portfolio is a series of the Republic Portfolios (the
"Portfolio Trust") which is an open-end management investment company. The Fund
is described in this Statement of Additional Information.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Prospectus for
the Fund, dated March 1, 1997 (the "Prospectus"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
March 1, 1997
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TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.................
Investment Restrictions.........................................
Percentage and Rating Restrictions..............................
PORTFOLIO TRANSACTIONS..........................................
PERFORMANCE INFORMATION.........................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST.................
Trustees and Officers...........................................
Investment Manager..............................................
Sub-Adviser.....................................................
Administrator and Portfolio Administrator.......................
Distribution Plan...............................................
Administrative Services Plan....................................
Shareholder Servicing Agents....................................
Fund Accounting Agent...........................................
Custodian, Transfer Agents, and Fund Accounting Agents..........
DETERMINATION OF NET ASSET VALUE................................
TAXATION........................................................
Options, Futures and Forward Contracts..........................
Swap Agreements.................................................
Investment in Passive Foreign Investment Companies..............
Disposition of Shares...........................................
OTHER INFORMATION...............................................
Capitalization..................................................
Voting Rights...................................................
Independent Auditors............................................
Counsel.........................................................
Registration Statement..........................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated March 1, 1997, of the Fund by which
shares of the Fund ("Shares") 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.
FOREIGN SECURITIES: The Portfolio may invest in foreign securities as
discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Portfolio may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Portfolio may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Portfolio's custodian in five days. The Portfolio may also
execute trades on the U.S. markets using existing ADRs. A foreign issuer of the
security underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly the
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the issuer
of the underlying security. ADRs may also be subject to exchange rate risks if
the underlying foreign securities are denominated in foreign currency.
EMERGING MARKETS: The Portfolio may invest in Emerging Market
Securities. Such investments entail significant risks as described in the
Prospectus under the caption "Additional Risk Factors -- Emerging Markets" and
as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities
held by the Portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Portfolio's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest when due
in accordance with the terms of such debt. A governmental entity's willingness
or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International Monetary Fund,
and the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest averages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Portfolio) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and tarnish its trade account surplus, if
any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities
markets of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to the
volume of trading in the securities of U.S. issuers could cause prices to be
erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market size may
cause prices to be unduly influenced by traders who control large positions.
Adverse publicity and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of portfolio
securities.
DEFAULT; LEGAL RECOURSE -- The Portfolio may have limited legal
recourse in the event of a default with respect to certain debt obligations it
may hold. If the issuer of a fixed-income security owned by the Portfolio
defaults, that Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt obligations
of private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued in
the courts of the defaulting party itself. The Portfolio's ability to enforce
its rights against private issuers may be limited. The ability to attach assets
to enforce a judgment may be limited. Legal recourse is therefore somewhat
diminished. Bankruptcy, moratorium and other similar laws applicable to private
issuers of debt obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for example, is
of considerable importance. In addition, no assurance can be given that the
holders of commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested. The Sub-Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN CURRENCIES -- Some emerging market countries also may have
managed currencies, which are not free floating against the U.S. dollar. In
addition, there is risk that certain emerging market countries may restrict the
free conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which the Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Portfolio
may enter into repurchase agreements with sellers who are member firms (or a
subsidiary thereof) of the New York Stock Exchange or members of the Federal
Reserve System, recognized domestic or foreign securities dealers or
institutions which the Sub-Adviser has determined to be of comparable
creditworthiness. The securities that the Portfolio purchases and holds have
values that are equal to or greater than the repurchase price agreed to be paid
by the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Portfolio, or the purchase and repurchase prices
may be the same, with interest at a standard rate due to the Portfolio together
with the repurchase price on repurchase.
The repurchase agreement provides that in the event the seller fails to
pay the price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Portfolio will have the right to liquidate the securities.
If at the time the Portfolio is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Portfolio's exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Portfolio. The Portfolio has adopted
and follows procedures which are intended to minimize the risks of repurchase
agreements. For example, the Portfolio only enters into repurchase agreements
after the Sub-Adviser has determined that the seller is creditworthy, and the
Sub- Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are marked
to market every business day) is required to be greater than the repurchase
price, and the Portfolio has the right to make margin calls at any time if the
value of the securities falls below the agreed upon margin.
LENDING OF PORTFOLIO SECURITIES: The Portfolio may seek to increase its
income by lending portfolio securities to entities deemed creditworthy by the
Sub-Adviser. The Portfolio would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the
Portfolio would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
based on investment of the collateral. The Portfolio would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Sub-Adviser to be of good
standing, and when, in the judgment of the Sub-Adviser, the consideration which
could be earned currently from securities loans of this type justifies the
attendant risk. If the Sub-Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 30% of the
value of the Portfolio's total assets.
OPTIONS ON SECURITIES: The Portfolio may write (sell) covered call and
put options on securities ("Options") and purchase call and put Options. The
Portfolio may write Options for the purpose of attempting to increase its return
and for hedging purposes. In particular, if the Portfolio writes an Option which
expires unexercised or is closed out by the Portfolio at a profit, the Portfolio
retains the premium paid for the Option less related transaction costs, which
increases its gross income and offsets in part the reduced value of the
portfolio security in connection with which the Option is written, or the
increased cost of portfolio securities to be acquired. In contrast, however, if
the price of the security underlying the Option moves adversely to the
Portfolio's position, the Option may be exercised and the Portfolio will then be
required to purchase or sell the security at a disadvantageous price, which
might only partially be offset by the amount of the premium.
The Portfolio may write Options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call Option against that security. The exercise price of the call Option the
Portfolio determines to write depends upon the expected price movement of the
underlying security. The exercise price of a call Option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Portfolio in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call Options on
the same security, a practice known as a "straddle." By writing a straddle, the
Portfolio undertakes a simultaneous obligation to sell or purchase the same
security in the event that one of the Options is exercised. If the price of the
security subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be exercised
and the Portfolio will be required to sell the underlying security at a below
market price. This loss may be offset, however, in whole or in part, by the
premiums received on the writing of the two Options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the Options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call Option on a portfolio security, the Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the Option. By writing a put
Option, the Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price above its then current market value,
resulting in a loss unless the security subsequently appreciates in value. The
writing of Options will not be undertaken by the Portfolio solely for hedging
purposes, and may involve certain risks which are not present in the case of
hedging transactions. Moreover, even where Options are written for hedging
purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Portfolio may also purchase put and call Options. Put Options are
purchased to hedge against a decline in the value of securities held in the
Portfolio's portfolio. If such a decline occurs, the put Options will permit the
Portfolio to sell the securities underlying such Options at the exercise price,
or to close out the Options at a profit. The Portfolio will purchase call
Options to hedge against an increase in the price of securities that the
Portfolio anticipates purchasing in the future. If such an increase occurs, the
call Option will permit the Portfolio to purchase the securities underlying such
Option at the exercise price or to close out the Option at a profit. The premium
paid for a call or put Option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the Option, and,
unless the price of the underlying security rises or declines sufficiently, the
Option may expire worthless to the Portfolio. In addition, in the event that the
price of the security in connection with which an Option was purchased moves in
a direction favorable to the Portfolio, the benefits realized by the Portfolio
as a result of such favorable movement will be reduced by the amount of the
premium paid for the Option and related transaction costs.
The staff of the Securities and Exchange Commission ("SEC") has taken
the position that purchased over-the-counter options and certain assets used to
cover written over-the-counter options are illiquid and, therefore, together
with other illiquid securities, cannot exceed a certain percentage of the
Portfolio's assets (the "SEC illiquidity ceiling"). Although the Sub-Adviser
disagrees with this position, the Sub-Adviser intends to limit the Portfolio's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Portfolio intends to write over-the-counter
options only with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York. Also, the contracts the Portfolio has in place
with such primary dealers will provide that the Portfolio has the absolute right
to repurchase an option it writes at any time at a price which represents the
fair market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Portfolio for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of- the-money. The Portfolio will treat all
or a portion of the formula as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Portfolio may also write over-the-counter
options with non-primary dealers, including foreign dealers, and will treat the
assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
OPTIONS ON STOCK INDICES: The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices ("Options on
Stock Indices"). The Portfolio may cover call Options on Stock Indices by owning
securities whose price changes, in the opinion of the Sub-Adviser, are expected
to be similar to those of the underlying index, or by having an absolute and
immediate right to acquire such securities without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities in its portfolio.
Where the Portfolio covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index and, in
that event, the Portfolio will not be fully covered and could be subject to risk
of loss in the event of adverse changes in the value of the index. The Portfolio
may also cover call options on stock indices by holding a call on the same index
and in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian. The Portfolio may cover put options on
stock indices by maintaining cash or cash equivalents with a value equal to the
exercise price in a segregated account with its custodian, or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Portfolio in cash or cash
equivalents in a segregated account with its custodian. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Portfolio will receive a premium from writing a put or call option
on a stock index, which increases the Portfolio's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of an
index on which the Portfolio has written a call option falls or remains the
same, the Portfolio will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises, however,
the Portfolio will realize a loss in its call option position, which will reduce
the benefit of any unrealized appreciation in the Portfolio's stock investment.
By writing a put option, the Portfolio assumes the risk of a decline in the
index. To the extent that the price changes of securities owned by the Portfolio
correlate with changes in the value of the index, writing covered put options on
indexes will increase the Portfolio's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
The Portfolio may also purchase put options on stock indices to hedge
their investments against a decline in value. By purchasing a put option on a
stock index, the Portfolio will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this strategy
will largely depend on the accuracy of the correlation between the changes in
value of the index and the changes in value of the Portfolio's security
holdings.
The purchase of call options on stock indices may be used by the
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid if the value of the index does
not rise. The purchase of call options on stock indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
FUTURES CONTRACTS: The Portfolio may enter into contracts for the
purchase or sale for future delivery of securities or foreign currencies or
contracts based on indexes of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the
Portfolio's portfolio securities or adversely affect the prices of long-term
bonds or other securities which the Portfolio intends to purchase at a later
date. Futures Contracts may also be entered into for non-hedging purposes to the
extent permitted by applicable law. A "sale" of a Futures Contract means a
contractual obligation to deliver the securities or foreign currency called for
by the contract at a fixed price at a specified time in the future. A "purchase"
of a Futures Contract means a contractual obligation to acquire the securities
or foreign currency at a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or
currencies, such deliveries are very seldom made. Generally, a Futures Contract
is terminated by entering into an offsetting transaction. The Portfolio will
incur brokerage fees when it purchases and sells Futures Contracts. At the time
such a purchase or sale is made, the Portfolio must allocate cash or securities
as a margin deposit ("initial deposit"). It is expected that the initial deposit
will vary but may be as low as 5% or less of the value of the contract. The
Futures Contract is valued daily thereafter and the payment of "variation
margin" may be required to be paid or received, so that each day the Portfolio
may provide or receive cash that reflects the decline or increase in the value
of the contract.
The purpose of the purchase or sale of a Futures Contract, for hedging
purposes in the case of a portfolio holding long-term debt securities, is to
protect the Portfolio from fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, if the Portfolio owned
long-term bonds and interest rates were expected to increase, the Portfolio
might enter into Futures Contracts for the sale of debt securities. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Portfolio's Futures Contracts should increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. However, since the futures market
is more liquid than the cash market, the use of Futures Contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities. Transactions entered into for
non-hedging purposes include greater risk, including the risk of losses which
are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Portfolio could take advantage
of the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Portfolio could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Portfolio could have the effect of
diluting dividend earnings. To the extent the Portfolio enters into Futures
Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or short-term money market
instruments from the portfolio of the Portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such Futures Contracts, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar
manner, in order to protect against declines in the dollar value of portfolio
securities denominated in foreign currencies, or increases in the dollar value
of securities to be acquired.
A Futures Contract on an index of securities provides for the making
and acceptance of a cash settlement based on changes in value of the underlying
index. The Portfolio may enter into stock index futures contracts in order to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices and for non-hedging purposes to the extent
permitted by applicable law. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or in whole,
offset increases in the cost of securities that Fund intends to purchase. As
such acquisitions are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon the termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities. Futures Contracts on other
securities indexes may be used in a similar manner in order to protect the
portfolio from broad fluctuations in securities prices and for non-hedging
purposes to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Portfolio may write and purchase
options to buy or sell Futures Contracts ("Options on Futures Contracts"). The
writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security or currency underlying the Futures
Contract. If the futures price at expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium, less
related transaction costs, which provides a partial hedge against any decline
that may have occurred in the Portfolio's portfolio holdings. The writing of a
put Option on a Futures Contract constitutes a partial hedge against increasing
prices of the security or currency underlying the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio will incur a loss
which will be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio securities
and changes in the value of its futures positions, the Portfolio's losses from
existing Options on Futures Contracts may to some extent be reduced or increased
by changes in the value of portfolio securities.
The Portfolio may purchase Options on Futures Contracts for hedging
purposes as an alternative to purchasing or selling the underlying Futures
Contracts, or for non-hedging purposes to the extent permitted by applicable
law. For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline, a rise in interest
rates or a decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the Portfolio may, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease in
portfolio value occurs, it may be offset, in whole or part, by a profit on the
option. Conversely, where it is projected that the value of securities to be
acquired by the Portfolio will increase prior to acquisition, due to a market
advance, or a decline in interest rates or a rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, the Portfolio may
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Portfolio to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Portfolio to forego all
or a portion of such benefits up to the amount of the premium paid and related
transaction costs. Transactions entered into for non-hedging purposes include
greater risk, including the risk of losses which are not offset by gains on
other portfolio assets.
FORWARD CONTRACTS: The Portfolio may enter into forward foreign
currency exchange contracts for the purchase or sale of a specific currency at a
future date at a price set at the time of the contract (a "Forward Contract").
The Portfolio may enter into Forward Contracts for hedging purposes as well as
for non-hedging purposes. The Portfolio may also enter into Forward Contracts
for "cross hedging" purposes as noted in the Prospectus. Transactions in Forward
Contracts entered into for hedging purposes will include forward purchases or
sales of foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such securities. By entering into such
transactions, however, the Portfolio may be required to forego the benefits of
advantageous changes in exchange rates. The Portfolio may also enter into
transactions in Forward Contracts for other than hedging purposes, which
presents greater profit potential but also involves increased risk. For example,
if the Sub- Adviser believes that the value of a particular foreign currency
will increase or decrease relative to the value of the U.S. dollar, the
Portfolio may purchase or sell such currency, respectively, through a Forward
Contract. If the expected changes in the value of the currency occur, the
Portfolio will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Portfolio may sustain losses which will reduce its gross income.
Such transactions, therefore, could be considered speculative.
The Portfolio has established procedures consistent with statements by
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. In those instances in
which the Portfolio satisfies this requirement through segregation of assets, it
will maintain, in a segregated account, cash, cash equivalents or high grade
debt securities, which will be marked to market on a daily basis, in an amount
equal to the value of its commitments under Forward Contracts.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
PORTFOLIO'S PORTFOLIO -- The Portfolio's ability effectively to hedge all or a
portion of its portfolio through transactions in Options, Futures Contracts, and
Forward Contracts will depend on the degree to which price movements in the
underlying instruments correlate with price movements in the relevant portion of
that Fund's portfolio. If the values of portfolio securities being hedged do not
move in the same amount or direction as the instruments underlying options,
Futures Contracts or Forward Contracts traded, the Portfolio's hedging strategy
may not be successful and the Portfolio could sustain losses on its hedging
strategy which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the instrument
underlying an Option, Future Contract or Forward Contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transaction had not
been undertaken. In the case of futures and options based on an index of
securities or individual fixed income securities, the portfolio will not
duplicate the components of the index, and in the case of Futures Contracts and
Options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contracts. As a
result, the correlation probably will not be exact. Consequently, the Portfolio
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation. In
addition, where the Portfolio enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Portfolio incurs the risk of imperfect correlation between changes in the values
of the two currencies, which could result in losses.
The correlation between prices of securities and prices of Options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the Option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the
Sub-Adviser may still not result in a successful transaction. The trading of
Options on Futures Contracts also entails the risk that changes in the value of
the underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the Option, Futures Contract or Forward
Contract approaches.
The trading of Options, Futures Contracts and Forward Contracts also
entails the risk that, if the Sub-Adviser's judgment as to the general direction
of interest or exchange rates is incorrect, the Portfolio's overall performance
may be poorer than if it had not entered into any such contract. For example, if
the Portfolio has hedged against the possibility of an increase in interest
rates, and rates instead decline, the Portfolio will lose part or all of the
benefit of the increased value of the securities being hedged, and may be
required to meet ongoing daily variation margin payments.
It should be noted that the Portfolio may purchase and write Options
not only for hedging purposes, but also for the purpose of attempting to
increase its return. As a result, the Portfolio will incur the risk that losses
on such transactions will not be offset by corresponding increases in the value
of portfolio securities or decreases in the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract or Option
on a Futures Contract can only be terminated by entering into a closing purchase
or sale transaction, which requires a secondary market for such instruments on
the exchange on which the initial transaction was entered into. If no such
market exists, it may not be possible to close out a position, and the Portfolio
could be required to purchase or sell the underlying instrument or meet ongoing
variation margin requirements. The inability to close out option or futures
positions also could have an adverse effect on the Portfolio's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract
may be adversely affected by "daily price fluctuation limits," established by
the exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Portfolio from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of
an Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available
information on which the Portfolio will make trading decisions concerning
transactions related to foreign currencies or foreign securities may not be as
complete as the comparable data on which the Portfolio makes investment and
trading decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, and the markets for foreign
securities as well as markets in foreign countries may be operating during
non-business hours in the United States, events could occur in such markets
which would not be reflected until the following day, thereby rendering it more
difficult for the Portfolio to respond in a timely manner.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position, unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. This could make it difficult or impossible to enter into a desired
transaction or liquidate open positions, and could therefore result in trading
losses. Further, over-the-counter transactions are not subject to the
performance guarantee of an exchange clearing house and the Portfolio will
therefore be subject to the risk of default by, or the bankruptcy of, a
financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be
conducted in the same manner as those entered into on United States exchanges,
and may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may be
present in connection with such transactions. Moreover, the SEC or the
Commodities Futures Trading Commission ("CFTC") has jurisdiction over the
trading in the United States of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Portfolio to enter into the
trading strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Portfolio may
receive interest or dividend payments, or the proceeds of the sale or redemption
of such securities, in foreign currencies. The Portfolio may also be required to
receive delivery of the foreign currencies underlying options on foreign
currencies or Forward Contracts it has entered into. This could occur, for
example, if an option written by the Portfolio is exercised or the Portfolio is
unable to close out a Forward Contract it has entered into. In addition, the
Portfolio may elect to take delivery of such currencies. Under such
circumstances, the Portfolio may promptly convert the foreign currencies into
dollars at the then current exchange rate. Alternatively, the Portfolio may hold
such currencies for an indefinite period of time if the Sub-Adviser believes
that the exchange rate at the time of delivery is unfavorable or if, for any
other reason, the Sub-Adviser anticipates favorable movements in such rates.
While the holding of currencies will permit the Portfolio to take
advantage of favorable movements in the applicable exchange rate, it also
exposes the Portfolio to risk of loss if such rates move in a direction adverse
to the Portfolio's position. Such losses could also adversely affect the
Portfolio's hedging strategies. Certain tax requirements may limit the extent to
which the Portfolio will be able to hold currencies.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Portfolio will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Portfolio enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Portfolio's assets. In addition, the Portfolio must comply with the requirements
of various state securities laws in connection with such transactions.
The Portfolio has adopted the additional policy that it will not enter
into a Futures Contract if, immediately thereafter, the value of securities and
other obligations underlying all such Futures Contracts would exceed 50% of the
value of the Portfolio's total assets. Moreover, the Portfolio will not purchase
put and call options if, as a result, more than 5% of its total assets would be
invested in such options.
When the Portfolio purchases a Futures Contract, an amount of cash and
cash equivalents will be deposited in a segregated account with the Portfolio's
custodian so that the amount so segregated will at all times equal the value of
the Futures Contract, thereby insuring that the leveraging effect of such
Futures is minimized.
Investment Restrictions
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities". The term "voting securities" as used in this paragraph has
the same meaning as in the 1940 Act.
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money (including from a bank or through
reverse repurchase agreements, forward roll transactions involving mortgage
backed securities or other investment techniques entered into for the purpose of
leverage), and except that it may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "State and Federal Restrictions"
below;
(2) underwrite securities issued by other persons except insofar as the
Portfolios may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed 30%
of the Portfolio's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for the Portfolio's portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Portfolio's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government securities) of any one
issuer.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by the Board of Trustees without shareholder
approval (except that none of the following investment policies shall prevent
the Trust from investing all of the Assets of the Fund in a separate registered
investment company with substantially the same investment objective).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(i) borrow money (including from a bank or through reverse repurchase
agreements or forward roll transactions involving mortgage backed securities or
similar investment techniques entered into for leveraging purposes), except that
the Portfolio may borrow for temporary or emergency purposes up to 10% of its
total assets; provided, however, that no Portfolio may purchase any security
while outstanding borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, and reverse repurchase agreements are
not considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer to be held
for the Portfolio; provided further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any securities of any open-end
investment company unless the Portfolio (Fund) (1) waives the investment
advisory fee, with respect to assets invested in other open-end investment
companies and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable;
(viii) invest more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) in (a) securities that are restricted as to
resale under the 1933 Act, and (b) securities that are issued by issuers which
(including predecessors) have been in operation less than three years (other
than U.S. Government securities), provided, however, that no more than 5% of the
Portfolio's total assets are invested in securities issued by issuers which
(including predecessors) have been in operation less than three years;
(ix) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not be
subject to this restriction;
(x) with respect to 75% of the Portfolio's (Fund's) total assets,
purchase or retain in the Portfolio's portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is an officer or partner of the Advisor, if
after the purchase of the securities of such issuer for the Portfolio one or
more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value;
(xi) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Portfolio (Fund) as part of a unit or attached to securities at the time of
purchase), but not more than 2% of the Portfolio's net assets may be invested in
warrants not listed on the New York Stock Exchange Inc. ("NYSE") or the American
Stock Exchange;
(xii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more than 10% of the
Portfolio's net assets (taken at market value) is represented by such
securities, or securities convertible into or exchangeable for such securities,
at any one time (the Portfolios have no current intention to engage in short
selling);
(xiii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within the
investment policies of the Portfolio and the option is issued by the Options
Clearing Corporation, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b) the
aggregate value of the obligations underlying the puts determined as of the date
the options are sold shall not exceed 50% of the Portfolio's net assets; (c) the
securities subject to the exercise of the call written by the Portfolio must be
owned by the Portfolio at the time the call is sold and must continue to be
owned by the Portfolio until the call has been exercised, has lapsed, or the
Portfolio has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's obligation to deliver securities pursuant
to the call it has sold; and (d) at the time a put is written, the Portfolio
establishes a segregated account with its custodian consisting of cash or
short-term U.S. Government securities equal in value to the amount the Portfolio
will be obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio has
purchased a closing put, which is a put of the same series as the one previously
written); and
(xiv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the options or
futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net assets; and
(c) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Portfolio's total assets.
Percentage and Rating Restrictions
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Fund or a later change in the rating of a security held by the Fund is
not considered a violation of policy; however, the Sub-Adviser will consider
such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by employees of the Sub-Adviser who are appointed and supervised by its
senior officers. Changes in the Portfolio's investments are reviewed by its
Board of Trustees. The Portfolio's portfolio manager or management committee may
serve other clients of the Sub-Adviser or any subsidiary of the Sub-Adviser in a
similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Sub-Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In the
United States and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Sub-Adviser normally
seeks to deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject to the
requirement of seeking execution at the best available price, securities may, as
authorized by each Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Sub-Adviser. At present no arrangements for the recapture of commission payments
are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees may determine, the Sub-Adviser may consider sales
of shares of the Fund and of certain investment company clients of MFS Fund
Distributors, Inc., the principal underwriter of certain funds in the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934, the Sub-Adviser may cause the Portfolio to
pay a broker-dealer which provides brokerage and research services to the
Sub-Adviser an amount of commission for effecting a securities transaction for
the Portfolio in excess of the amount other broker-dealers would have charged
for the transaction if the Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their respective overall responsibilities to the
Portfolio or to their other clients. Not all of such services are useful or of
value in advising the Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Sub-Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Sub-Adviser's other clients in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided such Research. For the
period from September 3, 1996 (Portfolio commencement of operations) to October
31, 1996, the Portfolio paid aggregate brokerage commissions equal to $65,132,
of which $42,400 (on $37,168,763 of transactions) was paid to broker-dealers
that provided Research to the Sub-Adviser.
In certain instances there may be securities which are suitable for
the Portfolio as well as for the portfolio of one or more of the other clients
of the Sub-Adviser or any affiliate of the Sub- Adviser. Investment decisions
for the Portfolio and for such other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. Some simultaneous transactions are inevitable when several
clients receive investment advice from the same investment adviser, particularly
when the same security is suitable for the investment objectives of more than
one client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in a
manner believed by the Sub-Adviser to be equitable to each. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as the Portfolio is concerned. In other cases,
however, the Sub-Adviser believes that the Portfolio's ability to participate in
volume transactions will produce better executions for the Portfolio.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and total return
for the Fund, both computed in accordance with formulas prescribed by the
Securities and Exchange Commission ("SEC"), in advertisements or reports to
shareholders or prospective investors.
Quotations of yield for the Fund will be based on all investment
income per share (as defined by the SEC during a particular 30-day (or one
month) period (including dividends and interest), less expenses accrued during
the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
a-b
YIELD = 2[( --- + 1)6-1] where
cd
a = dividends and interest earned during
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: 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.
Historical performance information for any period or portion thereof
prior to the establishment of the Fund will be that of the Portfolio, adjusted
to assume that all charges, expenses and fees of the Fund and the Porfolio which
are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. For the period from September 3, 1996
(Portfolio commencement of operations) to October 31, 1996, the total return of
the Fund was 4.64%.
Performance information for the Fund may also be compared to various
unmanaged indices. Unmanaged indices (i.e., other than Lipper) generally do not
reflect deductions for administrative and management costs and expenses.
Comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information should be
considered in light of the Fund's investment objectives and policies,
characteristics and quality of the Fund, and the market conditions during the
given time period, and should not be considered to be representative of what may
be achieved in the future.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
Trustees and Officers
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
officers are "interested persons" (as defined in the 1940 Act) of the Trust and
the Portfolio Trust. The address of each, unless otherwise indicated, is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
FREDERICK C. CHEN, Trustee
126 Butternut Hollow Road, Greenwich, Connecticut 06830 - Management
Consultant.
ALAN S. PARSOW, Trustee
2222 Skyline Drive, Elkhorn, Nebraska 68022 - General Partner of
Parsow Partnership, Ltd. (investments).
LARRY M. ROBBINS, Trustee
Wharton Communication Program, University of Pennsylvania, 336
Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104
Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, Trustee
405 Lexington Avenue, Suite 909, New York, New York 10174 - President
of Investor Access Corporation (investor relations consulting firm).
GEORGE O. MARTINEZ*, President and Secretary
Senior Vice President and Director of Legal and Compliance Services,
BISYS Fund Services, Inc., March 1995 to present; Senior Vice
President, Emerald Asset Management, Inc., August 1995 to present;
Vice President and Associate General Counsel, Alliance Capital
Management, June 1989 to March 1995.
KAREN DOYLE*, Vice President
Manager of Client Services for BISYS Fund Services, Inc., October 1994
to present; from 1979 to October 1994, an employee of the Bank of New
York.
FRANK M. DEUTCHKI*, Vice President
Employee of BISYS Fund Services, Inc., April 1996 to present; Vice
President, Chase Global Funds Service, September 1995 to April 1996;
Vice President, Mutual Funds Service Company, 1989 to September 1995.
KEVIN MARTIN*, Vice President
Employee of BISYS Fund Services, Inc., February 1996 to present;
Senior Manager, Ernst & Young, 1984 to February 1996.
ADRIAN WATERS*, Treasurer
Employee of BISYS Fund Services (Ireland) LTD., May 1993 to present;
Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer
Employee of BISYS Fund Services (Ireland) LTD., March 1994 to present;
Supervisor, Price Waterhouse, 1990 to March 1994.
ALAINA METZ*, Assistant Secretary
Chief Administrator, Administrative and Regulatory Services, BISYS
Fund Services, Inc., June 1995 to present; Supervisor, Mutual Fund
Legal Department, Alliance Capital Management, May 1989 to June 1995.
Messrs. Martinez, Deutchki, Martin and Waters and Mss. Doyle, Brady
and Metz also are officers of certain other investment companies of which
BISYS or an affiliate is the administrator.
Compensation Table
<TABLE>
Pension or
Retirement
Benefits Estimated Total
Aggregate Accrued as Annual Compensation
Name of Compensation Part of Fund Benefits Upon From Fund Complex*
Trustee from Trust Expenses Retirement to Trustees
- ------- ------------ ------------ ------------- -------------------
<S> <C> <C> <C> <C>
Frederick C. Chen $1,950 none none $8,600
Alan S. Parsow $1,950 none none $8,600
Larry M. Robbins $1,950 none none $8,600
Michael Seely $1,950 none none $8,600
</TABLE>
* The Fund Complex includes the Trust, Republic Advisor Funds Trust,
and the Portfolio Trust.
The compensation table above reflects the fees received by the Trustees for
the year ended October 31, 1996. The Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust will receive an annual retainer of
$3,600 and a fee of $1,000 for each meeting of the Board of Trustees or
committee thereof attended, except that Mr. Robbins will receive an annual
retainer of $4,600 and a fee of $1,000 for each meeting attended.
As of February 10, 1997, the Trustees and officers of the Trust and the
Portfolio Trust, as a group, owned less than 1% of the outstanding shares of the
Fund. As of the same date, the following shareholders of record owned 5% or more
of the outstanding Shares (the Trust has no knowledge of the beneficial
ownership of such Shares): Trussal & Co., P.O. Box 771072, Detroit, Michigan
48277 - 77.08%; and BHC Securities, Inc., One Commerce Square, 2005 Market
Square, Philadelphia, Pennsylvania 19103 - 10.50%. Shareholders who own more
than 25% of the outstanding voting securities of the Fund may be able to control
the outcome of any matter submitted for the approval of shareholders of the
Fund.
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in their offices, or unless with
respect to any other matter it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
Investment Manager
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the Manager is paid a fee by the Portfolio,
computed daily and paid monthly, equal on an annual basis to 0.25% of the
Portfolio's average daily net assets. For the period from September 3, 1996
(Portfolio commencement of operations) to October 31, 1996, investment
management fees aggregated $30,803, all of which was waived.
The Investment Management Contract will continue in effect with
respect to the Portfolio, provided such continuance is approved at least
annually (i) by the holders of a majority of the outstanding voting securities
of the Portfolio or by the Portfolio Trust's Board of Trustees, and (ii) by a
majority of the Trustees of the Portfolio Trust who are not parties to the
Investment Management Contract or "interested persons" (as defined in the 1940
Act) of any such party. The Investment Management Contract may be terminated
with respect to the Portfolio without penalty by either party on 60 days'
written notice and will terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York
Corporation, a registered bank holding company. No securities or instruments
issued by Republic New York Corporation or Republic will be purchased for the
Portfolio.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
Sub-Adviser
MFS Institutional Advisors, Inc., as the Portfolio's Sub-Adviser, is
responsible for the investment management of the Portfolio's assets, including
making investment decisions and placing orders for the purchase and sale of
securities for the Portfolio directly with the issuers or with brokers or
dealers selected by the Sub-Adviser or Republic in their discretion. See
"Portfolio Transactions." The Sub- Adviser also furnishes to the Board of
Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
The Sub-Adviser, together with its parent company, MFS, and their
predecessor organizations , has a history of money management dating from 1924.
MFS is a wholly owned subsidiary of Sun Life Assurance Company of Canada (U.S.)
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada. The Prospectus contains information with respect to the management of
the Sub- Adviser and other investment companies for which the Sub-Adviser or MFS
serve as investment adviser.
For its services, the Sub-Adviser receives from the Portfolio a fee,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.75% of assets up to $50 million and 0.60% of assets in
excess of $50 million. For the period from September 3, 1996 (Portfolio
commencement of operations) to October 31, 1996, sub-advisory fees aggregated
$85,616.
The investment advisory services of the Sub-Adviser to the Portfolio
are not exclusive under the terms of the Sub-Advisory Agreement. The Sub-Adviser
is free to and does render investment advisory services to others.
Administrator and Portfolio Administrator
Each Administration Agreement will remain in effect until March 31, 1999,
and automatically will continue in effect thereafter from year to year unless
terminated upon 60 days' written notice to BISYS or BISYS (Ireland), as
appropriate. Each Administration Agreement will terminate automatically in the
event of its assignment. Each Administration Agreement also provides that
neither BISYS nor BISYS (Ireland), as appropriate, nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust or Portfolio Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
For the fiscal period ended October 31, 1996, the Portfolio accrued
administration fees equal to $6,161, of which $2,683 was waived, and the Fund
accrued administration fees equal to $1,446, of which $1,309 was waived.
Distribution Plan
A Distribution Plan has been adopted by the Trust (the "Distribution
Plan") with respect to the Shares, and provides that it may not be amended to
increase materially the costs which the Fund may bear pursuant to the
Distribution Plan without approval by shareholders of the Fund, and that any
material amendments of the Distribution Plan must be approved by the Board of
Trustees, and by the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the operation of the Distribution Plan or in any related agreement ("Qualified
Trustees"), by vote cast in person at a meeting called for the purpose of
considering such amendments. The selection and nomination of the Trustees who
are not "interested persons" of the Trust (the "Independent Trustees") has been
committed to the discretion of the Independent Trustees. The Distribution Plan
has been approved, and is subject to annual approval, by a majority vote of the
Board of Trustees and by a majority vote of the Qualified Trustees, by vote cast
in person at a meeting called for the purpose of voting on the Distribution
Plan. In adopting the Distribution Plan, the Trustees considered alternative
methods to distribute the Shares and to reduce the Fund's per share expense
ratio and concluded that there was a reasonable likelihood that the Distribution
Plan will benefit the Fund and its shareholders. The Distribution Plan is
terminable with respect to the Fund at any time by a vote of a majority of the
Qualified Trustees or by vote of the holders of a majority of the Shares.
The Fund did not incur expenses pursuant to the Distribution Plan
during the fiscal period ended October 31, 1996.
Administrative Services Plan
An Administrative Services Plan has been adopted by the Trust with
respect to the Fund, and continues in effect indefinitely if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trustees and a majority of the Trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Administrative Services Plan or in any agreement related to such Plan
("Qualified Trustees"). The Administrative Services Plan may be terminated at
any time by a vote of a majority of the Qualified Trustees or with respect to
the Fund by a majority vote of shareholders of the Fund. The Administrative
Services Plan may not be amended to increase materially the amount of permitted
expenses thereunder with respect to the Fund without the approval of a majority
of shareholders of the Fund, and may not be materially amended in any case
without a vote of the majority of both the Trustees and the Qualified Trustees.
Shareholder Servicing Agents
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Shares, see "Management of the Trust - Shareholder Servicing Agents" in the
Prospectus.
Custodian, Transfer Agents, and Fund Accounting Agents
Investors Bank & Trust Company ("IBT") serves as custodian for the Fund and
the Portfolio and as transfer agent and fund accounting agent for the Fund. The
Custodian may use the services of sub-custodians with respect to the Portfolio.
The principal business address of IBT is 89 South Street, Boston, Massachusetts
02111. IBT Fund Services (Canada) Inc. serves as the fund accounting agent for
the Portfolio, and Investors Fund Services (Ireland) Limited is the Portfolio's
transfer agent.
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.
The Sub-Adviser typically completes its trading on behalf of the
Portfolio in various markets before 4:00 p.m., and the value of portfolio
securities is determined when the primary market for those securities closes for
the day. Foreign currency exchange rates are also determined prior to 4:00 p.m.
However, if extraordinary events occur that are expected to affect the value of
a portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolio Trust.
Subject to the Trust's compliance with applicable regulations, the
Trust on behalf of the Fund and the Portfolio have reserved the right to pay the
redemption or repurchase price of Shares, either totally or partially, by a
distribution in kind of portfolio securities from the Portfolio (instead of
cash). The securities so distributed would be valued at the same amount as that
assigned to them in calculating the net asset value for the Shares being sold.
If a shareholder received a distribution in kind, the shareholder could incur
brokerage or other charges in converting the securities to cash. The Trust will
redeem Fund shares in kind only if it has received a redemption in kind from the
Portfolio and therefore shareholders of the Fund that receive redemptions in
kind will receive securities of the Portfolio. The Portfolio has advised the
Trust that the Portfolio will not redeem in kind except in circumstances in
which the Fund is permitted to redeem in kind.
TAXATION
Each year, to qualify as a separate "regulated investment company"
under the Code, at least 90% of the Fund's investment company taxable income
(which includes, among other items, interest, dividends and the excess of net
short-term capital gains over net long-term capital losses) must be distributed
to Fund shareholders and the Fund must meet certain diversification of assets,
source of income, and other requirements. If the Fund does not so qualify, it
will be taxed as an ordinary corporation.
The Fund intends to apply to the Internal Revenue Service ("IRS") 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 the Trust 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.
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.
Options, Futures and Forward Contracts
Some of the options, futures contracts and forward contracts entered
into by the Portfolio may be "Section 1256 contracts." Section 1256 contracts
held by the Portfolio at the end of its taxable year (and, for purposes of the
4% excise tax, on certain other dates as prescribed under the Code) are
"marked-to- market" with unrealized gains or losses being treated as though they
were realized. Any gains or losses, including "marked-to-market" gains or
losses, on Section 1256 contracts are generally 60% long-term and 40% short-term
capital gains or losses ("60/40") although all foreign currency gains and losses
from such contracts may be treated as ordinary in character absent a special
election.
Generally, hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by the Portfolio may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gain or loss realized by the Portfolio. In addition, losses
realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Portfolio are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Portfolio.
Short-term gain is taxed as ordinary income when distributed to Fund
shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character, and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options, futures
and forward 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.
Investment in Passive Foreign Investment Companies
The Portfolio may invest in shares of foreign corporations (through
ADRs) which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Portfolio receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Portfolio held the PFIC shares. The
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares held by the Portfolio. Under an election that currently
is available in some circumstances, the Fund generally would be required to
include in its gross income its share of the earnings of a PFIC on a current
basis, regardless of whether distributions are received from the PFIC in a given
year. If this election were made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market the Fund's PFIC
shares at the end of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Fund level under the PFIC rules
would generally be eliminated, but the Fund could, in limited circumstances,
incur nondeductible interest charges. The Fund's intention to qualify annually
as a regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
Disposition of Shares
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, 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
and fundamental policies) at any time in the future. Establishment and offering
of additional series will not alter the rights of the Fund's shareholders. When
issued, shares are fully paid, nonassessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights. In
liquidation of the Fund, each shareholder is entitled to receive his pro rata
share of the net assets of the Fund.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Interests in the Portfolio have no preference, preemptive, conversion
or similar rights, and are fully paid and non-assessable. The Portfolio Trust is
not required to hold annual meetings of investors, but will hold special
meetings of investors when, in the judgment of the Portfolio Trust's Trustees,
it is necessary or desirable to submit matters for an investor vote. Each
investor is entitled to a vote in proportion to the share of its investment in
the Portfolio.
Except as described below, whenever the Trust is requested to vote on a
matter pertaining to the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast all of its votes on each matter at a meeting of
investors in the Portfolio proportionately as instructed by the Fund's
shareholders. However, subject to applicable statutory and regulatory
requirements, the Trust would not request a vote of the Fund's shareholders with
respect to any proposal relating to the Portfolio which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund.
Independent Auditors
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent accountants of the Trust and the Fund for the fiscal year ending
October 31, 1997. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's and Portfolio's income tax returns, and assist in
the preparation of filings with the SEC. The address of KPMG Peat Marwick LLP is
99 High Street, Boston, Massachusetts 02110. The Portfolio Trust has appointed
KPMG as its independent accountants to audit the Portfolio's financial
statements for the fiscal year ending October 31, 1997.
Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Trust's registration statement filed with
the SEC under the 1933 Act with respect to shares of the Fund, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1996 of
each of the Fund and the Portfolio are hereby incorporated herein by reference
from the Annual Report of the Fund dated October 31, 1996 as filed with the SEC.
A copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
