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REPUBLIC BOND FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Miller Anderson & Sherrerd - Sub-Adviser
("MAS" or the "Sub-Adviser")
BISYS Fund Services -
Administrator, 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 Bond 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
Fixed Income Portfolio (the "Portfolio"), which has the same investment
objective as the Fund. The Portfolio is a series of the Republic Portfolios (the
"Portfolio Trust") which is an open-end management investment company. The Fund
is described in this Statement of Additional Information. Shares of the Fund are
divided into two separate classes, Class A (formerly designated Class C) (the
"Investor Shares") and Class B.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS
FOR THE FUND, DATED JANUARY 2, 1998 (THE "PROSPECTUS"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
January 2, 1998
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TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.............................
Mortgage-Related and Other Asset-Backed Securities.................
Brady Bonds........................................................
Foreign Currency Exchange-Related Securities.......................
Sovereign and Supranational Debt Obligations.......................
Mortgage Dollar Roll Transaction...................................
Portfolio Management...............................................
Investment Restrictions............................................
Percentage and Rating Restrictions.................................
PORTFOLIO TRANSACTIONS......................................................
PERFORMANCE INFORMATION.....................................................
Consumer Price Index...............................................
Lehman Brothers Government/Corporate Index.........................
Salomon Bond Index.................................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST.............................
Trustees and Officers..............................................
Compensation Table.................................................
Investment Manager.................................................
Sub-Adviser........................................................
Administrator and Portfolio Administrator..........................
Distribution Plans.................................................
Administrative Services Plan.......................................
Shareholder Servicing Agents.......................................
Custodian, Transfer Agents, and Fund Accounting Agents.............
Expenses...........................................................
DETERMINATION OF NET ASSET VALUE............................................
TAXATION ...................................................................
Options, Futures, Forward Contracts and Swap Contracts.............
OTHER INFORMATION...........................................................
Capitalization.....................................................
Voting Rights......................................................
Independent Auditors...............................................
Counsel............................................................
Registration Statement.............................................
FINANCIAL STATEMENTS........................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 2, 1998, 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.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Portfolio may also invest in debt securities
which are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations") and in other types of mortgage-related
securities.
There are two methods of trading mortgage-backed securities. A specific
pool transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This is
in contrast with the typical mortgage transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be delivered
is specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. For example, in a
TBA transaction an investor could purchase $1 million 30-year FNMA 9's and
receive up to three pools on the settlement date. The pool numbers of the pools
to be delivered at settlement will be announced shortly before settlement takes
place. The terms of the TBA trade may be made more specific if desired. For
example, an investor may request pools with particular characteristics, such as
those that were issued prior to January 1, 1990. The most detailed specification
of the trade is to request that the pool number be known prior to purchase. In
this case the investor has entered into a specific pool transaction. Generally,
agency pass-through mortgage-backed securities are traded on a TBA basis. The
specific pool numbers of the securities purchased do not have to be determined
at the time of the trade.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the 12 Federal Home Loan Banks and now
owned entirely by private stockholders. FHLMC issues participation certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Portfolio will not
purchase mortgage-related securities or other assets which in the Sub-Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the
Portfolio's net assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued mortgage-
related securities, the Portfolio takes the position that mortgage-related
securities do not represent interests in any particular "industry" or group of
industries. The assets underlying such securities may be represented by a
portfolio of first lien residential mortgages (including both whole mortgage
loans and mortgage participation interests) or portfolios of mortgage pass-
through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans
underlying a mortgage-related security may in turn be insured or guaranteed by
the Federal Housing Administration or the Department of Veterans Affairs. In the
case of private issue mortgage-related securities whose underlying assets are
neither U.S. Government securities nor U.S. Government-insured mortgages, to the
extent that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
than other comparable securities in the event of adverse economic, political or
business developments that may affect such region and, ultimately, the ability
of residential homeowners to make payments of principal and interest on the
underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC CMOS. FHLMC CMOs are debt obligations of FHLMC issued in multiple
classes having different maturity dates which are secured by the pledge of a
pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs,
payments of principal and interest on the CMOs are made semiannually, as opposed
to monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which, in
turn, is equal to approximately 100% of FHA prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities --Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped mortgage-
backed securities, in certain circumstances the Portfolio may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability and may be deemed "illiquid"
and subject to the Portfolio's limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
IO class), while the other class will receive all of the principal (the
principal-only or PO class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed
securities unrelated to mortgage loans. Asset-backed securities present certain
risks that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same type of security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to avoid payment of
certain amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicer to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES -- TYPES OF
CREDIT SUPPORT. Mortgage-backed securities and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failure by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The U.S. Bond Index Portfolio will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
BRADY BONDS
The Brady Plan was conceived by the U.S. Treasury in the 1980's in an
attempt to produce a debt restructuring program that would enable a debtor
country to (i) reduce the absolute level of debt of its creditor banks, and (ii)
reschedule its external debt repayments, based upon its ability to service such
debts by persuading its creditor banks to accept a debt write-off by offering
them a selection of options, each of which represented an attractive substitute
for the nonperforming debt. Although it was envisioned that each debtor country
would agree to a unique package of options with its creditor banks, the plan was
that these options would be based upon the following: (i) a discount bond
carrying a market rate of interest (whether fixed or floating), with principal
collateralized by the debtor country with cash or securities in an amount equal
to at least one year of rolling interest; (ii) a par bond carrying a low rate of
interest (whether fixed or floating), collateralized in the same way as in (i)
above; and (iii) retention of existing debt (thereby avoiding a debt write-off)
coupled with an advance of new money or subscription of new bonds.
Brady Plan debt restructurings totaling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity,
(ii) the collateralized interest payments, (iii) the uncollateralized payments,
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants such as Currency
Exchange Warrants(SM) ("CEWs"(SM)) are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese yen or German deutsche mark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required to either sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unaccrued obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation (the "OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate
linked securities ("PERLs"(SM)) are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that time.
The return on "standard" PERLS is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S. dollar;
"reverse" PERLS are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). PERLS may in limited cases be subject to acceleration of
maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be
made at maturity.
PERFORMANCE INDEXED PAPER. Performance indexed paper ("PIPs"(SM)) is
U.S. dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on PIPs is
established at maturity as a function of the spot exchange rates between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity. The Portfolio has no current intention
of investing in CEWsSM, PERLsSM or PIPsSM.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS
Debt instruments issued or guaranteed by foreign governments, agencies,
and supranational ("sovereign debt obligations"), especially sovereign debt
obligations of developing countries, may involve a high degree of risk, and may
be in default or present the risk of default. The issuer of the obligation or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal and interest when due, and may require
renegotiation or rescheduling of debt payments. In addition, prospects for
repayment of principal and interest may depend on political as well as economic
factors.
MORTGAGE DOLLAR ROLL TRANSACTIONS
The Portfolio may engage in dollar roll transactions with respect to
mortgage securities issued by the Government National Mortgage Association, the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. In a dollar roll transaction, the Portfolio sells a mortgage-backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on the
securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the reinvestment
of the sales proceeds. The Portfolio may also be compensated by receipt of a
commitment fee. When the Portfolio enters into a mortgage dollar roll
transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Portfolio's custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Portfolio's investment restrictions.
PORTFOLIO MANAGEMENT
The Sub-Adviser's investment strategy for achieving the Portfolio's
investment objective has two basic components: maturity and duration management
and value investing.
MATURITY AND DURATION MANAGEMENT. Maturity and duration management
decisions are made in the context of an intermediate maturity orientation. The
maturity structure of the Portfolio is adjusted in anticipation of cyclical
interest rate changes. Such adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of longer term, secular shifts in the levels of interest rates
(i.e., shifts transcending and/or not inherent to the business cycle).
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Sub-Adviser's maturity and duration strategy lies in analysis
of the U.S. and global economies, focusing on levels of real interest rates,
monetary and fiscal policy actions, and cyclical indicators.
VALUE INVESTING. The second component of the Sub-Adviser's investment
strategy for the Portfolio is value investing, whereby the Sub-Adviser seeks to
identify undervalued sectors and securities through analysis of credit quality,
option characteristics and liquidity. Quantitative models are used in
conjunction with judgment and experience to evaluate and select securities with
embedded put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit the portfolio to benefit from the
price appreciation of individual securities during periods when interest rates
are unchanged.
INVESTMENT RESTRICTIONS
Each of the Portfolio Trust (with respect to the Portfolio) and the
Trust (with respect to the Fund) has adopted the following investment
restrictions which may not be changed without approval by holders of a "majority
of the outstanding voting securities" of the Portfolio or Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities". The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940, as amended (the "1940
Act").
As a matter of fundamental policy, the Portfolio (Fund) will not
(except that none of the following investment restrictions shall prevent the
Trust from investing all of the Fund's Assets in a separate registered
investment company with substantially the same investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real
estate limited partnerships, and may purchase and sell marketable
securities which are secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objective and policies, or entering into
repurchase agreements, and (ii) by lending its portfolio
securities;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any
issuer if, as the result, more than 5% of the Portfolio's (Fund's)
total assets, taken at market value at the time of such
investment, would be invested in the securities of such issuer,
except that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(6) underwrite the securities of other issuers (except to the extent
that the Portfolio (Fund) may be deemed to be an underwriter
within the meaning of the 1933 Act in the disposition of
restricted securities);
(7) acquire any securities of companies within one industry if as a
result of such acquisition, more than 25% of the value of the
Portfolio's (Fund's) total assets would be invested in securities
of companies within such industry; provided, however, that there
shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a temporary
defensive position; and provided further that mortgage-backed
securities shall not be considered a single industry for the
purposes of this investment restriction;
(8) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Portfolio
(Fund) may borrow as a temporary measure to satisfy redemption
requests or for extraordinary or emergency purposes, provided that
the Portfolio (Fund) maintains asset coverage of at least 300% for
all such borrowings;
(9) issue senior securities, except as permitted under the 1940 Act.
In applying fundamental policy number seven, mortgage-backed securities
shall not be considered a single industry. Mortgage-backed securities issued by
governmental agencies and government-related organizations shall be excluded
from the limitation in fundamental policy number seven. Private mortgage-backed
securities (i.e., not issued or guaranteed by a governmental agency or
government-related organization) that are backed by mortgages on commercial
properties shall be treated as a separate industry from private mortgage-backed
securities backed by mortgages on residential properties.
Each of the Portfolio and the Fund is also subject to the following
restrictions which may be changed by their respective Boards of Trustees without
investor approval (except that none of the following investment policies shall
prevent the Trust from investing all of the Assets of the Fund in a separate
registered investment company with substantially the same investment
objectives).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(a) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 10% of
its net assets; provided, however, that the Portfolio (Fund) may
not purchase any security while outstanding borrowings exceed 5%
of net assets;
(b) invest in futures and/or options on futures to the extent that its
outstanding obligations to purchase securities under any future
contracts in combination with its outstanding obligations with
respect to options transactions would exceed 35% of its total
assets;
(c) invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of its total assets (included within
that amount, but not to exceed 2% of the value of the Portfolio's
(Fund's) net assets, may be warrants that are not listed on the
New York Stock Exchange, the American Stock Exchange or an
exchange with comparable listing requirements; warrants attached
to securities are not subject to this limitation);
(d) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities,
but it may make margin deposits in connection with transactions in
options, futures, and options on futures; or sell short unless, by
virtue of its ownership of other securities, it has the right to
obtain securities equivalent in kind and amount to the securities
sold and, if the right is conditional, the sale is made upon the
same conditions (transactions in futures contracts and options are
not deemed to constitute selling securities short);
(e) purchase or retain securities of an issuer if those officers and
Trustees of the Portfolio Trust or the Manager or Sub-Adviser
owning more than 1/2 of 1% of such securities together own more
than 5% of such securities;
(f) pledge, mortgage or hypothecate any of its assets to an extent
greater than one-third of its total assets at fair market value;
(g) invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund), determined at the time of investment, in
securities that are illiquid because their disposition is
restricted under the federal securities laws or securities for
which there is no readily available market; provided, however that
this policy does not limit the acquisition of (i) securities that
have legal or contractual restrictions on resale but have a
readily available market or (ii) securities that are not
registered under the 1933 Act, but which can be sold to qualified
institutional investors in accordance with Rule 144A under the
1933 Act and which are deemed to be liquid pursuant to guidelines
adopted by the Board of Trustees ("Restricted Securities").
(h) invest more than 25% of its assets in Restricted Securities
(including Rule 144A Securities);
(i) invest for the purpose of exercising control over management of
any company;
(j) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets
or consolidations and except as may otherwise be permitted by the
1940 Act; provided, however, that the Portfolio shall not invest
in the shares of any open-end investment company unless (1) the
Portfolio's Sub-Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge
in connection with the investment;
(k) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
government or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous
operations;
(l) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Portfolio or a later change in the rating of a security held by the
Portfolio is not considered a violation of policy; however, the Sub-Adviser will
consider such change in its determination of whether to hold the security.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is primarily responsible for portfolio decisions and
the placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of the Portfolio's
investments with Republic New York Securities Corporation, an affiliate of the
Manager.
Because the Portfolio invests primarily in fixed-income securities, it
is anticipated that most purchases and sales will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return for the
Fund, computed in accordance with formulas prescribed by the Securities and
Exchange Commission (the "SEC"), in advertisements or reports to shareholders or
prospective investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (or up to
the life of the Fund), calculated pursuant to the following formula: P (1 + T)n
= ERV (where P = a hypothetical initial payment of $1,000, T = the average
annual total return, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the period). All
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. The Fund also may, with respect to certain periods of less
than one year, provide total return information for that period that is
unannualized. Any such information would be accompanied by standardized total
return information.
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 Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Investor Shares (without sales charge):
Annual Total Return--Year Ended October 31, 1997: 8.71%.
Average Annual Total Return - January 9, 1995 (commencement of operations) to
October 31, 1997: 10.34%.
Had the sales charge been in effect during the relevant periods, the annual
total return for the year ended October 31, 1997 would have been 5.72% and the
average annual total return for the period from January 9, 1995 to October 31,
1997 would have been 9.26%.
Class B Shares:
Class B Shares were not offered prior to January 2, 1998.
Performance information for the Fund may also be compared to various
unmanaged indices, described below. Unmanaged indices (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs and
expenses. Comparative information may be compiled or provided by independent
ratings services or by news organizations. Any performance information should be
considered in light of the Fund's investment objective and policies,
characteristics and quality of the Fund, and the market conditions during the
given time period, and should not be considered to be representative of what may
be achieved in the future.
The Fund may from time to time use one or more of the following
unmanaged indices for performance comparison purposes:
CONSUMER PRICE INDEX
The Consumer Price Index is published by the U.S. Department of Labor
and is a measure of inflation.
LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U.S. Treasury, issues of government agencies, and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes fixed-rate
nonconvertible corporate debt. Also included are Yankee Bonds and nonconvertible
debt issued by or guaranteed by foreign or international governments and
agencies. All issues are investment grade (BBB) or higher, with maturities of at
least one year and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for others. Any security downgraded during the
month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
SALOMON BOND INDEX
The Salomon Bond Index, also known as the Broad Investment Grade (BIG)
Index, is a fixed income market capitalization-weighted index, including U.S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e.g., U.S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the index is published monthly.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust and Portfolio Trust for the past five years are listed below. Asterisks
indicate that those officers are "interested persons" (as defined in the 1940
Act) of the Trust and the Portfolio Trust. The address of each, unless otherwise
indicated, is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
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.
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 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>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement Trustees
- ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Frederick C. Chen $2,900 none none $8,600
Alan S. Parsow $2,600 none none $7,600
Larry M. Robbins $2,600 none none $7,600
Michael Seely $2,600 none none $7,600
</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, 1997. 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 December 8, 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 of the Fund (the Trust has no knowledge of the
beneficial ownership of such Shares): BHC Securities, Inc., One Commerce Square,
2005 Market Square, Philadelphia, Pennsylvania 19103 - 99.62% (Investor Shares).
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 willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT MANAGER
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 entitled to a fee from the
Portfolio, computed daily and paid monthly, equal on an annual basis to 0.20% of
the Portfolio's average daily net assets. For the period from January 9, 1995
(Portfolio commencement of operations) to October 31, 1995 and for the fiscal
years ended October 31, 1996 and October 31, 1997, investment management fees
aggregated $0, $98,923 and $184,724 (of which the entire amount was waived),
respectively.
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
MAS, as the Portfolio's Sub-Adviser, is responsible for the investment
management of the Portfolio's assets, including making investment decisions and
placing orders for the purchase and sale of securities for the Portfolio
directly with the issuers or with brokers or dealers selected by MAS or Republic
in its discretion. See "Portfolio Transactions." MAS also furnishes to the Board
of Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
For its services, MAS receives from the Portfolio a fee, computed daily
and based on the Portfolio's average daily net assets, equal on an annual basis
to 0.375% on net assets up to $50 million, 0.25% on net assets over $50 million
and up to $95 million, $300,000 on net assets over $95 million and up to $150
million, 0.20% on net assets over $150 million and up to $250 million, and 0.15%
on net assets over $250 million. For the period from January 9, 1995 (Portfolio
commencement of operations) to October 31, 1995 and for the fiscal years ended
October 31, 1996 and October 31, 1997, sub-advisory fees aggregated $53,963,
$185,480 and $276,784, respectively.
The investment advisory services of MAS to the Portfolio are not
exclusive under the terms of the Sub-Advisory Agreement. MAS is free to and does
render investment advisory services to others.
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 period from January 9, 1995 (Portfolio commencement of
operations) to October 31, 1995 and for the fiscal years ended October 31, 1996
and October 31, 1997, the Portfolio accrued administration fees of $7,195,
$24,731 and $46,181, respectively. For the fiscal periods ended October 31, 1996
and October 31, 1997, the Fund accrued administration fees of $4 and $477,
respectively, all of which was waived.
DISTRIBUTION PLANS
Two Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Investor Shares (the "Class A Plan")
and the Class B Shares (the "Class B Plan"). The Distribution Plans provide that
they may not be amended to increase materially the costs which either the
Investor Shares or the Class B Shares may bear pursuant to the Class A Plan or
Class B Plan without approval by shareholders of the Investor Shares or Class B
Shares, respectively, and that any material amendments of the Distribution Plans
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 Plans
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 Plans have been approved, and are 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 Plans. In adopting the Class A Plan and
Class B Plan, the Trustees considered alternative methods to distribute the
Investor Shares and Class B Shares and to reduce each class's per share expense
ratio and concluded that there was a reasonable likelihood that each
Distribution Plan will benefit its respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Investor
Shares or Class B Shares at any time by a vote of a majority of the Qualified
Trustees or by vote of the holders of a majority of that class.
The Fund did not incur expenses pursuant to the Distribution Plans
during the fiscal period ended October 31, 1997.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Investor Shares and Class B Shares, 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 Investor Shares or the Class B Shares
by a majority vote of shareholders of that class. The Administrative Services
Plan may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Investor Shares or Class B Shares without the
approval of a majority of shareholders of that class, and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Investor Shares and Class B Shares, respectively, see "Management of the Trust -
Shareholder Servicing Agents" in the Prospectus.
CUSTODIAN, TRANSFER AGENTS, AND FUND ACCOUNTING AGENTS
With respect to domestic assets, Republic serves as custodian for the
Fund and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio. IBT also
serves as transfer agent, with respect to the Investor Shares, and fund
accounting agent for the Fund. The Custodians 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. BISYS serves as transfer
agent with respect to the Class B Shares. 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.
EXPENSES
Except for the expenses paid by the Manager and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Investor Shares or the Class B Shares must include payments made pursuant to
their respective Distribution Plan and the Administrative Services Plan. In the
event a particular expense is not reasonably allocable by class or to a
particular class, it shall be treated as a Fund expense or a Trust expense.
Trust expenses directly related to the Fund are charged to the Fund; other
expenses are allocated proportionally among all the portfolios of the Trust in
relation to the net asset value of the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the Shares is determined on each day on
which the New York Stock Exchange ("NYSE") is open for trading. As of the date
of this Statement of Additional Information, the NYSE is open every weekday
except for the days on which the following holidays are observed: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Bonds and other fixed income securities listed on a foreign exchange
are valued at the latest quoted sales price available before the time when
assets are valued. For purposes of determining the Portfolio's net asset value,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by any major bank.
Bonds and other fixed-income securities which are traded
over-the-counter and on a stock exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds and
other fixed-income securities this ordinarily will be the over-the-counter
market. Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Portfolio's portfolio may be
valued on the basis of valuations furnished by a pricing service, use of which
has been approved by the Board of Trustees of the Portfolio Trust. In making
such valuations, the pricing service utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or exchange
or over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Portfolio Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such valuations are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of the Portfolio Trust.
Interest income on long-term obligations in the Portfolio's portfolio
is determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued plus amortization of
premium.
Subject to the Trust's compliance with applicable regulations, the
Trust 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
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
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 Portfolio has obtained a ruling from the Internal Revenue Service
("IRS") that the Portfolio will be treated for federal income tax purposes as a
partnership. 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 the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
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.
Under certain circumstances, the Fund may be taxed on income deemed to
be earned from certain CMO residuals.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Gain" or "28% Gain," depending upon the Fund's holding period for
the assets sold. "20% Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%, "28% Gains"
arise from sales of assets held by the Fund for more than one year but no more
than 18 months and are subject to a maximum tax rate of 28%. Net capital gains
from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP CONTRACTS
Some of the options, futures contracts, forward contracts and swap
contracts entered into by the Portfolio may be "Section 1256 contracts." Section
1256 contracts held by the Portfolio at the end of its taxable year (and, for
purposes of the 4% excise tax, on certain other dates as prescribed under the
Code) are "marked-to-market" with unrealized gains or losses being treated as
though they were realized. Any gains or losses, including "marked-to-market"
gains or losses, on Section 1256 contracts are generally 60% long-term and 40%
short-term capital gains or losses ("60/40") although all foreign currency gains
and losses from such contracts may be treated as ordinary in character absent a
special election.
Generally, hedging transactions and certain other transactions in
options, futures, forward contracts and swap contracts undertaken by the
Portfolio may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gain or loss realized by the
Portfolio. In addition, losses realized by the Portfolio on positions that are
part of a straddle may be deferred under the straddle rules, rather than being
taken into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures, forward contracts and swap contracts to the Portfolio are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Portfolio. Short-term gain is taxed as ordinary income when
distributed to Fund shareholders.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Recently enacted rules may affect the timing and character of gain if
the Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Rules governing the tax aspects of swap contracts are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner deemed to be
appropriate, the IRS might not necessarily accept such treatment. If it does
not, the status of the Fund as a regulated investment company might be affected.
The Fund intends to monitor developments in this area. Certain requirements that
must be met under the Code in order for the Fund to qualify as a regulated
investment company may limit the extent to which the Fund will be able to engage
in swap agreements.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
Earnings derived by the Portfolio from sources outside the U.S. may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty and the
Portfolio would undertake any procedural steps required to claim the benefits of
such a treaty. With respect to any non-U.S. taxes actually paid by the
Portfolio, if more than 50% in value of the Portfolio's total assets at the
close of any taxable year consists of securities of foreign corporations, the
Fund will elect to treat its share of any non-U.S. income and similar taxes the
Portfolio pays as though the taxes were paid by the Fund's shareholders.
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and to a maximum tax rate of 28% if the shareholders
holding period for the shares is more than one year but not more than 18 months.
Gain from the sale of shares held for not more than one year will be taxed as
short-term capital gain. 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.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
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 auditors of Fund for the fiscal year ending October 31, 1998. 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 auditors to audit the Portfolio's financial statements for the
fiscal year ending October 31, 1998.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the 1933 Act with respect to
shares of the Fund, certain portions of which have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1997 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1997 as filed with the SEC. A
copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
REPUBLIC NEW YORK
TAX-FREE BOND FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
General
and (888) 525-5757 (Toll Free)
Account Information
- -------------------------------------------------------------------------------
Republic National Bank of New York - Investment Adviser
("Republic" or the "Adviser")
BISYS Fund Services -
Administrator, Distributor and Sponsor
("BISYS," "Sponsor" or the "Distributor")
STATEMENT OF ADDITIONAL INFORMATION
Republic New York Tax-Free Bond Fund (the "Fund") is a separate series
(portfolio) of the Republic Funds (the "Trust"), an open-end, management
investment company which currently consists of seven portfolios, each of which
has different and distinct investment objectives and policies. The Fund is
described in this Statement of Additional Information. Shares of the Fund are
divided into three separate classes, Class A (formerly designated Class C) (the
"Investor Shares"), Class B and Class Y (the "Adviser Shares").
The investment objective of the Fund is to provide shareholders of the
Fund with monthly dividends exempt from regular federal, New York State and New
York City personal income taxes as well as to protect the value of its
shareholders' investment. The Trust seeks to achieve the investment objective of
the Fund by investing the assets of the Fund primarily in a non-diversified
portfolio of municipal bonds and notes and other debt instruments the interest
on which is exempt from regular federal, New York State and New York City
personal income taxes. There can be no assurance that the investment objective
of the Fund will be achieved.
Shares of the Fund are continuously offered for sale by the Distributor
at net asset value with no sales charge (i) directly to the public, (ii) to
customers of a financial institution, such as a federal or state-chartered bank,
trust company or savings and loan association that has entered into a
shareholder servicing agreement with the Trust (collectively, "Shareholder
Servicing Agents"), and (iii) to customers of a securities broker that has
entered into a dealer agreement with the Distributor.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS
FOR THE INVESTOR SHARES AND CLASS B SHARES, OR THE ADVISER SHARES OF THE FUND,
AS APPROPRIATE, EACH DATED JANUARY 2, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Trust at the address and
telephone number printed above.
January 2, 1998
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.............................
"When-issued" Municipal Obligations...............................
Variable Rate Instruments..........................................
Repurchase Agreements..............................................
Participation Interests............................................
Futures Contracts..................................................
Portfolio Management...............................................
Portfolio Transactions.............................................
Special Factors Affecting New York.................................
Investment Restrictions............................................
Other Restrictions.................................................
Percentage and Rating Restrictions.................................
PERFORMANCE INFORMATION.....................................................
MANAGEMENT OF THE TRUST.....................................................
Trustees and Officers..............................................
Compensation Table.................................................
Investment Adviser.................................................
Administrator......................................................
Distribution Plans - Investor Shares and Class B Shares only.......
Administrative Services Plan.......................................
Shareholder Servicing Agents.......................................
Transfer Agent and Custodian.......................................
Expenses...........................................................
DETERMINATION OF NET ASSET VALUE............................................
TAXATION....................................................................
Federal Income Tax.................................................
Alternative Minimum Tax............................................
Special Tax Considerations.........................................
OTHER INFORMATION...........................................................
Capitalization.....................................................
Voting Rights......................................................
Independent Auditors...............................................
Counsel............................................................
Registration Statement.............................................
FINANCIAL STATEMENTS........................................................
APPENDIX A..................................................................
APPENDIX B..................................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 1, 1998 of the Trust by
which shares of the Fund are offered. Unless the context otherwise requires,
terms defined in the Prospectus have the same meaning in this Statement of
Additional Information as in the Prospectus.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective and Policies" in the Prospectus.
The investment objective of the Fund is to provide shareholders of the
Fund with monthly dividends exempt from regular federal, New York State and New
York City personal income taxes as well as to protect the value of its
shareholders' investment.
As a non-diversified investment company, the Trust is not subject to
any statutory restrictions under the Investment Company Act of 1940 (the "1940
Act") with respect to limiting the investment of the Fund's assets in one or
relatively few issuers. This concentration may present greater risks than in the
case of a diversified company. However, the Trust intends to qualify the Fund as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In order so to qualify under current law, at
the close of each quarter of the Fund's taxable year, at least 50% of the Fund's
total assets must be represented by cash, U.S. Government securities, investment
company securities and other securities limited in respect of any one issuer to
not more than 5% in value of the total assets of the Fund and not more than 10%
of the outstanding voting securities of such issuer. In addition, and again
under current law, at the close of each quarter of its taxable year, not more
than 25% of the Fund's total assets may be invested in securities of one issuer
(or two or more issuers which are controlled by the Fund and which are
determined to be engaged in the same or similar trades or businesses or related
businesses) other than U.S. Government securities.
"WHEN-ISSUED" MUNICIPAL OBLIGATIONS
Municipal Obligations purchased on a "when-issued" or "forward
delivery" basis and the securities held in the Fund's portfolio are subject to
changes in value (both generally changing in the same way, that is, both
experiencing appreciation when interest rates decline and depreciation when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
In order to invest the Fund's assets immediately, while awaiting delivery of
securities purchased on a "when-issued" or "forward delivery" basis, short-term
obligations that offer same day settlement and earnings normally are purchased.
Although short-term investments normally are in tax-exempt securities,
short-term taxable securities may be purchased if suitable short-term tax-exempt
securities are not available. A separate account of the Fund consisting of cash,
cash equivalents or high quality debt securities equal to the amount of the
"when-issued" or "forward delivery" commitments is established at the Fund's
custodian bank. For the purpose of determining the adequacy of the securities in
the account, the deposited securities are valued at market value. If the market
value of such securities declines, additional cash or high quality debt
securities are placed in the account daily so that the value of the account
equals the amount of the Fund's commitments. On the settlement date of the
"when-issued" or "forward delivery" securities, the Fund's obligations are met
from then-available cash flow, sale of securities held in the separate account,
sale of other securities or, although not normally expected, from sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or lesser than the Fund's payment obligations).
VARIABLE RATE INSTRUMENTS
Investments in floating or variable rate securities normally involve
industrial development or revenue bonds which provide that the rate of interest
is set as a specific percentage of a designated base rate, such as rates on
Treasury bonds or bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on short notice at par plus
accrued interest. While there is usually no established secondary market for
issues of this type of security, the dealer that sells an issue of such
securities frequently also offers to repurchase such securities at any time, at
a repurchase price which varies and may be more or less than the amount the
bondholder paid for them.
The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before the Fund is entitled to receive payment of the obligation
upon demand, or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed for the Fund through the demand feature, an
obligation matures on a specified date which may range up to 30 years from the
date of issuance.
REPURCHASE AGREEMENTS
The Trust may invest the Fund's assets in instruments subject to
repurchase agreements only with member banks of the Federal Reserve System or
"primary dealers" (as designated by the Federal Reserve Bank of New York) in
U.S. Government securities. Under the terms of a typical repurchase agreement,
an underlying debt instrument would be acquired for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument at a fixed price and time, thereby determining the
yield during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. A repurchase agreement is
subject to the risk that the seller may fail to repurchase the security.
Repurchase agreements may be deemed to be loans under the 1940 Act. All
repurchase agreements entered into on behalf of the Fund are fully
collateralized at all times during the period of the agreement in that the value
of the underlying security is at least equal to the amount of the loan,
including the accrued interest thereon, and the Trust or its custodian bank has
possession of the collateral, which the Trust's Board of Trustees believes gives
the Fund a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been definitively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs in connection
with the disposition of the collateral. The Trust's Board of Trustees believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. Repurchase agreements give rise to income which does not qualify as
tax-exempt income when distributed to Fund shareholders. The Trust will not
invest on behalf of the Fund in a repurchase agreement maturing in more than
seven days if any such investment together with illiquid securities held for the
Fund exceed 10% of the Fund's net assets.
PARTICIPATION INTERESTS
The Trust may purchase from banks on behalf of the Fund participation
interests in all or part of specific holdings of Municipal Obligations. The
Trust has the right to sell the participation interest back to the bank and draw
on the letter of credit or guarantee for all or any part of the full principal
amount of the participation interest in the security, plus accrued interest. In
some cases, these rights may not be exercisable in the event of a default on the
underlying Municipal Obligations; in these cases, the underlying Municipal
Obligations must meet the Fund's high credit standards at the time of purchase
of the participation interest. Each participation interest is backed by an
irrevocable letter of credit or guarantee of the selling bank. Participation
interests will be purchased only if in the opinion of counsel interest income on
such interests will be tax-exempt when distributed as dividends to shareholders
of the Fund. The Trust will not invest more than 5% of the Fund's assets in
participation interests.
The Trust has no current intention of purchasing any participation
interest for the Fund in the foreseeable future.
FUTURES CONTRACTS
A Futures Contract is an agreement between two parties for the purchase
or sale for future delivery of fixed income securities or for the payment or
acceptance of a cash settlement based upon changes in the value of an index of
securities. A "sale" of a Futures Contract means the acquisition of a
contractual obligation to deliver the securities or to make or accept the cash
settlement called for by the contract at a specified price on a specified date.
A "purchase" of a Futures Contract means the acquisition of a contractual
obligation to acquire the securities or to make or accept the cash settlement
called for by the contract at a specified price on a specified date. Futures
Contracts have been designed by exchanges which have been designated "contract
markets" by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures Contracts trade on these
markets, and the exchanges, through their clearing organizations, guarantee that
the contracts will be performed as between the clearing members of the exchange.
Presently, Futures Contracts are based on such debt securities as long-term U.S.
Treasury bonds, Treasury notes, three-month U.S. Treasury bills and on an index
of municipal bonds.
The Trust may enter into transactions in Futures Contracts on any fixed
income securities and indexes of municipal securities to hedge the Fund's
portfolio, i.e., to protect the Fund from fluctuations in interest rates without
the risks and transaction costs of actually buying or selling long-term debt
securities. For example, if the Fund owns long-term bonds, and interest rates
were expected to increase, the Trust might enter into Futures Contracts on
behalf of the Fund for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the long-term bonds owned by
the Fund. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of the Fund's Futures Contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. When the Fund is not
fully invested, and a decline in interest rates is anticipated, which would
increase the cost of fixed income securities which the Trust intends to acquire
for the Fund, the Trust may purchase Futures Contracts on behalf of the Fund. In
the event that the projected decline in interest rates occurs, the increased
cost to the Fund of the securities acquired should be offset, in whole or in
part, by gains on the Futures Contracts. As portfolio securities are purchased,
the Trust will close out the Fund's Futures Contracts by entering into
offsetting transactions on the contract market on which the initial purchase was
effected. In a substantial majority of these transactions, the Trust will
purchase fixed income securities for the Fund upon termination of the long
futures positions, but under unusual market conditions, a long futures position
may be terminated without a corresponding purchase of securities.
While Futures Contracts based on debt securities do provide for the
delivery and acceptance of securities, such deliveries and acceptances are very
seldom made. Generally, a Futures Contract is terminated by entering into an
offsetting transaction. The Trust will incur brokerage fees on behalf of the
Fund when it purchases and sells Futures Contracts. At the time a purchase or
sale is made, cash or securities must be provided as an initial deposit known as
"margin". The initial deposit required will vary, but may be as low as 2% or
less of a contract's face value. Daily thereafter, the Futures Contract is
valued through a process known as "marking to market", and the Trust may receive
or be required to pay additional "variation margin" on behalf of the Fund as the
Futures Contract becomes more or less valuable. At the time of delivery of
securities pursuant to such a contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than the specific security that provides the standard for the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was entered into.
The Trust would purchase and sell Futures Contracts on indexes of
municipal securities on behalf of the Fund for the purpose of hedging against a
broad market decline which would cause a general reduction in the value of the
Fund's portfolio of municipal securities, or in the value of a portion of such
portfolio. To the extent that municipal securities held in the Fund's portfolio
are the same, or have the same characteristics, as the securities comprising the
index underlying the Futures Contract, changes in the value of the index should
correlate closely with changes in the value of the Fund's portfolio securities.
Under such circumstances, declines in the value of the Fund's portfolio
securities may be offset through gains on the Fund's futures position.
Similarly, the Trust may purchase Futures Contracts on indexes of municipal
securities on behalf of the Fund where it expects to acquire a portfolio of
municipal securities for the Fund and anticipates an increase in the cost of
such securities prior to acquisition. To the extent that the securities to be
acquired reflect the composition of the index underlying the Futures Contract,
such increased cost may be offset, in whole or in part, through gains on the
futures position. To the extent that the Trust on behalf of the Fund enters into
Futures Contracts on securities other than municipal bonds, there is a
possibility that the value of such Futures Contracts will not correlate in
direct proportion to the value of the portfolio securities since the value of
municipal bonds and other debt securities may not react in the same manner to a
general change in interest rates and may react differently to factors other than
changes in the general level of interest rates. The Fund's overall performance
would be adversely affected if the value of its Futures Contracts on securities
other than municipal bonds declined disproportionately to the value of the
Fund's municipal bond portfolio.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund may be
protected, in whole or in part, against the increased cost of acquiring bonds
resulting from a decline in interest rates. Similar results could be
accomplished by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase. However, since
the futures market is more liquid than the cash market, the use of Futures
Contracts as an investment technique allows action in anticipation of such an
interest rate decline without having to sell the Fund's portfolio securities. To
the extent Futures Contracts are entered into for this purpose, the assets in
the segregated asset accounts maintained on behalf of the Fund will consist of
cash, cash equivalents or high quality debt securities from the portfolio of the
Fund in an amount equal to the difference between the fluctuating market value
of such Futures Contracts and the aggregate value of the initial deposit and
variation margin payments made for the Fund with respect to such Futures
Contracts.
The ability to hedge effectively all or a portion of the Fund's
portfolio through transactions in Futures Contracts depends on the degree to
which movements in the value of the fixed income securities or index underlying
such contracts correlate with movements in the value of securities held in the
Fund's portfolio. If the security, or the securities comprising the index,
underlying a Futures Contract is different than the portfolio securities being
hedged, they may not move to the same extent or in the same direction. In that
event, the hedging strategy might not be successful and the Fund could sustain
losses on the hedging transactions which would not be offset by gains on its
portfolio. It is also possible that there may be a negative correlation between
the index or security underlying a Futures Contract and the portfolio securities
being hedged, which could result in losses both on the hedging transaction and
the portfolio securities. In such instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken.
The trading of Futures Contracts on an index of fixed income securities
entails the additional risk of imperfect correlation between movements in the
futures price and the value of the underlying index. The anticipated spread
between the prices may be distorted due to differences in the nature of the
markets, such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the futures market. The risk of
imperfect correlation, however, generally tends to diminish as the maturity date
of the Futures Contract approaches.
The Trust would purchase or sell Futures Contracts for the Fund only
if, in the judgment of the Adviser, there is expected to be a sufficient degree
of correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. This could require the Trust to post additional
cash or cash equivalents on behalf of the Fund as the value of the position
fluctuates. Further, rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a Futures Contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the Futures Contract
was originally entered into. While the Trust will establish a futures position
for the Fund only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
Futures Contract at any specific time. In that event, it may not be possible to
close out a position held for the Fund, which could require the Trust on behalf
of the Fund to purchase or sell the instrument underlying the Futures Contract,
make or receive a cash settlement, or meet ongoing variation margin
requirements. The inability to close out futures positions also could have an
adverse impact on the Trust's ability to hedge effectively the Fund's portfolio.
The liquidity of a secondary market in a Futures Contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a Futures
Contract during a single trading day and prohibit trading beyond such limits
once they have been reached. The trading of Futures Contracts also is subject to
the risk of trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of the brokerage firm or clearing
house or other disruptions of normal trading activity, which could at times make
it difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Investments in Futures Contracts also entail the risk that if the
Adviser's investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance may be poorer than if the Trust had
not entered into any such contract for the Fund. For example, if the Fund has
been hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in the Fund's portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which are hedged because there will be offsetting
losses in the Fund's futures positions. In addition, in such situations, if the
Fund has insufficient cash, bonds may have to be sold from the Fund's portfolio
to meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
Each contract market on which Futures Contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
The Adviser does not believe that these trading and position limits will have an
adverse impact on the hedging strategies regarding the Fund's portfolio.
Regulations of the CFTC require that transactions in Futures Contracts
may be entered into for the Fund for hedging purposes only, in order to assure
that the Fund is not deemed to be a "commodity pool" under such regulations. In
particular, CFTC regulations require that all short futures positions be entered
into in order to hedge the value of securities held in the Fund's portfolio, and
that all long futures positions either constitute bona fide hedge transactions,
as defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, such instruments
may not be entered into for the Fund if, immediately thereafter, the sum of the
amount of initial deposits on the Fund's existing futures positions would exceed
5% of the market value of the Fund's total assets.
When a Futures Contract is purchased, an amount of cash or cash
equivalents will be deposited in a segregated account with the Fund's custodian
bank so that the amount so segregated, plus the initial and variation margin
held in the account of its broker, will at all times equal the value of the
Futures Contract, thereby insuring that the use of such futures is unleveraged.
The ability to engage in the hedging transactions described herein may
be limited by the current federal income tax requirement that less than 30% of
the Fund's gross income be derived from the sale or other disposition of stock
or securities held for less than three months.
The Trustees have adopted the requirement that Futures Contracts only
be used for the Fund as a hedge and not for speculation. In addition to this
requirement, the Board of Trustees has also adopted two percentage restrictions
on the use of Futures Contracts. The first is that no Futures Contract will be
entered into for the Fund if immediately thereafter the amount of margin
deposits on all the Futures Contracts of the Fund would exceed 5% of the market
value of the total assets of the Fund. The second restriction is that the
aggregate market value of the Futures Contracts held for the Fund not exceed 50%
of the market value of the Fund's total assets. Neither of these restrictions
would be changed by the Board of Trustees without considering the policies and
concerns of the various federal and state regulatory agencies.
The Trust has no current intention of entering into any Futures
Contract for the Fund in the foreseeable future.
PORTFOLIO MANAGEMENT
The Trust intends that the Adviser fully manage the Fund's portfolio by
buying and selling securities, as well as by holding selected securities to
maturity. In managing the Fund's portfolio, the Adviser seeks to maximize the
return on the Fund's portfolio by taking advantage of market developments, yield
disparities and variations in the creditworthiness of issuers, which may include
use of the following strategies:
(1) shortening the average maturity of the portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of the portfolio in anticipation
of a decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the relative
values of each; and
(4) changing from one debt security to an essentially similar debt
security when their respective yields are distorted due to market factors.
Distributions of gains, if any, realized from the sale of Municipal
Obligations or other securities are subject to regular federal income taxes and
New York State and New York City personal income taxes. These strategies may
result in increases or decreases in the Fund's current income available for
distribution to the Fund's shareholders and in the holding for the Fund of
securities which sell at moderate to substantial premiums or discounts from face
value. Moreover, if the expectations of changes in interest rates or the
evaluation of the normal yield relationship between two securities proves to be
incorrect, the Fund's income, net asset value per share and potential capital
gain may be decreased or its potential capital loss may be increased.
PORTFOLIO TRANSACTIONS
Municipal Obligations and other debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. The cost of executing portfolio securities
transactions for the Fund primarily consists of dealer spreads and underwriting
commissions or concessions. Under the 1940 Act, persons affiliated with the Fund
or the Distributor are prohibited from dealing with the Fund as a principal in
the purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Securities and Exchange Commission.
The Trust has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities for the Fund. Subject
to policies established by the Trust's Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of Fund shareholders rather than by any formula. In
placing orders for the Fund, the primary consideration is prompt execution of
orders in an effective manner at the most favorable price, although the Fund
does not necessarily pay the lowest spread or commission available. Other
factors taken into consideration are the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities.
The Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms. These services,
which in some cases may also be purchased for cash, include such matters as
general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Adviser in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Fund. The management fee
paid from the Fund is not reduced because the Adviser and its affiliates receive
such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Adviser may cause the Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in the Act) to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and such other policies as the Trustees may
determine, and subject to seeking the most favorable price and execution
available, the Adviser may consider sales of shares of the Fund as a factor in
the selection of broker-dealers to execute portfolio transactions for the Fund.
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought for certain clients even though it could have
been sold for other clients at the same time, and a particular security may be
sold for certain clients even though it could have been bought for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. In some
instances, one client may sell a particular security to another client. Two or
more clients may simultaneously purchase or sell the same security, in which
event each day's transactions in that security are, insofar as practicable,
averaged as to price and allocated between such clients in a manner which in the
Adviser's opinion is equitable to each and in accordance with the amount being
purchased or sold by each. In addition, when purchases or sales of the same
security for the Fund and for other clients of the Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantage available to large denomination purchases or sales.
There may be circumstances when purchases or sales of portfolio securities for
one or more clients will have an adverse effect on other clients in terms of the
price paid or received or of the size of the position obtainable.
SPECIAL FACTORS AFFECTING NEW YORK
The fiscal stability of New York is related, at least in part, to the
fiscal stability of its localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by the State through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such State agencies,
authorities and localities, the State has had to provide special assistance in
recent years, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. To the extent State agencies and local
governments require State assistance to meet their financial obligations, the
ability of the State to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
On October 9, 1997, Standard & Poor's gave New York City's outstanding
general obligation bonds a rating of A.
For further information concerning New York Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is included for the purpose of providing a general
description of New York State and New York City credit and financial conditions.
This summary is based on information from statements of issuers of New York
Municipal Obligations and does not purport to be complete.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions with
respect to the Fund which may not be changed without approval by holders of a
"majority of the outstanding shares" of the Fund, which as used in this
Statement of Additional Information means the vote of the lesser of (i) 67% or
more of the outstanding "voting securities" of the Fund present at a meeting, if
the holders of more than 50% of the outstanding "voting securities" of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
"voting securities" of the Fund. The term "voting securities" as used in this
paragraph has the same meaning as in the 1940 Act.
The Trust, on behalf of the Fund, may not:
(1) borrow money or pledge, mortgage or hypothecate assets of
the Fund, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed 1/3 of the
value of the net assets of the Fund, including the amount borrowed, and
may pledge, mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings (it is intended that money would be borrowed
only from banks and only to accommodate requests for the redemption of
shares of the Fund while effecting an orderly liquidation of portfolio
securities), provided that collateral arrangements with respect to
Futures Contracts, including deposits of initial and variation margin,
are not considered a pledge of assets for purposes of this Investment
Restriction; for additional related restrictions, see clause (i) under
the caption "Other Restrictions" below;
(2) purchase any security or evidence of interest therein on
margin, except that the Trust may obtain such short-term credit for the
Fund as may be necessary for the clearance of purchases and sales of
securities and except that deposits of initial and variation margin in
connection with the purchase, ownership, holding or sale of Futures
Contracts may be made;
(3) underwrite securities issued by other persons, except
insofar as the Trust may technically be deemed an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in selling a
portfolio security for the Fund;
(4) make loans to other persons except (a) through the lending
of securities held by the Fund, but not in excess of 1/3 of the Fund's
net assets taken at market value, (b) through the use of fixed time
deposits or repurchase agreements or the purchase of short-term
obligations, (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions; for purposes of this Investment Restriction (4) the
purchase of short-term commercial paper or a portion of an issue of
debt securities which are part of an issue to the public shall not be
considered the making of a loan;
(5) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts in the ordinary course of business
(the Trust reserves the freedom of action to hold and to sell for the
Fund real estate acquired as a result of its ownership of securities);
(6) concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the Fund's
investment objective, up to 25% of the assets of the Fund (taken at
market value at the time of each investment) may be invested in any one
industry, except that positions in Futures Contracts shall not be
subject to this Investment Restriction and except that the Trust may
invest all or substantially all of the Fund's assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those
with respect to the Fund;
(7) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, except as
appropriate to evidence a debt incurred without violating Investment
Restriction (1) above, and provided that collateral arrangements with
respect to Futures Contracts, including deposits of initial and
variation margin, are not considered to be the issuance of a senior
security for purposes of this Investment Restriction;
(8) write, purchase or sell any put or call option or any
combination thereof, provided that this shall not prevent the writing,
purchase, ownership, holding or sale of Futures Contracts;
(9) invest in securities which are subject to legal or
contractual restrictions on resale (other than fixed time deposits and
repurchase agreements maturing in not more than seven days) if, as a
result thereof, more than 10% of the net assets of the Fund would be so
invested (including fixed time deposits and repurchase agreements
maturing in more than seven days); provided, however, that this
Investment Restriction shall not apply to (a) any security if the
holder thereof is permitted to receive payment upon a specified number
of days' notice of the unpaid principal balance plus accrued interest
either from the issuer or by drawing on a bank letter of credit, a
guarantee or an insurance policy issued with respect to such security
or by tendering or "putting" such security to a third party, or (b) the
investment by the Trust of all or substantially all of the Fund's
assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund;
(10) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held for the Fund, except that the Trust may invest all or
substantially all of the Fund's assets in another registered investment
company having the same investment objective and policies and
substantially the same investment restrictions as those with respect to
the Fund; or
(11) purchase more than 10% of all outstanding debt
obligations of any one issuer (other than obligations issued by the
U.S. Government, its agencies or instrumentalities).
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security. If, however, the
creating government or some other entity, such as an insurance company or other
corporate obligor, guarantees a security or a bank issues a letter of credit,
such a guarantee or letter of credit may, in accordance with applicable rules of
the Securities and Exchange Commission, be considered a separate security and
treated as an issue of such government, other entity or bank.
OTHER RESTRICTIONS
The Trust on behalf of the Fund does not, as a matter of operating
policy: (i) borrow money for any purpose in excess of 10% of the Fund's total
assets (taken at cost) (moreover, the Trust will not purchase any securities for
the Fund's portfolio at any time at which borrowings exceed 5% of the Fund's
total assets (taken at market value)), (ii) pledge, mortgage or hypothecate for
any purpose in excess of 10% of the Fund's net assets (taken at market value)
provided that collateral arrangements with respect to Futures Contracts,
including deposits of initial and variation margin, are not considered a pledge
of assets for purposes of this Investment Restriction, (iii) sell any security
which it does not own unless by virtue of its ownership of other securities it
has at the time of sale a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same conditions,
(iv) invest for the purpose of exercising control or management, (v) purchase
securities issued by any registered investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
such purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation, provided, however, that the Trust will not purchase the
securities of any registered investment company for the Fund if such purchase at
the time thereof would cause more than 10% of the Fund's total assets (taken at
the greater of cost or market value) to be invested in the securities of such
issuers or would cause more than 3% of the outstanding voting securities of any
such issuer to be held for the Fund; and provided, further, that the Trust shall
not purchase securities issued by any open-end investment company, (vi) invest
more than 15% of the Fund's net assets in securities that are not readily
marketable, including fixed time deposits and repurchase agreements maturing in
more than seven days, (vii) purchase securities of any issuer if such purchase
at the time thereof would cause the Fund to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class, and all preferred stock of an issuer shall be
deemed a single class, except that Futures Contracts shall not be subject to
this Investment Restriction, (viii) invest more than 5% of the Fund's assets in
companies which, including predecessors, have a record of less than three years'
continuous operation, or (ix) purchase or retain in the Fund's portfolio any
securities issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of the Trust, or is an officer or
director of the Adviser, if after the purchase of the securities of such issuer
for the Fund one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value. These policies are not fundamental and may be changed
by the Trust on behalf of the Fund without shareholder approval in response to
changes in the various state and federal requirements.
For purposes of the investment restrictions described above, the issuer
of a tax-exempt security is deemed to be the entity (public or private)
ultimately responsible for the payment of principal of and interest on the
security. If, however, the creating government or some other entity, such as an
insurance company or other corporate obligor, guarantees a security or a bank
issues a letter of credit, such a guarantee or letter of credit may, in
accordance with applicable rules of the Securities and Exchange Commission, be
considered a separate security and treated as an issue of such government, other
entity or bank.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the Prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by the Fund or a later change in the rating of a security held by the Fund is
not considered a violation of policy, however the Adviser will consider such
change in its determination of whether to hold the security.
Subsequent to its purchase by the Trust on behalf of the Fund, a rated
Municipal Obligation may cease to be rated or its rating may be reduced below
the minimum required for purchase for the Fund. Neither event requires sale of
such Municipal Obligation by the Trust (other than variable rate instruments
which must be sold if they are not "high quality"), but the Adviser considers
such event in determining whether the Trust should continue to hold the
Municipal Obligation on behalf of the Fund. To the extent that the ratings given
to the Municipal Obligations or other securities held by the Trust on behalf of
the Fund are altered due to changes in either the Moody's, Standard & Poor's or
Fitch's ratings systems (see "Description of Ratings" in Appendix A to the
Prospectus for an explanation of Standard & Poor's, Moody's and Fitch ratings),
the Adviser will adopt such changed ratings as standards for its future
investments in accordance with the investment policies contained in the
Prospectus. Certain Municipal Obligations issued by instrumentalities of the
U.S. Government are not backed by the full faith and credit of the U.S. Treasury
but only by the creditworthiness of the instrumentality. The Trust's Board of
Trustees has determined that any Municipal Obligation that depends directly, or
indirectly through a government insurance program or other guarantee, on the
full faith and credit of the U.S. Government is considered to have a rating in
the highest category. Where necessary to ensure that the Municipal Obligations
are of "high quality" (i.e., within the two highest ratings assigned by any
major rating service), or where the obligations are not freely transferable, the
Trust requires that the obligation to pay the principal and accrued interest be
backed by an unconditional irrevocable bank letter of credit, a guarantee,
insurance or other comparable undertaking of an approved financial institution.
PERFORMANCE INFORMATION
Any current "yield" quotation of the Fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act is
calculated by (a) dividing (i) the dividends and interest earned during the
period (as calculated in accordance with the requirements of the Securities and
Exchange Commission) minus the expenses accrued for the period (net of
reimbursements), by (ii) the average daily number of shares outstanding during
the period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period, (b) adding 1 to the
quotient, (c) raising the sum to the sixth power, (d) subtracting 1 from the
result, and (e) multiplying that result by 2. For the 30-day period ended
October 31, 1997, the yield of the Fund was 4.44% for Investor Shares (without
the sales charge) and 4.57% for Adviser Shares. Had the sales charge been in
effect during the relevant period, the yield of the Fund would have been 4.32%
for Investor Shares. Class B Shares were not offered prior to January 2, 1998.
Any "tax equivalent yield" quotation for the Fund is calculated as
follows: if the entire current yield quotation for such period is tax-exempt,
the tax equivalent yield will be the current yield quotation divided by 1 minus
a stated income tax rate or rates. If a portion of the current yield quotation
is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion
of the yield which is tax-exempt divided by 1 minus a stated income tax rate or
rates, and (b) the portion of the yield which is not tax-exempt. For the 30-day
period ended October 31, 1997, the tax equivalent yield of the Fund (assuming a
39.6% tax rate) was 7.35% for Investor Shares (without the sales charge) and
7.57% for Adviser Shares. Had the sales charge been in effect during the
relevant period, the tax equivalent yield of the Fund would have been 7.15% for
Investor Shares. Class B Shares were not offered prior to January 2, 1998.
A "total rate of return" quotation for the Fund is calculated for any
period by (a) dividing (i) the sum of the net asset value per share on the last
day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to a share held at the beginning of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) the net asset value on the first day of such
period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result. The total return of the Investor Shares of the Fund for the
one-year period ended October 31, 1997 was 8.22% without the sales charge, and
the average annual total return of the Investor Shares of the Fund for the
period from May 1, 1995 (commencement of operations) to October 31, 1997 was
7.78% without the sales charge. Had the sales charge been in effect during the
relevant periods, the annual total return for the year ended October 31, 1997
would have been 5.24% and the average annual total return for the period from
May 1, 1995 to October 31, 1997 would have been 6.57%. The total return for
Adviser Shares of the Fund for the one-year period ended October 31, 1997 was
8.38%, and the average annual total return for the Adviser Shares of the Fund
for the period from July 1, 1996 (date of initial offering) to October 31, 1997
was 9.01%. Class B Shares were not offered prior to January 2, 1998.
Any "tax equivalent total rate of return" quotation for the Fund is
calculated as follows: if the entire current total rate of return quotation for
such period is tax-exempt, the tax equivalent total rate of return will be the
current total rate of return quotation divided by 1 minus a stated income tax
rate or rates. If a portion of the current total rate of return quotation is not
tax-exempt, the tax equivalent total rate of return will be the sum of (a) that
portion of the total rate of return which is tax-exempt divided by 1 minus a
stated income tax rate or rates, and (b) the portion of the total rate of return
which is not tax-exempt. The tax equivalent total rate of return of the Investor
Shares of the Fund for the one-year period ended October 31, 1997 was 13.61%
without the sales charge, and the average annual tax equivalent total rate of
return of the Investor Shares of the Fund for the period from May 1, 1995
(commencement of operations) to October 31, 1997 was 12.88% without the sales
charge, assuming a 39.6% tax rate. Had the sales charge been in effect during
the relevant periods, the annual total return for the year ended October 31,
1997 would have been 8.68% and the average annual total return for the period
from May 1, 1995 to October 31, 1997 would have been 10.87%. The tax equivalent
total rate of return for the Adviser Shares of the Fund for the one-year period
ended October 31, 1997 was 13.87% and the average annual tax equivalent total
rate of return for the Adviser Shares of the Fund for the period from July 1,
1996 (date of initial offering) to October 31, 1997 was 14.91%, assuming a 39.6%
tax rate. Class B Shares were not offered prior to January 2, 1998.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
officers are "interested persons" (as defined in the 1940 Act) of the 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.
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 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement 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
Republic Portfolios.
The compensation table above reflects the fees received by the Trustees
for the year ended October 31, 1997. 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 December 8, 1997, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding Shares of the Fund. As of the same
date, the following shareholders of record owned 5% or more of the outstanding
Shares of the Fund (the Trust has no knowledge of the beneficial ownership of
such Shares): Kinco & Co. c/o Republic National Bank of New York, One Hanson
Place, Brooklyn, New York, 11243 - 97.30% (Adviser Shares); and BHC Securities
Inc., One Commerce Square, 2005 Market Square, Philadelphia, PA 19103 - 89.78%
(Investor Shares). Shareholders who own more than 25% of the outstanding voting
securities of the Fund (or a class thereof) may be able to control the outcome
of any matter submitted for the approval of shareholders of the Fund (or class
thereof).
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Contract, Republic is responsible
for the investment management of the Fund's assets, including the responsibility
for making investment decisions and placing orders for the purchase and sale of
securities for the Fund directly with the issuers or with brokers or dealers
selected by Republic in its discretion, not including the Distributor. See
"Portfolio Transactions". Republic also furnishes to the Board of Trustees,
which has overall responsibility for the business and affairs of the Trust,
periodic reports on the investment performance of the Fund.
Republic is a wholly-owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Fund are not
exclusive under the terms of the Investment Advisory Contract. Republic is free
to and does render investment advisory services to others.
The Investment Advisory Contract will continue in effect with respect
to the Fund, provided such continuance is approved annually (i) by the holders
of a majority of the outstanding voting securities of the Fund or by the Board
of Trustees, and (ii) by a majority of the Trustees who are not parties to such
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Contract may be terminated with respect to the Fund without penalty by
either party on 60 days' written notice and will terminate automatically if
assigned. The Contract provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of portfolio
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence or of reckless disregard of its or their obligations and duties under
the Contract.
For the period from May 1, 1995 (commencement of operations) to October
31, 1995, investment advisory fees aggregated $9,063, of which the entire amount
was waived. For the years ended October 31, 1996 and October 31, 1997,
investment advisory fees aggregated $24,512 and $55,654, respectively, the
entire amounts of which were waived.
ADMINISTRATOR
The 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. The Administration
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement also provides that neither BISYS nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the administration or management of the Trust, 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 period from May 1, 1995 (commencement of operations) to October
31, 1995, the Fund accrued administration fees of $7,250 to its former
administrator, of which the entire amount was waived. For the year ended October
31, 1996, the Fund accrued administration fees equal to $19,609, $18,432 of
which was waived. For the year ended October 31, 1997, the Fund accrued
administration fees equal to $22,290.
DISTRIBUTION PLANS - INVESTOR SHARES AND CLASS B SHARES ONLY
Two Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Investor Shares (the "Class A Plan")
and the Class B Shares (the "Class B Plan"). The Distribution Plans provide that
they may not be amended to increase materially the costs which either the
Investor Shares or the Class B Shares may bear pursuant to the Class A Plan or
Class B Plan without approval by shareholders of the Investor Shares or Class B
Shares, respectively, and that any material amendments to the Distribution Plans
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 interests in the operation of the Distribution
Plans 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 Plans have been approved, and are subject
to annual approval, by the Board of Trustees and by the Qualified Trustees, by
vote cast in person at a meeting called for the purpose of voting on the
Distribution Plans. In adopting the Class A Plan and Class B Plan, the Trustees
considered alternative methods to distribute the Investor Shares and the Class B
Shares and to reduce each class's per share expense ratio and concluded that
there was a reasonable likelihood that each Distribution Plan will benefit its
respective class and that class's shareholders. The Distribution Plans are
terminable with respect to the Investor Shares or the Class B Shares at any time
by a vote of a majority of the Qualified Trustees or by vote of the holders of a
majority of that class.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Investor Shares, the Class B Shares and the Adviser Shares, 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 Investor Shares, the
Class B Shares or the Adviser Shares by a majority vote of shareholders of that
class. The Administrative Services Plan may not be amended to increase
materially the amount of permitted expenses thereunder with respect to the
Investor Shares, the Class B Shares or the Adviser Shares without the approval
of a majority of shareholders of that class, and may not be materially amended
in any case without a vote of the majority of both the Trustees and the
Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Investor Shares and Class B Shares, respectively, see "Management of
the Trust - Shareholder Servicing Agents" in the Prospectus describing the
Investor Shares and the Class B Shares.
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has approved a Custodian Agreement
and a Transfer Agency Agreement between the Trust and Investors Bank & Trust
Company ("IBT") pursuant to which IBT will provide custodial services with
respect to foreign assets, fund accounting services, transfer agency services
with respect to Investor Shares and Adviser Shares, dividend disbursing services
and shareholder servicing services to the Trust and the Fund. The principal
business address of IBT is 89 South Street, Boston, Massachusetts 02111. The
Board of Trustees has also approved a Custodian Agreement between the Trust and
Republic pursuant to which Republic will provide custodial services to the Trust
and the Fund with respect to domestic assets and a Transfer Agency Agreement
between the Trust and BISYS pursuant to which BISYS will provide transfer agency
services with respect to the Class B Shares to the Fund.
EXPENSES
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class expenses with respect to
the Investor Shares or the Class B Shares must include payments made pursuant to
their respective Distribution Plan and the Administrative Services Plan. In the
event a particular expense is not reasonably allocable by class or to a
particular class, it shall be treated as a Fund expense or a Trust expense.
Trust expenses directly related to the Fund are charged to the Fund; other
expenses are allocated proportionally among all the portfolios of the Trust in
relation to the net asset value of the portfolios.
DETERMINATION OF NET ASSET VALUE
The net asset value of each share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service, use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees. Futures Contracts are normally valued at the settlement price on the
exchange on which they are traded. Portfolio securities (other than short-term
obligations) for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in the Fund's portfolio is
determined on the basis of interest accrued plus amortization of "original issue
discount" (generally, the difference between issue price and stated redemption
price at maturity) and premiums (generally, the excess of purchase price over
stated redemption price at maturity). Interest income on short-term obligations
is determined on the basis of interest accrued plus amortization of premium.
Subject to the Trust's compliance with applicable regulations, the
Trust has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in kind of the
Fund's portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in kind, the shareholder could incur brokerage or other charges in
converting the securities to cash.
TAXATION
FEDERAL INCOME TAX
The following is a summary of certain U.S. federal income tax issues
concerning the Fund and its shareholders. The Fund may also be subject to state,
local, foreign or other taxes not discussed below. This discussion does not
purport to be complete or to address all tax issues relevant to each
shareholder. Prospective investors should consult their own tax advisors with
regard to the federal, state, foreign and other tax consequences to them of the
purchase, ownership or disposition of Fund shares. This discussion is based upon
present provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder, and judicial and administrative
authorities, all of which are subject to change, which change may be
retroactive.
The Fund intends to qualify each year as a "regulated investment
company" under the Code. By so qualifying, the Fund will be exempt from regular
federal income taxes to the extent that it distributes substantially all of its
net investment income and net realized capital gains to shareholders.
It is intended that the Fund's assets will be sufficiently invested in
municipal securities to qualify to pay "exempt-interest dividends" (as defined
in the Code) to shareholders. The Fund's dividends payable from net tax-exempt
interest earned from municipal securities will qualify as exempt-interest
dividends if, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets consists of securities the interest on which is
exempt from the regular federal income tax under Code section 103.
Exempt-interest dividends distributed to shareholders are not included in
shareholders' gross income for regular federal income tax purposes.
The Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If the Fund earns income which is not
eligible to be so designated, the Fund, nonetheless, intends to distribute such
income. Such distributions will be subject to federal, state, and local state
taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by the Fund from
investment in taxable debt securities, or ordinary income realized upon the
disposition of market discount bonds (including tax-exempt market discount
bonds), and of any net realized short-term capital gains will be taxable to
shareholders as ordinary income. Because the Fund's investment income is derived
from interest rather than dividends, no portion of such distributions is
expected to be eligible for the dividends-received deduction available to
corporations.
Upon the sale or exchange of shares, a shareholder generally will
realize a taxable gain or loss depending upon his or her basis in the shares.
Such gain or loss will be treated as a capital gain or loss if the shares are
capital assets in the shareholder's hands; gain will generally be subject to a
maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum tax rate of 28% if the shareholder's holding
period for the shares is more than one year but less than 18 months. Gain from
the disposition of shares held not more than one year will be taxed as
short-term capital gain. If a capital gain distribution designated as a
capital gain dividend is paid with respect to any shares of the Fund sold at a
loss after being held for six months or less, the loss will be treated as a
long-term capital loss for tax purposes.
Any loss realized from a disposition of Fund shares that were held for
six months or less will be disallowed, to the extent that dividends received
from the Fund are designated as exempt-interest dividends. Any loss realized on
a sale or exchange of Fund shares also will be disallowed to the extent that the
shares disposed of are replaced (including replacement through reinvesting of
dividends and capital gain distributions in the Fund) within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of the shares.
In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss, to the extent not disallowed, realized on a
disposition of shares of the Fund with respect to which long-term capital gain
distributions have been paid will, to the extent of those dividends, be treated
as a long-term capital loss if your shares have been held for six months or less
at the time of their disposition.
Distributions of net capital gain, whether received in cash or
reinvested in Fund shares, will generally be taxable to shareholders as either
"20% Gain" or "28% Gain," depending upon the Fund's holding period for the
assets sold. "20% Gains" arise from sales of assets held by the Fund for more
than 18 months and are subject to a maximum tax rate of 20%, "28% Gains" arise
from sales of assets held by the Fund for more than one year but no more than 18
months and are subject to a maximum tax rate of 28%. Net capital gains from
assets held for one year or less will be taxed as ordinary income. Distributions
will be subject to these capital gains rates regardless of how long a
shareholder has held Fund shares.
Distributions by the Fund (other than exempt-interest dividends) and
redemption proceeds may be subject to backup withholding at the rate of 31%.
Backup withholding generally applies to shareholders who have failed to properly
certify their taxpayer identification numbers, who fail to provide other
required tax-related certifications, and with respect to whom the Fund has
received certain notifications from the Internal Revenue Service requiring or
permitting the Fund to apply backup withholding. Backup withholding is not an
additional tax and amounts so withheld generally may be applied by affected
shareholders as a credit against their federal income tax liability.
Interest on certain types of private activity bonds is not exempt from
regular federal income tax when received by "substantial users" or persons
related to substantial users as defined in the Code. The term "substantial user"
includes any "nonexempt person" who regularly uses in trade or business part of
a facility financed from the proceeds of private activity bonds. The Fund may
invest periodically in private activity bonds and, therefore, may not be
appropriate investments for entities that are substantial users of facilities
financed by private activity bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he/she or his/her immediate family (spouse, brothers,
sisters, and lineal descendants) owns indirectly in aggregate more than 50% in
the equity value of the substantial user.
Certain futures contracts in which the Fund may invest are "section
1256 contracts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses (60-40).
Also, section 1256 contracts held by the Fund at the end of each taxable year
(and, in some cases, for purposes of the 4% excise tax, on October 31 of each
year) are marked to market with the result that unrealized gains or losses are
treated as though they were realized.
The hedging transactions undertaken by the Fund may result in straddles
for regular federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gains realized by the Fund, which are taxed as ordinary income when
distributed to shareholders.
The Fund may make one or more of the elections available under the Code
that are applicable to straddles. If the Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the application of the straddle rules may affect the character
of gains or losses, defer losses, and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount that must be distributed
to shareholders and that will be taxed to shareholders as ordinary income or a
long-term capital gain may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Recently enacted rules may affect the timing and character of gain if
the Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although the
Fund's advisor attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be federal and (as applicable) state tax-exempt, neither
the advisor nor the Fund's counsel makes any review of proceedings relating to
the issuance of municipal securities or the bases of such opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the regular federal income tax exemption
for interest on municipal securities, and similar proposals may be introduced in
the future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund and the Trust or their dissolution.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while exempt from
the regular federal income tax, constitutes a tax-preference item for taxpayers
in determining alternative minimum tax liability under the Code and income tax
provisions of several states. The interest on private activity securities could
subject a shareholder to, or increase liability under, the federal alternative
minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal
income tax may subject corporate shareholders to or increase their liability
under, the alternative minimum tax and environmental tax because these
distributions are included in the corporation's adjusted current earnings.
The Fund will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
SPECIAL TAX CONSIDERATIONS
Exempt-interest dividends, whether received by shareholders in cash or
in additional shares, derived by New York residents from interest on qualifying
New York bonds generally are exempt from New York State and New York City
personal income taxes, but not corporate franchise taxes. Dividends and
distributions derived from taxable income and capital gains are not exempt from
New York State and New York City taxes. Interest on indebtedness incurred or
continued by a shareholder to purchase or carry shares of the Fund is not
deductible for New York State or New York City personal income tax purposes.
Gain on the sale or redemption of Fund shares generally is subject to New York
State and New York City personal income tax.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) and classes of shares within each series at any time
in the future. Establishment and offering of additional classes or series will
not alter the rights of the Fund's shareholders. When issued, shares are fully
paid, nonassessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In liquidation of the Fund, each
shareholder is entitled to receive his pro rata share of the net assets of the
Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Funds of the Trust for the fiscal year ending
October 31, 1998. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02110.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the 1933 Act with respect to
shares of the Fund, certain portions of which have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund's current audited financial statements dated October 31, 1997
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1997 as filed with the Securities and Exchange Commission. A
copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
APPENDIX A
DESCRIPTION OF MUNICIPAL OBLIGATIONS
Municipal Obligations include bonds, notes and commercial paper issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
taxes (without regard to whether the interest thereon is also exempt from the
personal income taxes of any state). Municipal Obligation bonds are issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, industrial facilities, sports facilities, convention or
trade show facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities, hazardous waste treatment or disposal
facilities, and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Such obligations are included within the term
Municipal Obligations if the interest paid thereon qualifies as exempt from
regular federal income tax. Other types of industrial development bonds, the
proceeds of which are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, may
constitute Municipal Obligations, although the current federal tax laws place
substantial limitations on the size of such issues.
The two principal classifications of Municipal Obligation bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its good faith, credit and taxing, power for the
payment of principal and interest. The payment of the principal of and interest
on such bonds may be dependent upon an appropriation by the issuer's legislative
body. The characteristics and enforcement of general obligation bonds vary
according to the law applicable to the particular issuer. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Industrial development bonds which are Municipal
Obligations are in most cases revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications, depending" on numerous factors.
Municipal Obligation notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
Obligation notes include:
1.TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
operational needs of municipalities. Generally, they are issued in anticipation
of the receipt of various tax revenues, such as property, income, sales, use and
business taxes.
2.REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of dedicated revenues, such as state aid or federal
revenues available under federal revenue sharing programs.
3.TAX AND REVENUE ANTICIPATION NOTES. Tax and Revenue Anticipation
Notes are issued by the State to fund its day-to-day operations and certain
local assistance payments to its municipalities and school districts. Such Notes
are issued in anticipation of the receipt of various taxes and revenues, such as
personal income taxes, business taxes and user taxes and fees.
4.BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to
provide interim financing until long-term bond financing can be arranged.
Long-term bonds or renewal Bond Anticipation Notes provide the money for the
repayment of the Notes.
Issues of commercial paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by agencies of state
and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, Municipal Obligation commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
The yields on Municipal Obligations are dependent on a variety of
factors, including general market conditions, supply and demand and general
conditions of the Municipal Obligation market, size of a particular offering,
the maturity of the obligation and rating (if any) of the issue. The ratings of
Moody's Investors Service, Inc., Standard & Poor's Corporation and Fitch
Investors Service, Inc. represent their opinions as to the quality of various
Municipal Obligations. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, Municipal Obligations with the same
maturity, coupon and rating may have different yields while Municipal
Obligations of the same maturity and coupon with different ratings may have the
same yield.
APPENDIX B
ADDITIONAL INFORMATION CONCERNING
NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the Annual Information
Statement of the State of New York dated August 15, 1997.
GENERAL
New York (the "State") is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location, air transport
facilities and natural harbors have made it an important link in international
commerce. Travel and tourism constitute an important part of the economy. The
State has a declining proportion of its work force engaged in manufacturing and
an increasing proportion engaged in service industries. This transition reflects
a national trend.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than that
of the nation as a whole, resulting in the gradual erosion of its relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. New York City (the "City") has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in the following areas: Westchester
County -- headquarters for several major corporations; Buffalo -- diverse
manufacturing base; Rochester -- manufacture of photographic and optical
equipment; Syracuse and Utica-Rome area -- production of machinery and
transportation equipment; Albany-Troy-Schenectady -- government and education
center and production of electrical products; Binghampton -- original site of
the International Business Machines Corporation and continued concentration of
employment in computer and other high technology manufacturing; and New York
City -- headquarters for the nation's securities business and for a major
portion of the nation's major commercial banks, diversified financial
institutions and life insurance companies. In addition, the City houses the home
offices of three major radio and television broadcasting networks, most of the
national magazines and a substantial portion of the nation's book publishers.
The City also retains leadership in the design and manufacture of men's and
women's apparel.
ECONOMIC OUTLOOK
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. The State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal
financial and monetary policies, the availability of credit, the level of
interest rates, and the condition of the world economy, which would have an
adverse effect on the State. There can be no assurance that the State economy
will not experience results in the current fiscal year that are worse than
predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
The national economy has resumed a more robust rate of growth after a
"soft landing" in 1995, with over 14 million jobs added nationally since early
1992. Since late 1992, the State has added approximately 300,000 jobs.
Employment growth has been hindered during recent years by significant cutbacks
in the computer and instrument manufacturing, utility, defense, and banking
industries. Government downsizing has also moderated these job gains.
The overall rate of growth of the national economy during calendar year
1997 was forecast to be practically identical to the "consensus" of a widely
followed survey of national economic forecasters. Growth in the real gross
domestic product during 1997 was projected to be 3.6 percent, with anticipated
declines in federal spending and net exports more than offset by increases in
consumption and investment. Inflation, as measured by the Consumer Price Index,
was projected to be contained at about 2.6 percent due to improved productivity
and foreign competition. Personal income and wages were projected to increase by
6.0 percent and 6.7 percent respectively.
The forecast of the State's economy showed modest expansion during the
first half of calendar 1997. Although industries that export goods and services
are expected to continue to do well, growth was expected to be moderated by
tight fiscal constraints on health and social services. On an average annual
basis, employment growth in the State was expected to be up slightly from the
1996 rate. Personal income was expected to record moderate gains in 1997. Bonus
payments in the securities industry were expected to increase further from the
prior year's record level.
The forecast for continued slow growth, and any resultant impact on the
State's 1997-98 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment could lead to a significant
improvement in consumption spending. Investment could also remain robust.
Conversely, hints of accelerating inflation or fears of excessively rapid
economic growth could create upward pressures on interest rates. In addition,
the State economic forecast could over- or underestimate the level of future
bonus payments or inflation growth, resulting in forecasted average wage growth
that could differ significantly from actual growth. Similarly, the State
forecast could fail to correctly account for declines in banking employment and
the direction of employment change that is likely to accompany
telecommunications and energy deregulation.
STATE FINANCIAL PLAN
The State Constitution requires the Governor to submit to the
Legislature a balanced Executive Budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the Executive Budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
The State's fiscal year, which commenced on April 1, 1997, and ends on
March 31, 1998, is referred to herein as the State's 1997-98 fiscal year.
The State's budget for the 1997-98 fiscal year was enacted by the
Legislature on August 4, 1997, more than four months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including all necessary appropriations for all
State-supported debt service. The State Financial Plan for the 1997-98 fiscal
year was formulated on August 11, 1997, and is based on the State's budget as
enacted by the Legislature, as well as actual results for the first quarter of
the current fiscal year. The State Financial Plan will be updated in October and
January.
The adopted 1997-98 budget projects an increase in General Fund
disbursements of 5.2 percent over 1996-97. State Funds (excluding federal
grants) disbursements are projected to increase by 5.4 percent from the prior
fiscal year. All Governmental Funds projected disbursements increase by 7.0
percent over the prior fiscal year.
The 1997-98 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as amended in February
1997, the State's adopted budget for 1997-98 increases General Fund spending by
$1.7 billion, primarily from increases for local assistance ($1.3 billion).
Resources used to fund these additional expenditures include increased revenues
projected for the 1997-98 fiscal year, increased resources produced in the
1996-97 fiscal year that will be utilized in 1997-98, re-estimates of social
service, fringe benefit and other spending, and certain non-recurring resources.
Resources used to fund these additional expenditures include incresed
revenues projected for the 1997-98 fiscal year, increased resources produced in
the 1996-97 fiscal year that will be utilized in 1997-98, re-estimates of social
service, fringe benefit and other spending, and certain non-recurring resources.
The total amount of non-recurring resources included in the 1997-98 State budget
is projected to be $270 million, or 0.7 percent of total General Fund receipts.
The 1997-98 Financial Plan also includes: a projected General Fund
reserve of $530 million; a projected balance of $332 million in the Tax
Stabilization Reserve Fund, and a projected $65 million balance in the
Contingency Reserve Fund.
The projections do not include any subsequent actions that the Governor
may also take to exercise his line-item veto (or vetoing any companion
legislation) before signing the 1997-98 budget appropriation bills into law.
Under the Constitution, the Governor may veto any additions to the Executive
Budget within 10 days after the submission of appropriation bills for his
approval. If the Governor were to take such action, the resulting impact on the
Financial Plan would be positive.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the State Financial Plan is
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of Budget believes that
its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in the Annual Information Statement, and those projections
may be changed materially and adversely from time to time. There are also risks
and uncertainties concerning the future-year impact of actions taken in the
1997-98 budget.
GOVERNMENT FUNDS
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
General Fund Receipts
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1997-98 fiscal year, the General Fund is expected to account for
approximately 48 percent of total governmental-funded disbursements and 71
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The Financial Plan for the 1997-98 fiscal year projects General Fund
receipts, including transfers from other funds, of $35.09 billion, an increase
of $2.05 billion from the total receipts in the prior fiscal year. This total
includes $31.68 billion in tax receipts, $1.48 billion in miscellaneous
receipts, and $1.94 billion in transfers from other funds.
The projected $2 billion increase in receipts exaggerates the
underlying year-to-year growth in State tax revenues. This increase is largely
the result of actions undertaken by the State to utilize the $1.4 billion
1996-97 budget surplus reported by the Department of the Budget to finance costs
in the State's 1997-98 fiscal year. This transaction reduced reported receipts
in the 1996-97 fiscal year and increased projected receipts in the State's
1997-98 fiscal year. Conversely, the incremental cost of tax reductions newly
effective in 1997-98 and the impact of new earmarking statutes which divert
receipts from the General Fund to other funds work to depress apparent growth
below the underlying growth in the receipts base attributable to expansion of
the State's economy. After adjusting for these actions, tax receipts are
projected to grow by approximately 5 percent in 1997-98.
Personal income tax is imposed on the income of individuals, estates
and trusts and is based on federal definitions of income and deductions with
certain modifications. In 1995, the State enacted a tax-reduction program
designed to reduce receipts from the personal income tax by 20 percent over
three years. Prior to 1995, the tax had remained substantially unchanged since
1989 as a result of annual deferrals of tax reductions originally enacted in
1987. The tax-reduction program is estimated to reduce receipts by approximately
$4 billion in the 1997-98 fiscal year, compared to what tax receipts would have
been under the pre-1995 rate structure. The maximum rate was reduced from the
7.875 percent in effect between 1989 and 1994 to 6.85 percent for 1997 and
thereafter. On a current law basis, 1997 income tax liability is expected to
fall slightly, reflecting the tax cut. On a constant law basis, liability growth
during taxable year 1997 would be between 6 and 7 percent.
The projected net collections of personal income tax in the 1997-98
fiscal year of $18.87 billion is over half of all General Fund receipts and an
increase of $2.5 billion from reported collections in the State's 1996-97 fiscal
year. Virtually all of the projected annual growth in this category, however, is
provided by tax refund and refund reserve transactions which affect reported
receipt levels in the 1995-96 through 1997-98 fiscal years. Without these
transactions between years, income tax receipts in 1997-98 would be virtually
flat.
Receipts in user taxes and fees in the State's 1997-98 fiscal year are
expected to total $7 billion, an increase of $204 million from reported 1996-97
results. The sales tax component of this category accounts for all of the
projected 1997-98 growth in this category, as receipts from all other sources
are projected to decline by $3 million. The yield of most of the excise taxes in
this category show a long-term declining trend, particularly cigarette and
alcoholic beverage taxes. These declines in the 1997-98 fiscal year are
projected to be offset by an increase in anticipated motor vehicle fees arising,
in large part, from legislative actions that raise additional receipts from this
source.
Total business tax collections in 1997-98 are now projected to be $4.83
billion, $253 million less than received in the prior fiscal year. The
year-over-year decline in projected receipts in this category is a function of
both statutory changes between the two years -- 1997 is the first "surcharge
free" taxable period in this decade -- and a number of essentially one-time
transactions that increased receipts in the base year, including unusually large
audit receipts under the bank tax. Business taxes include franchise taxes based
generally on net income of general business, bank and insurance corporations, as
well as gross-receipts-based taxes on utilities and gallonage-based petroleum
business taxes. Beginning in 1994, a 15 percent surcharge on these levies began
to be phased out and, for most taxpayers, there will be no surcharge liability
for taxable periods ending in 1997 and thereafter.
Total receipts from other taxes and miscellaneous receipts in the
State's 1997-98 fiscal year are projected at $2.462 billion, nearly $700 million
less than in the preceding year. This figure masks the significant increase in
estate tax collections during the first four months of the fiscal year, and
results largely from the dedication of the proceeds of the real estate transfer
tax to meet debt service obligations on the new Clean Water/Clean Air bond act
and from the full-year impact of the repeal of the real property gains tax. The
reduction also reflects a significant diminution in the amount of non-recurring
resources used in the 1997-98 State Financial Plan as compared to 1996-97.
Additionally, transfers from other funds to the General Fund consisting
primarily of tax revenues in excess of debt service requirements (particularly
the 1% sales tax used to support payments to the LGAC) are projected to be $1.48
billion, or $58 million more than in the 1996-97 fiscal year. All other
transfers are projected to increase by $237 million, primarily reflecting the
non-recurring transfer of $200 million for retroactive reimbursement to the
state of certain social services claims from the federal government
General Fund Disbursements
Disbursements from grants to local governments are projected to total
$23.63 billion in the 1997-98 State Financial Plan, an increase of $750 million
from 1996-97 levels. This category of the State Financial Plan includes $11.57
billion in aid for elementary, secondary, and higher education. This category of
the financial plan is affected by the reclassification of costs formerly
budgeted as City University local assistance that are now included in the
transfers for debt service category. This has the effect of decreasing
disbursements in this category by a projected $262 million, and raising
projected transfers by the same amount.
General Fund disbursements and transfers to capital, debt service and
other funds are projected at $34.60 billion, an increase of $1.7 billion (5
percent) from 1996-97 fiscal year levels. Over the last two years, spending
growth for most State agencies and programs has been negative or flat, producing
an overall decline in General Fund spending during that period. The 1997-98
adopted budget reflects negotiated increases for State employee salaries,
increased transfers for debt service, and other mandated increases, as well as
increased investments in school aid, higher education, mental health, and public
protection.
Grants to local governments is the largest category of General Fund
disbursements, and accounts for approximately 68 percent of overall General Fund
spending. Disbursements from this category are projected to total $23.63 billion
in the 1997-98 State Financial Plan, an increase of $750 million (3.3 percent)
from 1996-97 levels. This includes $11.57 billion in aid for elementary,
secondary, and higher education, accounting for 49 cents of every dollar spent
in this category. On a school year basis, school aid increases by $750 million,
including formula-based elementary and secondary education aid increases of $650
million. This category of the Financial Plan is affected by the reclassification
of costs formerly budgeted as City University local assistance that are now
included in the transfers for debt service category. This has the effect of
decreasing disbursements in this category by a projected $262 million, and
raising projected transfers by the same amount.
General Fund payments for Medicaid are projected to be $5.42 billion,
virtually unchanged from the level of $5.38 billion in 1996-97. This slow growth
is due primarily to continuation of cost containment measures enacted in 1995-96
and 1996-97, new reforms included in the 1997-98 adopted budget and forecasts
for slower underlying growth. Other social service spending is forecast to
increase by only $115 million to $3.15 billion in 1997-98. This slow growth
stems from continued State efforts to reduce welfare fraud, declining caseloads,
and changes produced by federal welfare legislation enacted in 1996.
Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing payments to local governments. Revenue sharing and other
general purpose aid is projected at $802 million, an increase of approximately
$54 million from 1996-97.
State operations spending reflects the administrative costs of operating
the State's agencies, including the prison system, mental hygiene institutions,
the State University system ("SUNY"), the Legislature, and the court system.
Personal service costs account for approximately 71 percent of this category.
Since January 1995, the State's workforce has been reduced by about 10 percent,
and is projected to reach a level of approximately 191,000 persons by the end of
the 1997-98 fiscal year. Collective bargaining agreements have been ratified by
employee bargaining units representing most State employees subject to such
agreements, and the 1997-98 projections reflect salary increases under these
agreements. For more information on the State's workforce, see the section
entitled "State Organization -- State Government Employment."
Disbursements for State operations are projected at $6.22 billion, an
increase of $441 million or 7.6 percent over the 1996-97 fiscal year. About $200
million of this increase results from approved collective bargaining agreements
and the impact of binding arbitration settlements. Other major increases include
growth in SUNY operations, increased mental hygiene costs resulting from
increased assessments on State-operated programs, public protection agency
spending, which is increasing to reflect the impact of sentencing reforms and
prison expansion, and higher spending by the Judiciary and Legislature.
General State charges primarily reflect the costs of providing fringe
benefits for State employees, including contributions to pension systems, the
employer's share of social security contributions, employer contributions toward
the cost of health insurance, and the costs of providing worker's compensation
and unemployment insurance benefits. This category also reflects certain fixed
costs such as payments in lieu of taxes, and payments of judgments against the
State or its public officers.
Disbursements for General State charges are projected to total $2.18
billion in the 1997-98 State Financial Plan virtually unchanged from 1996-97
levels. Pension costs are projected to grow moderately year over year, while
most of the projected growth in fixed costs is related to increased payments to
localities for State-owned lands. These increases are fully offset by continued
savings from health care and worker's compensation reforms, which account for
most of the cost containment savings in this area.
Debt service paid from the General Fund for 1997-98 reflects only the
$11 million interest cost of the State's commercial paper program. This is
approximately the same level as last year, reflecting projections for stable
interest rates for the balance of the fiscal year. Debt service on long-term
obligations is paid from Debt Service Funds as described below.
Finally, in addition to disbursements previously outlined, transfers to
other funds from the General Fund are made primarily to finance certain portions
of State capital project spending and debt service on long-term bonds, where
these costs are not funded from other sources. Transfers to other funds for debt
service are projected at $2.07 billion in 1997-98, an increase of $496 million.
This reflects the increased debt service impact of prior year bond sales (net of
refunding savings), the reclassification of City University debt service costs
that had been previously included in grants to local governments, and the
inclusion of costs associated with the 1996-97 bonding of previous pension
liabilities at lower interest rates. This action has the effect of adding $159
million in costs that would have otherwise been included with general State
charges.
Transfers for capital projects provide General Fund support for
projects not otherwise financed through bond proceeds, dedicated taxes and other
revenues and federal grants. These transfers are projected at $184 million for
1997-98, an increase of $46 million. The 1997-98 State Financial Plan also
includes $299 million for subsidies or transfers to other State funds, a
decrease of $30 million from last year's level.
Special Revenue Funds
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes. For
1997-98, the State Financial Plan projects disbursements of $28.22 billion from
these funds, an increase of $2.51 billion over 1996-97 levels. Disbursements
from federal funds, primarily the federal share of Medicaid and other social
services programs, are projected to total $21.19 billion in the 1997-98 fiscal
year. Remaining projected spending of $7.26 billion primarily reflects aid to
SUNY supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
funded from the proceeds of dedicated transportation taxes, and costs of a
variety of self-supporting programs which deliver services financed by user
fees.
Capital Projects Funds
Capital Projects Funds account for the financial resources used for the
acquisition, construction, or rehabilitation of major State capital facilities
and for capital assistance grants to certain local government or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax dollars transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Disbursements from the Capital Projects Funds in 1997-98 are projected
at $3.70 billion, an increase of $154 million over prior-year levels.
Debt Service Funds
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements.
Disbursements are estimated at $3.17 billion in the 1997-98 fiscal year, an
increase of $641 million from 1996-97. The transfer from the General Fund of
$2.07 billion is expected to finance 65 percent of these payments. The remaining
payments are expected to be financed by pledged revenues, including $2.03
billion in taxes and $601 million in dedicated fees, and other miscellaneous
receipts. After required impoundment for debt service, $3.77 billion is expected
to be transferred to the General Fund and other funds in support of State
operations. The largest transfer -- $1.86 billion -- is made to the Special
Revenue fund type in support of operations of the mental hygiene agencies.
Another $1.47 billion in excess sales taxes is expected to be transferred to the
General Funds following payment of projected debt service on LGAC bonds.
PRIOR FISCAL YEARS
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
last five fiscal years, the State recorded balanced budgets on a cash basis,
with positive fund balances in each year.
1996-97 Fiscal Year
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on
a cash basis, with a General Fund cash surplus as reported by the Division of
the Budget of approximately $1.4 billion. The cash surplus was derived primarily
from higher-than-expected revenues and lower-than-expected spending for social
services programs. The Governor in his Executive Budget applied $1.05 billion of
the cash surplus amount to finance the 1997-98 Financial Plan, and the
additional $373 million is available for use in financing the 1997-98 Financial
Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the Tax Stabilization Reserve Fund "TSRF," after a required
deposit of $15 million and an additional deposit of $65 million in 1996-97. The
TSRF can be used in the event of any future General Fund deficit, as provided
under the State Constitution and State Finance Law. In addition, $41 million
remains on deposit in the CRF. This fund assists the State in financing any
extraordinary litigation costs during the fiscal year. The remaining $75 million
reflects amounts on deposit in the Community Projects Fund. This fund was
created to fund certain legislative initiatives. The General Fund closing fund
balance does not include $1.86 billion in the tax refund reserve account, of
which $521 million was made available as a result of the Local Government
Assistance Corporation ("LGAC") financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the previous
fiscal year (excluding deposits into the tax refund reserve account). General
Fund disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
1995-96 Fiscal Year
The State ended its 1995-96 fiscal year on March 31, 1996 with a
General Fund cash surplus. The Division of the Budget reported that revenues
exceeded projections by $270 million, while spending for social service programs
was lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the "TSRF", and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million form 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the Contingency Reserve
Fund ("CRF"), and a $9 million deposit to the Revenue Accumulation Fund. The
closing fund balance includes $237 million on deposit in the TSRF, to be used in
the event of any future General Fund deficit as provided under the State
Constitution and State Finance Law. In addition, $41 million is on deposit in
the CRF. The CRF was established in State fiscal year 1993-94 to assist the
State in financing the costs of extraordinary litigation. The remaining $9
million reflects amounts on deposit in the Revenue Accumulation Fund. This fund
was created to hold certain tax receipts temporarily before their deposit to
other accounts. In addition, $678 million was on deposit in the tax refund
reserve account, of which $521 million was necessary to complete the
restructuring of the State's cash flow under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together with decreased social services spending, this
management review accounts for the bulk of the decline in spending.
1994-95 Fiscal Year
The State ended its 1994-95 fiscal year with the General Fund in
balance. The $241 million in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million to
the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9
percent from 1993-94 levels. General Fund disbursements totaled $33.40 billion
for the 1994-95 fiscal year, an increase of 4.7 percent form the previous fiscal
year. The increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF, offset by $188
million in spending reductions initiated in January 1995 to avert a potential
gap in the 1994-95 State Financial Plan. These actions included savings from a
hiring freeze, halting the development of certain services, and the suspension
of non-essential capital projects.
THE CITY OF NEW YORK
The fiscal health of the State of New York is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from New York. The City
has achieved balanced operating results for each of its fiscal years since 1981
as reported in accordance with GAAP.
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
(the "MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; the Office of the State Deputy Comptroller for the City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities; and a "Control Period" from 1975 to 1986 during which the City
was subject to certain statutorily-prescribed fiscal-monitoring arrangements.
Although the Control Board terminated the Control Period in 1986 when certain
statutory conditions were met, thus suspending certain Control Board powers, the
Control Board, MAC and OSDC continue to exercise various fiscal-monitoring
functions over the City, and upon the occurrence or "substantial likelihood and
imminence" of the occurrence of certain events, including, but not limited to, a
City operating budget deficit of more than $100 million, the Control Board is
required by law to reimpose a Control Period. Currently, the City and its
Covered Organizations (i.e., those which receive or may receive monies from the
City directly, indirectly or contingently) operate under a four-year financial
plan which the City prepares annually and periodically updates.
Implementation of the financial plan is also dependent upon the ability
of the City and certain Covered Organizations to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In order to help the City to avoid exceeding its State Constitutional general
debt limit, the state created the New York City Transitional Finance Authority
to finance a portion of the City's capital program. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. On June 2,
1997, an action was commenced seeking a declaratory judgment declaring the
legislation establishing the Transitional Finance Authority to be
unconstitutional. If such legislation were voided, projected contracts for City
capital projects would exceed the City's debt limit during fiscal year 1997-98.
Future developments concerning the City or its Covered Organizations, and public
discussion of such developments, as well as prevailing market conditions and
securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such Covered Organizations and may also affect the market
for their outstanding securities.
The staffs of the OSDC, the Control Board and the City Controller issue
periodic reports on the City's financial plans, as modified, analyzing forecasts
of revenues and expenditures, cash flow, and debt service requirements, as well
as compliance with the financial plan, as modified, by the City and its Covered
Organizations. According to recent staff reports, while economic recovery in New
York City has been slower than in other regions of the country, a surge in Wall
Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in City fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industries and the course of
the national economy. These reports have also indicated that recent City budgets
have been balanced in part through the use of non-recurring resources; that the
City's Financial Plan tends to rely on actions outside its direct control; that
the City has not yet brought its long-term expenditure growth in line with
recurring revenue growth; and that the City is therefore likely to continue to
face substantial gaps between forecast revenues and expenditures in future years
that must be closed with reduced expenditures and/or increased revenues. In
addition to these monitoring agencies, the Independent Budget Office ("IBO") has
been established pursuant to the City Charter to provide analysis to elected
officials and the public on relevant fiscal and budgetary issues affecting the
City.
OTHER LOCALITIES
In addition to the City, certain localities have experienced financial
problems leading to requests for additional State assistance during the last
several state fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1997-98
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, aid that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share the more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97 percent increase in
General Purpose State Aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1995, the total indebtedness of all
localities in the State other than New York City was approximately $19.0
billion. A small portion (approximately $102.3 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
State enabling legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in
some cases, eliminate, federal funding of some local programs, and, accordingly,
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts, and as otherwise
restricted by, their legislative authorization. As of September 30, 1995,
aggregate outstanding debt, including refunding bonds, of all State public
authorities was $75.4 billion, only a portion of which constitutes
state-supported or state-related debt.
The Metropolitan Transit Authority (the "MTA"), which receives the bulk
of the appropriated moneys from the State, oversees the operation of the City's
bus and subway system by its affiliates, the New York City Transit Authority and
Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). The MTA has depended and will continue to depend upon federal, state and
local government support to operate the transit system because fare revenues are
insufficient.
Since 1980, the State has enacted several taxes (including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county region served by the MTA and a
special one-quarter of one percent regional sales and use tax) that provide
additional revenues for mass transit purposes, including assistance to the MTA.
In addition, a one-quarter of one percent regional mortgages recording tax paid
on certain mortgages creates an additional source of recurring revenues for the
MTA. Further, in 1993, the State dedicated a portion of the State petroleum
business tax to assist the MTA. For the 1997-98 State fiscal year, total State
assistance to the MTA is estimated at approximately $1.2 billion.
State legislation accompanying the 1996-97 adopted State budget
authorized the MTA, Triborough Bridge and Tunnel Authority, and TA to issue an
aggregate of $6.5 billion in bonds to finance a portion of a new $12.17 billion
MTA capital plan for the 1995 through 1999 calendar years (the "1995-99 Capital
Program"), and in July 1997 the Capital Program Review Board approved the
1995-99 Capital Program. This plan supersedes the overlapping portion of the
MTA's 1992-96 Capital Program. This is the fourth five-year plan since the
Legislature authorized procedures for the adoption, approval and amendment of
capital programs designed to upgrade the performance of the MTA's transportation
systems and to supplement, replace and rehabilitate facilities and equipment.
The 1995-99 Capital Program assumes the issuance of an estimated $5.1 billion in
bonds under this $6.5 billion aggregate bonding authority. The remainder of the
plan is projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions
for future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. Should funding levels
fall below current projections, the MTA would have to revise its 1995-99 Capital
Program accordingly. If the Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional State assistance.
<PAGE>
REPUBLIC EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
General
and (888) 525-5757 (Toll Free)
Account Information
- --------------------------------------------------------------------------------
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Alliance Capital Management L.P. -
Investment Sub-Adviser
("Alliance" or a "Sub-Adviser")
Brinson Partners, Inc.
Investment Sub-Adviser
("Brinson" or a "Sub-Adviser")
BISYS Fund Services
Administrator, Distributor and Sponsor
("BISYS" or the "Distributor" or the "Sponsor")
STATEMENT OF ADDITIONAL INFORMATION
Republic Equity Fund (the "Fund") is a separate series (portfolio) of
the Republic Funds (the "Trust"), an open-end, management investment company
which currently consists of seven portfolios, each of which has different and
distinct investment objectives and policies. The Fund is described in this
Statement of Additional Information. Shares of the Fund are divided into three
separate classes, Class A (formerly designated Class C) (the "Investor Shares"),
Class B and Class Y (the "Adviser Shares").
The investment objective of the Fund is long-term growth of capital and
income without excessive fluctuations in market value. The Fund will normally
invest in equity securities of seasoned companies in sound financial condition
which are expected to show above-average price appreciation. There can be no
assurance that the investment objective of the Fund will be achieved.
Shares of the Fund are continuously offered for sale by the Distributor
at net asset value with no sales charge (i) directly to the public, (ii) to
customers of a financial institution, such as a federal or state-chartered bank,
trust company or savings and loan association that has entered into a
shareholder servicing agreement with the Trust (collectively, "Shareholder
Servicing Agents"), and (iii) to customers of a securities broker that has
entered into a dealer agreement with the Distributor.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS
FOR THE INVESTOR SHARES AND CLASS B SHARES, OR THE ADVISER SHARES OF THE FUND,
AS APPROPRIATE, EACH DATED JANUARY 2, 1998 (each a "Prospectus"). This Statement
of Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Trust at the address and
telephone number printed above.
January 2, 1998
TABLE OF CONTENTS
PAGE
----
INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS .............
Convertible Securities ....................................
Portfolio Securities Loans.................................
Rule 144A Securities.......................................
Repurchase Agreements......................................
Options on Securities......................................
Options on Securities Indices..............................
Futures Contracts..........................................
Options on Futures Contracts...............................
Forward Contracts..........................................
Portfolio Transactions.....................................
Risk Factors...............................................
Investment Restrictions ...................................
Percentage and Rating Restrictions ........................
PERFORMANCE INFORMATION ............................................
MANAGEMENT OF THE TRUST ............................................
Trustees and Officers .....................................
Compensation Table ........................................
Investment Manager ........................................
Investment Sub-Advisers ...................................
Administrator .............................................
Distribution Plans-Investor Shares and Class B Shares only
Administrative Services Plan ..............................
Shareholder Servicing Agents ..............................
Transfer Agent and Custodian ..............................
Expenses ..................................................
VALUATION OF SECURITIES, REDEMPTION IN KIND ........................
TAXATION ...........................................................
Federal Income Tax ........................................
Options ...................................................
Investment in Passive Foreign Investment Companies ........
Effect of Foreign Currencies ..............................
Disposition of Shares .....................................
OTHER INFORMATION ..................................................
Capitalization ............................................
Voting Rights .............................................
Independent Auditors ......................................
Counsel ...................................................
Registration Statement ....................................
FINANCIAL STATEMENTS ...............................................
APPENDIX ...........................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 2, 1998, of the Trust by
which shares of the Fund are offered. Unless the context otherwise requires,
terms defined in the Prospectus have the same meaning in this Statement of
Additional Information as in the Prospectus.
INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective, Risks and Policies" and the discussion of risks described under
"Additional Risk Factors and Policies" in the Prospectus.
The investment objective of the Fund is long-term growth of capital and
income without excessive fluctuations in market value. The Fund will normally
invest in equity securities of seasoned companies in sound financial condition
which are expected to show above-average price appreciation.
CONVERTIBLE SECURITIES
The Fund may buy securities that are convertible into common stock. The
following is a brief description of the various types of convertible securities
in which the Fund may invest.
Convertible bonds are issued with lower coupons than non-convertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to common
shares becomes more valuable.
Convertible preferred stocks are non-voting equity securities that pay
a fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
Warrants entitle the holder to buy the issuer's stock at a specific
price for a specific period of time. The price of a warrant tends to be more
volatile than, and does not always track, the price of its underlying stock.
Warrants are issued with expiration dates. Once a warrant expires, it has no
value in the market.
Rights represent a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public.
PORTFOLIO SECURITIES LOANS
The Fund may lend portfolio securities to registered broker-dealers.
These loans may not exceed 30% of the Fund's total assets. The Fund's loans of
securities will be collateralized by cash or marketable securities issued or
guaranteed by the U.S. Government or its agencies ("U.S. Government Securities")
or other permissible means. The cash or instruments collateralizing the Fund's
loans of securities will be maintained at all times in an amount at least equal
to the current market value of the loaned securities.
By lending portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in permissible investments, such as U.S.
Government Securities or obtaining yield in the form of interest paid by the
borrower when such U.S. Government Securities are used as collateral. The Fund
will comply with the following conditions whenever it loans securities: (i) the
Fund must receive at least 100% collateral from the borrower; (ii) the borrower
must increase the collateral whenever the market value of the securities loaned
rises above the level of the collateral; (iii) the Fund must be able to
terminate the loan at any time; (iv) the Fund must receive reasonable
compensation with respect to the loan, as well as any dividends, interest or
other distributions on the loaned securities; (iv) the Fund may pay only
reasonable fees in connection with the loaned securities (no fee will be paid to
affiliated persons of the Fund); and (vi) voting rights on the loaned securities
may pass to the borrower except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Trust's Board of Trustees
must terminate the loan and regain the right to vote the securities.
RULE 144A SECURITIES
The Fund may invest in securities qualifying for resale to "qualified
institutional buyers" under Securities and Exchange Commission ("SEC") Rule 144A
that are determined by the Board, or by a Sub-Adviser pursuant to the Board's
delegation, to be liquid securities. The Board will review quarterly the
liquidity of the investments the Fund makes in such securities.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund 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 a Sub-Adviser has
determined to be of comparable creditworthiness. The securities that the Fund
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 Fund, or the purchase and
repurchase prices may be the same, with interest at a standard rate due to the
Fund 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 Fund will have the right to liquidate the securities. If at
the time the Fund is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after a Sub-Adviser has determined that
the seller is creditworthy, and the Sub-Adviser monitor that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the value
of the securities (which are marked to market every business day) is required to
be greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
OPTIONS ON SECURITIES
The Fund may write (sell) covered call and put options on securities
and purchase call and put options. The Fund may write options for the purpose of
attempting to increase its return and for hedging purposes. In particular, if
the Fund writes an option which expires unexercised or is closed out by the Fund
at a profit, the Fund retains the premium paid for the option less related
transaction costs, which increases its gross income and offsets in part the
reduced value of the portfolio security in connection with which the option is
written, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the security underlying the option moves
adversely to the Fund's position, the option may be exercised and the Fund will
then be required to purchase or sell the security at a disadvantageous price,
which might only partially be offset by the amount of the premium.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a call
option against that security. The exercise price of the call option the Fund
determines to write depends upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the
same security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call options. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the Fund
to sell the securities underlying such options at the exercise price, or to
close out the options at a profit. The Fund will purchase call options to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. If such an increase occurs, the call option will
permit the Fund to purchase the securities underlying such option at the
exercise price or to close out the option at a profit. The premium paid for a
call or put option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises or declines sufficiently, the option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the option and
related transaction costs.
The staff of the SEC has taken the position that purchased
over-the-counter options and certain assets used to cover written
over-the-counter options are illiquid and, therefore, together with other
illiquid securities, cannot exceed a certain percentage of the Fund's assets
(the "SEC illiquidity ceiling"). The Sub-Advisers intend to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling imposed
by the SEC staff. The Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity ceiling.
OPTIONS ON SECURITIES INDICES
The Fund may write (sell) covered call and put options and purchase
call and put options on securities indices. The Fund may cover call options on
securities indices by owning securities whose price changes, in the opinion of a
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 Fund covers a call option on a securities
index through ownership of securities, such securities may not match the
composition of the index and, in that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. The Fund may also cover call options on securities indices
by holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. The Fund may cover put
options on securities indices by maintaining cash or cash equivalents with a
value equal to the exercise price in a segregated account with its custodian, or
else by holding a put on the same security and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash or cash equivalents in a segregated account with its custodian. Put and
call options on securities indices may also be covered in such other manner as
may be in accordance with the rules of the exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations.
The Fund will receive a premium from writing a put or call option on a
securities index, which increases the Fund's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of an
index on which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of any
unrealized appreciation in the Fund's investment. By writing a put option, the
Fund assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by the Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options on securities indices to hedge
their investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of securities
it owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option does
not increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely depend
on the accuracy of the correlation between the changes in value of the index and
the changes in value of the Fund's security holdings.
The purchase of call options on securities indices may be used by the
Fund to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk of
losing all or a portion of the premium paid if the value of the index does not
rise. The purchase of call options on securities indices when the Fund is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Fund owns.
FUTURES CONTRACTS
The Fund may enter into futures contracts for the purchase or sale for
future delivery of securities or foreign currencies or contracts based on
indices of securities as such instruments become available for trading. This
investment technique is designed to hedge (i.e., to protect) against anticipated
future changes in interest or exchange rates which otherwise might adversely
affect the value of the Fund's portfolio securities or adversely affect the
prices of long-term bonds or other securities which the Fund intends to purchase
at a later date. Futures contracts may also be entered into for non-hedging
purposes to the extent permitted by applicable law. A "sale" of a futures
contract means a contractual obligation to deliver the securities or foreign
currency called for by the contract at a fixed price at a specified time in the
future. A "purchase" of a futures contract means a contractual obligation to
acquire the securities or foreign currency at a fixed price at a specified time
in the future.
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 Fund will incur
brokerage fees when it purchases and sells futures contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The futures
contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund 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 Fund from fluctuations in interest rates without actually buying or
selling long-term debt securities. For example, if the Fund owned long-term
bonds and interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. If interest rates did
increase, the value of the debt securities in the Fund would decline, but the
value of the Fund's futures contracts should increase at approximately the same
rate, thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have. The Fund could accomplish similar results by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase or by buying bonds with long maturities
and selling bonds with short maturities when interest rates are expected to
decline. However, since the futures market is more liquid than the cash market,
the use of futures contracts as an investment technique allows the Fund to
maintain a defensive position without having to sell its portfolio securities.
Transactions entered into for non-hedging purposes include greater risk,
including the risk of losses which are not offset by gains on other portfolio
assets.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of futures contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of futures contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such futures contracts will consist of liquid
instruments from the portfolio of the Fund in an amount equal to the difference
between the fluctuating market value of such futures contracts and the aggregate
value of the initial and variation margin payments made by the Portfolio with
respect to such futures contracts, thereby assuring that the transactions are
unleveraged.
Futures contracts on foreign currencies may be used in a similar
manner, in order to protect against declines in the dollar value of portfolio
securities denominated in foreign currencies, or increases in the dollar value
of securities to be acquired.
A futures contract on an index of securities provides for the making
and acceptance of a cash settlement based on changes in value of the underlying
index. The Fund may enter into stock index futures contracts in order to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices and for non-hedging purposes to the extent permitted by applicable
law. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or in part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or in whole, offset increases in the cost of
securities that Fund intends to purchase. As such acquisitions are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon the termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a related
purchase of securities. Futures contracts on other securities indices may be
used in a similar manner in order to protect the portfolio from broad
fluctuations in securities prices and for non-hedging purposes to the extent
permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS
The Fund may write and purchase options to buy or sell futures
contracts. The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or currency underlying
the futures contract. If the futures price at expiration of the option is below
the exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the security or currency underlying the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, the Fund 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 Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Fund's losses from existing options
on futures contracts may to some extent be reduced or increased by changes in
the value of portfolio securities.
The Fund may purchase options on futures contracts for hedging purposes
as an alternative to purchasing or selling the underlying futures contracts, or
for non-hedging purposes to the extent permitted by applicable law. For example,
where a decrease in the value of portfolio securities is anticipated as a result
of a projected market-wide decline, a rise in interest rates or a decline in the
dollar value of foreign currencies in which portfolio securities are
denominated, the Fund may, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease in portfolio value occurs, it
may be offset, in whole or part, by a profit on the option. Conversely, where it
is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call options on futures
contracts, rather than purchasing the underlying futures contracts. As in the
case of Options, the writing of options on futures contracts may require the
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 Fund to forego all or a portion of such benefits up to
the amount of the premium paid and related transaction costs. Transactions
entered into for non-hedging purposes include greater risk, including the risk
of losses which are not offset by gains on other portfolio assets.
FORWARD CONTRACTS
The Fund 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 Fund may enter into Forward
Contracts for hedging purposes as well as for non-hedging purposes. The Fund 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 Fund may be
required to forego the benefits of advantageous changes in exchange rates. The
Fund 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 a 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 Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative.
The Fund 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 Fund satisfies this requirement through segregation of assets, it will
maintain, in a segregated account, cash, cash equivalents or high grade debt
securities, which will be marked to market on a daily basis, in an amount equal
to the value of its commitments under Forward Contracts.
PORTFOLIO TRANSACTIONS
The Sub-Advisers are primarily responsible for portfolio decisions and
the placing of portfolio transactions. The Trust has no obligation to deal with
any dealer or group of dealers in the execution of transactions in portfolio
securities for the Fund. In placing orders for the Fund, the primary
consideration is prompt execution of orders in an effective manner at the most
favorable price, although the Fund does not necessarily pay the lowest spread or
commission available. Other factors taken into consideration are the dealer's
general execution and operational facilities, the type of transaction involved
and other factors such as the dealer's risk in positioning the securities. To
the extent consistent with applicable legal requirements, the Sub-Adviser may
place orders for the purchase and sale of Fund investments for the Fund with a
broker-dealer affiliate of the Manager or a Sub-Adviser.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), a Sub-Adviser may cause the Fund to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to the
Sub-Adviser an amount of commission for effecting a securities transaction for
the Fund in excess of the commission which another broker-dealer would have
charged for effecting that transaction. For the fiscal years ended October 31,
1996 and October 31, 1997, the Fund paid aggregate brokerage commissions equal
to $45,987 and $108,310, respectively, a11 of which for the fiscal year ended
October 31, 1996 was paid to broker-dealers that provided "brokerage and
research services" to the Fund's former sub-adviser and none of which for the
fiscal year ended October 31, 1997 was paid to broker dealers that provided
"brokerage and research services" to the Fund's current sub-advisers. For the
period August 1, 1995 to October 31, 1995, no brokerage commissions were paid by
the Fund.
Investment decisions for the Fund and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought for certain clients even though it could have
been sold for other clients at the same time, and a particular security may be
sold for certain clients even though it could have been bought for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. In some
instances, one client may sell a particular security to another client. Two or
more clients may simultaneously purchase or sell the same security, in which
event each day's transactions in that security are, insofar as practicable,
averaged as to price and allocated between such clients in a manner which in a
Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. In addition, when purchases or sales of the
same security for the Fund and for other clients of a Sub-Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantage available to large denomination purchases or sales.
There may be circumstances when purchases or sales of portfolio securities for
one or more clients will have an adverse effect on other clients in terms of the
price paid or received or of the size of the position obtainable.
RISK FACTORS
As stated in the Prospectus, the Fund may invest in lower rated,
high-yield, "junk" bonds. In general, the market for lower rated, high-yield
bonds is more limited than the market for higher rated bonds, and because their
markets may be thinner and less active, the market prices of lower rated,
high-yield bonds may fluctuate more than the prices of higher rated bonds,
particularly in times of market stress. In addition, while the market for
high-yield, corporate debt securities has been in existence for many years, the
market in recent years experienced a dramatic increase in the large-scale use of
such securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high-yield bond market, especially
during periods of economic recession. Other risks which may be associated with
lower rated, high-yield bonds include their relative insensitivity to
interest-rate changes; the exercise of any of their redemption or call
provisions in a declining market which may result in their replacement by lower
yielding bonds; and legislation, from time to time, which may adversely affect
their market. Since the risk of default is higher among lower rated, high-yield
bonds, a Sub-Adviser's research and analyses are important ingredients in the
selection of lower rated, high-yield bonds. Through portfolio diversification,
good credit analysis and attention to current developments and trends in
interest rates and economic conditions, investment risk can be reduced, although
there is no assurance that losses will not occur. The Fund does not have any
minimum rating criteria applicable to the fixed-income securities in which it
invests. A description of the ratings used herein and in the Prospectus is set
forth in the Appendix to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Trust (with respect to the Fund) has adopted the following
investment restrictions which may not be changed without approval by holders of
a "majority of the outstanding voting securities" of the Fund, which as used in
this Statement of Additional Information means the vote of the lesser of (i) 67%
or more of the outstanding "voting securities" of the Fund present at a meeting,
if the holders of more than 50% of the outstanding "voting securities" are
present or represented by proxy, or (ii) more than 50% of the Fund's outstanding
"voting securities." The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940 ("1940 Act").
As a matter of fundamental policy, the Fund may not (except that no
investment restriction of the Fund shall prevent the Fund from investing all of
its assets (other than assets which are not "investment securities" as defined
in the 1940 Act) in an open-end investment company with substantially the same
investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than
real estate limited partnerships, and may purchase and sell
marketable securities which are secured by interests in real
estate;
(3) make loans except for the lending of portfolio securities
pursuant to guidelines established by the Board of Trustees and
except as otherwise in accordance with the Fund's investment
objective and policies;
(4) borrow money, except from a bank as a temporary measure to
satisfy redemption requests or for extraordinary or emergency
purposes, provided that the Fund maintains asset coverage of at
least 300% for all such borrowings;
(5) underwrite the securities of other issuers (except to the extent
that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 (the "1933 Act") in the
disposition of restricted securities);
(6) acquire any securities of companies within one industry, if as a
result of such acquisition, more than 25% of the value of the
Fund's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, when the
Fund adopts a temporary defensive position;
(7) issue senior securities, except as permitted under the 1940 Act;
(8) with respect to 75% of its assets, the Fund will not purchase
securities of any issuer if, as a result, more than 5% of the
Fund's total assets taken at market value would be invested in
the securities of any single issuer; and
(9) with respect to 75% of its assets, the Fund will not purchase a
security if, as a result, the Fund would hold more than 10% of
the outstanding voting securities of any issuer.
The Fund is also subject to the following restrictions which may be
changed by the Board of Trustees without shareholder approval. As a matter of
non-fundamental policy, the Fund will not:
(1) borrow money, except that the Fund may borrow for temporary or
emergency purposes up to 10% of its net assets; provided,
however, that the Fund may not purchase any security while
outstanding borrowings exceed 5% of net assets;
(2) sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options and futures
contracts are not deemed to constitute short sales of securities;
(3) purchase warrants, valued at the lower of cost or market, in
excess of 10% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants that are not listed on the New York or
American Stock Exchanges or an exchange with comparable listing
requirements. Warrants attached to securities are not subject to
this limitation;
(4) purchase securities on margin, except for use of short-term
credit as may be necessary for the clearance of purchases and
sales of securities, but it may make margin deposits in
connection with transactions in options, futures, and options on
futures;
(5) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are illiquid
or not readily marketable (excluding Rule 144A securities deemed
by the Board of Trustees of the Trust to be liquid);
(6) invest more than 15% of the Fund's total assets (taken at the
greater of cost or market value) in (a) securities (including
Rule 144A securities) that are restricted as to resale under the
1933 Act, and (b) securities that are issued by issuers which
(including predecessors) have been in operation less than three
years (other than U.S. Government securities), provided, however,
that no more than 5% of the Fund's total assets are invested in
securities issued by issuers which (including predecessors) have
been in operation less than three years;
(7) invest more than 10% of the Fund's total assets (taken at the
greater of cost or market value) in securities (excluding Rule
144A securities) that are restricted as to resale under the 1933
Act;
(8) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund to hold more than 10% of any class
of securities of such issuer, for which purposes all indebtedness
of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class, except that
futures or option contracts shall not be subject to this
restriction;
(9) invest for the purpose of exercising control over management of
any company;
(10) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets
or consolidations and except as may otherwise be permitted by the
1940 Act; provided, however, that the Fund shall not invest in
the shares of any open-end investment company unless (a) the
Sub-Adviser waives any investment advisory fees with respect to
such assets, and (b) the Fund pays no sales charge in connection
with the investment;
(11) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
government or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous
operations;
(12) write or acquire options or interests in oil, gas or other
mineral explorations or development programs or leases; and
(13) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call
is within the investment policies of the Fund and the option is
issued by the Options Clearing Corporation, except for put and
call options issued by non-U.S. entities or listed on non-U.S.
securities or commodities exchanges; (b) the aggregate value of
the obligations underlying the put determined as of the date the
options are sold shall not exceed 50% of the Fund's net assets;
(c) the securities subject to the exercise of the call written by
the Fund must be owned by the Fund at the time the call is sold
and must continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing call,
and such purchase has been confirmed, thereby extinguishing the
Fund's obligation to deliver securities pursuant to the call it
has sold; and (d) at the time a put is written, the Fund
establishes a segregated account with its custodian consisting of
cash or short-term U.S. Government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the
put (this account must be maintained until the put is exercised,
has expired, or the Fund has purchased a closing put, which is a
put of the same series as the one previously written); and
(14) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options
on financial futures unless such options are written by other
persons and: (a) the options or futures are offered through the
facilities of a national securities association or are listed on
a national securities or commodities exchange, except for put and
call options issued by non-U.S. entities or listed on non-U.S.
securities or commodities exchanges; (b) the aggregate premiums
paid on all such options which are held at any time do not exceed
20% of the Fund's total net assets; and (c) the aggregate margin
deposits required on all such futures or options thereon held at
any time do not exceed 5% of the Fund's total assets.
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 a Sub-Adviser will consider such
change in its determination of whether to hold the security.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and total return
for the Fund, both computed in accordance with formulas prescribed by the SEC,
in advertisements or reports to shareholders or prospective investors.
Quotations of 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 accompanied by standardized total return information.
The total return of the Investor (Class A) Shares of the Fund for the year ended
October 31, 1997 was 28.92% without the sales charge, and for the period from
August 1, 1995 (commencement of operations) to October 31, 1997, total return
for the Investor Shares equaled 21.89% without the sales charge. Had the sales
charge been in effect during the relevant periods, the annual total return for
the year ended October 31, 1997 would have been 24.41% and the average annual
total return for the period from August 1, 1995 to October 31, 1997 would have
been 20.14%. The total return of the Adviser Shares of the Fund for the one-year
period ended October 31, 1997 was 29.28%, and the average annual total return of
the Adviser Shares of the Fund for the period from July 1, 1996 (date of initial
offering) to October 31, 1997 was 24.98%. Class B Shares were not offered prior
to January 2, 1998.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Standard & Poor's Stock Index. Unmanaged indices
(i.e., other than Lipper) generally do not reflect deductions for administrative
and management costs and expenses. Comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information should be considered in light of the Fund's investment
objective and policies, characteristics and quality of the Fund, and the market
conditions during the given time period, and should not be considered to be
representative of what may be achieved in the future.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
officers are "interested persons" (as defined in the 1940 Act) of the 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.
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 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement Trustees
- ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Frederick C. Chen $2,900 none none $8,600
Alan S. Parsow $2,600 none none $7,600
Larry M. Robbins $2,600 none none $7,600
Michael Seely $2,600 none none $7,600
* The Fund Complex includes the Trust, Republic Advisor Funds Trust, and Republic Portfolios.
</TABLE>
The compensation table above reflects the fees received by the Trustees
for the year ended October 31, 1997. 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 December 8, 1997, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of the Fund. As of the same
date, the following shareholders of record owned 5% or more of the outstanding
Shares of the Fund (the Trust has no knowledge of the beneficial ownership of
such Shares): Kinco & Co. c/o RNB Securities Services, One Hanson Place,
Brooklyn, New York, 11243 - 89.28% (Adviser Shares) and 27.92% (Investor
Shares); BHC Securities, Inc., One Commerce Square, 2005 Market Square,
Philadelphia, Pennsylvania 19103 - 10.29% (Adviser Shares) and 59.30% (Investor
Shares), Republic New York Securities Corp. (as Custodian), 452 Fifth Avenue,
Tower 14, New York, New York 10018 - 8.85% (Investor Shares); and Sara Leiter, 4
Dogwood Lane, Lawrence, NY 11559 - 8.61% (Investor Shares). Shareholders who own
more than 25% of the outstanding voting securities of the Fund (or a class
thereof) may be able to control the outcome of any matter submitted for the
approval of the shareholders of the Fund (or class thereof).
The Trust's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their officers with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT MANAGER
Republic is the investment manager to the Fund pursuant to an
investment management agreement (the "Investment Management Contract") with the
Trust. For its services, the Manager is paid a fee by the Fund, computed daily
and based on the Fund's average daily net assets, equal on the annual basis to
0.175% of net assets. For the period from August 1, 1995 (commencement of
operations) to October 31, 1995 and for the fiscal years ended October 31, 1996
and October 31, 1997, investment management fees aggregated $6,118, $54,829 and
$94,389, respectively. The entire amount was waived for the period ended October
3, 1995 and the fiscal year ended October 31, 1996 and $30,089 was waived for
the fiscal year ended October 31, 1997.
The Investment Management Contract will continue in effect with respect
to the Fund, provided such continuance is approved annually (i) by the holders
of a majority of the outstanding voting securities of the Fund or by the Trust's
Board of Trustees, and (ii) by a majority of the Trustees of the Trust who are
not parties to the Investment Management Contract or "interested persons" (as
defined in the 1940 Act) of any such party. The Investment Management Contract
may be terminated with respect to the Fund without penalty by either party on 60
days' written notice and will terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Fund.
Republic complies with applicable laws, regulations, and rulings of the
U.S. Comptroller of the Currency relating to fiduciary powers of national banks.
These regulations provide, in general, that assets managed by a national bank as
fiduciary shall not be invested in stock or obligations of, or property acquired
from, the bank, its affiliates or their directors, officers or employees or
other persons with substantial connections with the bank. The regulations
further provide that fiduciary assets shall not be sold or transferred, by loan
or otherwise, to the bank or persons connected with the bank as described above.
Republic, in accordance with federal banking laws, may not purchase for its own
account securities of any investment company the investment adviser of which it
controls, extend credit to any such investment company, or accept the securities
of any such investment company as collateral for a loan to purchase such
securities. Moreover, Republic, its officers and employees do not express any
opinion with respect to the advisability of any purchase of such securities.
The investment management services of Republic to the Fund are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment management and advisory services to others.
INVESTMENT SUB-ADVISERS
Alliance and Brinson, as the Fund's Sub-Advisers, are responsible for
the investment management of the Fund's assets, including making investment
decisions and placing orders for the purchase and sale of securities for the
Fund directly with the issuers or with brokers or dealers selected by the
Sub-Advisers in their discretion. See "Portfolio Transactions." Each Sub-Adviser
also furnishes to the Board of Trustees of the Trust, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund. Prior to January 1, 1997, a different
investment management firm served as the Fund's sub-adviser.
For its services, each Sub-Adviser receives from the Fund a fee,
computed daily and based on the Fund's average daily net assets allocated to the
Sub-Adviser for management, at the annual rate of 0.325% of net assets up to $50
million, 0.25% of net assets over $50 million up to $100 million, 0.20% of net
assets over $100 million up to $200 million, and 0.15% of net assets in excess
of $200 million. For the period from August 1, 1995 (commencement of operations)
to October 31, 1995, sub-advisory fees aggregated $11,363, of which the entire
amount was reimbursed, and for the fiscal years ended October 31, 1996 and
October 31, 1997, sub-advisory fees aggregated $101,825 and $171,691,
respectively.
Alliance is a Delaware limited partnership. Alliance Capital Management
Corporation ("ACMC") is the general partner of Alliance and conducts no other
active business. Units representing assignment of beneficial ownership of
limited partnership interests of Alliance are publicly traded on the New York
Stock Exchange. As of September 30, 1997, The Equitable Life Assurance Society
of the United States ("Equitable"), ACMC, Inc. and Equitable Capital Management
Corporation ("ECMC") were the beneficial owners of approximately 57% of the
outstanding units of Alliance. ACMC, ECMC, and ACMC, Inc. are wholly owned
subsidiaries of Equitable. Equitable, a New York life insurance company, is a
wholly owned subsidiary of The Equitable Companies Incorporated, a Delaware
corporation ("ECI"), whose shares are publicly traded on the New York Stock
Exchange. As of March 1, 1996, AXA, a French insurance holding company, owned
59% of the issued and outstanding shares of the common stock of ECI.
Brinson is an indirect wholly owned subsidiary of Swiss Bank
Corporation ("Swiss Bank"). Swiss Bank, with headquarters in Basel, Switzerland,
is an internationally diversified organization with operations in many aspects
of the financial services industry. On December 8, 1997, Swiss Bank announced
its intention to merge with Union Bank of Switzerland. Subject to shareholder
approval, the merger is scheduled to occur during the second quarter of 1998.
The investment advisory services of each Sub-Adviser to the Fund are
not exclusive under the terms of its Subadvisory Agreement with Republic. Each
Sub-Adviser is free to and does render investment advisory services to others.
ADMINISTRATOR
The 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. The Administration
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement also provides that neither BISYS nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the administration or management of the Trust, 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 period from August 1, 1995 (commencement of operations) to
October 31, 1995, the Fund accrued administration fees of $6,992 to its former
administrator, of which the entire amount was waived. For the year ended October
31, 1996, the Fund accrued administration fees equal to $62,662 of which $43,028
was waived. For the year ended October 31, 1997, the Fund accrued administration
fees equal to $53,385, none of which was waived.
DISTRIBUTION PLANS - INVESTOR SHARES AND CLASS B SHARES ONLY
Two Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Investor Shares (the "Class A Plan")
and the Class B Shares (the "Class B Plan"). The Distribution Plans provide that
they may not be amended to increase materially the costs which either the
Investor Shares or the Class B Share may bear pursuant to the Class A Plan or
Class B Plan without approval by shareholders of the Investor Shares or Class B
Shares, respectively, and that any material amendments of the Distribution Plans
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 interests in the operation of the Distribution
Plans 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 Plans have been approved, and are 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 Plans. In adopting the
Class A Plan and Class B Plan, the Trustees considered alternative methods to
distribute Investor Shares and Class B Shares and to reduce each class's per
share expense ratio and concluded that there was a reasonable likelihood that
each Distribution Plan will benefit its respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Investor
Shares or the Class B Shares at any time by a vote of a majority of the
Qualified Trustees or by vote of the holders of a majority of that class.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Investor Shares, the Class B Shares and the Adviser Shares,
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 Investor Shares, the Class B Shares or the Adviser Shares by a
majority vote of shareholders of that class. The Administrative Services Plan
may not be amended to increase materially the amount of permitted expenses
thereunder with respect to the Investor Shares, the Class B Shares or the
Adviser Shares without the approval of a majority of shareholders of that
class, and may not be materially amended in any case without a vote of the
majority of both the Trustees and the Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Investor Shares and Class B Shares, respectively, see "Management of the
Trust - Shareholder Servicing Agents" in the Prospectus describing the Investor
Shares and the Class B Shares.
TRANSFER AGENT AND CUSTODIAN
The Board of Trustees of the Trust has approved a Custodian Agreement
and a Transfer Agency Agreement between the Trust and Investors Bank & Trust
Company ("IBT") pursuant to which IBT will provide custodial services with
respect to foreign assets, fund accounting services, transfer agency services
with respect to Investor Shares and Adviser Shares, dividend disbursing services
and shareholder servicing services to the Trust and the Fund. The principal
business address of IBT is 200 Clarendon Street, Boston, Massachusetts 02116.
The Board of Trustees has also approved a Custodian Agreement between the Trust
and Republic pursuant to which Republic will provide custodial services, with
respect to domestic assets to the Trust and the Fund and a Transfer Agency
Agreement between the Trust and BISYS pursuant to which BISYS will provide
transfer agency services with respect to the Class B Shares to the Fund.
EXPENSES
Except for the expenses paid by the Manager and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Investor Shares or the Class B Shares must include payments made pursuant to
their respective Distribution Plan and the Administrative Services Plan. In the
event a particular expense is not reasonably allocable by class or to a
particular class, it shall be treated as a Fund expense or a Trust expense.
Trust expenses directly related to the Fund are charged to the Fund; other
expenses are allocated proportionally among all the Funds of the Trust in
relation to the net asset value of the Funds.
VALUATION OF SECURITIES; REDEMPTION IN KIND
The net asset value of each share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Trust. Such procedures include the use of independent pricing
services, which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. All portfolio securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market value.
The accounting records of the Fund are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and forward
contracts denominated in foreign currencies are translated into U.S. dollars at
the prevailing exchange rates at the end of the period. Purchases and sales of
securities, income receipts, and expense payments are translated at the exchange
rate prevailing on the respective dates of such transactions. Reported net
realized gains and losses on foreign currency transactions represent net gains
and losses from sales and maturities of forward currency contracts, disposition
of foreign currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
Type of security involved, financial statements,
cost at date of purchase, size of holding,
discount from market value of unrestricted
securities of the same class at the time of
purchase, special reports prepared by analysts,
information as to any transactions or offers with
respect to the security, existence of merger
proposals or tender offers affecting the security,
price and extent of public trading in similar
securities of the issuer or comparable companies,
and other relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the
Sub-Advisers will value such securities based upon all relevant factors as
outlined in FRR 1.
Subject to the Trust's compliance with applicable regulations, the
Trust has reserved the right to pay the redemption or repurchase price of shares
of the Fund, either totally or partially, by a distribution in kind of the
Fund's portfolio securities (instead of cash). The securities so distributed
would be valued at the same amount as that assigned to them in calculating the
net asset value for the shares being sold. If a shareholder received a
distribution in kind, the shareholder could incur brokerage or other charges in
converting the securities to cash.
TAXATION
FEDERAL INCOME TAX
The following is a summary of certain U.S. federal income tax issues
concerning the Fund and its shareholders. The Fund may also be subject to state,
local, foreign or other taxes not discussed below. This discussion does not
purport to be complete or to address all tax issues relevant to each
shareholder. Prospective investors should consult their own tax advisors with
regard to the federal, state, foreign and other tax consequences to them of the
purchase, ownership or disposition of Fund shares. This discussion is based upon
present provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder, and judicial and administrative
authorities, all of which are subject to change, which change may be
retroactive.
The Fund intends to qualify annually as a separate "regulated
investment company" (a "RIC") under the Code. In order to qualify, at least 90%
of the Fund's investment company taxable income (which includes, among other
items, interest, dividends and the excess of net short-term capital gains over
net long-term capital losses) must be distributed to Fund shareholders, and the
Fund must meet certain diversification of assets, source of income, and other
requirements. If the Fund does not so qualify, it will be taxed as an ordinary
corporation.
Amounts not distributed by the Fund on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, for each calendar year an
amount must be distributed that is equal to the sum of (a) at least 98% of the
Fund's ordinary income (excluding any capital gains or losses) for the calendar
year, (b) at least 98% of the Fund's capital gain net income for the 12-month
period ending, as a general rule, on October 31 of the calendar year, and (c)
all such ordinary income and capital gains for previous years that were not
distributed during such years.
Distributions by the Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described in the Prospectus, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (1)
the date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (2) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Some of the debt securities that may be acquired by the Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
Generally, the gain realized on the disposition of any debt security acquired by
the Fund will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Gain" or "28% Gain," depending upon the Fund's holding period for
the assets sold. "20% Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%; "28% Gains"
arise from sales of assets held by the Fund for more than one year but no more
than 18 months and are subject to a maximum tax rate of 28%. Net capital gains
from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
OPTIONS
Some of the options entered into by the Fund may be "Section 1256
contracts." Section 1256 contracts held by the Fund at the end of its taxable
year (and, for purposes of the 4% excise tax, on certain other dates as
prescribed under the Code) are "marked-to-market" with unrealized gains or
losses being treated as though they were realized. Any gains or losses,
including "marked-to-market" gains or losses, on Section 1256 contracts are
generally treated as 60% long-term and 40% short-term capital gains or losses
("60/40"), although all foreign currency gains and losses from such contracts
may be treated as ordinary in character absent a special election.
Generally, certain options transactions undertaken by the Fund may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options to the Fund
are not entirely clear. The transactions may increase the amount of short-term
capital gain realized by the Fund, which generally would increase the amount of
dividends. Short-term gain is taxed as ordinary income when distributed to Fund
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Fund shareholders, and which will be taxed to Fund shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such transactions.
Recently enacted rules may affect the timing and character of gain if
the Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares held by the Fund. Under an election that currently is
available in some circumstances, the Fund generally would be required to include
in its gross income its share of the earnings of a PFIC on a current basis,
regardless of whether distributions are received from the PFIC in a given year.
If this election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. Alternatively, another
election would involve marking-to-market the Fund's PFIC shares at the end of
each taxable year with the result that unrealized gains are treated as though
they were realized and reported as ordinary income. Any mark-to-market losses
and loss from an actual disposition of PFIC shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in income
in prior years.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
EFFECT OF FOREIGN CURRENCIES
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to shareholders as ordinary income.
DISPOSITION OF SHARES
Upon the sale or exchange of shares of the Fund, a shareholder
generally will realize a taxable gain or loss depending upon his basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum tax rate of 28% if the shaeholder's holding
period for the shares is more than one year but less than 18 months. Gain from
the disposition of shares held not more than one year will be taxed as
short-term capital gain. 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.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an aditional tax and amounts so withheld generally may
be applied by affected shareholders as a credit against their federal income tax
liability.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994, the name of the Trust was
"FundTrust."
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) and classes of shares within each series at any time
in the future. Establishment and offering of additional classes or series will
not alter the rights of the Fund's shareholders. When issued, shares are fully
paid, nonassessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In liquidation of the Fund, each
shareholder is entitled to receive his pro rata share of the net assets of the
Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees has been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Funds of the Trust for the fiscal year ending
October 31, 1998. KPMG Peat Marwick LLP will audit the Fund's annual financial
statements, prepare the Fund's income tax returns, and assist in the filings
with the Securities and Exchange Commission. KPMG Peat Marwick LLP's address is
99 High Street, Boston, Massachusetts 02110.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares of the Fund
offered by the Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the SEC under the 1933 Act with respect to shares of the Fund, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund's current audited financial statements dated October 31, 1997
are hereby incorporated herein by reference from the Annual Report of the Fund
dated October 31, 1997 as filed with the SEC. A copy of such report will be
provided without charge to each person receiving this Statement of Additional
Information.
APPENDIX
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in a small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
Plus(+)
or
Minus(-) The ratings from "AA" to "BB" may be modified by the addition
of a plus or minus sign to show relative standing within the
major rating categories.
Commercial Paper, including Tax Exempt
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category
are further refined with the designations 1, 2, and 3 to
indicate the relative degree of safety.
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
MOODY'S
Corporate and Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged". Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long term risk appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Note Moody's applies numerical modifiers, 1,2, and 3 in each
generic rating classification from Aa through Bb in its
corporate bond rating system. The modifier 1 indicates that
the security rates in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category. Those municipal bonds within
the Aa, A, Baa, and Ba categories that Moody's believes
possess the strongest credit attributes within those
categories are designated by the symbols Aa1, A1, Baa1, and
Ba1.
Commercial Paper
Prime-1 Issuers rated P-1 (or supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
Not
Prime Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
FITCH INVESTORS SERVICE
Corporate Bond Ratings
AAA Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market
fluctuation other than through changes in the money rate. The
factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public
utility fields, though some industrial obligations have this
rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements
with such stability of applicable earnings that safety is
beyond reasonable question whatever changes occur in
conditions. Other features may enter in, such as a wide margin
of protection through collateral security or direct lien on
specific property as in the case of high class equipment
certificates or bonds that are first mortgages on valuable
real estate. Sinking funds or voluntary reduction of the debt
by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may also
influence the rating.
AA Securities in this group are of safety virtually beyond
question, and as a class are readily salable while many are
highly active. Their merits are not greatly unlike those of
the AAA class, but a security so rated may be of junior though
strong lien -- in many cases directly following an AAA
security -- or the margin of safety is less strikingly broad.
The issue may be the obligation of a small company, strongly
secured but influenced as to ratings by the lesser financial
power of the enterprise and more local type of market.
A Securities of this rating are considered to be investment
grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but
may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Securities of this rating are considered to be investment
grade and of satisfactory credit quality. The obligor's
ability to pay interest and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus(+)
or
Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA"
category.
Commercial Paper Ratings
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than the strongest issue.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
DUFF & PHELPS RATINGS
Corporate Bond Ratings
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury Funds.
AA+
AA, AA- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of
economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic
stress.
BBB+
BBB, BBB- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in
risk during economic cycles.
Commercial Paper Ratings
Duff 1+ Highest certainty of timely payment. Short term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk free U.S. Treasury short term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
REPUBLIC OVERSEAS EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
Capital Guardian Trust Company - Sub-Adviser
("CGTC" or the "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 Overseas Equity 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 International 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.
Shares of the Fund are divided into two separate classes, Class A (formerly
designated Class C) (the "Investor Shares") and Class B.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS
FOR THE FUND, DATED JANUARY 2, 1998 (THE "PROSPECTUS"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
January 2, 1998
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS............................
U.S. Government Securities........................................
Convertible Securities............................................
Repurchase Agreements.............................................
Investment Restrictions...........................................
Percentage and Rating Restrictions................................
PORTFOLIO TRANSACTIONS.....................................................
PERFORMANCE INFORMATION....................................................
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST...........................
Trustees and Officers.............................................
Compensation Table................................................
Investment Manager................................................
Sub-Adviser.......................................................
Administrator and Portfolio Administrator.........................
Distribution Plans.................................................
Administrative Services Plan......................................
Shareholder Servicing Agents......................................
Custodian, Transfer Agents, and Fund Accounting Agents............
Expenses..........................................................
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............................................
FINANCIAL STATEMENTS.......................................................
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 2, 1998, 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.
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.
U.S. GOVERNMENT SECURITIES
For liquidity purposes and for temporary defensive purposes, the
Portfolio may invest in U.S. Government securities held directly or under
repurchase agreements. U.S. Government securities include bills, notes, and
bonds issued by the U.S. Treasury and securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government.
Some U.S. Government securities are supported by the direct full faith
and credit pledge of the U.S. Government; others are supported by the right of
the issuer to borrow from the U.S. Treasury; others, such as securities issued
by the Federal National Mortgage Association ("FNMA"), are supported by the
discretionary authority of the U.S. Government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. Government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
CONVERTIBLE SECURITIES
The Portfolio may buy securities that are convertible into common
stock. The following is a brief description of the various types of convertible
securities in which the Portfolio may invest.
Convertible bonds are issued with lower coupons than non-convertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to common
shares becomes more valuable.
Convertible preferred stocks are non-voting equity securities that pay
a fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
Warrants entitle the holder to buy the issuer's stock at a specific
price for a specific period of time. The price of a warrant tends to be more
volatile than, and does not always track, the price of its underlying stock.
Warrants are issued with expiration dates. Once a warrant expires, it has no
value in the market.
Rights represent a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public.
REPURCHASE AGREEMENTS
The Portfolio may invest in instruments subject to repurchase
agreements only with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York) in U.S.
Government securities. Under the terms of a typical repurchase agreement, an
underlying debt instrument would be acquired for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument at a fixed price and time, thereby determining the
yield during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. A repurchase agreement is
subject to the risk that the seller may fail to repurchase the security.
Repurchase agreements may be deemed to be loans under the 1940 Act. All
repurchase agreements entered into on behalf of the Fund are fully
collateralized at all times during the period of the agreement in that the value
of the underlying security is at least equal to the amount of the loan,
including accrued interest thereon, and the Portfolio or its custodian bank has
possession of the collateral, which the Portfolio Trust's Board of Trustees
believes gives the Portfolio a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been definitively established. This
could become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Portfolio but only constitute collateral for the seller's obligation to
pay the repurchase price. Therefore, the Portfolio may suffer time delays and
incur costs in connection with the disposition of the collateral. The Board of
Trustees of the Portfolio Trust believes that the collateral underlying
repurchase agreements may be more susceptible to claims of the seller's
creditors than would be the case with securities owned by the Portfolio. The
Portfolio will not invest in a repurchase agreement maturing in more than seven
days if any such investment together with illiquid securities held for the
Portfolio exceed 15% of the Portfolio's net assets.
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 objectives):
(1) invest in physical commodities or contracts on physical
commodities:
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real
estate limited partnerships, and may purchase and sell marketable
securities which are secured by interests in real estate;
(3) make loans except for the lending of portfolio securities pursuant
to guidelines established by the Board of Trustees and except as
otherwise in accordance with the Portfolio's (Fund's) investment
objective and policies;
(4) borrow money, except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes,
provided that the Portfolio (Fund) maintains asset coverage of at
least 300% for all such borrowings;
(5) underwrite the securities of other issuers (except to the extent
that the Portfolio (Fund) may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in the disposition of
restricted securities);
(6) acquire any securities of companies within one industry, if as a
result of such acquisition, more than 25% of the value of the
Portfolio's (Fund's) total assets would be invested in securities
of companies within such industry; provided, however, that there
shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a temporary
defensive position;
(7) issue senior securities, except as permitted under the 1940 Act;
(8) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase securities of any issuer if, as a result, more than 5% of
the Portfolio's (Fund's) total assets taken at market value would
be invested in the securities of any single issuer;
(9) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase a security if, as a result, the Portfolio (Fund) would
hold more than 10% of the outstanding voting securities of any
issuer.
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 objectives).
As a matter of non-fundamental policy, the Portfolio (Fund) will not:
(1) borrow money, except that the Portfolio (Fund) may borrow for
temporary or emergency purposes up to 10% of its net assets;
provided, however, that the Portfolio (Fund) may not purchase any
security while outstanding borrowings exceed 5% of net assets;
(2) sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options and futures
contracts are not deemed to constitute short sales of securities;
(3) purchase warrants, valued at the lower of cost or market, in excess
of 10% of the value of its net assets. Included within that amount,
but not to exceed 2% of the value of the Portfolio's (Fund's) net
assets, may be warrants that are not listed on the New York or
American Stock Exchanges or an exchange with comparable listing
requirements. Warrants attached to securities are not subject to
this limitation;
(4) purchase securities on margin, except for use of short-term credit
as may be necessary for the clearance of purchases and sales of
securities, but it may make margin deposits in connection with
transactions in options, futures, and options on futures;
(5) invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund), determined at the time of investment, in
securities that are illiquid because their disposition is
restricted under the federal securities laws or securities for
which there is no readily available market; provided, however that
this policy does not limit the acquisition of (i) securities that
have legal or contractual restrictions on resale but have a readily
available market or (ii) securities that are not registered under
the 1933 Act, but which can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and which
are deemed to be liquid pursuant to guidelines adopted by the Board
of Trustees ("Restricted Securities").
(6) invest more than 10% of the Portfolio's (Fund's) assets in
Restricted Securities (including Rule 144A securities);
(7) invest for the purpose of exercising control over management of any
company;
(8) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers'
commissions or in connection with mergers, acquisitions of assets
or consolidations and except as may otherwise be permitted by the
1940 Act; provided, however, that the Portfolio shall not invest in
the shares of any open-end investment company unless (1) the
Portfolio's Sub-Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge
in connection with the investment;
(9) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
government or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous
operations;
(10) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases;
(11) purchase or retain securities of an issuer of those officers and
Trustees of the Portfolio Trust or the Manager or Sub-Adviser
owning more than 1/2 of 1% of such securities together own more
than 5% of such securities.
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
The Sub-Adviser is primarily responsible for portfolio decisions and
the placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of Portfolio investments
for the Portfolio with Republic New York Securities Corporation, an affiliate of
the Manager.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), the Sub-Adviser may cause the Portfolio to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Sub-Adviser an amount of commission for effecting a securities transaction
for the Fund in excess of the commission which another broker-dealer would have
charged for effecting that transaction. For the fiscal years ended October 31,
1996 and October 31, 1997, the Portfolio paid aggregate brokerage commissions
equal to $352,429 and $295,571, respectively, none of which was paid to
broker-dealers that provided "brokerage and research services" to the
Sub-Adviser. For the period January 9, 1995 (commencement of operations) to
October 31, 1995, there were no brokerage commissions paid from the Portfolio.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees of the
Portfolio Trust may determine, and subject to seeking the most favorable price
and execution available, the Sub-Adviser may consider sales of shares of the
Fund as a factor in the selection of broker-dealers to execute portfolio
transactions for the Portfolio.
Investment decisions for the Portfolio and for the other investment
advisory clients of the Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security may be sold for certain clients even though it could have been bought
for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Sub-Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Fund and for other clients of the Sub-Adviser
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchases or
sales. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients
in terms of the price paid or received or of the size of the position
obtainable.
PERFORMANCE INFORMATION
The Trust may, from time to time, include total return for the Fund,
computed in accordance with formulas prescribed by the Securities and Exchange
Commission ("SEC"), in advertisements or reports to shareholders or prospective
investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: P (1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The Fund also may, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accompanied 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 Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Investor Shares (without Sales Charge):
Annual Total Return - Year Ended October 31, 1997: 14.08%.
Average Annual Total Return - January 9, 1995 (commencement of operations) to
October 31, 1997: 12.16%.
Had the sales charge been in effect during the relevant periods, the annual
total return for the year ended October 31, 1997 would have been 10.09% and the
average annual total return for the period from January 9, 1995 to October 31,
1997 would have been 11.06%.
Class B Shares:
Class B Shares were not offered prior to January 2, 1998.
Performance information for the Fund may also be compared to various
unmanaged indices, such as the Morgan Stanley Capital International Europe,
Australia and Far East ("EAFE") Index. Unmanaged indices (i.e., other than
Lipper) generally do not reflect deductions for administrative and management
costs and expenses. Comparative information may be compiled or provided by
independent ratings services or by news organizations. Any performance
information should be considered in light of the Fund's investment 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 and Portfolio Trust for the past five years are listed below. Asterisks
indicate that those officers are "interested persons" (as defined in the 1940
Act) of the Trust and the Portfolio Trust. The address of each, unless otherwise
indicated, is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
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.
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 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Name of Compensation Part of Fund Benefits Upon Complex* to
Trustee from Trust Expenses Retirement Trustees
- ------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C>
Frederick C. Chen $2,900 none none $8,600
Alan S. Parsow $2,600 none none $7,600
Larry M. Robbins $2,600 none none $7,600
Michael Seely $2,600 none none $7,600
</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, 1997. 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 December 8, 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 of the Fund (the Trust has no knowledge of the
beneficial ownership of such Shares): Republic National Bank (as Custodian), 452
Fifth Avenue, New York, New York 10018 - 21.45% (Investor Shares); and BHC
Securities, Inc., One Commerce Square, 2005 Market Square, Philadelphia,
Pennsylvania 19103 - 75.93%. 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 willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT MANAGER
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 entitled to receive a fee from
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 January
9, 1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, investment management
fees aggregated $0, $243,751 and $466,480 (of which the entire amount was
waived), respectively.
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
CGTC, as the Portfolio's Sub-Adviser, is responsible for the investment
management of the Portfolio's assets, including making investment decisions and
placing orders for the purchase and sale of securities for the Portfolio
directly with the issuers or with brokers or dealers selected by CGTC or
Republic in its discretion. See "Portfolio Transactions." CGTC also furnishes to
the Board of Trustees of the Portfolio Trust, which has overall responsibility
for the business and affairs of the Portfolio Trust, periodic reports on the
investment performance of the Portfolio.
For its services, CGTC receives from the Portfolio a fee, computed
daily and based on the Portfolio's average daily net assets, at the annual rate
of 0.70% of net assets up to $25 million, 0.55% of net assets over $25 million
up to $50 million, 0.425% of net assets over $50 million up to $250 million, and
0.375% of net assets in excess of $250 million. For the period from January 9,
1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, sub-advisory fees
aggregated $131,059, $514,874 and $893,016, respectively.
The investment advisory services of CGTC to the Portfolio are not
exclusive under the terms of the Sub-Advisory Agreement. CGTC is free to and
does render investment advisory services to others.
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 period from January 9, 1995 (Portfolio commencement of
operations) to October 31, 1995 and for the fiscal years ended October 31, 1996
and October 31, 1997, the Portfolio accrued administration fees of $9,433,
$48,750 and $93,296, respectively, $117 of which was waived for the year ended
October 31, 1996. For the period from August 26, 1996 to October 31, 1996, the
Fund accrued administration fees of $8, of which $3 was waived. For the fiscal
year ended October 31, 1997, the Fund accrued administration fees of $682.
DISTRIBUTION PLANS
Two Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Investor Shares (the "Class A Plan")
and the Class B Shares (the "Class B Plan"). The Distribution Plans provide that
they may not be amended to increase materially the costs which the Investor
Shares or Class B Shares may bear pursuant to the Class A Plan or Class B Plan
without approval by shareholders of the Investor Shares or Class B Shares,
respectively, and that any material amendments of the Distribution Plans 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 interests in the operation of the Distribution Plans 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 Plans have been approved, and are 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 Plans. In adopting the Class A Plan and
the Class B Plan, the Trustees considered alternative methods to distribute the
Investor Shares and Class B Shares and to reduce each class's per share expense
ratio and concluded that there was a reasonable likelihood that each
Distribution Plan will benefit its respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Investor
Shares or Class B Shares at any time by a vote of a majority of the Qualified
Trustees or by vote of the holders of a majority of that class.
The Fund did not incur expenses pursuant to the Distribution Plans
during the fiscal period ended October 31, 1997.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Investor Shares and Class B Shares 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 Investor Shares or
the Class B Shares by a majority vote of shareholders of that class. The
Administrative Services Plan may not be amended to increase materially the
amount of permitted expenses thereunder with respect to the Investor Shares
or Class B Shares without the approval of a majority of shareholders of that
class, and may not be materially amended in any case without a vote of the
majority of both the Trustees and the Qualified Trustees.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Fund's Investor Shares and Class B Shares, respectively, see "Management of the
Trust - Shareholder Servicing Agents" in the Prospectus.
CUSTODIAN, TRANSFER AGENTS, AND FUND ACCOUNTING AGENTS
With respect to domestic assets, Republic serves as custodian for the
Fund and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio. IBT also
serves as transfer agent with respect to the Investor Shares, and fund
accounting agent for the Fund. The Custodians may use the services of
sub-custodians with respect to the Portfolio. The principal business address of
IBT is 200 Clarendon Street, Boston, Massachusetts 02116. BISYS serves as
transfer agent with respect to the Class B Shares. 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.
EXPENSES
Except for the expenses paid by the Manager and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Investor Shares or the Class B Shares must include payments made pursuant to
their respective Distribution Plan and the Administrative Services Plan. In the
event a particular expense is not reasonably allocable by class or to a
particular class, it shall be treated as a Fund expense or a Trust expense.
Trust expenses directly related to the Fund are charged to the Fund; other
expenses are allocated proportionally among all the portfolios of the Trust in
relation to the net asset value of the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the Shares is determined on each day on
which the New York Stock Exchange ("NYSE") is open for trading. As of the date
of this Statement of Additional Information, the NYSE is open every weekday
except for the days on which the following holidays are observed: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The 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
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
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 Portfolio has obtained a ruling from the Internal Revenue Service
("IRS") that the Portfolio will be treated for federal income tax purposes as a
partnership. 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 the Portfolio will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
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.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Gain" or 28% Gain," depending upon the Fund's holding period for
the assets sold. "20% Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%, "28% Gains"
arise from sales of assets held by the Fund for more than one year but no more
than 18 months and are subject to a maximum tax rate of 28%. Net capital gains
from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
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.
Recently enacted rules may affect the timing and character of gain if
the Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
SWAP AGREEMENTS
Rules governing the tax aspects of swap contracts are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner deemed to be
appropriate, the IRS might not necessarily accept such treatment. If it does
not, the status of the Fund as a regulated investment company might be affected.
The Fund intends to monitor developments in this area. Certain requirements that
must be met under the Code in order for the Fund to qualify as a regulated
investment company may limit the extent to which the Fund will be able to engage
in swap agreements.
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. Alternatively, another
election would involve marking to market the Fund's PFIC shares at the end of
each taxable year, with the result that unrealized gains are treated as though
they were realized and reported as ordinary income. Any mark-to-market losses
and any loss from an actual dispositon of PFIC shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in income
in prior years.
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; gain will generally be subject to
a mimimum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum tax rate of 28% if the shareholder's holding
period for the shares is more than one year but less than 18 months. Gain from
the disposition of shares held not more than one year will be taxed a short-term
capital gain. 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.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
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 auditors of the Fund for the fiscal year ending
October 31, 1998. 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 auditors to audit the Portfolio's financial statements
for the fiscal year ending October 31, 1998.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the 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, 1997 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1997 as filed with the SEC. A
copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
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. Shares of the Fund are
divided into two separate classes Class A (formerly designated Class C) (the
"Investor Shares") and Class B.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY THE PROSPECTUS
FOR THE FUND, DATED JANUARY 2, 1998 (THE "PROSPECTUS"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus. The Prospectus and Statement of Additional Information may be
obtained without charge by writing or calling the Fund at the address and
telephone number printed above.
January 2, 1998
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 Plans...............................................
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 January 2, 1998, 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.
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. For the year ended October 31, 1997, the
Portfolio paid aggregate brokerage commissions equal to $316,521, none of
which was paid to broker-dealers that provided "brokerage and research services"
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 total return for the
Fund, computed in accordance with formulas prescribed by the Securities and
Exchange Commission ("SEC"), in advertisements or reports to shareholders or
prospective investors.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: P (1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The Fund also may, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accomplished by standardized total return information.
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 Portfolio
which are presently in effect were deducted during such periods, as permitted by
applicable SEC staff interpretations. The table that follows sets forth
historical return information for the periods indicated:
Investor Shares (without Sales Charge):
Annual Total Return - Year Ended October 31, 1997: 26.28%.
Average Annual Total Return - September 3, 1996 (commencement of operations) to
October 31, 1997: 26.68%.
Had the sales charge been in effect during the relevant periods, the annual
total return for the year ended October 31, 1997 would have been 21.86% and the
average annual total return for the period from January 9, 1995 to October 31,
1997 would have been 23.31%.
Class B Shares:
Class B Shares were not offered prior to January 2, 1998.
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 and Portfolio Trust for the past five years are listed below. Asterisks
indicate that those officers are "interested persons" (as defined in the 1940
Act) of the Trust and the Portfolio Trust. The address of each, unless otherwise
indicated, is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
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.
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 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.
<TABLE>
<CAPTION>
Compensation 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 $2,900 none none $8,600
Alan S. Parsow $2,600 none none $7,600
Larry M. Robbins $2,600 none none $7,600
Michael Seely $2,600 none none $7,600
</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, 1997. 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 December 8, 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 - 35.20% (Investor Shares); BHC Securities, Inc., One Commerce Square,
2005 Market Square, Philadelphia, Pennsylvania 19103 - 51.32% (Investor Shares);
and Republic New York Securities Corp. (as Custodian), 452 Fifth Avenue, Tower
14, New York, New York 10018 - 9.05% (Investor Shares). 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 willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
Investment Manager
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 and for the fiscal
year ended October 31, 1997, investment management fees aggregated $30,803 and
$429,442, respectively, all of which were 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 Advisers, 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 and for the fiscal year ended
October 31, 1997, sub-advisory fees aggregated $85,616 and $1,104,635,
respectively.
The investment advisory services of the Sub-Adviser to the Portfolio
are not exclusive under the terms of the Sub-Advisory Agreement. The Sub-Adviser
is free to and does render investment advisory services to others.
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. For the
fiscal year ended October 31, 1997, the Portfolio accrued administration fees
equal to $85,889 and the Fund accrued administration fees equal to $2,763, none
of which fees were waived.
Distribution Plans
Two Distribution Plans has been adopted by the Trust (the "Distribution
Plans") with respect to the Investor Shares (the "Class A Plan") and the Class B
Shares (the "Class B Plan"). The Distribution Plans provide that they may not be
amended to increase materially the costs which the Investor Shares or Class B
Shares may bear pursuant to the Distribution Plans without approval by
shareholders of the Investor Shares or Class B Shares, respectively, and that
any material amendments of the Distribution Plans 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 interests in
the operation of the Distribution Plans 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 Plans
have been approved, and are 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
Plans. In adopting the Class A Plan and Class B Plan, the Trustees considered
alternative methods to distribute the Investor Shares and Class B Shares and to
reduce each class's per share expense ratio and concluded that there was a
reasonable likelihood that each Distribution Plan will benefit its respective
class and that class's shareholders. The Distribution Plans are terminable with
respect to the Investor Shares or Class B Shares at any time by a vote of a
majority of the Qualified Trustees or by vote of the holders of a majority of
that class.
The Fund did not incur expenses pursuant to the Distribution Plans
during the fiscal period ended October 31, 1997.
Administrative Services Plan
An Administrative Services Plan has been adopted by the Trust with
respect to the Investor Shares and Class B Shares 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 Investor Shares or the Class B Shares
by a majority vote of shareholders of that class. The Administrative Services
Plan may not be amended to increase materially the amount of permitted
expenses thereunder with respect to the Investor Shares or Class B Shares
without the approval of a majority of shareholders of that class and may not
be materially amended in any case without a vote of the majority of both the
Trustees and the Qualified Trustees.
Shareholder Servicing Agents
The Trust has entered into a shareholder servicing agreement with each
Shareholder Servicing Agent. For additional information, including a description
of the fees paid to Shareholder Servicing Agents from assets attributable to the
Investor Shares and Class B Shares, respectively, see "Management of the Trust -
Shareholder Servicing Agents" in the Prospectus.
Custodian, Transfer Agents, and Fund Accounting Agents
With respect to domestic assets, Republic serves as custodian for the
Fund and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Fund and the Portfolio. IBT also
serves as transfer agent, with respect to Investor Shares, and fund accounting
agent for the Fund. The Custodians may use the services of sub-custodians with
respect to the Portfolio. The principal business address of IBT is 200 Clarendon
Street, Boston, Massachusetts 02116. BISYS serves as transfer agent with respect
to the Class B Shares. 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.
EXPENSES
Except for the expenses paid by the Manager and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the Investor Shares or the Class B Shares must include payments made pursuant to
their respective Distribution Plan and the Administrative Services Plan. In the
event a particular expense is not reasonably allocable by class or to a
particular class, it shall be treated as a Fund expense or a Trust expense.
Trust expenses directly related to the Fund are charged to the Fund; other
expenses are allocated proportionally among all the portfolios of the Trust in
relation to the net asset value of the portfolios.
DETERMINATION OF NET ASSET VALUE
The net asset value of each 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, Martin Luther King, Jr. 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
The following is a summary of certain U.S. federal income tax issues
concerning the Fund, its shareholders and the Portfolio. The Fund and the
Portfolio may also be subject to state, local, foreign or other taxes not
discussed below. This discussion does not purport to be complete or to address
all tax issues relevant to each shareholder. Prospective investors should
consult their own tax advisors with regard to the federal, state, foreign and
other tax consequences to them of the purchase, ownership or disposition of Fund
shares. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative authorities, all of which are subject to change,
which change may be retroactive.
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 Portfolio has obtained from the Internal Revenue Service ("IRS") a
ruling that the Portfolio will be treated for federal income tax purposes as a
partnership. 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 the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share.
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.
Distributions by the Fund of its net investment income will be taxable
to shareholders as ordinary income, whether received in cash or reinvested in
Fund shares. Distributions by the Fund of its net capital gain, whether received
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as either "20% Gain" or 28% Gain," depending upon the Fund's holding period for
the assets sold. "20% Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%, "28% Gains"
arise from sales of assets held by the Fund for more than one year but no more
than 18 months and are subject to a maximum tax rate of 28%. Net capital gains
from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
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.
Recently enacted rules may affect the timing and character of gain if
the Fund engages in transctions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period in the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
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. Alternatively, another
election may be available that would involve marking to market the Fund's PFIC
shares at the end of each taxable year, with the result that unrealized gains
are treated as though they were realized and reported as ordinary income. Any
mark-to-market losses and any loss from an actual disposition of PFIC shares
would be deductible as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years.
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; gain will generally be subject to
a maximum tax rate of 20% if the shareholder's holding period for the shares is
more than 18 months, and a maximum tax rate of 28% if the shareholder's holding
period for the shares is more than one year but less than 18 months. Gain from
the disposition of shares held not more than one year will be taxed as
short-term capital gain. 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.
Distributions by the Fund and redemption proceeds may be subject to
backup withholding at the rate of 31%. Backup withholding generally applies to
shareholders who have failed to properly certify their taxpayer identification
numbers, who fail to provide other required tax-related certifications, and with
respect to whom the Fund has received certain notifications from the Internal
Revenue Service requiring or permitting the Fund to apply backup withholding.
Backup withholding is not an additional tax and amounts so withheld generally
may be applied by affected shareholders as a credit against their federal income
tax liability.
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 auditors of the Fund for the fiscal year ending October 31, 1998.
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 auditors to audit the Portfolio's financial statements for the
fiscal year ending October 31, 1998.
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, 1997 of
each of the Fund and the Portfolio are hereby incorporated herein by reference
from the Annual Report of the Fund dated October 31, 1997 as filed with the SEC.
A copy of such report will be provided without charge to each person receiving
this Statement of Additional Information.
