<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
FILE NO. 33-7647
FILE NO. 811-4782
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 58
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 59
REPUBLIC FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219-3035
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code:
(614) 470-8000
Walter B. Grimm
3435 Stelzer Road, Columbus, Ohio 43219-3035
(Name and address of agent for service of process)
Copy to:
Allan S. Mostoff, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W., Washington, D.C. 20006
--------------------------------
It is proposed that this filing will become effective 60 days after filing
pursuant to paragraph (a) (1)
--------------------------------
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has previously registered an indefinite number of its
shares under the Securities Act of 1933, as amended, pursuant to Rule 24f-2
under the Investment Company Act of 1933, as amended. The Registrant has filed
Rule 24f-2 notices with respect to its series as follows: Republic U.S.
Government Money Market Fund (for its fiscal year ended September 30. 1997) on
December 23, 1997; Fund, Republic Equity Fund, Republic Bond Fund, Republic
Overseas Equity Fund and Republic Opportunity Fund for their fiscal years ended
October 31, 1997 on January 27, 1998.
<PAGE> 2
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
PART A; INFORMATION REQUIRED IN PROSPECTUS
ITEM NUMBER PROSPECTUS CAPTION
<S> <C> <C>
Item 1. Front and Back Cover Page Front and Back Cover Page
Item 2. Risk/Return Summary: Investments, Risk/Return Summary and
Risks and Performance Fund Expenses
Item 3. Risk/Return Summary: Fee Table Risk/Return Summary and
Fund Expenses
Item 4. Investment Objectives, Principal Investment Objectives and
Investment Strategies, and Related Risks Strategies; Investment Risks
Item 5 Management's Discussion Not Applicable
of Fund Performance
Item 6. Management, Organization, and Fund Management
Capital Structure
Item 7. Shareholder Information Shareholder Information
Item 8. Distribution Arrangements Distribution Arrangements/
Sales Charges
Item 9. Financial Highlights Information Financial Highlights
</TABLE>
<TABLE>
<CAPTION>
PART B; INFORMATION REQUIRED IN STATEMENT /OF ADDITIONAL INFORMATION
Statement of Additional
ITEM NUMBER INFORMATION CAPTION
<S> <C> <C>
Item 10. Cover Page and Table of Contents Cover Page and Table of Contents
Item 11. Fund History Capitalization
Item 12. Description of the Fund and Its Investment Objective, Policies
Investments and Risks and Restrictions
Item 13. Management of the Fund Management of the Trust
Item 14. Control Persons and Principal Other Information
Holders of Securities
Item 15. Investment Advisory and Management of the Trust
Other Securities Investment Adviser
Item 16. Brokerage Allocation Portfolio Transactions
Item 17. Capital Stock and Other Securities Other Information
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Item 18. Purchase, Redemption and Pricing Purchase of Shares; Redemption
of Shares of Shares; Determination of Net
Asset Value
Item 19. Taxation of the Fund Taxation
Item 20. Underwriters Management of the Trust -
Administrator, Distributor and
Sponsor
Item 21. Calculation of Performance Date Performance Information
Item 22. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be in Part C is set forth under the appropriate
items, so numbered, in Part C of this Registration Statement.
<PAGE> 4
EXPLANATORY NOTE
This post-effective amendment no. 58 (the "Amendment") to the
Registrant's registration statement on Form N-1A (File no. 33-7647) (the
"Registration Statement") is being filed to amend the Registrant's disclosure
with respect to the Republic Bond Fund, Republic New York Tax-Free Bond Fund,
Republic Equity Fund, Republic Overseas Equity Fund, and Republic Opportunity
Fund, in order to comply with the new Form N-1A. The Amendment does not affect
any other series of the Registrant, which are the subject of other
post-effective amendments to the Registration Statement. The financial
information will be filed by amendment prior to the effectiveness of this
amendment.
<PAGE> 5
COVER PAGE
- -------------------------------------------------------------------------------
REPUBLIC FUNDS
===============================================================================
-----------
PROSPECTUS
-----------
___________, 1999
Republic Bond Fund
Republic New York Tax-Free Bond Fund
Republic Equity Fund
Republic Overseas Equity Fund
Republic Opportunity Fund
The Securities and
Exchange Commission has
not approved the shares
described in this
prospectus or determined
whether this prospectus is
accurate or complete.
Anyone who tells you
otherwise is committing a
crime.
===============================================================================
<PAGE> 6
TABLE OF CONTENTS
==============================================================================
Risk/Return Summary
and Fund Expenses Republic Bond Fund ____
Republic New York Tax-Free
Bond Fund ____
Carefully review this Republic Equity Fund ____
important section, which
summarizes each Fund's Republic Overseas Equity Fund ____
investments, risks, past
performance, and fees Republic Opportunity Fund ____
- -------------------------------------------------------------------------------
Investment Objectives, Republic Bond Fund ____
Strategies and Risks
Republic New York Tax-Free ____
Bond Fund
Republic Equity Fund ____
Republic Overseas Equity Fund ____
Republic Opportunity Fund ____
- -------------------------------------------------------------------------------
Fund Management The Investment Adviser ____
Review this section for details Portfolio Manager ____
on the people and organization
who oversee the Funds. The Distributor and Administrator ____
The Two-Tier Structure ____
Shareholder Information Pricing of Fund Shares ____
Review this section for details Purchasing and Adding to Your Shares ____
on how shares are valued, how to
purchase, sell and exchange Selling Your Shares ____
shares, related charges, and
payments of dividends and General Policies on Selling Shares ____
distribution.
Distribution Arrangements/Sales Charge ____
Dividends Distributions and Taxes ____
Exchanging Your Shares ____
- -------------------------------------------------------------------------------
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
Review this section for details on
selected financial statements of the
Funds
- ------------------------------------
3
<PAGE> 8
RISK/RETURN SUMMARY AND FUND EXPENSES
The following is a summary of key information about the Funds. You will find
additional information about the Funds, including a detailed description of the
Fund's investment objectives, strategies, and risks, after this Summary.
REPUBLIC BOND FUND
INVESTMENT OBJECTIVES The investment objective of the Bond Fund is
to realize above-average total return,
consistent with reasonable risk, through
investment primarily in a diversified
portfolio of fixed income securities.
STRUCTURE OF THE FUND The Fund seeks to achieve its investment
objective by investing all of its assets in
the Republic Fixed Income Portfolio (the
"Portfolio"), which has the same investment
objective as the Fund. This two-tier fund
structure is commonly referred to as a
"master/feeder" structure because one fund
(the Bond Fund or "feeder fund") is
investing all its assets in a second fund
(the Portfolio or "master fund").
The Fund offers three different types of
shares: Class A Shares, Class B Shares, and
Class C Shares. Each class of shares has
different characteristics and are subject
to different fees and expenses. The
following pages of this Prospectus will
highlight these differences. The Fund's
Statement of Additional information contains
a more detailed discussion of the different
classes of shares.
PRINCIPAL INVESTMENT STRATEGIES The Fixed Income Portfolio invests primarily
in fixed income securities, such as U.S.
Government securities, corporate debt
securities and commercial paper,
mortgage-backed and asset-backed securities;
and similar securities issued by foreign
governments and corporations.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change
daily based on many factors, including, the
quality of the instruments in the Fund's
investment portfolio, national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
The Fund could lose money if the issuer of a
fixed income security owned by the Portfolio
defaults on its financial obligation.
3
<PAGE> 9
Changes in interest rates will affect the
yield or value of the Fund's investments in
debt securities.
The Fund may invest in derivative
instruments (e.g., options and futures
contracts) to help achieve its investment
objectives. These investments could increase
the Fund's price volatility or reduce the
return on your investment.
The Fund may invest in high-yield
securities, which are subject to higher
credit risks and are less liquid than other
fixed income securities. The Fund could lose
money if it is unable to dispose of these
investments at an appropriate time.
An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- LOOKING TO ADD A MONTHLY INCOME
COMPONENT TO YOUR PORTFOLIO
- SEEKING HIGHER POTENTIAL RETURNS
THAN PROVIDED BY MONEY MARKET FUNDS
- WILLING TO ACCEPT THE RISKS OF
PRICE AND DIVIDEND FLUCTUATIONS
- INVESTING SHORT-TERM RESERVES
This Fund will not be appropriate for
anyone:
- INVESTING EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
4
<PAGE> 10
RISK/RETURN SUMMARY AND FUND EXPENSES
The chart and table on this page show how the Republic Bond Fund has performed
and how its performance has varied from year to year. The bar chart shows
changes in the Fund's yearly performance for the past two years to demonstrate
that the Fund has gained [and lost] value at differing times. The table below
compares the Fund's performance over time to that of the [Lipper A Rated Bond
Fund Index], an unmanaged, equally weighted index composed of the 30 largest
Mutual Funds with this investment objective.
The returns for Class B and Class C shares will differ from the Class A returns
shown in the bar chart because of differences in expenses of each class. The
table assumes that Class B and Class C shareholders redeem all their fund
shares at the end of the period indicated.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Class A Shares
[graph]
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 4.99% 5.04% ____%
</TABLE>
Of course, past performance does not indicate how the Fund will perform
in the future.
-------------------------------------------------------------------------
Best quarter: Q_ ____ +___%
-------------------------------------------------------------------------
Worst quarter: Q_ ____ +___%
-------------------------------------------------------------------------
Year To Date:
------------------------
Average Annual Total Returns (for the periods ending October 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Class A 8/26/1996 ____% N/A N/A ____%
Class B
(with applicable CDSC) 1/6/1998 ____% N/A N/A ____%
Class C
(with applicable CDSC) 11/3/1998 N/A N/A N/A ___%
Lipper A Rated Bond Fund
Index ____ ____% ____% ____% ____%
</TABLE>
The table above reflects the impact of any contingent deferred sales charges
that apply to Class B and Class C shares of the Republic Bond Fund.
5
<PAGE> 11
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES*
As an investor in the Republic Bond Fund, you will pay the following fees and
expenses. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses (fees
paid by you
directly) A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum sales
charge (load)
on purchases 2.75% None None
- ------------------------ --------------- ------------- -------------
Maximum deferred
sales charge (load) None 3.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Annual Fund
Operating
Expenses
(fees paid from A SHARES B SHARES C SHARES
Fund assets)
- ------------------------ --------------- ------------- -------------
<S> <C> <C> <C>
Management fee* .55% .55% .55%
- ------------------------ --------------- ------------- -------------
Distribution (12b-1)
and Service fee .25% 1.00% 1.00%
- ------------------------ --------------- ------------- -------------
Other expenses .81% .81% .81%
- ------------------------ --------------- ------------- -------------
Total Fund
operating expenses 1.61% 2.36% 2.36%
- ------------------------ --------------- ------------- -------------
Fee waivers
and reimbursements .51% .51% .51%
- ------------------------ --------------- ------------- -------------
Net operating expenses 1.10% 1.85% 1.85%
- ------------------------ --------------- ------------- -------------
</TABLE>
* The table reflects the combined fees of both the Bond Fund and the
Fixed Income Portfolio
6
<PAGE> 12
RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE*
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
<TABLE>
<CAPTION>
REPUBLIC BOND FUND 1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
CLASS A SHARES $434 $769 $1,127 $2,133
- ------------------------------ -------- --------- --------- ----------
CLASS B SHARES
Assuming Redemption $539 $836 $1,260 $2,338
Assuming no Redemption $239 $736 $1,260 $2,338
- ------------------------------ -------- --------- --------- ----------
CLASS C SHARES
Assuming Redemption $297 $736 $1,260 $2,338
Assuming no Redemption $239 $736 $1,260 $2,338
- ------------------------------ -------- --------- --------- ----------
</TABLE>
* The example reflects the combined fees of both the Bond Fund and the
Fixed Income Portfolio.
7
<PAGE> 13
RISK/RETURN SUMMARY AND FUND EXPENSES
REPUBLIC NEW YORK TAX-FREE BOND FUND
INVESTMENT OBJECTIVES The investment objective of the New York
Tax-Free Bond Fund is to provide
shareholders of the Fund with income exempt
from regular federal, New York State and New
York City personal income taxes.
STRUCTURE OF THE FUND The Fund offers three different types of
shares through this prospectus: Class A
Shares, Class B Shares, and Class C Shares.
The Fund offers another class of shares
pursuant to a separate prospectus. Each
class of shares has different
characteristics and are subject to
different fees and expenses. The following
pages of this Prospectus will highlight
these differences. The Fund's Statement of
Additional information contains a more
detailed discussion of the different
classes of shares.
PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its investment
objective by investing its assets primarily
in a non-diversified portfolio of municipal
bonds, notes, commercial paper, U.S.
Government securities, and other debt
instruments the interest on which is exempt
from regular federal, New York State and New
York City personal income taxes.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will
change daily based on many factors,
including, the quality of the instruments in
the Fund's investment portfolio, national
and international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
The Fund could lose money if the issuer of a
fixed income security owned by the Fund
defaults on its financial obligation.
Changes in interest rates will affect the
yield or value of the Fund's investments in
debt securities.
The Fund may invest in derivative
instruments (e.g., option and futures
contracts) to help achieve its investment
objective. These investments could increase
the Fund's price volatility or reduce the
return on your
8
<PAGE> 14
investment.
Because the Fund will concentrate its
investments in New York obligations and may
invest a significant portion of its assets
is the securities of a single issuer or
sector, the value of the Fund's assets could
lose significant value due to the poor
performance of a single issuer or sector.
An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- LOOKING TO ADD A MONTHLY INCOME
COMPONENT TO YOUR PORTFOLIO
- SEEKING HIGHER POTENTIAL RETURNS
THAN PROVIDED BY MONEY MARKET FUNDS
- WILLING TO ACCEPT THE RISKS OF
PRICE AND DIVIDEND FLUCTUATIONS
- INVESTING SHORT-TERM RESERVES
This Fund will not be appropriate for
anyone:
- INVESTING EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
- WHO DOES NOT LIVE IN NEW YORK
9
<PAGE> 15
RISK/RETURN SUMMARY AND FUND EXPENSES
The chart and table on this page show how the Republic New York Tax-Free Bond
Fund has performed and how its performance has varied from year to year. The bar
chart shows changes in the Fund's yearly performance for the past three years to
demonstrate that the Fund has gained [and lost] value at differing times. The
table below compares the Fund's performance over time to that of the [Lipper NY
Municipal Bond Fund Index], an unmanaged, equally weighted index composed of the
30 largest Mutual Funds with this investment objective.
The returns for Class B and Class C shares will differ from the Class A returns
shown in the bar chart because of differences in expenses of each class. The
table assumes that Class B and Class C shareholders redeem all their fund shares
at the end of the period indicated.
PERFORMANCE BAR CHART AND TABLE
[GRAPH]
Year-by-Year Total Returns as of 12/31 for Class A Shares
<TABLE>
<CAPTION>
1995 1996 1997 1998
<S> <C> <C> <C> <C>
Percentage 5.63% 4.99% 5.04% ____%
</TABLE>
Of course, past performance does not indicate how the Fund will perform in the
future.
-------------------------------------------------------------------------
Best quarter: Q_ ____ +___%
-------------------------------------------------------------------------
Worst quarter: Q_ ____ +___%
Year To Date:
----------------------
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending October 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Class A 5/1/1995 ____% N/A N/A ____%
Class B
(with applicable CDSC) 1/6/1998 ____% N/A N/A ____%
Class C
(with applicable CDSC) 11/3/1996 N/A N/A N/A ____%
Lipper NY Municipal
Bond Fund ____ ____% ____% ____% ____%
</TABLE>
The table above reflects the impact of any contingent deferred sales charges
that apply to Class B and Class C shares of the Republic New York Tax-Free Bond
Fund.
10
<PAGE> 16
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
As an investor in the Republic New York Tax-Free Bond Fund, you will pay the
following fees and expenses. Shareholder transaction fees are paid from your
account. Annual Fund operating expenses are paid out of Fund assets, and are
reflected in the share price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses (fees
paid by you
directly) A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum sales
charge (load)
on purchases 2.75% None None
------------------------ --------------- ------------- -------------
Maximum deferred
sales charge (load) None 3.00% 1.00%
Annual Fund
Operating
Expenses
(fees paid from A SHARES B SHARES C SHARES
Fund assets)
------------------------ --------------- ------------- -------------
Management fee .25% 25% .25%
------------------------ --------------- ------------- -------------
Distribution (12b-1)
and Service fee .25% 1.00% 1.00%
------------------------ --------------- ------------- -------------
Other expenses .70% .70% .70%
------------------------ --------------- ------------- -------------
Total Fund
operating expenses 1.20% 1.95% 1.95%
------------------------ --------------- ------------- -------------
Fee waivers
and reimbursements .25% .25% .25%
------------------------ --------------- ------------- -------------
Net operating expenses .95% 1.70% 1.70%
------------------------ --------------- ------------- -------------
</TABLE>
11
<PAGE> 17
RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
<TABLE>
<CAPTION>
REPUBLIC NEW YORK TAX-FREE 1 3 5 10
BOND Year Years Years Years
<S> <C> <C> <C> <C>
CLASS A SHARES $394 $645 $917 $1,690
- ------------------------------ -------- --------- --------- ----------
CLASS B SHARES
Assuming Redemption $498 $712 $1,052 $1,902
Assuming no Redemption $198 $612 $1,052 $1,902
- ------------------------------ -------- --------- --------- ----------
CLASS C SHARES
Assuming Redemption $283 $612 $1,052 $1,902
Assuming no Redemption $198 $612 $1,052 $1,902
- ------------------------------ -------- --------- --------- ----------
</TABLE>
12
<PAGE> 18
RISK/RETURN SUMMARY AND FUND EXPENSES
REPUBLIC EQUITY FUND
INVESTMENT OBJECTIVES The investment objective of the Equity Fund
is long-term growth of capital and income
without excessive fluctuations in market
value.
STRUCTURE OF THE FUND The Fund offers three different types of
shares through this prospectus: Class A
Shares, Class B Shares and Class C Shares.
The Fund offers another class of shares
pursuant to a separate prospectus. Each
class of shares has different
characteristics and are subject to different
fees and expenses. The following pages of
this Prospectus will highlight these
differences. The Fund's Statement of
Additional information contains a more
detailed discussion of the different classes
of shares.
PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to achieve its objective by
investing at least 65% of its assets in
equity securities of seasoned medium and
large-sized companies that are expected to
show above average price appreciation. To
achieve its investment objective, the Fund
will pursue two styles of investing.
The "GROWTH" STYLE of investing focuses on
investing in financially secure firms with
established operating histories that are
proven leaders in their industry or market
sector. Such companies may demonstrate
characteristics such as participation in
expanding markets, increasing unit sales
volume, growth in revenues and earnings per
share, and increasing return on investments.
The "VALUE" STYLE of investing focuses on
investing in the equity securities of U.S.
companies believed to be undervalued based
upon internal research and proprietary
valuation systems. Investment decisions are
based on fundamental research, internally
developed valuations systems and seasoned
judgment.
13
<PAGE> 19
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change
daily based on many factors, including, the
quality of the instruments in the Fund's
investment portfolio, national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
Equity securities have greater price
volatility than fixed income instruments.
The value of the Fund will fluctuate as the
market price of its investments increases or
decreases.
The Fund may invest in derivative
instruments (e.g., option and futures
contracts) to help achieve its investment
objective. These investments could increase
the Fund's price volatility or reduce the
return on your investment.
An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- SEEKING A LONG-TERM GOAL SUCH AS
RETIREMENT
- LOOKING TO ADD A GROWTH COMPONENT
TO YOUR PORTFOLIO
- WILLING TO ACCEPT HIGHER RISKS OF
INVESTING IN THE STOCK MARKET IN
EXCHANGE FOR POTENTIALLY HIGHER
LONG-TERM RETURNS
This Fund will not be appropriate for
anyone:
- SEEKING MONTHLY INCOME
- PURSUING A SHORT-TERM GOAL OR
INVESTING EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
14
<PAGE> 20
RISK/RETURN SUMMARY AND FUND EXPENSES
The chart and table on this page show how the Republic Equity Fund has performed
and how its performance has varied from year to year. The bar chart shows
changes in the Fund's yearly performance for the past three years to demonstrate
that the Fund has gained [and lost] value at differing times. The table below
compares the Fund's performance over time to that of the [Lipper Growth Fund
Index], an unmanaged, equally weighted index composed of 30 of the largest
Mutual Funds with this investment objective.
The returns for Class B and Class C shares will differ from the Class A returns
shown in the bar chart because of differences in expenses of each class. The
table assumes that Class B and Class C shareholders redeem all their fund shares
at the end of the period indicated.
Performance Bar Chart and Table
Year-by-Year Total Returns as of 12/31 for Class A Shares
[GRAPHS]
<TABLE>
<CAPTION>
1995 1996 1997 1998
<S> <C> <C> <C> <C>
Percentage 5.63% 4.99% 5.04% ____%
</TABLE>
Of course, past performance does not indicate how the Fund will perform in the
future.
- ------------------------------------------------------------------------------
Best quarter: Q_ ____ +___%
- ------------------------------------------------------------------------------
Worst quarter: Q_ ____ +___%
Year To Date:
------------------------
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending October 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Class A 8/1/1995 ____% N/A N/A ____%
Class B
(with applicable CDSC) 1/6/1998 ____% N/A N/A ____%
Class C
(with applicable CDSC) 11/3/1998 N/A N/A N/A ____%
Lipper Growth Fund Index
____ ____% ____% ____% ____%
</TABLE>
The table above reflects the impact of any contingent deferred sales charges
that apply to Class B and Class C shares of the Republic Equity Fund.
15
<PAGE> 21
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
As an investor in the Republic Equity Fund, you will pay the following fees and
expenses. Shareholder transaction fees are paid from your account. Annual Fund
operating expenses are paid out of Fund assets, and are reflected in the share
price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses (fees
paid by you
directly) A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum sales
charge (load)
on purchases 3.50% None None
------------------------ --------------- ------------- -------------
------------------------ --------------- ------------- -------------
Maximum deferred
sales charge (load) None 4.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Annual Fund
Operating
Expenses
(fees paid from
Fund assets) A SHARES B SHARES C SHARES
------------------------ --------------- ------------- -------------
<S> <C> <C> <C>
Management fee .50% .50% .50%
------------------------ --------------- ------------- -------------
Distribution (12b-1)
and Service fee .25% 1.00% 1.00%
------------------------ --------------- ------------- -------------
Other expenses .28% .28% .28%
------------------------ --------------- ------------- -------------
Total Fund
operating expenses 1.03% 1.78% 1.78%
------------------------ --------------- ------------- -------------
Fee waivers
and reimbursements .00% .00% .00%
------------------------ --------------- ------------- -------------
Net operating expenses
1.03% 1.78% 1.78%
------------------------ --------------- ------------- -------------
</TABLE>
16
<PAGE> 22
Risk/Return Summary and Fund Expenses
Expense Example
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
<TABLE>
<CAPTION>
REPUBLIC EQUITY FUND 1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Class A Shares $451 $666 $899 $1,565
- ------------------------------ -------- --------- --------- ----------
CLASS B SHARES
Assuming Redemption $581 $760 $964 $1,716
Assuming no Redemption $181 $560 $964 $1,716
- ------------------------------ -------- --------- --------- ----------
CLASS C SHARES
Assuming Redemption $291 $560 $964 $1,716
Assuming no Redemption $181 $560 $964 $1,716
- ------------------------------ -------- --------- --------- ----------
</TABLE>
17
<PAGE> 23
RISK/RETURN SUMMARY AND FUND EXPENSES
REPUBLIC OVERSEAS EQUITY FUND
INVESTMENT OBJECTIVES The investment objective of the Overseas
Equity Fund is to seek long-term growth of
capital and future income through investment
primarily in securities of non-U.S. issuers
and securities whose principal markets are
outside of the United States.
STRUCTURE OF THE FUND The Fund seeks to achieve its investment
objective by investing all of its assets in
the Republic International Equity Portfolio
(the "Portfolio"), which has the same
investment objective as the Fund. This
two-tier fund structure is commonly
referred to as a "master/feeder" structure
because one fund (the Overseas Equity Fund
or "feeder fund") is investing all its
assets in a second fund (the Portfolio or
"master fund").
The Fund offers three different types of
shares: Class A Shares, Class B Shares, and
Class C Shares. Each class of shares has
different characteristics and are subject
to different fees and expenses. The
following pages of this Prospectus will
highlight these differences. The Fund's
Statement of Additional information contains
a more detailed discussion of the different
classes of shares.
PRINCIPAL INVESTMENT STRATEGIES The International Equity Portfolio will
invest primarily in equity securities of
companies organized and domiciled in
developed nations outside the United States
or for which the principal trading market is
outside the United States, including Europe,
Canada, Australia and the Far East.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change
daily based on many factors, including, the
quality of the instruments in the Fund's
investment portfolio, national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
Equity securities have greater price
volatility than fixed income instruments.
The value of the Fund will fluctuate as the
market price of its investments increases or
decreases.
18
<PAGE> 24
The Fund's investments in foreign securities
are riskier than its investments in U.S.
securities. Investments in foreign
securities may lose value due to unstable
international political and economic
conditions, fluctuations in currency
exchange rates, lack of adequate company
information, as well as other factors.
Investments in emerging markets are subject
to even greater price volatility than
investments in foreign securities because
there is a greater risk of political or
social upheaval in emerging markets. In
addition, these investments are often
illiquid and difficult to value accurately.
In January 1999, the European Monetary Union
plans to introduce a common currency for the
European Union (the "euro"). Significant
uncertainty surrounds the introduction of
the euro and its effect on the value of
securities denominated in local European
currencies. The currencies in which a Fund's
assets are denominated may be devalued
against the U.S. dollar, resulting in a loss
to the fund.
The Fund may invest in derivative
instruments (e.g., option and futures
contracts) to help achieve its investment
objective. These investments could increase
the Fund's price volatility or reduce the
return on your investment.
An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- SEEKING A LONG-TERM GOAL SUCH AS
RETIREMENT
- LOOKING TO ADD A GROWTH COMPONENT
TO YOUR PORTFOLIO
- WILLING TO ACCEPT HIGHER RISKS OF
INVESTING IN THE STOCK MARKET IN
EXCHANGE FOR POTENTIALLY HIGHER
LONG-TERM RETURNS
This Fund will not be appropriate for
anyone:
- SEEKING MONTHLY INCOME
- PURSUING A SHORT-TERM GOAL OR
INVESTING EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
19
<PAGE> 25
RISK/RETURN SUMMARY AND FUND EXPENSES
The chart and table on this page show how the Republic Overseas Equity Fund has
performed and how its performance has varied from year to year. The bar chart
shows changes in the Fund's yearly performance for the past two years to
demonstrate that the Fund has gained or lost value at differing times. The table
below compares the fund' performance to that of the [Lipper International Equity
Fund Index], an unmanaged, equally weighted index composed of the 30 largest
Mutual Funds with this investment objective.
The returns for Class B and Class C shares will differ from the Class A returns
shown in the bar chart because of differences in expenses of each class. The
table assumes that Class B and Class C shareholders redeem all their fund shares
at the end of the period indicated.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Class A Shares
[GRAPH]
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 4.99% 5.04% ____%
</TABLE>
Of course, past performance does not indicate how the Fund will perform in the
future.
-------------------------------------
Best quarter: Q_ ____ +___%
-------------------------------------
Worst quarter: Q_ ____ +___%
-------------------------------------
Year To Date:
------------------
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending October 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Class A 8/26/1996 ____% N/A N/A ____%
Class B
(with applicable CDSC) 1/6/1998 ____% N/A N/A ____%
Class C
(with applicable CDSC) 11/3/1998 N/A N/A N/A ____%
Lipper International
Equity Fund Index ____ ____% ____% ____% ____%
</TABLE>
The table above reflects the impact of any contingent deferred sales charges
that apply to Class B and Class C shares of the Republic Overseas Equity Fund.
20
<PAGE> 26
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES*
As an investor in the Republic Overseas Equity Fund, you will pay the following
fees and expenses. Shareholder transaction fees are paid from your account.
Annual Fund operating expenses are paid out of Fund assets, and are reflected in
the share price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses (fees
paid by you
directly) A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum sales
charge (load)
on purchases 3.50 None None
------------------------ --------------- ------------- -------------
Maximum deferred
sales charge (load) None 4.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Annual Fund
Operating
Expenses
(fees paid from
Fund assets) A SHARES B SHARES C SHARES
------------------------ --------------- ------------- -------------
<S> <C> <C> <C>
Management fee .675% .675% .675%
------------------------ --------------- ------------- -------------
Distribution (12b-1)
and Service fee .25% 1.00% 1.00%
------------------------ --------------- ------------- -------------
Other expenses .935% .935% .935%
------------------------ --------------- ------------- -------------
Total Fund
operating expenses 1.86% 2.61% 2.61%
------------------------ --------------- ------------- -------------
Fee waivers
and reimbursements .09% .09% .09%
------------------------ --------------- ------------- -------------
Net operating expenses 1.77% 2.52% 2.52%
------------------------ --------------- ------------- -------------
</TABLE>
* The table reflects the combined fees of both the Overseas Equity Fund
and the International Equity Portfolio.
21
<PAGE> 27
RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE*
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
<TABLE>
<CAPTION>
REPUBLIC OVERSEAS EQUITY FUND 1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
CLASS A SHARES $524 $888 $1,276 $2,361
- ------------------------------ -------- --------- --------- ----------
CLASS B SHARES
Assuming Redemption $664 $1,011 $1,385 $2,595
Assuming no Redemption $264 $811 $1,385 $2,595
- ------------------------------ -------- --------- --------- ----------
CLASS C SHARES
Assuming Redemption $370 $811 $1,385 $2,595
Assuming no Redemption $264 $811 $1,385 $2,595
- ------------------------------ -------- --------- --------- ----------
</TABLE>
* The example reflects the combined fees of both the Overseas Equity Fund
and the International Equity Portfolio.
22
<PAGE> 28
RISK/RETURN SUMMARY AND FUND EXPENSES
REPUBLIC OPPORTUNITY FUND
INVESTMENT OBJECTIVES The investment objective of the Opportunity
Fund is to seek long-term growth of capital
by investing in equity securities of
emerging small- and medium-sized companies
that are expected to show earnings growth
over time that is well above the growth rate
of the overall economy and the rate of
inflation.
STRUCTURE OF THE FUND The Fund seeks to achieve its investment
objective by investing all of its assets in
the Republic Small Cap Equity Portfolio
(the "Portfolio"), which has the same
investment objective as the Fund. This
two-tier fund structure is commonly
referred to as a "master/feeder" structure
because one fund (the Opportunity Fund or
"feeder fund") is investing all its assets
in a second fund (the Portfolio or "master
fund").
The Fund offers three different types of
shares: Class A Shares, Class B Shares, and
Class C Shares. Each class of shares has
different characteristics and are subject
to different fees and expenses. The
following pages of this Prospectus will
highlight these differences. The Fund's
Statement of Additional information contains
a more detailed discussion of the different
classes of shares.
PRINCIPAL INVESTMENT STRATEGIES The Portfolio will invest primarily in
common stocks of small- and medium sized
companies, but may also invest in bonds,
notes, commercial paper, U.S. Government
securities, and foreign securities. The Fund
may also invest in common stocks of larger,
more established companies if they are
expected to show increased earnings.
PRINCIPAL INVESTMENT RISKS The Fund's performance per share will change
daily based on many factors, including the
quality of the instruments in the Fund's
investment portfolio, national and
international economic conditions and
general market conditions. You could lose
money on your investment in the Fund or the
Fund could underperform other investments.
Equity securities have greater price
volatility than fixed income instruments.
The value of the Fund will fluctuate as the
market price of its investments increases or
decreases.
23
<PAGE> 29
Because emerging small and medium-sized
companies have fewer financial resources
than larger, well-established companies,
investments in the Fund are subject to
greater price volatility than investments in
other equity funds, particularly during
periods of economic uncertainty or
downturns.
The Fund's investments in foreign securities
are riskier than its investments in U.S.
securities. Investments in foreign
securities may lose value due to unstable
international political and economic
conditions, fluctuations in currency
exchange rates, lack of adequate company
information, as well as other factors.
The Fund may invest in derivative
instruments (e.g., option and futures
contracts) to help achieve its investment
objective. These investments could increase
the Fund's price volatility or reduce the
return on your investment.
An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
- SEEKING A LONG-TERM INVESTMENT
- LOOKING TO ADD A GROWTH COMPONENT
TO YOUR PORTFOLIO
- WILLING TO ACCEPT HIGHER RISKS OF
INVESTING IN EMERGING COMPANIES IN
EXCHANGE FOR POTENTIALLY HIGHER
LONG-TERM RETURNS
- INVESTING SHORT-TERM RESERVES
This Fund will not be appropriate for
anyone:
- SEEKING MONTHLY INCOME
- PURSUING A SHORT-TERM GOAL OR
INVESTING EMERGENCY RESERVES
24
<PAGE> 30
RISK/RETURN SUMMARY AND FUND EXPENSES
The chart and table on this page show how the Republic Opportunity Fund has
performed and how its performance has varied from year to year. The bar chart
shows changes in the Fund's yearly performance for the past two years to
demonstrate that the Fund has gained and lost value at differing times. The
table below compares the Fund's performance over time with the [Lipper Small
Company Fund Index], an unmanaged, equally weighted index composed of the 30
largest Mutual Funds with this investment objective.
The returns for Class B and Class C shares will differ from the Class A returns
shown in the bar chart because of differences in expenses of each class. The
table assumes that Class B and Class C shareholders redeem all their fund shares
at the end of the period indicated.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Class A Shares
[graph]
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 4.99% 5.04% ____%
</TABLE>
Of course, past performance does not indicate how the Fund will perform in the
future.
-------------------------------------
Best quarter: Q_ ____ +___%
-------------------------------------
Worst quarter: Q_ ____ +___%
-------------------------------------
Year To Date:
------------------
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending October 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Class A 9/23/1996 ____% N/A N/A ____%
Class B
(with applicable CDSC) 1/6/1998 ____% N/A N/A ____%
Class C
(with applicable CDSC) 11/3/1998 N/A N/A N/A ____%
Lipper Small Company Fund
Index ____ ____% ____% ____% ____%
</TABLE>
The table above reflects the impact of any contingent deferred sales charges
that apply to Class B and Class C shares of the Republic Opportunity Fund.
25
<PAGE> 31
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES*
As an investor in the Republic Opportunity Fund, you will pay the following fees
and expenses. Shareholder transaction fees are paid from your account. Annual
Fund operating expenses are paid out of Fund assets, and are reflected in the
share price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses (fees
paid by you
directly) A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum sales
charge (load)
on purchases 3.50% None None
------------------------ --------------- ------------- -------------
Maximum deferred
sales charge (load) None 4.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Annual Fund
Operating
Expenses
(fees paid from A SHARES B SHARES C SHARES
Fund assets)
------------------------ --------------- ------------- -------------
<S> <C> <C> <C>
Management fee .85% .85% .85%
------------------------ --------------- ------------- -------------
Distribution (12b-1)
and Service fee .25% 1.00% 1.00%
------------------------ --------------- ------------- -------------
Other expenses .54% .54% .54%
------------------------ --------------- ------------- -------------
Total Fund
operating expenses 1.64% 2.39% 2.39%
------------------------ --------------- ------------- -------------
Fee waivers
and reimbursements .01% .01% .01%
------------------------ --------------- ------------- -------------
Net operating expenses 1.63% 2.38% 2.38%
------------------------ --------------- ------------- -------------
</TABLE>
* The table reflects the combined fees of both the Opportunity Fund and
the Small Cap Equity Portfolio.
26
<PAGE> 32
RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE*
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
<TABLE>
<CAPTION>
REPUBLIC OPPORTUNITY FUND 1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
CLASS A SHARES $511 $849 $1,211 $2,226
- ------------------------------ -------- --------- --------- ----------
CLASS B SHARES
Assuming Redemption $642 $995 $1,275 $2,370
Assuming no Redemption $242 $745 $1,275 $2,370
- ------------------------------ -------- --------- --------- ----------
CLASS C SHARES
Assuming Redemption $355 $745 $1,275 $2,370
Assuming no Redemption $242 $745 $1,275 $2,370
- ------------------------------ -------- --------- --------- ----------
</TABLE>
* The example reflects the combined fees of both the Opportunity Fund and
the Small Cap Equity Portfolio.
27
<PAGE> 33
INVESTMENT OBJECTIVES AND STRATEGIES
- -------------------------------------------------------------------------------
REPUBLIC BOND FUND
- -------------------------------------------------------------------------------
Ticker Symbol: Class A _____ Class B _____ Class C _____
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Bond Fund is to realize above-average
total return, consistent with reasonable risk, through investment primarily in a
diversified portfolio of U.S. Government securities, corporate bonds,
mortgage-backed securities and other fixed income securities. The Fund seeks to
achieve its investment objective by investing all of its assets in the Republic
Fixed Income Portfolio, which has the same investment objective as the Fund.
Consistent with the investment objectives of the Bond Fund, the Fixed
Income Portfolio:
- will normally invest at least 65% of its total assets in fixed
income securities, which may include U.S. Government
securities; corporate debt securities and commercial paper;
mortgage-backed and asset-backed securities; obligations of
foreign governments or international entities; and foreign
currency exchange-related securities.
- may invest more than 50% of its assets in mortgage-backed
securities including mortgage pass-through securities,
mortgage-backed bonds and CMOs, that carry a guarantee of
timely payment.
- may lend its securities to brokers, dealers, and other
financial institutions for the purpose of realizing additional
income. The Fund or Portfolio may also borrow money for
temporary or emergency purposes.
- may invest in derivative instruments, including, but not
limited to, financial futures, foreign currency futures,
foreign currency contracts, options on futures contracts,
options on securities, and swaps.
- may invest in high yield/high risk securities as well as
floating and variable rate instruments and obligations.
- may engage in repurchase transactions, where the Portfolio or
Fund purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price on an
agreed upon date.
- may invest in debt obligations by commercial banks and savings
and loan associations. These instruments would include
certificates of deposit, time deposits, and bankers'
acceptances.
28
<PAGE> 34
- may purchase and sell securities on a when-issued basis, in
which a security's price and yield are fixed on the date of
the commitment but payment and delivery are scheduled for a
future date.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed without approval of the Fund
shareholders. If there is a change in the investment objective of the Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. There can be no
assurance that the investment objectives of the Fund or the Portfolio will be
achieved.
29
<PAGE> 35
INVESTMENT OBJECTIVES AND STRATEGIES
REPUBLIC NEW YORK TAX-FREE BOND FUND
- -------------------------------------------------------------------------------
Ticker Symbol: Class A _____ Class B _____ Class C _____
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the New York Tax-Free Bond Fund is to
provide shareholders of the Fund with income exempt from regular federal, New
York State and New York City personal income taxes. The Fund seeks to achieve
its investment objective by investing its assets primarily in a non-diversified
portfolio of municipal bonds, municipal notes, and other debt instruments, the
interest on which is exempt from regular federal, New York State and New York
City personal income taxes.
Consistent with its investment objectives, the New York Tax-Free Bond
Fund:
- will invest at least 80% of its assets in tax exempt
obligations, and a majority, if not all, of its assets in New
York Municipal Obligations. To the extent that acceptable New
York Municipal Obligations are not available for investment,
the Fund may purchase Municipal Obligations issued by other
states and political subdivisions, the interest income on
which is exempt from regular federal income tax but is subject
to New York State and New York City personal income taxes.
- may invest, as a temporary defensive measure, in short-term
obligations or hold some of its assets in cash. If so,
shareholders may have to pay federal and New York State and
New York City personal income taxes on the interest received
on these investments.
- may invest in derivative instruments, including, but not
limited to, options and futures contracts on fixed income
securities and indices of municipal securities.
- may invest in fixed income securities, which may include
bonds, debentures, mortgage securities, notes, bills,
commercial paper, and U.S. Government securities.
- may engage in repurchase transactions, where the Portfolio or
Fund purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price on an
agreed upon date.
- may purchase and sell securities on a when-issued basis, in
which a security's price and yield are fixed on the date of
the commitment but payment and delivery are scheduled for a
future date.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed without approval of the Fund
shareholders. If there is a change in the investment objective of the Fund,
shareholders should consider whether the Fund remains
30
<PAGE> 36
an appropriate investment in light of their then current financial position and
needs. There can be no assurance that the investment objectives of the Fund or
the Portfolio will be achieved.
31
<PAGE> 37
INVESTMENT OBJECTIVES AND STRATEGIES
REPUBLIC EQUITY FUND
- ------------------------------------------------------------------------------
Ticker Symbol: Class A _____ Class B _____ Class C _____
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Equity Fund is long-term growth of
capital and income without excessive fluctuations in market value. The Fund
seeks to achieve its objective by investing at least 65% of its assets in equity
securities of seasoned medium and large-sized companies in sound financial
condition that are expected to show above average price appreciation.
To achieve its investment goal, the Fund employs two Sub-Advisers, each
of which pursues a different investment strategy. As investment manager of the
Fund, Republic is responsible for allocating the assets between the
Sub-Advisers. Although Republic usually divides the assets in half, it may
allocate a greater portion of the assets to one of the Sub-Advisers if Republic
believes it is in the best interests of the Fund.
The first Sub-Adviser invests its portion of the Fund's assets using a
"growth" style of investing. The second Sub-Adviser invests the remaining assets
using a "value" style of investing. Each approach relies on a careful analysis
of each company considered for investment, using internal fundamental research
analysis, to determine its source of earnings, competitive edge, management
strength, and level of industry dominance as measured by market share.
"GROWTH" STRATEGY: The strategy focuses on investing in financially
secure firms with established operating histories that are proven leaders in
their industry or market sector. Such companies may demonstrate characteristics
such as participation in expanding markets, increasing unit sales volume, growth
in revenues and earnings per share, and increasing return on investments. The
Fund's assets may be invested in companies that do not demonstrate such
characteristics if such companies are expected to undergo an acceleration in
growth of earnings because of special factors such as new management, new
products, changes in consumer demand or basic changes in the economic
environment.
"VALUE" STRATEGY: This approach seeks to obtain the Fund's investment
objective by investing in equity securities of U.S. companies believed to be
undervalued based upon internal research and proprietary valuation systems.
Investment decisions are based on fundamental research, internally developed
valuation systems and seasoned judgment. The research focuses on several levels
of analysis: first, on understanding wealth shifts that occur within the equity
market; and second, on individual company research.
32
<PAGE> 38
Consistent with its investment objectives, the Republic Equity Fund:
- may invest in a broad range of equity securities of U.S. and
foreign companies, including debt securities, warrants or
rights that can be converted into common stock.
- may invest in derivative instruments, including, but not
limited to, futures contracts options on securities,
securities indices, futures contracts, and foreign currencies.
- may invest up to 35% in bonds and other debt securities,
including lower rated, high-yield bonds, commonly referred to
as "junk bonds."
- may invest without limit in short-term debt and other
high-quality, fixed income securities, including U.S. and
foreign government securities, certificates of deposit and
bankers' acceptances of U.S. and foreign banks, and commercial
paper of U.S. or foreign issuers.
- may engage in repurchase transactions, where the Fund
purchases a security and simultaneously commits to resell that
security to the seller at an agreed upon price on an agreed
upon date.
- may lend securities to qualified brokers, dealers, banks and
other financial institutions for the purpose of realizing
additional income.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed without approval of the Fund
shareholders. If there is a change in the investment objective of the Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. There can be no
assurance that the investment objectives of the Fund or the Portfolio will be
achieved.
33
<PAGE> 39
INVESTMENT OBJECTIVES AND STRATEGIES
REPUBLIC OVERSEAS EQUITY FUND
- -------------------------------------------------------------------------------
Ticker Symbol: Class A _____ Class B _____ Class C _____
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Overseas Equity Fund is to seek
long-term growth of capital and future income through investment primarily in
securities of non-U.S. issuers and securities whose principal markets are
outside of the United States. The Fund seeks to achieve its investment objective
by investing all of its assets in the International Equity Portfolio, which has
the same investment objective as the Fund. The principal investments of the
International Equity Portfolio will be in equity securities of companies
organized and domiciled in developed nations outside the United States or for
which the principal trading market is outside the United States, including
Europe, Canada, Australia and the Far East.
Consistent with the investment objectives of the Fund, the
International Equity Portfolio:
- will normally invest at least 80% of its total assets in
equity securities of foreign corporations, consisting of
common stocks, and other securities with equity
characteristics, including preferred stock, warrants, rights,
securities convertible into common stock, trust certificates,
limited partnership interests and equity participations.
- may invest up to 20% of its assets in equity securities of
companies in emerging markets.
- intends to have at least three different countries represented
in its portfolio and intends to invest primarily in companies
with large market capitalizations.
- may, under exceptional circumstances, temporarily invest part
or all of its assets in fixed income securities denominated in
foreign currencies, domestic or foreign government securities,
and nonconvertible preferred stock, or hold its assets in cash
or cash equivalents.
- may invest derivative instruments, including, but not limited
to, foreign currency futures contracts and options on foreign
currencies and foreign currency futures.
- may engage in repurchase transactions, where the Portfolio or
Fund purchases a security and simultaneously commits to resell
that security to the seller securities at an agreed upon price
on an agreed upon date.
- may lend securities to qualified brokers, dealers, banks and
other financial institutions for the purpose of realizing
additional income.
34
<PAGE> 40
- may purchase and sell securities on a "when-issued" basis, in
which a security's price and yield are fixed on the date of
the commitment but payment and delivery are scheduled for a
future date.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed without approval of the Fund
shareholders. If there is a change in the investment objective of the Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. There can be no
assurance that the investment objectives of the Fund or the Portfolio will be
achieved.
35
<PAGE> 41
INVESTMENT OBJECTIVES AND STRATEGIES
REPUBLIC OPPORTUNITY FUND
- -------------------------------------------------------------------------------
Ticker Symbol: Class A _____ Class B _____ Class C _____
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Opportunity Fund is to seek long-term
growth of capital by investing in equity securities of small- and medium-sized
companies that are early in their life cycle but which may have potential to
become major enterprises. These companies would be expected to show earnings
growth over time that is well above the growth rate of the overall economy and
the rate of inflation, and would have the products, management and market
opportunities which are usually necessary to become more widely recognized. The
Fund seeks to achieve its investment objective by investing all of its assets in
the Republic Small Cap Equity Portfolio, which has the same investment objective
as the Fund.
Consistent with the Fund's investment objective, the Small Cap Equity
Portfolio:
- may invest in more established companies whose rates of
earnings growth are expected to accelerate because of special
factors, such as rejuvenated management, new products, changes
in consumer demand or basic changes in the economic
environment.
- may invest up to 20% of its assets in foreign securities.
- will invest primarily in common stocks, but may, to a limited
extent, seek appreciation in other types of securities when
relative values and market conditions make such purchases
appear attractive.
- may invest part or all of its assets in cash (including
foreign currency) or short-term obligations during times of
international, political or economic uncertainty or turmoil,
or in order to meet anticipated redemption requests. These
investments may include certificates of deposit, commercial
paper, short-term notes and U.S. Government securities.
- may invest in derivative instruments, including, but not
limited to, financial and foreign currency futures contracts
as well as options on securities, foreign currencies, and
foreign currency futures.
- may invest in fixed income securities, which may include
bonds, debentures, mortgage securities, notes, bills,
commercial paper, and U.S. Government securities.
36
<PAGE> 42
- may engage in repurchase transactions, where the Portfolio or
Fund purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price on an
agreed upon date.
- may lend securities to qualified brokers, dealers, banks and
other financial institutions for the purpose of realizing
additional income.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed without approval of the Fund
shareholders. If there is a change in the investment objective of the Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. There can be no
assurance that the investment objectives of the Fund or the Portfolio will be
achieved.
37
<PAGE> 43
INVESTMENT RISKS
GENERAL RISK FACTORS: ALL FUNDS
- -------------------------------------------------------------------------------
An investment in the Funds is subject to investment risks, including
the possible loss of the principal amount invested. The Funds' performance per
share will change daily based on many factors, including fluctuation in interest
rates, the quality of the instruments in each Fund's investment portfolio,
national and international economic conditions and general market conditions.
Generally, the Bond Fund, the New York Tax-Free Fund, the Equity Fund,
the Opportunity Fund, the Overseas Equity Fund, and their corresponding
portfolios, will be subject to the following risks:
- FIXED INCOME SECURITIES: The value of investments in
fixed income securities will fluctuate as interest rates
decrease or increase. In addition, these securities may accrue
income that is distributable to shareholders. If so, a Fund or
Portfolio may need to liquidate some of its holdings and
forego the purchase of additional income-producing assets.
- CREDIT RISKS: The Funds could lose money if the issuer of a
fixed income security owned by a Fund or Portfolio is unable
to meet its financial obligations.
- DERIVATIVES: The Funds' may invest in various types of
derivative securities. Generally, a derivative is a
financial arrangement the value of which is based on (or
"derived" from) a traditional security, asset, or market
index. Derivative securities include, but are not limited to,
options and futures transactions, forward foreign currency
exchange contracts, mortgage- and asset-backed securities,
"when-issued"securities, and swaps. There are, in fact, may
different types of derivative securities and many different
ways to use them.
The use of derivative securities is a highly specialized
activity and there can be no guarantee that their use will
increase the return of the Funds or protect their assets from
declining in value. In fact, investments in derivative
securities may actually lower a Fund's return if such
investments are timed incorrectly or are executed under
adverse market conditions. In addition, the lack of a liquid
market for derivative securities may prevent the Fund from
selling unfavorable positions, which could result in adverse
consequences.
Each Fund may invest in different kinds of derivative
securities. Each Fund's Statement of Additional Information
contains a detailed description of the derivative securities
in which the Fund may invest and a discussion of the risks
associated with each security. To request a Statement of
Additional Information, please refer to the back cover of this
Prospectus.
- REPURCHASE AGREEMENTS: The use of repurchase agreements
involves certain risks. For example, if the seller of the
agreements defaults on its obligation to repurchase the
38
<PAGE> 44
underlying securities at a time when the value of these
securities has declined, the Portfolio or Fund may incur a
loss upon disposition of the securities. There is also the
risk that the seller of the agreement may become insolvent and
subject to liquidation.
- ILLIQUID SECURITIES: The Funds may, at times, hold illiquid
securities, by virtue of the absence of a readily available
market for certain of its investments, or because of legal or
contractual restrictions on sale. A Fund could lose money if
it is unable to dispose of an investment at a time that is
most beneficial to the Fund.
- RETURNS ARE NOT GUARANTEED: An investment in the Funds is
neither insured nor guaranteed by the U.S. Government. Shares
of the Funds are not deposits or obligations of, or guaranteed
or endorsed by. Republic or any other bank, and the shares are
not Federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency.
YEAR 2000 RISK: Like other funds and business organizations around the
world, the Fund could be adversely affected if the computer systems used by the
Adviser and the Fund's other service providers do not properly process and
calculate date-related information for the year 2000 and beyond. In addition,
Year 2000 issues may adversely affect companies in which the Fund invests where,
for example, such companies incur substantial costs to address Year 2000 issues
or suffer losses caused by the failure to adequately or timely do so.
The Fund has been assured that the Adviser and the Fund's other service
providers (i.e., Administrator, Transfer Agent, Fund Accounting Agent, Custodian
and Distributor) have developed and are implementing clearly defined and
documented plans intended to minimize risks to services critical to the Fund's
operations associated with Year 2000 issues. Internal efforts include a
commitment to dedicate adequate staff and funding to identify and remedy Year
2000 issues, and specific actions such as inventorying software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems, and retesting for Year 2000
readiness. The Fund's Adviser and service providers are likewise seeking
assurances from their respective vendors and suppliers that such entities are
addressing any Year 2000 issues, and each provider intends to engage, where
appropriate, in private and industry or "streetwide" interface testing of
systems for Year 2000 readiness.
In the event that any systems upon which the Fund is dependent are not
Year 2000 ready by December 31, 1999, administrative errors and account
maintenance failures would likely occur.
While the ultimate costs or consequences of incomplete or untimely
resolution of Year 2000 issues by the Adviser or the Fund's service providers
cannot be accurately assessed at this time, the Fund currently has no reason to
believe that the Year 2000 plans of the Adviser and the Fund's service providers
will not be completed by December 31, 1999, or that the anticipated costs
associated with full implementation of their plans will have a material adverse
impact on either their business operations or financial condition of those of
the Fund. The Fund and the Adviser will continue to closely monitor developments
relating to this issue, including development by the Adviser and the Fund's
service providers of contingency plans for providing back-up computer services
in the event of a systems failure or the inability of any provider to
39
<PAGE> 45
achieve Year 2000 readiness. Separately, the Adviser will monitor potential
investment risk related to Year 2000 issues.
SPECIFIC RISK FACTORS: FOREIGN AND HIGH YIELD SECURITIES
- ------------------------------------------------------------------------------
THE BOND FUND THE EQUITY FUND
THE OPPORTUNITY FUND THE OVERSEAS EQUITY FUND
Foreign securities involve investment risks different from those
associated with domestic securities. Foreign investments may be riskier than
U.S. investments because of unstable international political and economic
conditions, foreign controls on investment and currency exchange rates,
withholding taxes, or a lack of adequate company information, lack of liquidity,
and lack of government regulation.
In January 1999, the European Monetary Union plans to introduce a
common currency for the European Union (the "euro"). Significant uncertainty
surrounds the introduction of the euro and its effect on the value of securities
denominated in local European currencies. If the Fund or Portfolio holds
investments in countries with currencies replaced by the euro, those investments
may be devalued against the U.S. dollar, resulting in a loss to the Fund.
Investments in emerging markets present greater risk than investing in
foreign issuers in general. The risk of political or social upheaval is greater
in emerging markets. In addition, a number of emerging markets restrict foreign
investment in stocks. Inflation and rapid fluctuations in inflation rates have
had and may continue to have negative effects on the economies and securities
markets of certain emerging market countries. Moreover, many of the emerging
securities markets are relatively small, have low trading volumes, suffer
periods of relative illiquidity, and are characterized by significant price
volatility.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. If the issuer of high yield securities defaults, the Fund or
Portfolio may incur additional expenses to seek recovery. High yield securities
may be less liquid than the market for higher grade securities. Less liquidity
in the secondary trading markets could adversely affect and cause large
fluctuations in the daily net asset value of the Funds.
SPECIFIC RISK FACTORS: "WHEN-ISSUED" SECURITIES
- -------------------------------------------------------------------------------
THE BOND FUND
THE NEW YORK TAX-FREE FUND
THE OVERSEAS EQUITY FUND
The price and yield of a securities purchased on a "when-issued" basis
is fixed on the date of the commitment but payment and delivery are scheduled
for a future date. Consequently, these securities present a risk of loss if the
other party to a when-issued transaction fails to deliver or pay for the
security. In addition, purchasing securities on a "when-issued" basis can
involve a risk that the yields available in the market on the settlement date
may actually be higher (or lower)
40
<PAGE> 46
than those obtained in the transaction itself and, as a result, the
"when-issued" security may have a lesser (or greater) value at the time of
settlement than the Fund's payment obligation with respect to that security.
SPECIFIC RISK FACTORS: MORTGAGE-BACKED SECURITIES
- -------------------------------------------------------------------------------
THE BOND FUND
Mortgage- and asset-backed securities are subject to prepayment,
extension, market, and credit risks. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Conversely, an extension risk
is present during periods of rising interest rates, when a reduction in the rate
of prepayments may significantly lengthen the effective durations of such
securities. Market risk reflects the risk that the price of the security may
fluctuate over time as a result of changing interest rates or the lack of
liquidity. Credit risk reflects the risk that the Fund or Portfolio may not
receive all or part of its principal because the issuer has defaulted on its
obligations.
SPECIFIC RISK FACTORS: Non-Diversification
- ------------------------------------------------------------------------------
THE NEW YORK TAX-FREE BOND FUND
Because the Fund will concentrate its investments in New York and may
concentrate a significant portion of its assets in the securities of a single
issuer or sector, investment in this Fund may pose investment risks greater than
those posed by a more broadly diversified portfolio. Consequently, unlike a more
diversified portfolio, the value of the Fund's assets could lose significant
value due to the poor performance of a single issuer or sector.
The Fund may also be subject to greater credit risks than other funds
because it limits its investments to securities offered by New York State and
other issuers of New York Municipal Obligations. New York State and other
issuers of New York Municipal Obligations have historically experienced periods
of financial difficulties. The Fund could lose money if the issuer of a security
is unable to meet its financial obligations.
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<PAGE> 47
FUND MANAGEMENT
THE INVESTMENT ADVISER
Republic National Bank of New York ("Republic" or the "Adviser), 452
Fifth Avenue, New York, New York, is the investment adviser for the New York
Tax-Free Bond Fund. Republic is also the investment manager for the Equity Fund,
the Fixed Income Portfolio, the International Portfolio, and the Small Cap
Equity Portfolio. As investment manager of the Equity Fund and the Portfolios,
Republic provides general supervision over the investment management functions
performed by the investment advisers.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. As of June 30, 1998, Republic was the ___
largest commercial bank in the United States as measured by deposits. Republic
currently provides investment advisory services for individuals, trusts, estates
and institutions. Republic manages more than $___ billion in assets including
$___ billion in the Republic Family of Funds.
The following companies serve as investment advisers of their
respective Fund and Portfolios. The investment advisers make the day-to-day
investment decisions and continuously review, supervise and administer
investment programs.
THE BOND FUND (FIXED INCOME PORTFOLIO): Miller Anderson & Sherrard
("MAS"), One Tower Bridge, West Conshohocken, Pennsylvania 19428, is a
Pennsylvania limited partnership founded in 1969. MAS provides investment
services to employee benefit plans, endowment funds, foundations and other
institutional investors. As of ___________, 1998, MAS had in excess of $___
billion in assets under management.
THE NEW YORK TAX-FREE BOND FUND: Republic serves as the investment
adviser to the Fund. A description of Republic's experience in investment
management is set forth above.
THE EQUITY FUND: Alliance Capital Management L.P. ("Alliance"), 1345
Avenue of the Americas, New York, New York 10105, and Brinson Partners, Inc.
("Brinson"), 209 South LaSalle Street, Chicago, IL 60604, both serve as
investment advisers to the Equity Fund. As investment manager, Republic is
responsible for allocating the Fund's assets between Alliance and Brinson for
purposes of investment.
Alliance is a leading global investment adviser supervising client
accounts with assets totaling $262.5 billion as of June 30, 1998. Alliance's
clients are primarily major corporate employee benefit funds, public employee
retirement systems, investment companies, foundations and endowment funds. As of
____________, 1998, investment portfolios managed by Alliance currently had over
3.5 million shareholder accounts, in aggregate.
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<PAGE> 48
FUND MANAGEMENT
- ---------------
THE INVESTMENT ADVISER - CONTINUED
Brinson is an investment management firm managing, as of _______,
199__, approximately $__ billion, primarily for pension and profit sharing
institutional accounts. Brinson and its predecessor entities have managed
domestic and international investment assets since 1974 and global investment
assets since 1982. Brinson also serves as the investment adviser to seven other
investment companies.
THE OVERSEAS EQUITY FUND (INTERNATIONAL EQUITY PORTFOLIO): Capital
Guardian Trust Company ("CGTC"), which was founded in 1968, is a wholly owned
subsidiary of The Capital Group Companies, Inc., both of which are located at
333 South Hope Street, Los Angeles, California. As of ___________, 1998, CGTC
managed in excess of $70 billion of assets primarily for large institutional
clients.
THE OPPORTUNITY FUND (SMALL CAP EQUITY PORTFOLIO): MFS Institutional
Advisers, Inc. ("MFSI"), together with its parent company Massachusetts
Financial Services Company ("MFS"), is America's oldest mutual fund
organization. MFSI is a [Delaware Corporation] with its principal office at
[address]. Net assets under the management of the MFS organization were
approximately $__ billion on behalf of approximately __ million investor
accounts as of __________ , 1998. As of that date, the MFS organization managed
approximately $_____ billion of assets invested in equity securities,
approximately $___ billion of assets invested in fixed income securities, and
$___ billion of assets invested in securities of foreign issuers and non-U.S.
dollar securities.
For these advisory and management services, the Funds paid as follows:
<TABLE>
<CAPTION>
- ----------------------------------- ------------------------------------
Percentage of average net assets
as of 10/31/98
- ----------------------------------- ------------------------------------
<S> <C>
Bond Fund ______%
- ----------------------------------- ------------------------------------
New York Tax-Free Bond Fund ______%
- ----------------------------------- ------------------------------------
Equity Fund _______%
- ----------------------------------- ------------------------------------
Overseas Equity Fund _______%
- ----------------------------------- ------------------------------------
Opportunity Fund _______%
- ----------------------------------- ------------------------------------
</TABLE>
* Republic waived a portion of its contractual fees with the Funds for the most
recent fiscal year. Contractual fees (without waivers) are: Bond Fund, ___%, New
York Tax-Free Bond Fund, 0.25%; Equity Fund, 0.50%, Overseas Equity Fund, ____%,
and Opportunity Fund, ____%.
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<PAGE> 49
FUND MANAGEMENT
- ----------------
PORTFOLIO MANAGERS
THE BOND FUND (FIXED INCOME PORTFOLIO)
- The Portfolio Manager for the Fixed Income Portfolio is
Kenneth B. Dunn. Mr. Dunn has been a Partner at MAS since
prior to 1991. He has served as the Portfolio Manager of the
MAS Fixed Income and MAS Domestic Fixed Income Portfolios
since 1987; the MAS Fixed Income II Portfolio since 1990; the
MAS Mortgage-Backed Securities and Special Purpose Fixed
Income Portfolios, since 1992; and the MAS Municipal and PA
Municipal Portfolios, since 1994.
THE NEW YORK TAX-FREE BOND FUND:
- Peter J. Loftus, Senior Portfolio Manager with Republic since
1997, is primarily responsible for the day-to-day management
of the New York Tax-Free Bond Fund's portfolio. Prior to
joining Republic, Mr. Loftus was a Senior Vice President at
Dillon, Read & Co. from _________, 1992 through ____________,
1997, where he managed tax-exempt trading and hedging for the
firm. He also spent seven years (19__ - 19__) at Paine Webber
as a Vice President involved in the trading and distribution
of tax-exempt securities.
THE EQUITY FUND:
- John L. Blundin, an Executive Vice President and Portfolio
Manager, and Christopher Toub, a Senior Vice President and
Equity Portfolio Manager, have primary portfolio management
responsibility for the Equity Fund's assets allocated to
Alliance. Mr. Blundin has served as [POSITION, COMPANY NAME,
AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST FIVE YEARS TO
BE PROVIDED]. In all, Mr. Blundin has 32 years of investment
experience, including 24 years of experience as a portfolio
manager at Alliance. Mr. Toub has 16 years of investment
experience, including five years of experience as a portfolio
manager at Alliance. Prior to joining Alliance in 1992, Mr.
Toub was a Portfolio Manager at Marcus, Schloss, & Co from
__________, 19__ through ____________, 199__.
* Jeffrey J. Diermeier, Managing Partner-U.S. Equities at Brinson, has primary
portfolio management responsibility for the Fund's assets allocated to Brinson.
Mr. Diermeier has served as [position, company name, and length of service for
each employer in past five years to be provided]. Mr. Diermeier has 21 years of
investment experience at Brinson.
44
<PAGE> 50
FUND MANAGEMENT
- ---------------
PORTFOLIO MANAGERS - CONTINUED
THE OVERSEAS EQUITY FUND (INTERNATIONAL EQUITY PORTFOLIO): The following persons
are primarily responsible for portfolio management of the International Equity
Portfolio:
- David Fisher, Vice Chairman of CGTC, has had 32 years
experience as an investment professional (28 years with CGTC
or its affiliates). Mr. Fisher has served as [POSITION,
COMPANY NAME, AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST
FIVE YEARS TO BE PROVIDED]
- Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., has had 26 years experience as an
investment professional (24 years with CGTC or its
affiliates). Mr. Giesecke has served as [POSITION, COMPANY
NAME, AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST FIVE
YEARS TO BE PROVIDED].
- Nancy Kyle, Senior Vice President of CGTC, has had 24 years
experience as an investment professional (7 years with CGTC or
its affiliates). Ms. Kyle has served as [POSITION, COMPANY
NAME, AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST FIVE
YEARS TO BE PROVIDED]. From 1980 to 1990, Ms. Kyle was
managing director of J. P. Morgan Investment Management, Inc.
- John McIlwraith, Senior Vice President of CGTC, has had 28
years experience as an investment professional (14 years with
CGTC or its affiliates) Mr. McIlwraith has serves as
[POSITION, COMPANY NAME, AND LENGTH OF SERVICE FOR EACH
EMPLOYER IN PAST FIVE YEARS TO BE PROVIDED].
- Robert Ronus, President of CGTC, has had 29 years experience
as an investment professional (23 years with CGTC or its
affiliates). Mr. Ronus has served as [POSITION, COMPANY NAME,
AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST FIVE YEARS TO
BE PROVIDED].
- Nilly Sikorsky, Director of The Capital Group Companies, Inc.,
has had 35 years experience as an investment professional, all
of which was with CGTC or its affiliates. Ms. Sikorsky has
served as [POSITION, COMPANY NAME, AND LENGTH OF SERVICE FOR
EACH EMPLOYER IN PAST FIVE YEARS TO BE PROVIDED].
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<PAGE> 51
FUND MANAGEMENT
- ---------------
PORTFOLIO MANAGERS - CONTINUED
OPPORTUNITY FUND (SMALL CAP EQUITY PORTFOLIO):
- The portfolio managers of the Small Cap Equity Portfolio are
John W. Ballen and Brian Stack, Executive Vice President and
Vice President respectively, of the Small Cap Equity
Sub-Adviser. Mr. Ballen has been employed by [POSITION,
COMPANY NAME, AND LENGTH OF SERVICE FOR EACH EMPLOYER IN PAST
FIVE YEARS TO BE PROVIDED]. MR. STACK HAS BEEN EMPLOYED BY
[POSITION, COMPANY NAME, AND LENGTH OF SERVICE FOR EACH
EMPLOYER IN PAST FIVE YEARS TO BE PROVIDED].
THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Fund's administrator. Management and
administrative services of BISYS include providing office space, equipment and
clerical personnel to the Fund and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend dispersing services.
BISYS also serves as the distributor of the Fund's shares. BISYS may provide
financial assistance in connection with pre-approved seminars, conferences and
advertising to the extent permitted by applicable state or self-regulatory
agencies, such as the National Association of Securities Dealers.
Each Fund's Statement of Additional Information has more detailed information
about the Investment Adviser, Distributor and Administrator, and other service
providers.
THE TWO-TIER FUND STRUCTURE
The Bond Fund, Overseas Equity Fund, and Opportunity Fund seek to achieve their
investment objectives by investing all of each Fund's assets in the Republic
Fixed Income Portfolio, Republic International Equity Portfolio, and the
Republic Small Cap Equity Portfolio, respectively, series of a separate open-end
investment company with the same investment objectives as their respective
Funds. This is referred to as a "master/feeder" arrangement because one fund
(the "feeder" fund) "feeds" its assets into another fund (the "master fund").
The two-tier investment fund structure has been developed relatively recently,
so shareholders should carefully consider this investment approach. For example,
other mutual funds and institutional investors may invest in the Portfolios on
the same terms and conditions as the Funds (although they may have different
sales commissions and other operating expenses that may generate different
returns). As with traditionally structured funds which have large investors, the
actions of these mutual funds and institutional investors (or other large
investors) may have a material effect on smaller investors in the Fund. For
example, if a large investor withdraws from a portfolio (a "master fund"),
operating expenses may increase, thereby producing lower returns for investors
in the Funds ("feeder funds"). Additionally, the portfolio may become less
diverse, resulting in increased portfolio operating expenses.
46
<PAGE> 52
FUND MANAGEMENT
- ---------------
THE TWO-TIER FUND STRUCTURE - CONTINUED
Except as permitted, whenever a Fund is requested to vote on a matter pertaining
to its corresponding Portfolio, the Fund will hold a meeting of its
shareholders. At the meeting of investors in the Portfolio, the Fund will cast
all of its votes in the same proportion as the votes of the Fund's shareholders.
The investment objectives of the Funds and the Portfolios may be changed without
approval of the shareholders. A Fund may withdraw its investment in its
corresponding Portfolio as a result of certain changes in the Portfolio's
investment objective, policies or restrictions or if it is in the best interests
of the Fund to do so.
47
<PAGE> 53
SHAREHOLDER INFORMATION
- -----------------------
PRICING OF FUND SHARES
How NAV is Calculated
The NAV is calculated by adding the total value of the Fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the Fund:
NAV =
Total Assets - Liabilities
--------------------------
Number of Shares
Outstanding
THE INCOME AND EQUITY FUNDS
The net asset value per share (NAV) of the Bond Fund and the New York Tax-Free
Bond Fund (collectively, the "Income Funds"), and the Equity Fund, the Overseas
Equity Fund, and the Opportunity Fund (collectively, the "Equity Funds") and the
value of each Fund's investment in its corresponding Portfolio (the
"Portfolios), is determined once each day at the close of regular trading on
the New York Stock Exchange, normally at 4 p.m. Eastern time on days the
Exchange is open.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is accepted by the Fund plus any applicable sales
charge as noted in the section on "Distribution Arrangements/Sales Charges."
This is what is known as the offering price.
48
<PAGE> 54
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR SHARES
You may purchase Funds through the Republic Funds Distributor or through banks,
brokers and other investment representatives, which may charge additional fees
and may require higher minimum investments or impose other limitations on buying
and selling shares. If you purchase shares through an investment representative,
that party is responsible for transmitting orders by close of business and may
have an earlier cut-off time for purchase and sale requests. Consult your
investment representative or institution for specific information.
<TABLE>
<CAPTION>
ACCOUNT TYPE MINIMUM MINIMUM
INITIAL INVESTMENT SUBSEQUENT
<S> <C> <C>
Class A
Regular
(non-retirement) $ 1,000 $ 100
Retirement (IRA) $ 250 $ 100
Automatic
Investment Plan $ 250 $ 25
</TABLE>
All purchases must be in U.S. dollars. A fee will be charged for any checks that
do not clear. Third-party checks are not accepted.
A Fund may waive its minimum purchase requirement and the Distributor may reject
a purchase order if it considers it in the best interest of the Fund and its
shareholders.
- -------------------------------------------------------------------------------
Avoid 31% Tax Withholding
- -------------------------------------------------------------------------------
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
49
<PAGE> 55
SHAREHOLDER INFORMATION
- ------------------------
PURCHASING AND ADDING TO YOUR SHARES - CONTINUED
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL OR BY OVERNIGHT SERVICE
INITIAL INVESTMENT:
If purchasing through your financial adviser or brokerage account, simply tell
your adviser or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
1. Carefully read, complete, and sign the account application.
Establishing your account privileges now saves you the inconvenience of
having to add them later.
2. Make check, bank draft or money order payable to "Republic Funds" and
include the name of the appropriate Fund(s) on the check.
Mail to: Republic Funds, c/o BISYS Fund Services, 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
SUBSEQUENT:
1. Use the investment slip attached to your account statement.
Or, if unavailable,
2. Include the following information in writing:
- Fund name
- Share class
- Amount invested
- Account name
- Account number
Include your account number on your check.
Mail investment slip and check to: Republic Funds, c/o BISYS Fund Services, 3435
Stelzer Road, Columbus, Ohio 43219-3035.
50
<PAGE> 56
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR SHARES - CONTINUED
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-___-____. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-___-____to arrange a transfer from your bank account.
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to eight days to
clear. There is generally no fee for ACH transactions.
BY WIRE TRANSFER
NOTE: YOUR BANK MAY CHARGE A WIRE TRANSFER FEE.
For INITIAL INVESTMENT:
Fax the completed application, along with a request for a confirmation number to
1-800-___-____. Follow the instructions below after receiving your confirmation
number.
FOR INITIAL AND SUBSEQUENT INVESTMENTS:
Instruct your bank to wire transfer your investment to: BISYS Fund Services,
3435 Stelzer Road, Columbus, Ohio 43219-3035, Attn. Transfer Agent.
Name of Bank
Routing Number: ABA #011001438
Acct. #5999-99451
Include:
Your name
Your confirmation number
After instructing your bank to wire the funds, call ___-___-____ to advise us of
the amount being transferred and the name of your bank
You can add to your account by using the convenient options described below. The
Funds reserve the right to change or eliminate these privileges at any time with
60 days notice.
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<PAGE> 57
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND ADDING TO YOUR SHARES - CONTINUED
- ------------------------------------
<TABLE>
<CAPTION>
AUTOMATIC INVESTMENT PLAN DIRECTED DIVIDEND OPTION
<S> <C>
You can make automatic investments in the Funds from your bank By selecting the appropriate
account, through payroll deduction or from your federal box in the Account Application,
employment, Social Security or other regular government you can elect to receive your
checks. Automatic investments can be as little as $25, once distributions in cash (check)
you've invested the $250 minimum required to open the account. or have distributions (capital
gains and dividends) reinvested
To invest regularly from your bank account: in another Republic Fund
- Complete the Automatic Investment Plan portion on your without a sales charge. You
Account Application. must maintain the minimum
Make sure you note: balance in each Fund into which
- Your bank name, address and account number you plan to reinvest dividends
- The amount you wish to invest automatically or the reinvestment will be
(minimum $25) suspended and your dividends
- How often you want to invest (every month, 4 paid to you. The Fund may
times a year, twice a year or once a year) modify or terminate this
- Attach a voided personal check. reinvestment option without
notice. You can change or
To invest regularly from your paycheck or government check: terminate your participation in
Call 1-800-___-____ for an enrollment form. the reinvestment option at any
time.
</TABLE>
- -------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for Class A shares than for Class B and C shares, because
Class A shares have lower distribution expenses. Capital gains are distributed
at least annually.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A DISTRIBUTION.
- -------------------------------------------------------------------------------
52
<PAGE> 58
SHAREHOLDER INFORMATION
- -----------------------
SELLING YOUR SHARES
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is received by the Fund, its transfer agent, or your
investment representative. Normally you will receive your proceeds within a week
after your request is received. See section on "General Policies on Selling
Shares" below.
- ------------------------------------------------------------------------------
Withdrawing Money from Your
Fund Investment
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
When you sell Class B or C shares, you will be charged a fee for any shares that
have not been held for a sufficient length of time. These fees will be deducted
from the money paid to you. See the section on "Distribution Arrangements/Sales
Charges" below for details.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through your financial adviser or broker, ask him or her
for redemption procedures. Your adviser and/or broker may have transaction
minimums and/or transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
<TABLE>
<S> <C>
By telephone 1. Call 1-800-___-____ with instructions as to how you wish to
(unless you have declined receive your funds (mail, wire, electronic transfer). (See
telephone sales privileges) "General Policies on Selling Shares-Verifying Telephone
Redemptions" below)
- ------------------------------------- ---------------------------------------------------------------------
By mail or overnight service 1. Call 1-800-___-____to request redemption forms or write a
(See "General Policies on letter of instruction indicating:
Selling Shares-Redemptions in - your Fund and account number
Writing Required" below) - amount you wish to redeem
- address where your check should be sent
- account owner signature
2. Mail to:
Republic Funds
c/o BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035.
</TABLE>
53
<PAGE> 59
<TABLE>
<S> <C>
Wire transfer Call 1-800-___-____to request a wire transfer.
You must indicate this option
on your account application. If you call by 4 p.m. Eastern time, your payment will normally
be wired to your bank on the next business day. Otherwise, it
The Fund may charge a wire will normally be wired on the second business day after your
transfer fee. call.
NOTE: Your financial
institution may also charge a
separate fee.
- ------------------------------------- ---------------------------------------------------------------------
Electronic Redemptions Call 1-800-___-____ to request an electronic redemption.
Your bank must participate in If you call by 4 p.m. Eastern time, the NAV of your shares
the Automated Clearing House will normally be determined on the same day and the proceeds
(ACH) and must be a U.S. bank. credited within 8 days.
Your bank may charge for this
service.
</TABLE>
SYSTEMATIC WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
- - Make sure you've checked the appropriate box on the Account Application.
Or call 1-800-___-____.
- - Include a voided personal check.
- - Your account must have a value of $10,000 or more to start withdrawals.
- - If the value of your account falls below $1,000, you may be asked to
add sufficient funds to bring the account back to $1,000, or the Fund
may close your account and mail the proceeds to you.
54
<PAGE> 60
SHAREHOLDER INFORMATION
- -----------------------
SELLING YOUR SHARES - CONTINUED
REDEMPTIONS IN WRITING REQUIRED
You must request redemption in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ("IRAs").
2. Redemption requests requiring a signature guarantee which include each of
the following.
- Redemptions over $10,000
- Your account registration or the name(s) in your account has changed
within the last 15 days
- The check is not being mailed to the address on your account
- The check is not being made payable to the owner of the account
- The redemption proceeds are being transferred to another Fund account
with a different registration.
You must obtain a signature guarantee from members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Signature Program) or SEMP (Stock Exchanges Medallion Program). Members are
subject to dollar limitations which must be considered when requesting their
guarantee. The Transfer Agent may reject any signature guarantee if it believes
the transaction would otherwise be improper.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders. If appropriate precautions have not been taken, the
Transfer Agent may be liable for losses due to unauthorized transactions.
REDEMPTIONS WITHIN 15 DAYS OF INITIAL INVESTMENT
When you have made your initial investment by check, you cannot redeem any
portion of it until the Transfer Agent is satisfied that the check has cleared
(which may require up to 15 business days). You can avoid this delay by
purchasing shares with a certified check.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
55
<PAGE> 61
SHAREHOLDER INFORMATION
- -----------------------
SELLING YOUR SHARES - CONTINUED
CLOSING OF SMALL ACCOUNTS
If your account falls below $50, the Fund may ask you to increase your balance.
If it is still below $50 after 30 days, the Fund may close your account and send
you the proceeds at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the Fund.
56
<PAGE> 62
SHAREHOLDER INFORMATION
- -----------------------
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
This section describes the sales charges and fees you will pay as an investor in
different share classes offered by the Bond Fund and New York Tax-Free Bond Fund
(collectively, the "Income Funds") and the Equity Fund, the Overseas Equity
Fund, and the Opportunity Fund (collectively, the "Equity Funds").
THE INCOME FUNDS
<TABLE>
<CAPTION>
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C>
Sales Charge (Load) Percentage of the No front-end sales No front-end sales
average daily net assets: charge. A contingent charge. A contingent
deferred sales charge deferred sales charge
2.75% (CDSC) may be imposed (CDSC) may be imposed
Less than $50,000 1.75% on shares redeemed on shares redeemed
$50,000 but less than $100,000 1.25% within three years within one year after
$100,000 but less than 1.00% after purchase. purchase.
$250,000 None Shares automatically
$250,000 but less than convert to Class A
$500,000 Shares after 5 years.
$500,000 and over
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
Distribution Subject to combined Subject to combined Subject to combined
(12b-1) and Service Fees annual distribution and annual distribution annual distribution
shareholder servicing and shareholder and shareholder
fees of up to .25% of servicing fees of up servicing fees of up
the Fund's total assets. to 1.00% of the Fund's to 1.00% of the
assets. Fund's assets.
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
Fund Expenses Lower annual expenses Higher annual Higher annual
than Class B or C Shares. expenses than Class A expenses than Class A
Shares Shares
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
</TABLE>
57
<PAGE> 63
SHAREHOLDER INFORMATION
- -----------------------
DISTRIBUTION ARRANGEMENTS/SALES CHARGES - CONTINUED
THE EQUITY FUNDS
<TABLE>
<CAPTION>
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C>
SALES CHARGE (LOAD) Percentage of the NO FRONT-END SALES NO FRONT-END SALES
average daily net assets: CHARGE. A contingent CHARGE. A contingent
deferred sales charge deferred sales charge
3.50% (CDSC) may be imposed (CDSC) may be imposed
Less than $50,000 2.50% on shares redeemed on shares redeemed
$50,000 but less than $100,000 1.50% within four years within one year after
$100,000 but less than 1.00% after purchase. purchase.
$250,000 None Shares automatically
$250,000 but less than convert to Class A
$500,000 Shares after 6 years.
$500,000 and over
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
DISTRIBUTION Subject to combined Subject to combined Subject to combined
(12B-1) AND SERVICE FEES annual distribution and annual distribution annual distribution
shareholder servicing and shareholder and shareholder
fees of up to .25% of servicing fees of up servicing fees of up
the Fund's total assets. to 1.00% of the Fund's to 1.00% of the
assets. Fund's assets.
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
FUND EXPENSES Lower annual expenses Higher annual Higher annual
than Class B or C Shares. expenses than Class A expenses than Class A
Shares Shares
- ----------------------------------- ------------------------------- ----------------------------- ----------------------------
</TABLE>
58
<PAGE> 64
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES - CONTINUED
DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of the Fund's shares and/or for providing shareholder services. 12b-1 fees are
paid from Fund assets on an ongoing basis, and will decrease the return on your
investment.
- - The 12b-1 fees vary by share class as follows:
- Class A shares may pay a 12b-1 fee of up to .25% of the
average daily net assets of the applicable Fund.
- Class B and Class C shares pay a 12b-1 fee of up to 0.75% of
the average daily net assets of the applicable Fund. This will
cause expenses for Class B and Class C shares to be higher and
dividends to be lower than for Class A shares.
- - The higher 12b-1 fee on Class B and Class C shares, together with the
contingent deferred sales load help the Distributor sell Class B and
Class C shares without an "up-front" sales charge. In particular, these
fees help to defray the Distributor's costs of advancing brokerage
commissions to investment representatives.
- - In addition to the 12b-1 fees, Class A, Class B and Class C shares are
subject to a shareholder servicing fee of up to .25%.
- - The combination of the 12b-1 fees and shareholder servicing fees will
not exceed .25% for the Class A shares and 1.0% for the Class B and
Class C shares.
Long-term Class B and Class C shareholders may pay indirectly more than the
equivalent of the maximum permitted front-end sales charge due to the recurring
nature of 12b-1 distribution and service fees.
59
<PAGE> 65
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES - CONTINUED
CLASS A SHARES
WAIVER OF SALES CHARGES FOR CLASS A SHARES
The following qualify for waivers of sales charges:
- - Shares purchased by investment representatives through fee-based
investment products or accounts.
- - Proceeds from redemptions from another mutual fund complex within 60
days after redemption, if you paid a front end sales charge for those
shares.
- - Reinvestment of distributions from a deferred compensation plan,
agency, trust, or custody account that was maintained by the Advisers
or their affiliates or invested in any of the Funds.
- - Shares purchased for trust or other advisory accounts established with
the Advisers or their affiliates.
- - Shares purchased by directors, trustees, employees, and family members
of the Advisers and their affiliates and any organization that provides
services to the Funds; retired Fund trustees; dealers who have an
agreement with the Distributor; and any trade organization to which the
Advisers or the Administrator belongs.
SALES CHARGE REDUCTIONS
Reduced sales charges for Class A shares are available to shareholders with
investments of $50,000 or more. In addition, you may qualify for reduced sales
charges under the following circumstances.
- - Letter of Intent. You inform the Fund in writing that you intend to
purchase enough shares over a 13-month period to qualify for a reduced
sales charge. You must include a minimum of 5% of the total amount you
intend to purchase with your letter of intent.
- - Rights of Accumulation. When the value of shares you already own plus
the amount you intend to invest reaches the amount needed to qualify
for reduced sales charges, your added investment will qualify for the
reduced sales charge.
- - Combination Privilege. Combine accounts of multiple Funds (excluding
the Money Market Fund) or accounts of immediate family household
members (spouse and children under 21) to achieve reduced sales
charges.
60
<PAGE> 66
SHAREHOLDER INFORMATION
- -----------------------
DISTRIBUTION ARRANGEMENTS/SALES CHARGES - CONTINUED
- ---------------------------------------
CLASS B SHARES
Class B Shares of the Funds may be purchased for individual accounts only in
amounts of less than $500,000. There is no sales charge imposed upon purchases
of Class B Shares, but investors may be subject to a contingent deferred sales
charge ("CDSC").
Specifically, the Fund's Shares will be subject to a declining CDSC if Class B
shares of the Income Funds are redeemed less than three years after purchase. In
addition, the Fund's B Shares will be subject to a declining CDSC if Class B
shares the Equity Funds are redeemed within 4 years after purchase. In such
cases, the CDSC will be as follows:
THE INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------------------------------------------------
CDSC AS A % OF DOLLAR
YEARS SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
0-1 3.00%
1-2 2.00%
2-3 1.00%
More than 3 None
</TABLE>
THE EQUITY FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------------------------------------------------
CDSC AS A % OF DOLLAR
YEARS SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
0-1 4.00%
1-2 3.00%
2-3 2.00%
3-4 1.00%
More than 4 None
- ------------------------------------------------------- ------------------------------------------------------
</TABLE>
The CDSC will be based upon the lower of the NAV at the time of purchase or the
NAV at the time of redemption according to the schedule below. There is no CDSC
on reinvested dividends or distributions.
If you sell some but not all of your Class B shares, certain shares not subject
to the CDSC (i.e., shares purchased with reinvested dividends) will be redeemed
first, followed by shares subject to the lowest CDSC (typically shares held for
the longest time).
61
<PAGE> 67
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES - CONTINUED
CONVERSION FEATURE - CLASS B SHARES
- Class B Shares of the Funds will convert automatically to
Class A Shares of the same Fund after either five years
(Income Funds) or six years (Equity Funds) from the beginning
of the calendar month in which the Class B shares were
originally purchased.
- After conversion, your shares will be subject to the lower
distribution and shareholder servicing fees charged on Class A
shares which will increase your investment return compared to
the Class B shares.
- You will not pay any sales charge or fees when your shares
convert, nor will the transaction be subject to any tax.
- If you purchased Class B shares of one Fund which you
exchanged for Class B shares of another Fund, your holding
period will be calculated from the time of your original
purchase of Class B shares. The dollar value of Class A shares
you receive will equal the dollar value of the B shares
converted.
CLASS C SHARES
Class C Shares of the Funds may be purchased for individual accounts normally in
amounts of less than $500,000. There is no sales charge imposed upon purchases
of Class C Shares, but investors may be subject to a CDSC. Specifically, if you
redeem Class C shares of the Funds, your redemption may be subject to a 1.0%
CDSC if the shares are redeemed less than one year after the original purchase
of the Class C Shares. The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed.
Unlike Class B shares, Class C Shares have no conversion feature.
WAIVER OF SALES CHARGES - CLASS B SHARES AND CLASS C SHARES
The following qualify for waivers of sales charges:
- - Distributions following the death or disability of a Shareholder.
- - Redemptions representing the minimum distribution from an IRA or a
Custodial Account to a Shareholder who has reached age 70 1/2
- - Redemptions representing the minimum distribution from 401(k)
retirement plans where such redemptions are necessary to make
distributions to plan participants.
62
<PAGE> 68
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
Republic Fund, usually without paying additional sales charges (see "Notes on
Exchanges" below). No transaction fees are charged for exchanges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable.
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to Republic Funds, 3435
Stelzer Road, Columbus, Ohio 43219-3035 or by calling 1-800-___-____. Please
provide the following information:
- Your name and telephone number
- The exact name on your account and account number
- Taxpayer identification number (usually your Social Security
number)
- Dollar value or number of shares to be exchanged
- The name of the Fund from which the exchange is to be made
- The name of the Fund into which the exchange is being made.
See "Selling your Shares" for important information about telephone
transactions.
To prevent disruption in the management of the Funds, due to market timing
strategies, exchange activity may be limited to _____ exchanges within a _____
period.
AUTOMATIC EXCHANGES
You can use the Funds' Automatic Exchange feature to purchase shares of the
Funds at regular intervals through regular, automatic redemptions. To
participate in the Automatic Exchange:
- - Complete the appropriate section of the Account Application.
- - Keep a minimum of $10,000 in the Funds and $1,000 in the Fund
whose shares you are buying.
To change the Automatic Exchange instructions or to discontinue the feature, you
must send a written request to Republic Funds, c/o BISYS Fund Services, 3435
Stelzer Road, Columbus, Ohio 43219-3035
NOTES ON EXCHANGES
When exchanging from a Fund that has no sales charge or a lower sales charge to
a Fund with a higher sales charge, you will pay the difference.
The registration and tax identification numbers of the two accounts must be
identical.
The Exchange Privilege (including automatic exchanges) may be changed or
eliminated at any time upon a 60-day notice to shareholders.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
63
<PAGE> 69
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
- - Any income a Fund receives in the form of dividends is paid out, less
expenses, to its shareholders. Shares begin accruing dividends on the
day they are purchased.
- - Dividends on all Funds are paid monthly. Capital gains for all Funds
are distributed at least annually. Unless a shareholder elects to
receive dividends in cash, dividends will be automatically invested in
additional shares of the Fund.
- - Dividends and distributions are treated in the same manner for federal
income tax purposes whether you receive them in cash or in additional
shares.
- - Dividends are taxable as ordinary income. Taxation on capital gains
will vary with the length of time the Fund has held the security - not
how long the shareholder has been in the Fund.
- - Dividends are taxable in the year in which they are paid, even if they
appear on your account statement the following year.
- - There may be tax consequences to you if you dispose of your Fund
shares, for example, through redemption, exchange or sale. The amount
of any gain or loss and the rate of tax will depend mainly upon how
much you pay for the shares, how much you sell them for, and how long
you hold them.
- - You will be notified in January each year about the federal tax status
of distributions made by the Fund. The notice will tell you which
dividends and redemptions must be treated as taxable ordinary income
and which (if any) are short-term or long-term capital gain. Depending
on your residence for tax purposes, distributions also may be subject
to state and local taxes, including withholding taxes.
- - Foreign shareholders may be subject to special withholding
requirements. If you invest through a tax-deferred retirement account,
such as an IRA, you generally will not have to pay tax on dividends
until they are distributed from the account. These accounts are subject
to complex tax rules, and you should consult your tax adviser about
investment through a tax-deferred account.
- - There is a penalty on certain pre-retirement distributions from
retirement accounts.
- - BECAUSE EVERYONE'S TAX SITUATION IS UNIQUE, ALWAYS CONSULT YOUR TAX
PROFESSIONAL ABOUT FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES.
64
<PAGE> 70
FINANCIAL HIGHLIGHTS
Insert past 5 years'
Financial highlights
From annual report.
BOND FUND FINANCIAL HIGHLIGHTS
NEW YORK TAX-FREE BOND FUND FINANCIAL HIGHLIGHTS
EQUITY FUND FINANCIAL HIGHLIGHTS
OVERSEAS EQUITY FUND FINANCIAL HIGHLIGHTS
OPPORTUNITY FUND FINANCIAL HIGHLIGHTS
65
<PAGE> 71
PRIOR PERFORMANCE
The following tables set forth information for the Bond Fund, Equity
Fund, Overseas Equity Fund and the Opportunity Fund, and information on the
prior performance of the Sub-Advisers for those Funds and, where applicable, the
corresponding portfolios.
The Sub-Adviser prior performance information is a composite of the
average annual total returns of all institutional separate accounts managed by
the Sub-Advisers that have investment objectives, policies and restrictions
substantially similar to the Funds (and corresponding Portfolios), and which
have been managed as the Funds (and corresponding Portfolios) have been managed.
The composite data is provided to illustrate the past performance of the
Sub-Advisers in managing substantially similar accounts with substantially
similar investment objectives, strategies and policies as measured against the
specified market index and does not represent the performance of the Bond Fund,
Equity Fund, Overseas Equity Fund or Opportunity Fund or the Fixed Income
Portfolio, International Equity Portfolio or Small Cap Equity Portfolio.
<TABLE>
<CAPTION>
FIXED INCOME SUB-ADVISOR
ANNUALIZED RETURNS
BOND FUND SUB-ADVISER SALOMON BIG
PERFORMANCE COMPOSITE+ INDEX(2)
<S> <C> <C> <C>
1 Year(1) ............................ 7.62% 6.85% 11.53%
Since Portfolio Inception............. 9.59% N/A* 10.65%
(1/9/95)
5 Years(1) ........................... N/A 5.40% 7.23%
10 Years(1) .......................... N/A 7.97% 9.35%
</TABLE>
(1) Through September 30, 1998.
(2) The Salomon Broad Investment Grade Bond Index is a market-capitalization-
based total return index containing U.S. fixed rate issues having a maturity of
greater than one year and at least $25 million outstanding. The Salomon BIG
Index includes Treasury, Government-sponsored, mortgage-backed, and investment
grade corporate issues.
+ If the expense ratio of the Fund after expense reimbursements were used as
the basis for adjustment, the Sub-Adviser composite average annual returns would
be 7.83% for one year, 6.36% for 5 years and 8.95% for 10 years.
* Sub-Adviser performance information is not available for this time period.
EQUITY SUB-ADVISORS
<TABLE>
<CAPTION>
EQUITY FUND ALLIANCE RUSSELL BRINSON RUSSELL
RUSSELL PERFORMANCE COMPOSITE GROWTH(2) COMPOSITE VALUE(3)
1000(4)
<S> <C> <C> <C> <C> <C>
1 Year(1) ............. 4.30% 7.69% 11.11% 0.48% 3.60% 7.36%
Since Inception+....... 18.74% 23.24% 22.98% 20.65% 20.96% 22.00%
5 Years(1) ............ N/A 19.11% 20.80% 18.01% 17.13% 18.99%
Since 12/31/87 ........ N/A 17.22% 17.57% 18.01% 16.68% 17.17%
</TABLE>
66
<PAGE> 72
(1) Through September 30, 1998.
(2) The Russell 1000 Growth Index is an unmanaged index of those companies
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values.
(3) The Russell 1000 Value Index is an unmanaged index of those companies in
the Russell 1000 Index with lower price-to-book ratios and lower forecasted
growth values.
(4) The Russell 1000 Index is an unmanaged index of the 1000 largest U.S.
companies (representing approximately 90% of the total market capitalization)
in the Russell 3000 Index, which represents approximately 98% of the U.S.
equity market by capitalization.
+ Since Fund inception (8/1/95).
INTERNATIONAL EQUITY SUB-ADVISOR
ANNUALIZED RETURNS
<TABLE>
<CAPTION>
OVERSEAS EQUITY FUND SUB-ADVISOR EAFE
PERFORMANCE COMPOSITE+ INDEX(2)
<S> <C> <C> <C>
1 Year(1) ............................ 14.16% 11.94% -8.12%
Since Portfolio Inception............. 6.83% N/A* 5.73%
(1/9/95)
5 Years(1) ........................... N/A 7.67% 5.64%
10 Years(1) .......................... N/A 8.41% 5.40%
</TABLE>
(1) Through September 30, 1998.
(2) The EAFE Index includes 1,112 companies in twenty countries representing
the stock markets of Europe, Australia, New Zealand and the Far East. The
combined market capitalization of these companies represents approximately 60%
of the combined market value of the stock exchanges. The EAFE Index is
capitalization weighted in U.S. dollars and includes dividends.
+ If the expense ratio of the Fund after expense reimbursements were used as the
basis for adjustment, the Sub-Adviser composite average annual returns would be
- -11.72% for one year, 7.94% for 5 years and 8.68% for 10 years.
* Sub-Adviser performance information is not available for this time period.
SMALL CAP EQUITY SUB-ADVISOR ANNUALIZED RETURNS
<TABLE>
<CAPTION>
OPPORTUNITY FUND SUB-ADVISOR RUSSELL 2000
PERFORMANCE COMPOSITE INDEX(2)
<S> <C> <C> <C>
1 Year(1) ................... -14.26% 14.11% 19.02%Since
Portfolio Inception ... 8.97% N/A* 5.73%(9/4/96)
3 Years(1) ................. N/A 10.89% 6.86%
</TABLE>
(1) Through September 30, 1998.
(2) The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest companies (representing approximately 10% of the total market
capitalization) in the Russell 3000 Index, which represents approximately 98% of
the U.S. equity market by capitalization.
* Sub-Adviser Performance information is not available for this time period.
67
<PAGE> 73
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMIANNUAL REPORTS:
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
STATEMENTS OF ADDITIONAL INFORMATION (SAIs): The SAIs provide more detailed
information about the Funds, including their operations and investment policies.
They are incorporated by reference and legally considered a part of this
prospectus.
YOU CAN GET FREE COPIES OF REPORTS AND THE SAIS, PROSPECTUSES OF OTHER MEMBERS
OF THE REPUBLIC FAMILY OF FUNDS, OR REQUEST OTHER INFORMATION AND DISCUSS YOUR
QUESTIONS ABOUT THE FUNDS, BY CONTACTING A BROKER OR BANK THAT SELLS THE FUNDS.
OR CONTACT THE FUNDS AT:
- ------------------------------------------------------------------------------
REPUBLIC FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
TELEPHONE: 1-800-_____-_________
E-MAIL: _______________
INTERNET: Http://www.____________
- ------------------------------------------------------------------------------
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
- - For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- - Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-4782.
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<PAGE> 74
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
eight 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 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 three separate
classes, Class A (the "Class A Shares"), Class B (the "Class B Shares"), and
Class C (the "Class C Shares").
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 ___________, 1999 (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.
_______________, 1999
<PAGE> 75
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS...................................................................1
Derivatives..............................................................................................2
Options and Futures Transactions.........................................................................3
Forward Foreign Currency Contracts and Options on Foreign Currencies.....................................4
Foreign Securities.......................................................................................4
High Yield/High Risk Securities..........................................................................5
Fixed Income Securities..................................................................................6
Zero Coupon Obligations..................................................................................6
Mortgage-Related and Other Asset-Backed Securities.......................................................6
Other Asset-Backed Securities...........................................................................11
Mortgage-Backed Securities and Asset-Backed Securities - Types of Credit Support........................11
Eurodollar and Yankee Bank Obligations..................................................................12
Repurchase Agreements...................................................................................12
Illiquid Investments....................................................................................13
Brady Bonds.............................................................................................13
Foreign Currency Exchange-Related Securities............................................................14
Sovereign and Supranational Debt Obligations............................................................15
Mortgage Dollar Roll Transactions.......................................................................16
Floating and Variable Rate Obligations..................................................................16
Inverse Floating Rate Obligations.......................................................................16
Banking Industry and Savings and Loan Industry Obligations..............................................16
Firm Commitment Agreements and When-Issued Securities...................................................17
Swaps, Caps, Floors and Collars.........................................................................17
Portfolio Turnover......................................................................................18
Portfolio Management....................................................................................18
Investment Restrictions.................................................................................19
Percentage and Rating Restrictions......................................................................22
Portfolio Transactions..................................................................................22
PERFORMANCE INFORMATION..........................................................................................22
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST..................................................................24
Trustees and Officers...................................................................................24
Compensation Table......................................................................................25
Investment Manager......................................................................................26
Sub-Adviser.............................................................................................27
Distribution Plans......................................................................................27
Distributor and Sponsor.................................................................................28
Administrative Services Plan............................................................................29
Fund Administrator and Portfolio Administrator..........................................................29
Transfer Agent..........................................................................................30
</TABLE>
i
<PAGE> 76
<TABLE>
<S> <C>
Custodian and Fund Account Agents.......................................................................30
Shareholder Servicing Agents............................................................................30
Expenses................................................................................................31
DETERMINATION OF NET ASSET VALUE.................................................................................32
PURCHASE OF SHARES...............................................................................................33
Exchange Privilege......................................................................................33
Automatic Investment Plan...............................................................................33
Through a Shareholder Servicing Agent or a Securities Broker............................................34
SALES CHARGES....................................................................................................34
Sales Charge Waivers....................................................................................35
Concurrent Purchases....................................................................................36
Letters of Intent.......................................................................................36
Rights of Accumulation..................................................................................37
Contingent Deferred Sales Charge ("CDSC") - Class B Shares..............................................37
Level Load Alternative -- Class C Shares................................................................37
REDEMPTION OF SHARES.............................................................................................38
Systematic Withdrawal Plan..............................................................................38
Redemption of Shares Purchased Directly Through the Distributor.........................................39
Conversion Feature......................................................................................39
RETIREMENT PLANS.................................................................................................40
Individual Retirement Accounts..........................................................................40
Defined Contribution Plans..............................................................................40
Section 457 Plan, 401(k) Plan, 403(b) Plan..............................................................40
DIVIDENDS AND DISTRIBUTIONS......................................................................................40
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.............................................................41
TAXATION.........................................................................................................42
Options, Futures, Forward Contracts and Swap Contracts..................................................44
OTHER INFORMATION................................................................................................46
Capitalization..........................................................................................46
Independent Auditors....................................................................................46
Counsel.................................................................................................46
Registration Statement..................................................................................46
FINANCIAL STATEMENTS.............................................................................................48
</TABLE>
References in this Statement of Additional Information to the "Prospectus" are
to the Prospectus, dated
ii
<PAGE> 77
____________, 1999, 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.
iii
<PAGE> 78
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective, policies and risks of the Portfolio discussed in the Prospectus.
The investment objective of the Bond Fund is to realize above-average
total return over a market cycle of three to five years, consistent with
reasonable risk, through investment in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds rated below investment
grade commonly referred to as "junk bonds"), foreign fixed income securities,
mortgage-backed securities of domestic issuers and other fixed-income
securities. The Fund seeks to achieve its investment objective by investing all
of its assets in the Republic Fixed Income Portfolio (the "Portfolio"), which
has the same investment objective as the Fund. The Portfolio's average weighted
maturity will ordinarily exceed five years.
The Portfolio will normally invest at least 65% of its total assets in
fixed income securities. The Portfolio may invest in the following securities,
which may be issued by domestic or foreign entities and denominated in U.S.
dollars or foreign currencies: securities issued, sponsored or guaranteed by the
U.S. government, its agencies or instrumentalities (U.S. Government securities);
corporate debt securities; corporate commercial paper; mortgage pass-throughs,
mortgage- backed bonds, collateralized mortgage obligations ("CMOs") and other
asset- backed securities; variable and floating rate debt securities;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities; obligations of international agencies or supranational
entities; and foreign currency exchange-related securities.
Miller Anderson & Sherrerd ("MAS") (the "Sub-Adviser") will seek to
achieve the Portfolio's objective by investing at least 80% of the Portfolio's
assets in investment grade debt or fixed income securities. Investment grade
debt securities are those rated by one or more nationally recognized statistical
rating organizations ("NRSROs") within one of the four highest quality grades at
the time of purchase (e.g., AAA, AA, A or BBB by Standard & Poor's Ratings
Group, Inc. ("S&P") or Fitch Investors Service, Inc. ("Fitch") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or in the case of unrated
securities, determined by the Sub-Adviser to be of comparable quality.
Securities rated by a NRSRO in the fourth highest rating category have
speculative characteristics and are subject to greater credit and market risks
than higher-rated bonds.
Up to 20% of the Portfolio's assets may be invested in preferred stock,
convertible securities, and in fixed income securities that at the time of
purchase are rated Ba or B by Moody's or BB or B by S&P or rated comparably by
another NRSRO (or, if unrated, are deemed by the Fixed Income Sub-Adviser to be
of comparable quality). Securities rated below "investment grade," i.e., rated
below Baa by Moody's or BBB by S&P, are described as "speculative" by both
Moody's and S&P. Such securities are sometimes referred to as "junk bonds," and
may be subject to greater market fluctuations, less liquidity and greater risk.
From time to time, the Sub-Adviser may invest more than 50% of the
Portfolio's assets in mortgage-backed securities including mortgage pass-through
securities, mortgage-backed bonds and CMOs, that carry a guarantee from a U.S.
government agency or a private issuer of the timely payment of principal and
interest. When investing in mortgage-backed securities, it is expected that the
Portfolio's primary emphasis will be in mortgage-backed securities issued by
governmental and government-related organizations such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Association ("FHLMC").
However, the Portfolio may invest without limit in mortgage-backed securities of
private issuers when the Sub-Adviser determines that the quality of the
investment, the quality of the issuer, and market conditions
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<PAGE> 79
warrant such investments. Mortgage- backed securities issued by private issuers
will be rated investment grade by Moody's or S&P or, if unrated, deemed by the
Sub-Adviser to be of comparable quality.
A mortgage-backed bond is a collateralized debt security issued by a
thrift or financial institution. The bondholder has a first priority perfected
security interest in collateral consisting usually of agency mortgage pass-
through securities, although other assets including U.S. Treasury securities
(including zero coupon Treasury bonds), agency securities, cash equivalent
securities, whole loans and corporate bonds may qualify. The amount of
collateral must be continuously maintained at levels from 115% to 150% of the
principal amount of the bonds issued, depending on the specific issue structure
and collateral type.
A portion of the Portfolio's assets may be invested in bonds and other
fixed income securities denominated in foreign currencies if, in the opinion of
the Sub-Adviser, the combination of current yield and currency value offer
attractive expected returns. These holdings may be in as few as one foreign
currency bond market (such as the United Kingdom gilt market), or may be spread
across several foreign bond markets. The Portfolio may also purchase securities
of developing countries; however, the Portfolio does not intend to invest in the
securities of Eastern European countries. When the total return opportunities in
a foreign bond market appear attractive in local currency terms, but where, in
the Sub-Adviser's judgment, unacceptable currency risk exists, currency futures,
forwards and options and swaps may be used to hedge the currency risk.
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. The Portfolio may also invest in Brady Bonds, which are issued as a
result of a restructuring of a country's debt obligations to commercial banks
under the "Brady Plan". The Portfolio may also invest in the following
instruments on a temporary basis when economic or market conditions are such
that the Sub-Adviser deems a temporary defensive position to be appropriate:
time deposits, certificates of deposit and bankers' acceptances issued by a
commercial bank or savings and loan association; commercial paper rated at the
time of purchase by one or more NRSRO in one of the two highest categories or,
if not rated, issued by a corporation having an outstanding unsecured debt issue
rated high-grade by a NRSRO; short-term corporate obligations rated high-grade
by a NRSRO; U.S. Government obligations; Government agency securities issued or
guaranteed by U.S. Government-sponsored instrumentalities and federal agencies;
and repurchase agreements collateralized by the securities listed above. The
Portfolio may also purchase securities on a when-issued basis, lend its
securities to brokers, dealers, and other financial institutions to earn income
and borrow money for temporary or emergency purposes.
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known
as derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage- related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile or
less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There is a
range of risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Fixed Income Portfolio may use derivatives for hedging purposes, cash management
purposes, as a substitute for investing directly in fixed income instruments,
and to enhance return when their Sub-Adviser believes the investment will assist
the Portfolio in achieving its investment
2
<PAGE> 80
objectives. A description of the derivatives that the Portfolio may use and some
of their associated risks follows.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may invest in financial futures contracts, options on
futures contracts and options on securities (collectively, "futures and
options"). In addition, the Portfolio may invest in foreign currency futures
contracts and options on foreign currencies and foreign currency futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security at a specified future time
and price. An option is a legal contract that gives the holder the right to buy
or sell a specified amount of the underlying security, currency or futures
contract at a fixed or determinable price upon the exercise of the option. A
call option conveys the right to buy and a put option conveys the right to sell
a specified quantity of the underlying instrument.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the return of the Portfolio and the Fund. While the use
of these instruments by the Portfolio and the Fund may reduce certain risks
associated with owning its portfolio securities, these techniques themselves
entail certain other risks. If the Sub-Adviser applies a strategy at an
inappropriate time or judges market conditions or trends incorrectly, options
and futures strategies may lower the Portfolio's or Fund's return. Certain
strategies limit the potential of the Portfolio or the Fund to realize gains as
well as limit their exposure to losses. The Portfolio and the Fund could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments. There can be no assurance that a liquid
market will exist at a time when the Portfolio or the Fund seeks to close out a
futures contract or a futures option position. Most futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures contract prices
during a single day; once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio and the Fund from liquidating an
unfavorable position and the Portfolio or the Fund would remain obligated to
meet margin requirements until the position is closed. In addition, the
Portfolio and the Fund will incur transaction costs, including trading
commissions and options premiums, in connection with their futures and options
transactions, and these transactions could significantly increase a Portfolio or
Fund turnover rate.
The Portfolio will not enter into futures contracts or options thereon
to the extent that its outstanding obligations to purchase securities under
these contracts in combination with its outstanding obligations with respect to
options transactions would exceed 35% of its total assets. The Fixed Income
Portfolio will use financial futures contracts and related options only for
"bona fide hedging" purposes, as such term is defined in applicable regulations
of the Commodity Futures Trading Commission, or, with respect to positions in
financial futures and related options that do not qualify as "bona fide hedging"
positions, will enter such non-hedging positions only to the extent that assets
committed to initial margin deposits on such instruments, plus premiums paid for
open futures options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Portfolio's net assets. The Portfolio
will segregate assets or "cover" its positions consistent with requirements
under the 1940 Act. The Portfolio may also purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
U.S. dollar cost of foreign securities to be acquired.
3
<PAGE> 81
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. The Portfolio has no
specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except that
the Portfolio will not enter into a forward contract if the amount of assets set
aside to cover the contract would impede portfolio management. By entering into
transactions in Forward Contracts, however, the Portfolio may be required to
forego the benefits of advantageous changes in exchange rates and, in the case
of Forward Contracts entered into for non-hedging purposes, the Portfolio may
sustain losses which will reduce its gross income. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As a
result, such contracts operate in a manner distinct from exchange-traded
instruments and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges.
A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security.
The Portfolio may also purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities to be acquired.
The Portfolio may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, the Portfolio may
purchase a U.S. dollar-denominated security and at the same time enter into a
forward contract to exchange U.S. dollars for the contract's underlying currency
at a future date. By matching the amount of U.S. dollars to be exchanged with
the anticipated value of the U.S. dollar-denominated security, the Fixed Income
Portfolio may be able to lock in the foreign currency value of the security and
adopt a synthetic investment position reflecting the credit quality of the U.S.
dollar-denominated security.
There is a risk in adopting a synthetic investment position to the
extent that the value of a security denominated in U.S. dollars or other foreign
currency is not exactly matched with the Portfolio's obligation under the
forward contract. On the date of maturity the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Sub-Adviser will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Sub-Adviser will be able to do so. When the Portfolio enters into a forward
contract for purposes of creating a synthetic security, it will generally be
required to hold high-grade, liquid securities or cash in a segregated account
with a daily value at least equal to its obligation under the forward contract.
FOREIGN SECURITIES
The Portfolio may invest in foreign securities. Investing in securities
issued by companies whose principal business activities are outside the United
States may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities
4
<PAGE> 82
laws. Foreign issuers are generally not bound by uniform accounting, auditing,
and financial reporting requirements and standards of practice comparable to
those applicable to domestic issuers. Investments in foreign securities also
involve the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, other taxes imposed by the
foreign country on the Fund's earnings, assets, or transactions, limitation on
the removal of cash or other assets of the Portfolios, political or financial
instability, or diplomatic and other developments which could affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. For example,
significant uncertainty surrounds the proposed introduction of the euro (a
common currency for the European Union) in January 1999 and its effect on the
value of securities denominated in local European currencies. These and other
currencies in which a Fund's assets are denominated may be devalued against the
U.S. dollar, resulting in a loss to the Fund. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Furthermore, dividends and interest payments
from foreign securities may be withheld at the source. Additional costs
associated with an investment in foreign securities may include higher custodial
fees than apply to domestic custodial arrangements, and transaction costs of
foreign currency conversions.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics. Investing in high yield securities involves special risks in
addition to the risks associated with investments in higher rated debt
securities. High yield securities may be regarded as predominately speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fixed Income Portfolio to achieve its investment objective may,
to the extent of its investments in high yield securities, be more dependent
upon such creditworthiness analysis than would be the case if the Fixed Income
Portfolio were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, the Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes and, therefore, tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
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<PAGE> 83
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Sub-Adviser does not rely solely on credit ratings when selecting securities for
the Portfolio, and develops its own independent analysis of issuer credit
quality. If a credit rating agency changes the rating of a security held by the
Fixed Income Portfolio, the Portfolio may retain the security if the Sub-Adviser
deems it in the best interest of investors.
FIXED INCOME SECURITIES
To the extent the Fund or Portfolio invests in fixed income securities,
the net asset value of the Fund or Portfolio may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund's or
Portfolio's investments in fixed income securities with longer terms to maturity
or greater duration are subject to greater volatility than the Fund's or
Portfolio's shorter-term obligations.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon obligations, which are
fixed-income securities that do not make regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their face value.
The Fixed Income Portfolio accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations, in
which case the Portfolio will forego the purchase of additional income-producing
assets with these funds. The difference between a zero coupon obligation's issue
or purchase price and its face value represents the imputed interest an investor
will earn if the obligation is held until maturity. Zero coupon obligations may
offer investors the opportunity to earn higher yields than those available on
ordinary interest-paying obligations of similar credit quality and maturity.
However, zero coupon obligation prices may also exhibit greater price volatility
than ordinary fixed-income securities because of the manner in which their
principal and interest are returned to the investor.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Portfolio may invest in mortgage-backed certificates and other
securities representing ownership interests in mortgage pools, including CMOs.
Interest and principal payments on the mortgages underlying mortgage-backed
securities are passed through to the holders of the mortgage-backed securities.
Mortgage-backed securities currently offer yields higher than those available
from many other types of fixed-income securities, but because of their
prepayment aspects, their price volatility and yield characteristics will change
based on changes in prepayment rates.
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
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<PAGE> 84
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-backed securities have yield and maturity characteristics that
are dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and a fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold.
Credit risk reflects the risk that the Portfolio may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
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.
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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
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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.
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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 ("SMBS"). SMBS are derivative
multi-class mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private
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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 cash flow and yields on IO and PO classes can
be extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, 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
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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.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee bank obligations are
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent Yankee bank) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from freely
flowing across its borders. Other risks include: adverse political and economic
developments, the extent and quality of government regulation of financial
markets and institutions, the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by
U.S. Government securities, certificates of deposit and certain bankers'
acceptances. Repurchase agreements are transactions by which a portfolio or fund
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The Advisor or
Sub-Adviser will continually monitor the value of the underlying securities to
ensure that their value, including accrued interest, always equals or exceeds
the repurchase price. Repurchase agreements are considered to be loans
collateralized by the underlying security under the 1940 Act, and therefore will
be fully collateralized.
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The use of repurchase agreements involves certain risks. For example,
if the seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio or Fund may incur a loss upon disposition of them. If the seller
of the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a bankruptcy court may determine that
the underlying securities are collateral not within the control of the Portfolio
or Fund and therefore subject to sale by the trustee in bankruptcy. Finally, it
is possible that the Portfolio or Fund may not be able to substantiate its
interest in the underlying securities. While the managements of the Trust and
the Portfolio Trust acknowledge these risks, it is expected that they can be
controlled through stringent security selection criteria and careful monitoring
procedures.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that
are illiquid by virtue of the absence of a readily available market, or because
of legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 or commercial paper
issued pursuant to Section 4(2) under the Securities Act of 1933 that are
determined to be liquid in accordance with guidelines established by the
Portfolio Trust's Board of Trustees. There may be delays in selling these
securities and sales may be made at less favorable prices. The Portfolio has a
policy that no more than 25% of its net assets may be invested in restricted
securities which are restricted as to resale, including Rule 144A and Section
4(2) securities.
The Sub-Adviser may determine that a particular Rule 144A security is
liquid and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that the Sub-Adviser must consider in determining whether a particular Rule 144A
security is liquid include the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and the nature of the market for the
security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's or
Fund's illiquidity to the extent that qualified institutions might become, for a
time, uninterested in purchasing these securities.
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
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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
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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 CEWs(SM), PERLs(SM) or PIPs(SM).
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.
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<PAGE> 93
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.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Portfolio may purchase may have a floating
or variable rate of interest, i.e., the rate of interest varies with changes in
specified market rates or indices, such as the prime rates, and at specified
intervals. Certain floating or variable rate obligations that may be purchased
by the Portfolio may carry a demand feature that would permit the holder to
tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. The demand features of certain floating
or variable rate obligations may permit the holder to tender the obligations to
foreign banks, in which case the ability to receive payment under the demand
feature will be subject to certain risks, as described under "Foreign
Securities," above.
INVERSE FLOATING RATE OBLIGATIONS
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate, such as LIBOR (London Inter-Bank Offered Rate).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of inverse
floaters will generally decrease as interest rates increase. Inverse floaters
may exhibit substantially greater price volatility than fixed rate obligations
having similar credit quality, redemption provisions and maturity, and inverse
floater CMOs exhibit greater price volatility than the majority of mortgage
pass-through securities or CMOs. In addition, some inverse floater CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Portfolio may invest in
certificates of deposit, time deposits, bankers' acceptances, and other short-
term debt obligations issued by commercial banks and savings and loan
associations ("S&Ls"). Certificates of deposit are receipts from a bank or S&L
for funds deposited for a specified period of time at a specified rate of
return. Time deposits in banks or S&Ls are generally similar to certificates of
deposit but are uncertificated. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
commercial transactions. The
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<PAGE> 94
Portfolio may not invest in time deposits maturing in more than seven days. The
Portfolio will limit its investment in time deposits maturing from two business
days through seven calendar days to 15% of its total assets.
The Portfolio will not invest in any obligation of a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation (the "FDIC"), (ii)
in the case of U.S. banks, it is a member of the FDIC and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Sub-Adviser to be
of an investment quality comparable with other debt securities which may be
purchased by the Fixed Income Portfolio.
The Portfolio may also invest in obligations of U.S. banks, foreign
branches of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee
dollars) as a temporary defensive measure. Euro and Yankee dollar investments
will involve some of the same risks as investing in foreign securities, as
described above and in the Statement of Additional Information.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or
firm-commitment basis, in which a security's price and yield are fixed on the
date of the commitment but payment and delivery are scheduled for a future date.
On the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid securities equal (on a daily marked-to-market basis) to
the amount of its commitment to purchase the securities on a when-issued basis.
SWAPS, CAPS, FLOORS AND COLLARS
The Portfolio may enter into swap contracts and other similar
instruments in accordance with its policies. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The payment streams are calculated by reference to a specified index
and agreed upon notional amount. The term specified index includes currencies,
fixed interest rates, prices and total return on interest rate indices,
fixed-income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the Portfolio
may agree to swap the return generated by a fixed-income index for the return
generated by a second fixed-income index. The currency swaps in which the
Portfolio may enter will generally involve an agreement to pay interest streams
calculated by reference to interest income linked to a specified index in one
currency in exchange for a specified index in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
The swaps in which the Portfolio may engage also include rate caps,
floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium) and the other party pays periodic amounts based on the
movement of a specified index.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or
17
<PAGE> 95
paying, as the case may be, only the net amount of the two returns. The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or other
liquid securities, to avoid any potential leveraging. The Portfolio will not
enter into any swap agreement unless the unsecured commercial paper, senior debt
or the claims-paying ability of the counterparty is rated AA or A-1 or better by
S&P or Aa or P-1 or better by Moody's, rated comparably by another NRSRO or
determined by the Sub-Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Sub-Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the Fixed Income Portfolio would be less favorable
than it would have been if this investment technique were not used.
PORTFOLIO TURNOVER
The Sub-Adviser manages the Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio and the
Fund will not trade for short-term profits, but when circumstances warrant,
investments may be sold without regard to the length of time held. For the year
ended October 31, 1998, the portfolio turnover rate for the Portfolio was ___%.
It is expected that the annual turnover rate for the Portfolio will not exceed
___% in subsequent fiscal years. Because the Portfolio has a portfolio turnover
rate of 100% or more, transaction costs incurred by the Portfolio, and the
realized capital gains and losses of the Portfolio, may be greater than those of
a fund with a lesser portfolio turnover rate. See "Portfolio Transactions" and
"Tax Matters" below.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain, and maintain the availability
of, execution at the most favorable prices and in the most effective manner
possible.
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.
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<PAGE> 96
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
The Portfolio Trust (with respect to the Portfolio) and the Trust (with
respect to the Fund) have 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;
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<PAGE> 97
(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.
The Portfolio and the Fund are 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;
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(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-
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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 $10,000, T = the average
annual total return, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $10,000 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,
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<PAGE> 100
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:
CLASS A 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 __________, 1998 would have been [5.72%]
and the average annual total return for the period from January 9, 1995 to
__________, 1998 would have been [9.26%].
CLASS B SHARES: Class B Shares were not offered prior to January 2, 1998.
Annual Total Return - January 2, 1998 (commencement of operations) to
October 31, 1998: _____%
CLASS C SHARES: Class C Shares were offered prior to November 3, 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.
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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 business and affairs of the Trust and the Portfolio Trust are
managed under the direction of their respective Boards of Trustees. 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).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
ANTHONY J. FISCHER, Vice President
Employee of BISYS Fund Services, Inc., April, 1998 to present; Employee
of SEI Investments and Merrill Lynch prior to April 1998.
PENNY D. GRANDOMINICO*, Vice President
Employee of BISYS Fund Services, Inc., April 1995 to present; Financial
Consultant, Smith Barney, July 1992 to April 1995.
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<PAGE> 102
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.
ELLEN STOUTAMIRE, Secretary
Employee of BISYS Fund Services, Inc., April, 1997 to present; Attorney
in private practice prior to April 1997.
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. Grimm, Fischer and Waters and Mss. Grandominico, Brady, Stoutamire and
Metz also are officers of certain other investment companies of which BISYS or
an affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Retirement Pension Compensation
Aggregate of Benefits Estimated Annual From Fund
Compensation Accrued as Part of Benefits Upon Complex* to
Name of Trustee from Trust Fund 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 __________, 1998. 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 __________, 1998, 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 - 99.76% (Class A 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.
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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. For the fiscal year ended October 31, 1998, investment management
fees aggregated $_________ [OF WHICH $__________ WAS WAIVED].
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Funds or
Portfolios, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased. 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. Republic has informed the Trust that, in making its
26
<PAGE> 104
investment decisions, it does not obtain or use material inside information in
the possession of any division or department of Republic or in the possession of
any affiliate of Republic.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Funds and
Portfolios will not violate the Glass-Steagall Act or other applicable banking
laws or regulations. However, future statutory or regulatory changes, as well as
future judicial or administrative decisions and interpretations of present and
future statutes and regulations, could prevent Republic from continuing to
perform such services for the Funds and Portfolios. If Republic were prohibited
from acting as investment manager to the Funds and Portfolios, it is expected
that the Trust's Board of Trustees would recommend to Fund shareholders approval
of a new investment advisory agreement with another qualified investment adviser
selected by the Board or that the Board would recommend other appropriate
action.
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
Miller Anderson & Sherrerd ("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, October 31, 1997, and October 31, 1998, sub-advisory fees
aggregated $53,963, $185,480, $276,784, and $_________, 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.
DISTRIBUTION PLANS
Three Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Class A Shares (the "Class A Plan"),
the Class B Shares (the "Class B Plan") and the Class C Shares (the "Class C
Plan). The Distribution Plans provide that they may not be amended to increase
materially the costs which either the Class A Shares, the Class B Shares or the
Class C Shares may bear pursuant to the Class A Plan, Class B Plan or Class C
Plan without approval by shareholders of the Class A Shares, Class B Shares or
Class C 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
27
<PAGE> 105
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, Class B Plan and Class C
Plan, the Trustees considered alternative methods to distribute the Class
A Shares, Class B Shares and Class C 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 Class A
Shares, Class B Shares or Class C 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.
During the fiscal period ended October 31, 1998, the Fund incurred expenses
pursuant to the distribution plans in the amount of $__________.
DISTRIBUTOR AND SPONSOR
BISYS acts as sponsor and principal underwriter and distributor of
Shares of the Fund pursuant to a Distribution Contract with the Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares. Such compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
the Fund, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to certain dealers whose
representatives have sold a significant amount of such Shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. None
of the aforementioned compensation is paid by the Fund or its Shareholders.
Pursuant to the Distribution Plans adopted by the Trust, the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Shares of the Fund and
for the provision of certain shareholder services with respect to the Shares.
Payments to the Distributor are for various types of activities, including: (1)
payments to broker-dealers who advise shareholders regarding the purchase, sale
or retention of Shares and who provide shareholders with personal services and
account maintenance services ("service fees"), (2) payments to employees of the
Distributor, and (3) printing and advertising expenses. Pursuant to the Class A
Plan, the amount of their reimbursement from each Fund may not exceed on an
annual basis 0.25% of the average daily net assets of the Fund represented by
Class A Shares outstanding during the period for which payment is being made.
Pursuant to both the Class B Plan and the Class C Plan, the amount of this
reimbursement from the Fund for distribution related activities (other than
service fees) may not exceed on an annual basis 0.75% of the average daily net
assets of the Fund represented by Class B Shares and Class C Shares,
respectively, outstanding during the period for which payment is being made. The
aggregate fees paid to the Distributor pursuant to the Class B Plan and Class C
Plan, respectively, and to Shareholder Servicing Agents pursuant to the
Administrative Services Plan will not exceed on an annual basis 1.00% of the
Fund's average daily net assets represented by Class B Shares and Class C
Shares, respectively, outstanding during the period for which payment is being
made. Salary expense of BISYS personnel who are responsible for marketing shares
of the various portfolios of the Trust may be allocated to such portfolios on
the basis of average net assets; travel expense is allocated to, or divided
among, the particular portfolios for which it is incurred.
Any payment by the Distributor or reimbursement of the Distributor from
the Fund made pursuant to the Distribution Plans is contingent upon the Board of
Trustees' approval. The Fund is not liable for
28
<PAGE> 106
distribution and shareholder servicing expenditures made by the Distributor in
any given year in excess of the maximum amount payable under the Distribution
Plans in that year.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Class A Shares, Class B Shares and Class C 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 Class A Shares, the
Class B Shares or the Class C 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 Class
A Shares, Class B Shares or Class C 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.
FUND ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
and the Portfolio including, among other responsibilities, assisting in the
preparation and filing of all documents required for compliance by the Fund and
the Portfolio with applicable laws and regulations and arranging for the
maintenance of books and records of the Fund and the Portfolio. For its services
to the Bond Fund, BISYS receives from the Fund fees payable monthly equal on an
annual basis (for the Fund's then-current fiscal year) to 0.05% of the Fund's
average daily net assets up to $1 billion; 0.04% of the next $1 billion of such
assets; and 0.035% of such assets in excess of $2 billion. For providing similar
services to the Portfolio, BISYS (Ireland) receives from the Portfolio fees
payable monthly equal on an annual basis (for the Portfolio's then-current
fiscal year) to 0.05% of the first $1 billion of the Portfolio's average daily
net assets; 0.04% of the next $1 billion of such assets; and 0.035% of such
assets in excess of $2 billion.
For the period from January 9, 1995 (Portfolio commencement of
operations) to October 31, 1995 and for the fiscal years ended October 31, 1996,
October 31, 1997 and October 31, 1998, the Portfolio accrued administration fees
of $7,195, $24,731, $46,181 and $__________, respectively. For the fiscal
periods ended October 31, 1996, October 31, 1997 and October 31, 1998, the Fund
accrued administration fees of $4, $477 and $__________, respectively, all of
which was waived.
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.
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<PAGE> 107
BISYS provides persons satisfactory to the respective Boards of
Trustees to serve as officers of the Trust and the Portfolio Trust. Such
officers, as well as certain other employees of the Trust and of the Portfolio
Trust, may be directors, officers or employees of BISYS or its affiliates.
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with Investors
Bank & Trust Company ("IBT") and BISYS, pursuant to which IBT acts as transfer
agent for the Fund with respect to the Class A Shares and BISYS acts as transfer
agent for the Fund with respect to the Class B Shares and Class C Shares (the
"Transfer Agents"), and the Portfolio Trust has entered into a Transfer Agent
Agreement with Investors Fund Services (Ireland) Limited (also a "Transfer
Agent"). The Transfer Agents maintain an account for each shareholder of the
Fund (unless such account is maintained by the shareholder's securities-broker,
if applicable, or Shareholder Servicing Agent), performs other transfer agency
functions, and act as dividend disbursing agent for the Fund. The principal
business address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117.
The principal business address of BISYS is 3435 Stelzer Road, Columbus, OH
43219.
Pursuant to an agreement, as of April 1, 1999, BISYS will provide all
services with respect to each class of shares of the Fund.
CUSTODIAN AND FUND ACCOUNT AGENTS
Pursuant to a Custodian Agreement, with respect to domestic assets,
Republic acts as the custodian of the Fund's assets. With respect to foreign
assets, IBT serves as custodian for the Fund and the Portfolio (together, with
Republic, the "Custodian"). The Custodians' responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
fund accounting and other required books and accounts in order to calculate the
daily net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, the Custodians receive such compensation as may from
time to time be agreed upon by it and the Trust. IBT Fund Services (Canada) Inc.
serves as the fund accounting agent for the Portfolio.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent, including
Republic, pursuant to which a Shareholder Servicing Agent, as agent for its
customers, among other things: answers customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of
Class A Shares, Class B Shares, and Class C Shares of the Fund may be effected
and certain other matters pertaining to the Fund; assists shareholders in
designating and changing dividend options, account designations and addresses;
provides necessary personnel and facilities to establish and maintain
shareholder accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated
30
<PAGE> 108
prospectuses and other communications from the Trust to the Fund's shareholders;
receives, tabulates and transmits to the Trust proxies executed by shareholders
with respect to meetings of shareholders of the Fund or the Trust; and provides
such other related services as the Trust or a shareholder may request. With
respect to Class A Shares and Class B Shares, each Shareholder Servicing Agent
receives a fee from the Fund for these services, which may be paid periodically,
determined by a formula based upon the number of accounts serviced by such
Shareholder Servicing Agent during the period for which payment is being made,
the level of activity in accounts serviced by such Shareholder Servicing Agent
during such period, and the expenses incurred by such Shareholder Servicing
Agent. The aggregate fees paid to the Distributor pursuant to the Class B Plan
and Class C Plan, respectively, and to Shareholder Servicing Agents pursuant to
the Administrative Services Plan will not exceed on an annual basis 1.00% the of
the Fund's average daily net assets represented by Class B Shares and Class C
Shares, respectively, outstanding during the period for which payment is being
made.
The Trust understands that some Shareholder Servicing Agents also may
impose certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such as
requiring a different minimum initial or subsequent investment, account fees (a
fixed amount per transaction processed), compensating balance requirements (a
minimum dollar amount a customer must maintain in order to obtain the services
offered), or account maintenance fees (a periodic charge based on a percentage
of the assets in the account or of the dividends paid on those assets). Each
Shareholder Servicing Agent has agreed to transmit to its customers who are
holders of Shares appropriate prior written disclosure of any fees that it may
charge them directly and to provide written notice at least 30 days prior to the
imposition of any transaction fees. Conversely, the Trust understands that
certain Shareholder Servicing Agents may credit to the accounts of their
customers from whom they are already receiving other fees amounts not exceeding
such other fees or the fees received by the Shareholder Servicing Agent from the
Fund with respect to those accounts.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do not expect that
shareholders of the Fund would suffer any adverse financial consequences as a
result of these occurrences.
EXPENSES
Expenses attributable to a class ("Class Expenses") shall be allocated
to that class only. Class Expenses with respect to the Class A Shares, Class B
Shares and Class C 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
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<PAGE> 109
expenses are allocated proportionally among all the portfolios of the Trust in
relation to the net asset value of the Funds. Expenses for each class of shares
must include payments made pursuant to their respective Distribution Plan and
shareholder servicing agent fees paid pursuant to the Administrative Services
Plan.
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.
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<PAGE> 110
PURCHASE OF SHARES
Shares may be purchased through the Distributor Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are effected on the same day the purchase order is received by the
Transfer Agent provided such order is received prior to 4:00 p.m., New York
time, on any Fund Business Day. The Trust intends the Funds to be as fully
invested at all times as is reasonably practicable in order to enhance the yield
on their assets. Each Shareholder Servicing Agent or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
While there is no sales load on purchases of Class B Shares and Class C
Shares, the Distributor may receive fees from the Funds. Other funds which have
investment objectives similar to those of the Funds but which do not pay some or
all of such fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares at
net asset value without a sales charge for Shares of the same class offered with
the same or lower sales charge by any of the Trust's other Funds. Exchanges for
Shares with a higher sales charge may be made upon payment of the sales charge
differential. An exchange of Class B Shares or Class C Shares will not affect
the holding period of the Class B Shares or Class C Shares for purposes of
determining the CDSC, if any, upon redemption, or, with respect to Class B
Shares, the time of conversion to Class A Shares. An exchange may result in a
change in the number of Shares held, but not in the value of such Shares
immediately after the exchange. Each exchange involves the redemption of the
Shares to be exchanged and the purchase of the shares of the other Republic Fund
which may produce a gain or loss for tax purposes.
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified in writing to discontinue further investments. Due
to the varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the Fund Business
Day that both the check and the bank withdrawal data are received in required
form by the Transfer Agent. Further information about the plan may be obtained
from BISYS at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
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<PAGE> 111
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder Servicing Agents and
securities brokers may offer services to their customers, including specialized
procedures for the purchase and redemption of Shares, such as pre- authorized or
automatic purchase and redemption programs. Each Shareholder Servicing Agent and
securities broker may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees will
be to reduce the net return on the investment of customers of that Shareholder
Servicing Agent or securities broker. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from each Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to a Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker or a
Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent (see back cover for address
and phone number).
SALES CHARGES
CLASS A SHARES. The public offering price of the Class A Shares of the Fund
equals net asset value plus the applicable sales charge. BISYS receives this
sales charge as distributor and may reallow it as dealer discounts and brokerage
commissions as follows:
BOND FUND
SALES CHARGE AS:
---------------------------------------------------------
<TABLE>
<CAPTION>
Discount to
Selected Dealers
Size of Transaction at % Of Offering Price % Of net Amount as a Percentage of
Offering Price Invested Offering Price
- -------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less than $100,000 1.75% 1.78% 1.40%
$100,000 but less than $250,000 1.25% 1.27% 1.00%
$250,000 but less than $500,000 1.00% 1.01% 0.75%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
An investor may obtain reduced sales charges on Class A Shares under
the circumstances described below under "Reduced Sales Charges -- Class A
Shares."
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<PAGE> 112
EXISTING SHAREHOLDERS. Shareholders of the Fund who are shareholders as of
December 31, 1997 will be grandfathered with respect to the Fund and will be
exempt from paying sales charges on future purchases of Class A Shares of the
Fund.
REDUCED SALES CHARGES--CLASS A SHARES. Customers of Republic National Bank of
New York and its affiliates meeting certain criteria may purchase shares of the
Fund at a discounted sales charge. The maximum sales charge, in the case of the
Bond Fund will be 2.50% of the public offering price.
<TABLE>
<CAPTION>
BOND FUND
SALES CHARGE AS:
---------------------------------------------------------
Discount to
Selected Dealers as
Size of Transaction at % Of Offering Price % Of net Amount a Percentage of
Offering Price Invested Offering Price
- -------------------------------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
Less than $50,000 2.50% 2.56% 2.00%
$50,000 but less than $100,000 1.50% 1.52% 1.15%
$100,000 but less than $250,000 1.00% 1.01% 0.75%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares by or on behalf of (1) purchasers for whom Republic or one of its
affiliates acts in a fiduciary, advisory, custodial or similar capacity, (2)
employees and retired employees (including spouses, children and parents of
employees and retired employees) of Republic, BISYS and any affiliates thereof,
(3) Trustees of the Trust, (4) directors and retired directors (including
spouses and children of directors and retired directors) of Republic and any
affiliates thereof, (5) purchasers who use proceeds from an account for which
Republic or one of its affiliates acts in a fiduciary, advisory, custodial or
similar capacity, to purchase Class A Shares of a Fund, (6) brokers, dealers and
agents who have a sales agreement with the Distributor, and their employees (and
the immediate family members of such individuals), (7) investment advisers or
financial planners that have entered into an agreement with the Distributor and
that place trades for their own accounts or the accounts of eligible clients and
that charge a fee for their services, and clients of such investment advisers or
financial planners who place trades for their own accounts if such accounts are
linked to the master account of the investment adviser or financial planner on
the books and records of a broker or agent that has entered into an agreement
with the Distributor, and (8) orders placed on behalf of other investment
companies distributed by BISYS, The BISYS Group, Inc., or their affiliated
companies. In addition, the Distributor may waive sales charges for the purchase
of the Fund's Class A Shares with the proceeds from the recent redemption of
shares of a non-money market mutual fund (except one of the other funds of the
Trust) sold with a sales charge. The purchase must be made within 60 days of the
redemption, and the Distributor must be notified in writing by the investor, or
by his or her financial institution, at the time the purchase is made. A copy of
the investor's account statement showing such redemption must accompany such
notice. To receive a sales charge waiver in conjunction with any of the above
categories, Shareholders must, at the time of purchase, give the Transfer Agent
or the Distributor sufficient information to permit confirmation of
qualification.
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CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining "concurrent purchases" of Class A Shares of the Funds.
For example, if a Shareholder concurrently purchases Class A Shares in one of
the funds of the Trust sold with a sales charge at the total public offering
price of $25,000 and Class A Shares in another fund sold with a sales charge at
the total public offering price of $75,000, the sales charge would be that
applicable to a $100,000 purchase as shown in the appropriate table above. The
investor's "concurrent purchases" described above shall include the combined
purchases of the investor, the investor's spouse and children under the age of
21 and the purchaser's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Shareholders must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information
to permit confirmation of qualification. This privilege, however, may be
modified or eliminated at any time or from time to time by the Trust without
notice.
LETTERS OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Class A Shares of the Funds at a designated total public offering price within a
designated 13-month period. Each purchase of Class A Shares under a Letter of
Intent will be made at the net asset value plus the sales charge applicable at
the time of such purchase to a single transaction of the total dollar amount
indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of
Intent may include purchases of Class A Shares made not more than 90 days prior
to the date such investor signs a Letter of Intent; however, the 13-month period
during which the Letter of Intent is in effect will begin on the date of the
earliest purchase to be included. An investor will receive as a credit against
his/her purchase(s) of Class A Shares during this 90-day period at the end of
the 13-month period, the difference, if any, between the sales load paid on
previous purchases qualifying under the Letter of Intent and the Applicable
Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Class A Shares purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
of the investor) to secure payment of the higher sales charge applicable to the
Class A Shares actually purchased if the full amount indicated is not purchased,
and such escrowed Class A Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed Class A Shares,
whether paid in cash or reinvested in additional Class A Shares, are not subject
to escrow. The escrowed Class A Shares will not be available for disposal by the
investor until all purchases pursuant to the Letter of Intent have been made or
the higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated in the Letter of Intent and qualifies for
a further reduced sales charge, the sales charge will be adjusted for the entire
amount purchased at the end of the 13-month period. The difference in sales
charge will be used to purchase additional Class A Shares of such Fund at the
then current public offering price subject to the rate of sales charge
applicable to the actual amount of the aggregate purchases. For further
information about Letters of Intent, interested investors should contact the
Trust at 1-888-525-5757. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
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RIGHTS OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Funds at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Funds then being purchased plus (b) an amount equal to the then current net
asset value of the "purchaser's combined holdings" of the Class A Shares of all
of the Funds of the Trust sold with a sales charge. Class A Shares sold to
purchasers for whom Republic or one of its affiliates acts in a fiduciary,
advisory, custodial (other than retirement accounts), agency, or similar
capacity are not presently subject to a sales charge. The "purchaser's combined
holdings" described above shall include the combined holdings of the purchaser,
the purchaser's spouse and children under the age of 21 and the purchaser's
retirement plan accounts. To receive the applicable public offering price
pursuant to the right of accumulation, Shareholders must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This right of accumulation, however, may
be modified or eliminated at any time or from time to time by the Trust without
notice.
CONTINGENT DEFERRED SALES CHARGE ("CDSC") - CLASS B SHARES
Class B Shares of the Bond Fund which are redeemed less than three
years after purchase will be subject to a declining CDSC. The CDSC will be based
on the lesser of the net asset value at the time of purchase of the Class B
Shares being redeemed or the net asset value of such Shares at the time of
redemption. Accordingly, a CDSC will not be imposed on amounts representing
increases in net asset value above the net asset value at the time of purchase.
In addition, a CDSC will not be assessed on Class B Shares purchased through
reinvestment of dividends or capital gains distributions, or that are purchased
by "Institutional Investors" such as corporations, pension plans, foundations,
charitable institutions, insurance companies, banks and other banking
institutions, and non-bank fiduciaries.
Solely for purposes of determining the amount of time which has elapsed
from the time of purchase of any Class B Shares, all purchases during a month
will be aggregated and deemed to have been made on the last day of the month. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner that results in the lowest possible charge being assessed.
In this regard, it will be assumed that the redemption is first of Class B
Shares held for more than three years for Income Funds or four years for Equity
Funds or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
The CDSC is waived on redemptions of Class B Shares (i) following the
death or disability (as defined in the Internal Revenue Code of 1986, as amended
(the "Code")) of a Shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or a Custodial Account
under Code Section 403(b)(7) to a Shareholder who has reached age 70 1/2, and
(iii) to the extent the redemption represents the minimum distribution from
retirement plans under Code Section 401(a) where such redemptions are necessary
to make distributions to plan participants.
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
Contingent Deferred Sales Charge ("CDSC") -- Class B Shares" except that the
references to three years and four years in the first paragraph of that section
shall
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<PAGE> 115
mean one year in the case of Class C Shares. Class C Shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B Shares, Class C Shares have no conversion feature and,
accordingly, an investor that purchases Class C Shares will be subject to 12b-1
fees applicable to Class C Shares for an indefinite period subject to annual
approval by each Fund's Board of Trustees and regulatory limitations.
The higher fees mean a higher expense ratio, so Class C Shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A Shares. A Fund will not normally accept any purchase of Class C Shares in the
amount of $500,000 or more. Broker-dealers and other financial intermediaries
whose clients have purchased Class C Shares may receive a trailing commission
equal to 1.00% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Trailing commissions will commence immediately with respect to shares eligible
for exemption from the CDSC normally applicable to Class C Shares.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
account at any time at the net asset value next determined after a redemption
order in proper form is furnished by the shareholder to the Transfer Agent, with
respect to Shares purchased directly through the Distributor, or to his
securities broker or his Shareholder Servicing Agent, and is transmitted to and
received by the Transfer Agent. Redemptions are effected on the same day the
redemption order is received by the Transfer Agent provided such order is
received prior to 4:00 p.m., New York time, on any Fund Business Day. Shares
redeemed earn dividends up to and including the day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day following the date on which the redemption
is effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if
an emergency exists. To be in a position to eliminate excessive expenses, the
Trust reserves the right to redeem upon not less than 30 days' notice all Shares
in an account which has a value below $50, provided that such involuntary
redemptions will not result from fluctuations in the value of Fund Shares. A
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
Unless Shares have been purchased directly from the Distributor, a
shareholder may redeem Shares only by authorizing his securities broker, if
applicable, or his Shareholder Servicing Agent to redeem such Shares on his
behalf (since the account and records of such a shareholder are established and
maintained by his securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem Shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or
more may establish a Systematic Withdrawal Plan under which he redeems at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the
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<PAGE> 116
investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Class A Shares to be redeemed,
account number and the Fund. The letter must be signed in exactly the same way
the account is registered (if there is more than one owner of the Shares, all
must sign). In connection with a written redemption request, all signatures of
all registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
Redemption by wire or telephone. An investor may redeem Shares by wire
or by telephone if he has checked the appropriate box on the Purchase
Application or has filed a Telephone Authorization Form with the Trust. These
redemptions may be paid from the applicable Fund by wire or by check. The Trust
reserves the right to refuse telephone wire redemptions and may limit the amount
involved or the number of telephone redemptions. The telephone redemption
procedure may be modified or discontinued at any time by the Trust. Instructions
for wire redemptions are set forth in the Purchase Application. The Trust
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. For instance, the following information must be verified
by the shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities broker or bank. If the Trust fails to follow these or
other established procedures, it may be liable for any losses due to
unauthorized or fraudulent instructions.
CONVERSION FEATURE
Five years after the original purchase of Income Fund Class B shares
which have been exchanged for Class B Shares of the Fund and six years after the
original purchase of Equity Fund Class B shares which have been exchanged for
Class B Shares of the Fund, Class B Shares of the Fund will convert
automatically to Class A Shares. The purpose of the conversion is to relieve a
holder of Class B Shares of the higher ongoing expenses charged to those Shares,
after enough time has passed to allow the Distributor to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Class A Shares as he or she had of Class B Shares. For Class B Shares
that were exchanged from Income Fund Class B shares, the conversion occurs five
years after the beginning of the calendar month in which the Income Fund Class B
shares were purchased. For Class B shares that were exchanged from Equity Fund
Class B shares, the conversion occurs six years after the beginning of the
calendar month in which the Equity Fund Class B shares were purchased. As a
result of the conversion, the converted Shares are relieved of the Rule 12b-1
fees borne by Class B Shares, although they are subject to the Rule 12b-1 fees
borne by Class A Shares.
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<PAGE> 117
RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred
retirement plans. Application forms and further information about these plans,
including applicable fees, are available from the Trust or the Sponsor upon
request. The tax law governing tax-deferred retirement plans is complex and
changes frequently. Before investing in the Fund through one or more of these
plans, an investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be used as a funding medium for an IRA. An
Internal Revenue Service-approved IRA plan may be available from an investor's
Shareholder Servicing Agent. In any event, such a plan is available from the
Sponsor naming BISYS as custodian. The minimum initial investment for an IRA is
$250; the minimum subsequent investment is $100. IRAs are available to
individuals who receive compensation or earned income and their spouses whether
or not they are active participants in a tax-qualified or Government-approved
retirement plan. An IRA contribution by an individual who participates, or whose
spouse participates, in a tax-qualified or Government-approved retirement plan
may not be deductible, in whole or in part, depending upon the individual's
income. Individuals also may establish an IRA to receive a "rollover"
contribution of distributions from another IRA or a qualified plan. Tax advice
should be obtained before planning a rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase shares of the Fund for
retirement plans for self-employed persons which are known as Defined
Contribution Plans (formerly Keogh or H.R. 10 Plans). Republic offers a
prototype plan for Money Purchase and Profit Sharing Plans.
SECTION 457 PLAN, 401(K) PLAN, 403(B) PLAN
The Fund may be used as a vehicle for certain deferred compensation
plans provided for by Section 457 of the Internal Revenue Code of 1986, as
amended, (the "Code") with respect to service for state governments, local
governments, rural electric cooperatives and political subdivisions, agencies,
instrumentalities and certain affiliates of such entities. The Fund may also be
used as a vehicle for both 401(k) plans and 403(b) plans.
DIVIDENDS AND DISTRIBUTIONS
For the Bond Fund, the Trust declares all of the Fund's net investment
income daily as a dividend to the Fund shareholders. Dividends substantially
equal to the Fund's net investment income earned during the month are
distributed in that month to the Fund's shareholders of record. Generally, the
Fund's net investment income consists of the interest and dividend income it
earns, less expenses. In computing interest income, premiums are not amortized
nor are discounts accrued on long-term debt securities in the Portfolio, except
as required for federal income tax purposes.
The Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated
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<PAGE> 118
investment companies. Unless a shareholder elects to receive dividends in cash,
dividends are distributed in the form of additional shares of the Fund
(purchased at their net asset value without a sales charge).
Certain mortgage-backed securities may provide for periodic or
unscheduled payments of principal and interest as the mortgages underlying the
securities are paid or prepaid. However, such principal payments (not otherwise
characterized as ordinary discount income or bond premium expense) will not
normally be considered as income to the Fixed Income Portfolio and therefore
will not be distributed as dividends to the Bond Fund shareholders. Rather,
these payments on mortgage-backed securities generally will be reinvested by the
Fixed Income Portfolio in accordance with its investment objective and policies.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.001 per share) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the Bond
Fund is divided into three classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the Trust it is necessary
or desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of each class of a series represent an equal pro rata interest in such
series and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
shall have a different designation; (b) each class of shares shall bear any
class expenses; and (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement, and each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
The series of the Portfolio Trust will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of a Fund, shareholders
of the Fund would be entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.
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<PAGE> 119
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust is organized as a master trust fund under the laws
of the State of New York. The Portfolios are separate series of the Portfolio
Trust, which currently has only these three series. The Portfolio Trust's
Declaration of Trust provides that the Bond Fund, Republic Overseas Equity Fund
and Republic Opportunity Fund and other entities investing in the Portfolio
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) are each liable for all obligations of their
respective Portfolio. However, the risk of a Fund incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that the Bond Fund, nor its
shareholders will be adversely affected by reason of the investment of all of
the Assets of the Funds in their corresponding Portfolios.
Each investor in the Portfolios, including the Bond Fund, may add to or
reduce its investment in the Portfolios on each Portfolio Business Day. At 4:00
p.m., New York time on each Portfolio Business Day, the value of each investor's
beneficial interest in the Portfolios is determined by multiplying the net asset
value of each Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, which are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m., New York time on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of 4:00 p.m., New York time on the following Portfolio Business Day.
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
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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
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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.
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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
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<PAGE> 123
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.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors 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 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, 1775 Eye Street, N.W., Washington, D.C. 20006,
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
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<PAGE> 124
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.
47
<PAGE> 125
FINANCIAL STATEMENTS
The current audited financial statements dated October 31, 1998 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1998 as filed with the SEC.
Copies of such reports will be provided without charge to each person receiving
this Statement of Additional Information.
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<PAGE> 126
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 Fund (the "Fund") is a separate series (portfolio) of the
Republic Funds (the "Trust"), an open-end, management investment company which
currently consists of eight 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 four separate
classes, Class A (the "Class A Shares"), Class B (the "Class B Shares"), Class C
(the "Class C Shares") 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 CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES, OR THE ADVISER SHARES
OF THE FUND, AS APPROPRIATE, EACH DATED ___________, 1999 (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.
____________________, 1999
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fixed Income Securities........................................................3
"When-Issued" Municipal Obligations............................................3
Variable Rate Instruments......................................................4
Repurchase Agreements..........................................................5
Illiquid Investments...........................................................5
Participation Interests........................................................6
Futures Contracts..............................................................6
Portfolio Turnover............................................................10
Portfolio Management..........................................................10
Portfolio Transactions........................................................11
Special Factors Affecting New York............................................12
Investment Restrictions.......................................................13
Other Restrictions............................................................15
Percentage And Rating Restrictions............................................16
PERFORMANCE INFORMATION................................................................16
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST........................................17
Trustees And Officers.........................................................17
Compensation Table............................................................19
Investment Manager............................................................19
Distribution Plans............................................................21
Distributor And Sponsor.......................................................21
Administrative Services Plan..................................................22
Fund Administrator............................................................22
Transfer Agent................................................................23
Custodian.....................................................................23
Shareholder Servicing Agents..................................................23
Expenses......................................................................25
DETERMINATION OF NET ASSET VALUE..............................................25
PURCHASE OF SHARES.....................................................................26
Exchange Privilege............................................................26
Automatic Investment Plan.....................................................26
Through a Shareholder Servicing Agent or a Securities Broker..................27
SALES CHARGES..........................................................................27
Existing Shareholders.........................................................28
Reduced Sales Charges--Class A Shares.........................................28
Sales Charge Waivers..........................................................28
Concurrent Purchases..........................................................29
Letters of Intent.............................................................29
Rights of Accumulation........................................................30
</TABLE>
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<TABLE>
<S> <C>
Contingent Deferred Sales Charge ("CDSC") - Class B Shares....................30
Level Load Alternative -- Class C Shares......................................31
REDEMPTION OF SHARES...................................................................31
Systematic Withdrawal Plan....................................................32
Redemption of Shares Purchased Directly Through the Distributor...............32
Conversion Feature............................................................32
DIVIDENDS AND DISTRIBUTIONS............................................................33
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES...................................33
TAXATION ..............................................................................34
Federal Income Tax............................................................34
Alternative Minimum Tax.......................................................37
Special Tax Considerations....................................................37
OTHER INFORMATION......................................................................37
Capitalization................................................................37
Independent Auditors..........................................................38
Counsel.......................................................................38
Registration Statement........................................................38
FINANCIAL STATEMENTS...................................................................38
APPENDIX A.............................................................................38
APPENDIX B.............................................................................40
</TABLE>
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated ___________, 1999 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.
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<PAGE> 129
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective, policies, and risks of the Fund discussed 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.
The Adviser seeks to achieve the investment objective of the Fund by
investing the assets of the Fund primarily in municipal bonds and notes and
other debt obligations issued by or on behalf of the State of New York, other
states, territories and possessions of the United States, and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which is
exempt from regular federal income taxes. (Such obligations, whether or not the
interest thereon is subject to the federal alternative minimum tax, are referred
to herein as "Municipal Obligations".) The Adviser invests on behalf of the Fund
in certain Municipal Obligations of the State of New York and its authorities,
agencies, instrumentalities and political subdivisions, and of Puerto Rico,
other U.S. territories and their authorities, agencies, instrumentalities and
political subdivisions, the interest on which is exempt from regular federal,
New York State and New York City personal income taxes ("New York Municipal
Obligations"). In determining the tax status of interest on Municipal
Obligations and New York Municipal Obligations, the Adviser relies on opinions
of bond counsel who may be counsel to the issuer of those obligations.
Although under normal circumstances, the Adviser attempts to invest
100%, and does invest at least 65%, of the Fund's assets in New York Municipal
Obligations, market conditions may from time to time limit the availability of
such obligations. To the extent that acceptable New York Municipal Obligations
are not available for investment, the Adviser may purchase on behalf of the Fund
Municipal Obligations issued by other states, their authorities, agencies,
instrumentalities and political subdivisions, the interest income on which is
exempt from regular federal income tax but is subject to New York State and New
York City personal income taxes. As a fundamental policy the Adviser will invest
at least 80% of the Fund's net assets in tax exempt obligations. As a temporary
defensive measure, the Adviser may invest up to 20% of the Fund's total assets
in obligations the interest income on which is subject to regular federal, New
York State and New York City personal income taxes or the federal alternative
minimum tax. Also, as a temporary defensive measure during times of adverse
market conditions, assets of the Fund may be held in cash or invested in the
short-term obligations described below, the interest income on which is taxable
to shareholders as ordinary income for federal and New York State and New York
City personal income tax purposes.
All of the investments of the Fund are made in:
(1) Municipal bonds that at the date of purchase are
rated Aaa, Aa, A or Baa by Moody's, AAA, AA, A or BBB
by S&P or AAA, AA, A or BBB by Fitch or, if not rated
by any of these rating agencies, are of comparable
quality as determined by the Adviser;
(2) Municipal notes that at the date of purchase are
rated MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+,
SP-1 or SP-2 by S&P or F-1+, F-1 or F-2 by Fitch or,
if not rated by any of these rating agencies, are of
comparable quality as determined by the Adviser;
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<PAGE> 130
(3) Obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; and
(4) Commercial paper that at the date of purchase is
rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2
by S&P or F-1+, F-1 or F-2 by Fitch or, if not rated
by any of these rating agencies, is of comparable
quality as determined by the Adviser, obligations
(including certificates of deposit, bankers'
acceptances and repurchase agreements) of banks with
at least $1 billion of assets, and cash.
Municipal bonds rated Baa by Moody's or BBB by S&P or Fitch may have
some speculative elements. In evaluating the creditworthiness of an issue,
whether rated or unrated, the Adviser takes into consideration, among other
factors, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the quality of the issuer's management, and
legal and regulatory matters. For a general discussion of Municipal Obligations
and the risks associated with an investment therein, see Appendix A to the
Statement of Additional Information.
The maximum maturity of any debt security held for the Fund is 35
years.
Although higher quality Municipal Obligations may produce lower yields,
they generally are easier to sell or trade than lower quality Municipal
Obligations. To protect the value of its shareholders' investment under adverse
market conditions, the Adviser from time to time may deem it prudent to purchase
higher quality Municipal Obligations or taxable obligations for the Fund, with a
resultant decrease in yield or increase in the proportion of taxable income.
The net asset value of the Fund's shares changes as interest rates
fluctuate. When interest rates decline, the value of the Fund's portfolio can be
expected to rise. Conversely, when interest rates rise, the value of the Fund's
portfolio can be expected to decline. Such changes in the value of the Fund's
portfolio are reflected in the net asset value of shares of the New York Tax-
Free Bond Fund but do not affect the income received by the Fund from its
portfolio securities. Municipal Obligations with longer maturities, such as
those in which the Fund is invested, generally produce higher yields and are
subject to greater market fluctuation as a result of changes in interest rates
than such securities with shorter maturities. Dividends distributed to
shareholders rise or fall in direct relation to the Fund's net income. Since
available yields vary, no specific level of income can be assured.
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.
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<PAGE> 131
The Adviser may invest more than 25% of the assets of the Fund in
industrial revenue bonds (i.e., bonds issued by various state and local agencies
to finance various industrial projects). Certain investors in the Fund may be
required to pay a federal alternative minimum tax on Fund dividends attributable
to interest on certain industrial revenue bonds. The Adviser also may invest
more than 25% of the assets of the Fund in revenue bonds issued for housing,
electric utilities and hospitals (subject to the restriction that it may not
invest more than 25% of the Fund's assets in any one such industry) at times
when the relative value of issues of such a type is considered by the Adviser to
be more favorable than that of other available types of issues. Therefore,
investors should also be aware of the risks which these investments may entail.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds of
such an issue, there is a risk that the proceeds of the issue will be in excess
of demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when the
bonds are issued. Any difference in the actual cash flow from such mortgages
from the assumed cash flow could have an adverse impact upon the ability of the
issuer to make scheduled payments of principal and interest on the bonds, or
could result in early retirement of the bonds. Additionally, such bonds depend
in part for scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of return on
investment of such reserve funds. If the assumed rates of return are not
realized because of changes in interest rate levels or for other reasons, the
actual cash flow for scheduled payments of principal and interest on the bonds
may be adversely affected.
Electric utilities face problems in financing large and lengthy
construction programs, such as cost increases and delay occasioned by regulatory
and environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining sufficient rate increases, the effect of
energy conservation and difficulty of the capital markets to absorb utility
debt.
Hospital bond ratings are often based on feasibility studies containing
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by demand
for hospital services, the ability of the hospital to provide the services
required, management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding levels, possible federal or state legislation limiting the
rates of increase of hospital charges, and weakened state finances which limit
and/or delay aid payments.
FIXED INCOME SECURITIES
To the extent the Fund invests in fixed income securities, the net
asset value of the Fund may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. The Fund's investments in fixed
income securities with longer terms to maturity or greater duration are subject
to greater volatility than the Fund's shorter-term obligations.
"WHEN-ISSUED" MUNICIPAL OBLIGATIONS
New issues of Municipal Obligations may be offered on a "when-issued"
or "forward delivery" basis. The payment obligation and the interest rate that
will be received on the Municipal Obligations offered on this basis are each
fixed at the time the Trust commits to the purchase for the Fund, although
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<PAGE> 132
settlement, i.e., delivery of and payment for the Municipal Obligations, takes
place beyond customary settlement time (but normally within 45 days of the
commitment). Between the time the Trust commits to purchase the "when-issued" or
"forward delivery" Municipal Obligation for the Fund and the time delivery and
payment are made, the "when-issued" or "forward delivery" Municipal Obligation
is treated as an asset of the Fund and the amount which the Fund is committed to
pay for that Municipal Obligation is treated as a liability of the Fund. No
interest on a "when-issued" or "forward delivery" Municipal Obligation is
accrued for the Fund until delivery occurs. Although the Trust only makes
commitments to purchase "when-issued" or "forward delivery" Municipal
Obligations for the Fund with the intention of actually acquiring them, the
Trust may sell these obligations before the settlement date if deemed advisable
by the Adviser. Purchasing Municipal Obligations on a "when-issued" or "forward
delivery" basis can involve a risk that the yields available in the market on
the settlement date may actually be higher (or lower) than those obtained in the
transaction itself and, as a result, the "when-issued" or "forward delivery"
Municipal Obligation may have a lesser (or greater) value at the time of
settlement than the Fund's payment obligation with respect to that Municipal
Obligation. Furthermore, if the Trust sells the "when-issued" or "forward
delivery" Municipal Obligation before the settlement date or if the Trust sells
other obligations from the Fund's portfolio in order to meet the payment
obligations, the Fund may realize a capital gain, which is not exempt from
federal, New York State or New York City income taxation.
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
Variable rate instruments that the Adviser may purchase on behalf of
the Fund provide for a periodic adjustment in the interest rate paid on the
instrument and permit the holder 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 instrument or by tendering or "putting" such
instrument to a third party.
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
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<PAGE> 133
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.
Because of the variable rate nature of the instruments, during periods
when prevailing interest rates decline, the Fund's yield will decline and its
shareholders will forgo the opportunity for capital appreciation. On the other
hand, during periods when prevailing interest rates increase, the Fund's yield
will increase and its shareholders will have reduced risk of capital
depreciation. In certain cases, the interest rate index on which an instrument's
yield is based may not rise and fall to the same extent or as quickly as the
general market for Municipal Obligations. These instruments are considered
derivatives and the value of such instruments may be more volatile than other
floating rate Municipal Obligations.
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
Repurchase agreements are transactions by which the Fund purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. The Advisor will
continually monitor the value of the underlying securities to ensure that their
value, including accrued interest, always equals or exceeds the repurchase
price. Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized 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. In addition, a repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. 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.
ILLIQUID INVESTMENTS
The Fund may invest up to 10% of its net assets 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). This
policy does not apply to any security if the holder is permitted to receive
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payment upon a specified number of days' notice of the unpaid principal balance
plus accrued interest or 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 the Fund.
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
The Fund may enter into Futures Contracts on any fixed income
securities or indexes of municipal 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 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
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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
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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
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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.
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PORTFOLIO TURNOVER
The Adviser fully manages 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 Trust seeks to take advantage of market developments,
yield disparities and variations in the creditworthiness of issuers.
For the year ended October 31, 1998, the portfolio turnover rate for
the Fund was ___%. The Adviser anticipates that in subsequent years the annual
turnover rate of the Fund's assets generally will not exceed ___%. The Trust
engages in portfolio trading for the Fund if it believes a transaction net of
costs (including custodian charges) will help achieve the investment objective
of the Fund. Expenses to the Fund, including brokerage commissions, and the
realization of capital gains which are taxable to the Fund's shareholders tend
to increase as the portfolio turnover increases.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain, and maintain the availability
of, execution at the most favorable prices and in the most effective manner
possible. The Trust may, in the future, seek to achieve the investment
objectives of the Fund by investing all of its assets in a no-load, open-end
management investment company having the same investment objective and policies
and substantially the same investment restrictions as those applicable to the
Fund. In such event, the Fund's' Investment Advisory Contract would be
terminated and the administrative services fees paid by the Fund would be
reduced. Such investment would be made only if the Trustees of the Trust believe
that the aggregate per share expenses of the Fund and such other investment
companies will be less than or approximately equal to the expenses which the
Fund would incur if the Trust were to continue to retain the services of
investment advisers for the Fund and the assets of the Fund were to continue to
be invested directly in portfolio securities.
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
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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
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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 Adviser intends to invest a high proportion of the Fund's assets in
New York Municipal Obligations. Payment of interest and preservation of
principal is dependent upon the continuing ability of New York issuers and/or
obligors of state, municipal and public authority debt obligations to meet their
obligations thereunder. Investors should consider the greater risk inherent in
the Fund's concentration in such obligations versus the safety that comes with a
less geographically concentrated investment portfolio and should compare the
yield available on a portfolio of New York issues with the yield of a more
diversified portfolio including out-of-state issues before making an investment
decision. The Adviser believes that by maintaining the Fund's investment
portfolio in liquid, shorter-term Municipal Obligations, the Fund is somewhat
insulated from the credit risks that may exist for long-term New York Municipal
Obligations.
New York State and other issuers of New York Municipal Obligations have
historically experienced periods of financial difficulties which have caused the
credit ratings of certain of their obligations to be downgraded by certain
rating agencies. Beginning in 1975, New York State, New York City and other
State entities faced serious financial difficulties which jeopardized the credit
standing and impaired the borrowing abilities of such entities and contributed
to high interest rates on, and lower market prices for, debt obligations issued
by them. In the early 1990s, New York faced additional financial difficulties
which resulted in a lowering by Moody's and S&P of their credit ratings on
certain New York Municipal Obligations. Recurrence of such financial
difficulties could result in defaults or declines in the market values of
various New York Municipal Obligations in which the Fund may invest. There can
be no assurance that credit ratings on obligations of New York State and New
York City and other New York Municipal Obligations will not be downgraded
further.
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.
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On __________, 1998, 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;
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(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
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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.
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<PAGE> 144
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 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 period ended ____, 1998,
the yield of the Fund was ____% for Class A Shares, ____% for Class B Shares,
and ____% for Adviser Shares. Class C Shares were not offered prior to November
3, 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 period
ended _________, 1998, the tax equivalent yield of the Fund (assuming a 39.6%
tax rate) was ____% for Class A Shares, ____% for Class B Shares and ____% for
Adviser Shares. Class C Shares were not offered prior to November 3, 1998.
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<PAGE> 145
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 Class A Shares of the Fund for the
period ended was ______% without the sales charge, and the average annual total
return of the Class A of the Fund for the period from May 1, 1995 (commencement
of operations) to ____, 1998 was _____% without the sales charge. Had the sales
charge been in effect during the relevant periods, the annual total return for
the year ended ______, 1998 would have been _____% and the average annual total
return for the period from May 1, 1995 to October 31, 1997 would have been
_____%. The total rate of return for Adviser Shares of the Fund for the one year
period ended October 31, 1998 was ____%, and the average annual return for the
period from July 6, 1996 (date of initial offering) to October 31, 1998 was
____%. The total return for Class B Shares for the period of January 2, 1998
(date of initial offering) to October 31, 1998 was ____%. Class C Shares were
not offered prior to November 3, 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. Assuming that the entire total return is tax-exempt for
the relevant period, the tax equivalent total rate of return of the Class A
Shares of the Fund for the one-year period ended October 31, 1998 was ____%
without the sales charge, and the average annual tax equivalent total rate of
return of the Class A Shares of the Fund for the period from May 1, 1995
(commencement of operations) to October 31, 1998 was ____% without the sales
charge, assuming a 39.6% tax rate. Assuming that the entire total return is
tax-exempt for the relevant period, 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 ____% and the average annual total return for the period
from May 1, 1995 to October 31, 1998 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, 1998 was ____% and the average annual tax equivalent total
rate of return for the Adviser Shares for the period from July 1, 1996 (date of
initial offering) to October 31, 1998 was ____%. The tax equivalent total rate
of return for Class B Shares for the period of January 2, 1998 (date of initial
offering) to October 31, 1998 was ____%. Class C Shares were not offered prior
to November 3, 1998.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust and the Portfolio Trust are
managed under the direction of their respective Boards of Trustees. The
principal
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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).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
ANTHONY J. FISCHER, Vice President
Employee of BISYS Fund Services, Inc., April, 1998 to present; Employee
of SEI Investments and Merrill Lynch prior to April 1998.
PENNY D. GRANDOMINICO*, Vice President
Employee of BISYS Fund Services, Inc., April 1995 to present; Financial
Consultant, Smith Barney, July 1992 to April 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.
ELLEN STOUTAMIRE, Secretary
Employee of BISYS Fund Services, Inc., April, 1997 to present; Attorney
in private practice prior to April 1997.
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.
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<PAGE> 147
*Messrs. Grimm, Fischer and Waters and Mss. Grandominico, Brady,
Stoutamire and Metz also are officers of certain other investment companies of
which BISYS or an affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Retirement Total
Pension of Compensation
Aggregate Benefits Accrued Estimated Annual From Fund
Compensation as Part of Fund Benefits Upon Complex* to
Name of 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 the Portfolio Trust.
The compensation table above reflects the fees received by the Trustees
for the year ended __________, 1998. 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 __________, 1998, 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 - 98.13% (Adviser Shares); and BHC Securities
Inc., One Commerce Square, 2005 Market Square, Philadelphia, PA 19103 - 91.95%
(Class A 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 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
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
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<PAGE> 148
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. 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. For its services,
the Manager is entitled to a fee from the fund, computed daily and paid monthly,
equal on an annual basis to 0.25% of the fund's average daily net assets. For
the period from May 1, 1995 (Fund commencement of operations) to October 31,
1995 and for the fiscal years ended October 31, 1996 and October 31, 1997,
investment management fees aggregated $9,063, $24,512 and $55,654 (of which the
entire amount was waived), respectively. For the fiscal year ended October 31,
1998, investment management fees aggregated $_________ [of which $__________ was
waived].
The Investment Management Contract will continue in effect with respect
to the Fund, provided such continuance is approved at least 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
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. 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.
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 and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Fund,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of obligations so purchased. 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.
Republic has informed the Trust that, in making its investment decisions, it
does not obtain or use material inside information in the possession of any
division or department of Republic or in the possession of any affiliate of
Republic.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Fund will not
violate the Glass-Steagall Act or other applicable banking laws or regulations.
However, future statutory or regulatory changes, as well as future judicial or
administrative decisions and interpretations of present and future statutes and
regulations, could prevent Republic from continuing to perform such services for
the Fund. If Republic were prohibited from acting as investment manager to the
Fund, it is expected that the Trust's Board of Trustees would recommend to Fund
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<PAGE> 149
shareholders approval of a new investment advisory agreement with another
qualified investment adviser selected by the Board or that the Board would
recommend other appropriate action.
The investment advisory 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 advisory services to others.
DISTRIBUTION PLANS
Three Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Class A Shares (the "Class A Plan"),
the Class B Shares (the "Class B Plan") and the Class C Shares (the "Class C
Plan). The Distribution Plans provide that they may not be amended to increase
materially the costs which either the Class A Shares, the Class B Shares or the
Class C Shares may bear pursuant to the Class A Plan, Class B Plan or Class C
Plan without approval by shareholders of the Class A Shares, Class B Shares or
Class C 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, Class B Plan and Class C Plan, the Trustees
considered alternative methods to distribute the Class A Shares, Class B Shares
and Class C 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 Class A Shares, Class B
Shares or Class C 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. During the
fiscal period ended October 31, 1998, the Fund incurred expenses pursuant to
the distribution plans in the amount of $________.
DISTRIBUTOR AND SPONSOR
BISYS acts as sponsor and principal underwriter and distributor of
Shares of the Fund pursuant to a Distribution Contract with the Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares. Such compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
the Fund, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to certain dealers whose
representatives have sold a significant amount of such Shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. None
of the aforementioned compensation is paid by the Fund or its Shareholders.
Pursuant to the Distribution Plans adopted by the Trust, the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Shares of the Fund and
for the provision of certain shareholder services with respect to the Shares.
Payments to the Distributor are for various types of activities, including: (1)
payments to broker-dealers
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<PAGE> 150
who advise shareholders regarding the purchase, sale or retention of Shares and
who provide shareholders with personal services and account maintenance services
("service fees"), (2) payments to employees of the Distributor, and (3) printing
and advertising expenses. Pursuant to the Class A Plan, the amount of their
reimbursement from each Fund may not exceed on an annual basis 0.25% of the
average daily net assets of the Fund represented by Class A Shares outstanding
during the period for which payment is being made. Pursuant to both the Class B
Plan and the Class C Plan, the amount of this reimbursement from the Fund for
distribution related activities (other than service fees) may not exceed on an
annual basis 0.75% of the average daily net assets of the Fund represented by
Class B Shares and Class C Shares, respectively, outstanding during the period
for which payment is being made. The aggregate fees paid to the Distributor
pursuant to the Class B Plan and Class C Plan, respectively, and to Shareholder
Servicing Agents pursuant to the Administrative Services Plan will not exceed on
an annual basis 1.00% of the Fund's average daily net assets represented by
Class B Shares and Class C Shares, respectively, outstanding during the period
for which payment is being made. Salary expense of BISYS personnel who are
responsible for marketing shares of the various portfolios of the Trust may be
allocated to such portfolios on the basis of average net assets; travel expense
is allocated to, or divided among, the particular portfolios for which it is
incurred.
Any payment by the Distributor or reimbursement of the Distributor from
the Fund made pursuant to the Distribution Plans is contingent upon the Board of
Trustees' approval. The Fund is not liable for distribution and shareholder
servicing expenditures made by the Distributor in any given year in excess of
the maximum amount payable under the Distribution Plans in that year.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Class A Shares, Class B Shares and Class C 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 Class A Shares, the
Class B Shares, the Class C 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 Class A Shares, Class B Shares, Class C 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.
FUND ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
including, among other responsibilities, assisting in the preparation and filing
of all documents required for compliance by the Fund with applicable laws and
regulations and arranging for the maintenance of books and records of the Fund.
For its services to the Bond Fund, BISYS receives from the Fund fees payable
monthly equal on an annual basis (for the Fund's then-current fiscal year) to
0.05% of the Fund's average daily net assets up to $1 billion; 0.04% of the next
$1 billion of such assets; and 0.035% of such assets in excess of $2 billion.
For the period from May 1, 1995 (commencement of operations) to October 31,
1995, the Fund accrued administrative fees of $ 7,250 to its former
administrator, of which the entire amount was waived. For the fiscal periods
ended October 31, 1996, the Fund accrued administration fees of $19,609. $18,432
of which was waived. For the year
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ended October 31, 1997, the Fund accrued administration fees equal to $22,290.
for the Year ended October 31, 1998, the Fund accrued administration fees equal
to $ _____.
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.
BISYS provides persons satisfactory to the respective Boards of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees of the Trust, may be directors, officers or employees of BISYS
or its affiliates
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with Investors
Bank & Trust Company ("IBT") and BISYS, pursuant to which IBT acts as transfer
agent for the Fund with respect to the Class A Shares and BISYS acts as transfer
agent for the Fund with respect to the Class B Shares and Class C Shares (the
"Transfer Agents"). The Transfer Agents maintain an account for each shareholder
of the Fund (unless such account is maintained by the shareholder's
securities-broker, if applicable, or Shareholder Servicing Agent), performs
other transfer agency functions, and act as dividend disbursing agent for the
Fund. The principal business address of IBT is 200 Clarendon Street, Boston,
Massachusetts 02117. The principal business address of BISYS is 3435 Stelzer
Road, Columbus, OH 43219.
Pursuant to an agreement, as of April 1, 1999, BISYS will provide all
services with respect to each class of shares of the Fund.
CUSTODIAN
Pursuant to a Custodian Agreement, with respect to domestic assets,
Republic acts as the custodian of the Fund's assets. With respect to foreign
assets, IBT serves as custodian for the Fund and the Portfolio (together, with
Republic, the "Custodian"). The Custodians' responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
fund accounting and other required books and accounts in order to calculate the
daily net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, the Custodians receive such compensation as may from
time to time be agreed upon by it and the Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent, including
Republic, pursuant to which a Shareholder Servicing Agent, as agent for its
customers, among other things: answers customer inquiries regarding account
status and
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history, the manner in which purchases, exchanges and redemptions of
Class A Shares, Class B Shares, and Class C Shares of the Fund may be effected
and certain other matters pertaining to the Fund; assists shareholders in
designating and changing dividend options, account designations and addresses;
provides necessary personnel and facilities to establish and maintain
shareholder accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Fund's shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Fund or the Trust; and provides such other related services as the Trust
or a shareholder may request. With respect to Class A Shares and Class B Shares,
each Shareholder Servicing Agent receives a fee from the Fund for these
services, which may be paid periodically, determined by a formula based upon the
number of accounts serviced by such Shareholder Servicing Agent during the
period for which payment is being made, the level of activity in accounts
serviced by such Shareholder Servicing Agent during such period, and the
expenses incurred by such Shareholder Servicing Agent. The aggregate fees paid
to the Distributor pursuant to the Class B Plan and Class C Plan, respectively,
and to Shareholder Servicing Agents pursuant to the Administrative Services Plan
will not exceed on an annual basis 1.00% the of the Fund's average daily net
assets represented by Class B Shares and Class C Shares, respectively,
outstanding during the period for which payment is being made.
The Trust understands that some Shareholder Servicing Agents also may
impose certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such as
requiring a different minimum initial or subsequent investment, account fees (a
fixed amount per transaction processed), compensating balance requirements (a
minimum dollar amount a customer must maintain in order to obtain the services
offered), or account maintenance fees (a periodic charge based on a percentage
of the assets in the account or of the dividends paid on those assets). Each
Shareholder Servicing Agent has agreed to transmit to its customers who are
holders of Shares appropriate prior written disclosure of any fees that it may
charge them directly and to provide written notice at least 30 days prior to the
imposition of any transaction fees. Conversely, the Trust understands that
certain Shareholder Servicing Agents may credit to the accounts of their
customers from whom they are already receiving other fees amounts not exceeding
such other fees or the fees received by the Shareholder Servicing Agent from the
Fund with respect to those accounts.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust
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do not expect that shareholders of the Fund would suffer any adverse financial
consequences as a result of these occurrences.
EXPENSES
Expenses attributable to a class ("Class Expenses") shall be allocated
to that class only. Class Expenses with respect to the Class A Shares, Class B
Shares and Class C 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. Expenses for each class of shares must
include payments made pursuant to their respective Distribution Plan and
shareholder servicing agent fees paid pursuant to the Administrative Services
Plan.
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 Fund'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 Fund'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. Futures contracts are normally valued at the settlement price on the
exchange on which they are traded. Fund 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.
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.
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<PAGE> 154
Subject to the Trust's compliance with applicable regulations, the
Trust on behalf of the Fund 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.
PURCHASE OF SHARES
Shares may be purchased through the Distributor Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are effected on the same day the purchase order is received by the
Transfer Agent provided such order is received prior to 4:00 p.m., New York
time, on any Fund Business Day. The Trust intends the Funds to be as fully
invested at all times as is reasonably practicable in order to enhance the yield
on their assets. Each Shareholder Servicing Agent or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
While there is no sales load on purchases of Class B Shares and Class C
Shares, the Distributor may receive fees from the Funds. Other funds which have
investment objectives similar to those of the Funds but which do not pay some or
all of such fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares at
net asset value without a sales charge for Shares of the same class offered with
the same or lower sales charge by any of the Trust's other Funds. Exchanges for
Shares with a higher sales charge may be made upon payment of the sales charge
differential. An exchange of Class B Shares or Class C Shares will not affect
the holding period of the Class B Shares or Class C Shares for purposes of
determining the CDSC, if any, upon redemption, or, with respect to Class B
Shares, the time of conversion to Class A Shares. An exchange may result in a
change in the number of Shares held, but not in the value of such Shares
immediately after the exchange. Each exchange involves the redemption of the
Shares to be exchanged and the purchase of the shares of the other Republic Fund
which may produce a gain or loss for tax purposes.
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified in writing to discontinue further investments. Due
to the varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the
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<PAGE> 155
Fund Business Day that both the check and the bank withdrawal data are received
in required form by the Transfer Agent. Further information about the plan may
be obtained from BISYS at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder Servicing Agents and
securities brokers may offer services to their customers, including specialized
procedures for the purchase and redemption of Shares, such as pre- authorized or
automatic purchase and redemption programs. Each Shareholder Servicing Agent and
securities broker may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees will
be to reduce the net return on the investment of customers of that Shareholder
Servicing Agent or securities broker. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from each Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to a Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker or a
Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent (see back cover for address
and phone number).
SALES CHARGES
CLASS A SHARES. The public offering price of the Class A Shares of the
Fund equals net asset value plus the applicable sales charge. BISYS receives
this sales charge as distributor and may reallow it as dealer discounts and
brokerage commissions as follows:
NEW YORK TAX-FREE BOND FUND
SALES CHARGE AS:
---------------------------------------------------------
<TABLE>
<CAPTION>
Discount to
Size of Transaction at % Of Offering Price % Of net Amount Selected Dealers
Offering Price Invested as a Percentage of
Offering Price
- -------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less than $100,000 1.75% 1.78% 1.40%
$100,000 but less than $250,000 1.25% 1.27% 1.00%
$250,000 but less than $500,000 1.00% 1.01% 0.75%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
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<PAGE> 156
An investor may obtain reduced sales charges on Class A Shares under
the circumstances described below under "Reduced Sales Charges -- Class A
Shares."
EXISTING SHAREHOLDERS
Shareholders of the Fund who are shareholders as of December 31, 1997
will be grandfathered with respect to the Fund and will be exempt from paying
sales charges on future purchases of Class A Shares of the Fund.
REDUCED SALES CHARGES--CLASS A SHARES
Customers of Republic National Bank of New York and its affiliates
meeting certain criteria may purchase shares of the Fund at a discounted sales
charge. The maximum sales charge, in the case of the Fund will be 2.50% of the
public offering price.
NEW YORK TAX-FREE BOND FUND
SALES CHARGE AS:
---------------------------------------------------------
<TABLE>
<CAPTION>
Discount to Selected
Size of Transaction at % Of Offering % Of net Amount Dealers as a
Offering Price Price Invested Percentage of
Offering Price
- ------------------------------------------ ------------------ --------------------- -----------------------
<S> <C> <C> <C> <C>
Less than $50,000 2.50% 2.56% 2.00%
$50,000 but less than $100,000 1.50% 1.52% 1.15%
$100,000 but less than $250,000 1.00% 1.01% 0.75%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares by or on behalf of (1) purchasers for whom Republic or one of its
affiliates acts in a fiduciary, advisory, custodial or similar capacity, (2)
employees and retired employees (including spouses, children and parents of
employees and retired employees) of Republic, BISYS and any affiliates thereof,
(3) Trustees of the Trust, (4) directors and retired directors (including
spouses and children of directors and retired directors) of Republic and any
affiliates thereof, (5) purchasers who use proceeds from an account for which
Republic or one of its affiliates acts in a fiduciary, advisory, custodial or
similar capacity, to purchase Class A Shares of a Fund, (6) brokers, dealers and
agents who have a sales agreement with the Distributor, and their employees (and
the immediate family members of such individuals), (7) investment advisers or
financial planners that have entered into an agreement with the Distributor and
that place trades for their own accounts or the accounts of eligible clients and
that charge a fee for their services, and clients of such investment advisers or
financial planners who place trades for their own accounts if such accounts are
linked to the master account of the investment adviser or financial planner on
the books and records of a broker or agent that has entered into an agreement
with the Distributor, and (8) orders placed on behalf of other investment
companies distributed by BISYS, The BISYS Group, Inc., or their affiliated
companies. In addition, the Distributor
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<PAGE> 157
may waive sales charges for the purchase of the Fund's Class A Shares with the
proceeds from the recent redemption of shares of a non-money market mutual fund
(except one of the other funds of the Trust) sold with a sales charge. The
purchase must be made within 60 days of the redemption, and the Distributor must
be notified in writing by the investor, or by his or her financial institution,
at the time the purchase is made. A copy of the investor's account statement
showing such redemption must accompany such notice. To receive a sales charge
waiver in conjunction with any of the above categories, Shareholders must, at
the time of purchase, give the Transfer Agent or the Distributor sufficient
information to permit confirmation of qualification.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining "concurrent purchases" of Class A Shares of the funds.
For example, if a Shareholder concurrently purchases Class A Shares in one of
the funds of the Trust sold with a sales charge at the total public offering
price of $25,000 and Class A Shares in another fund sold with a sales charge at
the total public offering price of $75,000, the sales charge would be that
applicable to a $100,000 purchase as shown in the appropriate table above. The
investor's "concurrent purchases" described above shall include the combined
purchases of the investor, the investor's spouse and children under the age of
21 and the purchaser's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Shareholders must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information
to permit confirmation of qualification. This privilege, however, may be
modified or eliminated at any time or from time to time by the Trust without
notice.
LETTERS OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Class A Shares of the Funds at a designated total public offering price within a
designated 13-month period. Each purchase of Class A Shares under a Letter of
Intent will be made at the net asset value plus the sales charge applicable at
the time of such purchase to a single transaction of the total dollar amount
indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of
Intent may include purchases of Class A Shares made not more than 90 days prior
to the date such investor signs a Letter of Intent; however, the 13-month period
during which the Letter of Intent is in effect will begin on the date of the
earliest purchase to be included. An investor will receive as a credit against
his/her purchase(s) of Class A Shares during this 90-day period at the end of
the 13-month period, the difference, if any, between the sales load paid on
previous purchases qualifying under the Letter of Intent and the Applicable
Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Class A Shares purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
of the investor) to secure payment of the higher sales charge applicable to the
Class A Shares actually purchased if the full amount indicated is not purchased,
and such escrowed Class A Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed Class A Shares,
whether paid in cash or reinvested in additional Class A Shares, are not subject
to escrow. The escrowed Class A Shares will not be available for disposal by the
investor until all purchases pursuant to the Letter of Intent have been made or
the higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated in the Letter of Intent and qualifies for
a further reduced sales charge, the sales charge will be adjusted for the entire
amount purchased at the end of the 13-month period. The
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<PAGE> 158
difference in sales charge will be used to purchase additional Class A Shares of
such Fund at the then current public offering price subject to the rate of sales
charge applicable to the actual amount of the aggregate purchases. For further
information about Letters of Intent, interested investors should contact the
Trust at 1-888-525-5757. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
RIGHTS OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Funds at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Funds then being purchased plus (b) an amount equal to the then current net
asset value of the "purchaser's combined holdings" of the Class A Shares of all
of the Funds of the Trust sold with a sales charge. Class A Shares sold to
purchasers for whom Republic or one of its affiliates acts in a fiduciary,
advisory, custodial (other than retirement accounts), agency, or similar
capacity are not presently subject to a sales charge. The "purchaser's combined
holdings" described above shall include the combined holdings of the purchaser,
the purchaser's spouse and children under the age of 21 and the purchaser's
retirement plan accounts. To receive the applicable public offering price
pursuant to the right of accumulation, Shareholders must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This right of accumulation, however, may
be modified or eliminated at any time or from time to time by the Trust without
notice.
CONTINGENT DEFERRED SALES CHARGE ("CDSC") - CLASS B SHARES
Class B Shares of the Fund which are redeemed less than three years
after purchase will be subject to a declining CDSC. The CDSC will be based on
the lesser of the net asset value at the time of purchase of the Class B Shares
being redeemed or the net asset value of such Shares at the time of redemption.
Accordingly, a CDSC will not be imposed on amounts representing increases in net
asset value above the net asset value at the time of purchase. In addition, a
CDSC will not be assessed on Class B Shares purchased through reinvestment of
dividends or capital gains distributions, or that are purchased by
"Institutional Investors" such as corporations, pension plans, foundations,
charitable institutions, insurance companies, banks and other banking
institutions, and non-bank fiduciaries.
Solely for purposes of determining the amount of time which has elapsed
from the time of purchase of any Class B Shares, all purchases during a month
will be aggregated and deemed to have been made on the last day of the month. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner that results in the lowest possible charge being assessed.
In this regard, it will be assumed that the redemption is first of Class B
Shares held for more than three years for Income Funds or four years for Equity
Funds or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
The CDSC is waived on redemptions of Class B Shares (i) following the
death or disability (as defined in the Internal Revenue Code of 1986, as amended
(the "Code")) of a Shareholder, (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or a Custodial Account
under Code Section 403(b)(7) to a Shareholder who has reached age 70 1/2, and
(iii) to the extent the redemption represents the minimum distribution from
retirement plans under Code Section 401(a) where such redemptions are necessary
to make distributions to plan participants.
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<PAGE> 159
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
Contingent Deferred Sales Charge ("CDSC") -- Class B Shares" except that the
references to three years and four years in the first paragraph of that section
shall mean one year in the case of Class C Shares. Class C Shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B Shares, Class C Shares have no conversion feature and,
accordingly, an investor that purchases Class C Shares will be subject to 12b-1
fees applicable to Class C Shares for an indefinite period subject to annual
approval by each Fund's Board of Trustees and regulatory limitations.
The higher fees mean a higher expense ratio, so Class C Shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A Shares. A Fund will not normally accept any purchase of Class C Shares in the
amount of $500,000 or more. Broker-dealers and other financial intermediaries
whose clients have purchased Class C Shares may receive a trailing commission
equal to 1.00% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Trailing commissions will commence immediately with respect to shares eligible
for exemption from the CDSC normally applicable to Class C Shares.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
account at any time at the net asset value next determined after a redemption
order in proper form is furnished by the shareholder to the Transfer Agent, with
respect to Shares purchased directly through the Distributor, or to his
securities broker or his Shareholder Servicing Agent, and is transmitted to and
received by the Transfer Agent. Redemptions are effected on the same day the
redemption order is received by the Transfer Agent provided such order is
received prior to 4:00 p.m., New York time, on any Fund Business Day. Shares
redeemed earn dividends up to and including the day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day following the date on which the redemption
is effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if
an emergency exists. To be in a position to eliminate excessive expenses, the
Trust reserves the right to redeem upon not less than 30 days' notice all Shares
in an account which has a value below $50, provided that such involuntary
redemptions will not result from fluctuations in the value of Fund Shares. A
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
Unless Shares have been purchased directly from the Distributor, a
shareholder may redeem Shares only by authorizing his securities broker, if
applicable, or his Shareholder Servicing Agent to redeem such Shares on his
behalf (since the account and records of such a shareholder are established and
maintained by his securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem Shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
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SYSTEMATIC WITHDRAWAL PLAN.
Any shareholder who owns Shares with an aggregate value of $10,000 or
more may establish a Systematic Withdrawal Plan under which he redeems at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR.
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Class A Shares to be redeemed,
account number and the Fund. The letter must be signed in exactly the same way
the account is registered (if there is more than one owner of the Shares, all
must sign). In connection with a written redemption request, all signatures of
all registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
Redemption by wire or telephone. An investor may redeem Shares by wire
or by telephone if he has checked the appropriate box on the Purchase
Application or has filed a Telephone Authorization Form with the Trust. These
redemptions may be paid from the applicable Fund by wire or by check. The Trust
reserves the right to refuse telephone wire redemptions and may limit the amount
involved or the number of telephone redemptions. The telephone redemption
procedure may be modified or discontinued at any time by the Trust. Instructions
for wire redemptions are set forth in the Purchase Application. The Trust
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. For instance, the following information must be verified
by the shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities broker or bank. If the Trust fails to follow these or
other established procedures, it may be liable for any losses due to
unauthorized or fraudulent instructions.
CONVERSION FEATURE
Five years after the original purchase of Income Fund Class B shares
which have been exchanged for Class B Shares of the Fund and six years after the
original purchase of Equity Fund Class B shares which have been exchanged for
Class B Shares of the Fund, Class B Shares of the Fund will convert
automatically to Class A Shares. The purpose of the conversion is to relieve a
holder of Class B Shares of the higher ongoing expenses charged to those Shares,
after enough time has passed to allow the Distributor to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Class A Shares as he or she had of Class B Shares. For Class B Shares
that were exchanged from Income Fund Class B shares, the conversion occurs five
years after the beginning of the calendar month in which the Income Fund Class B
shares were purchased. For Class B shares that were exchanged from Equity Fund
Class B shares, the conversion occurs six years after the beginning of the
calendar month in which the Equity Fund Class B shares were purchased. As a
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result of the conversion, the converted Shares are relieved of the Rule 12b-1
fees borne by Class B Shares, although they are subject to the Rule 12b-1 fees
borne by Class A Shares.
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of the Fund's net investment income daily as a
dividend to the Fund shareholders. Dividends substantially equal to the Fund's
net investment income earned during the month are distributed in that month to
the Fund's shareholders of record. Generally, the Fund's net investment income
consists of the interest and dividend income it earns, less expenses. In
computing interest income, premiums are not amortized nor are discounts accrued
on long-term debt securities in the Portfolio, except as required for federal
income tax purposes.
The Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated investment companies. Unless a shareholder elects to receive
dividends in cash, dividends are distributed in the form of additional shares of
the Fund (purchased at their net asset value without a sales charge).
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.001 per share) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the Fund is
divided into four classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the Trust it is necessary
or desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of each class of a series represent an equal pro rata interest in such
series and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
shall have a different designation; (b) each class of shares shall bear any
class expenses; and (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement, and each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
The series of the Portfolio Trust will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
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Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of a Fund, shareholders
of the Fund would be entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
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
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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
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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.
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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 class 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.
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INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors 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 preparation of filings with the
SEC. The address of KPMG Peat Marwick LLP is 99 High Street, Boston,
Massachusetts 02110.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
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, 1998 of each
of the Fund are hereby incorporated herein by reference from the Annual Report
of the Fund dated October 31, 1998 as filed with the SEC. Copies of such reports
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
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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
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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.
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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.
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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 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.
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.
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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
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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.
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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.
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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.
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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
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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.
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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.
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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
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<PAGE> 179
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.
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<PAGE> 180
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 eight 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 four
separate classes, Class A (the "Class A Shares"), Class B (the "Class B
Shares"), Class C Shares (the "Class C Shares") and Class Y (the "Adviser
Shares").
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 CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES OR THE ADVISER SHARES
OF THE FUND, AS APPROPRIATE, EACH DATED ___________, 1999 (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.
___________, 1999
<PAGE> 181
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS............................................................1
Foreign Securities.......................................................................................2
Fixed Income Securities..................................................................................3
Convertible Securities...................................................................................3
Portfolio Securities Loans...............................................................................4
Repurchase Agreements....................................................................................4
Options and Futures......................................................................................5
Options on Futures Contracts.............................................................................9
Forward Foreign Currency Contracts and Options on Foreign Currencies....................................10
Illiquid Investments and Rule 144A Securities...........................................................11
Portfolio Transactions..................................................................................11
High Yield/High Risk Securities.........................................................................12
Investment Restrictions.................................................................................12
Percentage and Rating Restrictions......................................................................15
PERFORMANCE INFORMATION..........................................................................................15
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST..................................................................16
Trustees and Officers...................................................................................16
Investment Manager......................................................................................18
Investment Sub-Advisers.................................................................................19
Distribution Plans......................................................................................20
Distributor And Sponsor.................................................................................21
Administrative Services Plan............................................................................21
Fund Administrator......................................................................................22
Transfer Agent..........................................................................................23
Custodian...............................................................................................23
Shareholder Servicing Agents............................................................................23
Expenses................................................................................................24
VALUATION OF SECURITIES; REDEMPTION IN KIND......................................................................24
PURCHASE OF SHARES...............................................................................................26
Exchange Privilege......................................................................................26
Automatic Investment Plan...............................................................................26
Through a Shareholder Servicing Agent or a Securities Broker............................................26
SALES CHARGES....................................................................................................27
Class A Shares..........................................................................................27
Sales Charge Waivers....................................................................................28
Concurrent Purchases....................................................................................29
Letters of Intent.......................................................................................29
Rights of Accumulation..................................................................................30
</TABLE>
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<PAGE> 182
<TABLE>
<S> <C>
Contingent Deferred Sales Charge ("CDSC") - Class B Shares..............................................30
Level Load Alternative -- Class C Shares................................................................30
REDEMPTION OF SHARES.............................................................................................31
Systematic Withdrawal Plan..............................................................................31
Redemption of Shares Purchased Directly Through the Distributor.........................................32
Conversion Feature......................................................................................32
RETIREMENT PLANS.................................................................................................33
Individual Retirement Accounts..........................................................................33
Defined Contribution Plans..............................................................................33
Section 457 Plan, 401(k) Plan, 403(b) Plan..............................................................33
DIVIDENDS AND DISTRIBUTIONS......................................................................................33
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.............................................................34
TAXATION.........................................................................................................35
Federal Income Tax......................................................................................35
Options.................................................................................................36
Investment in Passive Foreign Investment Companies......................................................37
Effect of Foreign Currencies............................................................................38
Disposition of Shares...................................................................................38
OTHER INFORMATION................................................................................................38
Capitalization..........................................................................................38
Independent Auditors....................................................................................39
Counsel.................................................................................................39
Registration Statement..................................................................................39
FINANCIAL STATEMENTS.............................................................................................39
APPENDIX.........................................................................................................40
</TABLE>
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated ___________, 1999, 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.
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<PAGE> 183
INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
The following information supplements the discussion of the investment
objectives, policies, and risks of the Fund discussed 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.
The Fund will normally invest at least 65% of its total assets in
equity securities of seasoned companies in sound financial condition with large
or intermediate capitalization which are expected to show above-average price
appreciation. The Fund may invest in a broad range of equity securities,
including common and preferred stocks, debt securities convertible into or
exchangeable for common stock and securities such as warrants or rights that are
convertible into common stock.
The Fund also may (a) invest in options on securities, securities
indices or foreign currencies, (b) invest in futures contracts and options on
futures contracts, (c) enter into forward foreign currency exchange contracts,
(d) invest up to 10% of its net assets (at the time of investment) in debt and
equity securities which are traded in developed foreign countries, and (e)
invest up to 35% in bonds and other debt securities, including lower rated,
high-yield bonds, commonly referred to as "junk bonds." The Fund does not intend
to write covered call options with respect to securities with an aggregate
market value of more than 10% of its total assets at the time and option is
written. The Fund will not invest more than 5% of its net assets (at the time of
investment) in lower rated (BB/Ba or lower), high-yield bonds. The Equity Fund
may retain any bond whose rating drops below investment grade if its is in the
best interest of the Fund's shareholders. Securities rated BB/Ba by a nationally
recognized statistical rating organization are considered to have speculative
characteristics.
The Fund may lend its portfolio securities. These loans may not exceed
30% of the value of the Fund's total assets.
The Fund will not purchase securities for trading purposes. Pending
investment in equity and debt and also for temporary defensive purposes, the
Fund may invest without limit in short-term debt and other high-quality,
fixed-income securities and cash equivalents, which may include, but are not
limited to: (i) short-term obligations of the U.S. and foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits, certificates of deposit and bankers' acceptances of U.S. and
foreign banks, (iii) high-quality rated commercial paper of U.S. or foreign
issuers, and (iv) repurchase agreements related to the foregoing. The Fund may
invest up to 15% of its net assets in illiquid securities.
The Manager will allocate the Fund's assets between the Fund's two
sub-advisers, Alliance Capital Management L.P. ("Alliances") and Brinson
Partners, Inc. ("Brinson") (collectively, the "Sub-Advisers"). While the Manager
maintains complete discretion regarding the allocation of the Fund's assets, the
Manager anticipates that it typically will allocate the Fund's assets evenly
between the Sub-Advisers, each of which pursues the Fund's investment objective
in the manner described below.
Alliance. Alliance seeks the Fund's investment objective by pursuing a
"growth" style of investing in marketable equity securities, primarily of U.S.
companies. However, the Fund may purchase foreign, as well as domestic, equity
securities. Alliance normally will invest substantially all of the Fund's assets
allocated to it in common stocks which Alliance believes will appreciate in
value.
<PAGE> 184
Alliance generally seeks to invest the Fund's assets in financially
secure firms with established operating histories that are proven leaders in
their industry or market sector. Such companies may demonstrate characteristics
such as participation in expanding markets, increasing unit sales volume, growth
in revenues and earnings per share, and increasing return on investments.
However, Alliance may invest the Fund's assets in companies that do not
demonstrate such characteristics if it expects such companies to undergo an
acceleration in growth of earnings because of special factors such as new
management, new products, changes in consumer demand or basic changes in the
economic environment.
Alliance analyzes each company considered for investment, using
internal fundamental research analysts, to determine its source of earnings,
competitive edge, management strength, and level of industry dominance as
measured by market share. At the same time, Alliance conducts an analysis of the
financial condition of each company and selects those prospects that demonstrate
the greatest potential for above-average capital appreciation and growth in
earnings. Alliance's philosophy is to seek the best available combination of
relative earnings growth and attractive valuation.
Brinson. Brinson seeks the Fund's investment objective by pursuing a
"value" style of investment management. Brinson's approach to investing for the
Fund is to invest in the equity securities of U.S. companies believed to be
undervalued based upon internal research and proprietary valuation systems.
Investment decisions are based on fundamental research, internally developed
valuation systems and seasoned judgment. Brinson's research focuses on several
levels of analysis, first, on understanding wealth shifts that occur within the
equity market, and second, on individual company research. At the company level,
Brinson quantifies expectations of a company's ability to generate profit and to
grow business into the future.
For each stock under analysis, Brinson discounts to the present all of
the future cash flows that it believes will accrue to the Fund from the
investment in order to calculate a present or intrinsic value. This value
estimate generated by Brinson's proprietary valuation model is compared to
observed market price and ranked against other stocks accordingly. The rankings,
in combination with Brinson's investment judgment, determine which securities
are included in the portfolio.
Brinson monitors and assesses the degree to which the portfolio becomes
concentrated in industry or common types of stocks, and adjusts the portfolio to
balance the price/value opportunities with their concentrations. Brinson imposes
limits on the degree of concentration, as the Fund does not intend to
concentrate its investments in a particular industry.
FOREIGN SECURITIES
The Fund may invest in foreign securities. Investing in securities
issued by companies whose principal business activities are outside the United
States may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, other taxes imposed by the foreign country on the Fund's
earnings, assets, or transactions, limitation on the removal of cash or other
assets of the Fund, political or financial instability, or diplomatic and other
developments which could affect such investments. Further, economies of
particular countries or areas of the world may differ favorably or unfavorably
from the economy of the United States. Changes in foreign exchange rates will
affect the value of securities
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<PAGE> 185
denominated or quoted in currencies other than the U.S. dollar. For example,
significant uncertainty surrounds the proposed introduction of the euro (a
common currency for the European Union) in January 1999 and its effect on the
value of securities denominated in local European currencies. These and other
currencies in which a Fund's assets are denominated may be devalued against the
U.S. dollar, resulting in a loss to the Fund. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Furthermore, dividends and interest payments
from foreign securities may be withheld at the source. Additional costs
associated with an investment in foreign securities may include higher custodial
fees than apply to domestic custodial arrangements, and transaction costs of
foreign currency conversions.
FIXED INCOME SECURITIES
To the extent the Fund invests in fixed income securities, the net
asset value of the Fund may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. The Fund's investments in fixed
income securities with longer terms to maturity or greater duration are subject
to greater volatility than the Fund's shorter-term obligations.
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.
The Fund may invest up to 10% of its net assets in warrants, except
that this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants entitle the holder
to buy the issuer's stock at a specific price for a specific period of time.
Warrants do not represent ownership of securities, but only the right to buy the
securities. 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.
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<PAGE> 186
PORTFOLIO SECURITIES LOANS
The Fund may lend portfolio securities to registered broker-dealers for
the purpose of realizing additional income. 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.
REPURCHASE AGREEMENTS
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. Repurchase agreements are transactions by which a fund
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The 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 Advisor will
continually monitor the value of the underlying securities to ensure that their
value, including accrued interest, always equals or exceeds the repurchase
price. Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized.
The use of repurchase agreements involves certain risks. For example,
if the seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Fund may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Fund and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Fund may not be able to substantiate its interest in the underlying
securities.
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
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<PAGE> 187
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 AND FUTURES
The Fund may invest in options and futures contracts. The use of
options and futures is a highly specialized activity which involves investment
strategies and risks different from those associated with ordinary portfolio
securities transactions, and there can be no guarantee that their use will
increase the return of the Fund. While the use of these instruments by the Fund
may reduce certain risks associated with owning its portfolio securities, these
techniques themselves entail certain other risks. If the Sub-Adviser applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower Fund's return. Certain
strategies limit the potential of the Fund to realize gains as well as limit
their exposure to losses. The Fund could also experience losses if the prices of
its options and futures positions were poorly correlated with its other
investments. There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures contract or a futures option
position.
Options on Securities. The Fund may write (sell) covered call and put
options on securities and purchase call and put options. A "call option" is a
contract sold for a price (the "premium") giving its holder the right to buy a
specific number of shares of stock at a specific price prior to a specified
date. A "covered call option" is a call option issued on securities already
owned by the writer of the call option for delivery to the holder upon the
exercise of the option. 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.
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<PAGE> 188
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-
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<PAGE> 189
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.
The Fund also may enter into "closing purchase transactions" in order
to terminate its obligation to deliver the underlying security (this may result
in a short-term gain or loss). A closing purchase transaction is the purchase of
a call option (at a cost which may be more or less than the premium received for
writing the original call option) on the same security, with the same exercise
price and call period as the option previously written. If the Fund is unable to
enter into a closing purchase transaction, it may be required to hold a security
that it might otherwise have sold to protect against depreciation. The Fund does
not intend to write covered call options with respect to securities with an
aggregate market value of more than 10% of its total assets at the time an
option is written. This percentage limitation will not be increased without
prior disclosure in the current Prospectus.
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.
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<PAGE> 190
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. Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and price. 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
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<PAGE> 191
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,
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<PAGE> 192
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 FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
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"). Forward foreign currency
exchange contracts ("forward contracts") are intended to minimize the risk of
loss to the Equity Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. 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. 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.
Transactions in Forward Contracts for purposes other than hedging present
greater profit potential but also involve 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. By entering into transactions in Forward Contracts,
the Fund may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Forward Contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges.
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<PAGE> 193
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.
ILLIQUID INVESTMENTS AND RULE 144A SECURITIES
The Fund may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. The Fund may invest in securities
qualifying for resale to "qualified institutional buyers" under Securities and
Exchange Commission ("SEC") Rule 144A that are determined by the Board, or by
the 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. There may be delays in selling these securities and sales may
be made at less favorable prices.
Factors that the Adviser must consider in determining whether a
particular Rule 144A security is liquid include the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, dealer undertakings to
make a market in the security, and the nature of the security and the nature of
the market for the security (i.e., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Investing in
Rule 144A securities could have the effect of increasing the level of the
Portfolio's or Fund's illiquidity to the extent that qualified institutions
might become, for a time, uninterested in purchasing these securities.
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 year ended October 31,
1998, the Fund paid aggregate brokerage commissions equal to $________, [ALL OF]
which for the fiscal year ended October 31, 1998, was paid to broker-dealers
that provided "brokerage and research services" to the Fund's Sub-Advisers. 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
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<PAGE> 194
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.
HIGH YIELD/HIGH RISK SECURITIES
The Fund may invest in lower rated, high-yield, "junk" bonds. These
securities are generally rated lower than Baa by Moody's or lower than BBB by
S&P. 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
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<PAGE> 195
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;
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<PAGE> 196
(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;
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<PAGE> 197
(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 as 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
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<PAGE> 198
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, 1998 was _____% without the
sales charge, and for the period from August 1, 1995 (commencement of
operations) to October 31, 1998, total return for the Class A Shares equaled
_____% 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, 1998
would have been _____% and the average annual total return for the period from
August 1, 1995 to October 31, 1998 would have been _____%. The total return of
the Adviser Shares of the Fund for the one-year period ended October 31, 1998
was _____%, 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,
1998 was _____%. Class B Shares were not offered prior to January 2, 1998 and
Class C Shares were not offered prior to November 3, 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 AND THE PORTFOLIO TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust and the Portfolio Trust are
managed under the direction of their respective Boards of Trustees. 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).
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<PAGE> 199
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
ANTHONY J. FISCHER, Vice President
Employee of BISYS Fund Services, Inc., April, 1998 to present; Employee
of SEI Investments and Merrill Lynch prior to April 1998.
PENNY D. GRANDOMINICO*, Vice President
Employee of BISYS Fund Services, Inc., April 1995 to present; Financial
Consultant, Smith Barney, July 1992 to April 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.
ELLEN STOUTAMIRE, Secretary
Employee of BISYS Fund Services, Inc., April, 1997 to present; Attorney
in private practice prior to April 1997.
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. Grimm, Fischer and Waters and Mss. Grandominico, Brady,
Stoutamire and Metz also are officers of certain other investment companies of
which BISYS or an affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Retirement Total
Pension of Estimated Compensation
Aggregate Benefits Accrued Annual From Fund
Compensation as Part of Fund Benefits Upon Complex* to
Name of 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, 1998. The Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust
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<PAGE> 200
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 __________, 1998, 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 - _____% (Adviser Shares); BHC Securities, Inc., One
Commerce Square, 2005 Market Square, Philadelphia, Pennsylvania 19103 - _____%
(Class A Shares), Republic New York Securities Corp. (as Custodian), 452 Fifth
Avenue, Tower 14, New York, New York 10018 - _____% (Adviser Shares) and ____%
(Class A Shares); and Sara Leiter, 4 Dogwood Lane, Lawrence, NY 11559 - ____%
(Class A 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 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 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. For the fiscal
year ended October 31, 1998, investment management fees aggregated $_________
[OF WHICH $__________ WAS WAIVED].
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
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<PAGE> 201
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 and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Fund or
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased. 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. Republic has informed the Trust that, in making its
investment decisions, it does not obtain or use material inside information in
the possession of any division or department of Republic or in the possession of
any affiliate of Republic.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Fund and Portfolio
will not violate the Glass-Steagall Act or other applicable banking laws or
regulations. However, future statutory or regulatory changes, as well as future
judicial or administrative decisions and interpretations of present and future
statutes and regulations, could prevent Republic from continuing to perform such
services for the Fund and Portfolio. If Republic were prohibited from acting as
investment manager to the Fund and Portfolio, it is expected that the Trust's
Board of Trustees would recommend to Fund shareholders approval of a new
investment advisory agreement with another qualified investment adviser selected
by the Board or that the Board would recommend other appropriate action.
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.
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
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<PAGE> 202
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.
DISTRIBUTION PLANS
Three Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Class A Shares (the "Class A Plan"),
the Class B Shares (the "Class B Plan") and the Class C Shares (the "Class C
Plan). The Distribution Plans provide that they may not be amended to increase
materially the costs which either the Class A Shares, the Class B Shares or the
Class C Shares may bear pursuant to the Class A Plan, Class B Plan or Class C
Plan without approval by shareholders of the Class A Shares, Class B Shares or
Class C 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, Class B Plan and Class C Plan, the Trustees
considered alternative methods to distribute the Class A Shares, Class B Shares
and Class C 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 Class A Shares, Class B
Shares or Class C 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. During the
fiscal period ended October 31, 1998, the Fund incurred expenses pursuant to
the distribution plans in the amount of $___________.
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<PAGE> 203
DISTRIBUTOR AND SPONSOR
BISYS acts as sponsor and principal underwriter and distributor of
Shares of the Fund pursuant to a Distribution Contract with the Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares. Such compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
the Fund, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to certain dealers whose
representatives have sold a significant amount of such Shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. None
of the aforementioned compensation is paid by the Fund or its Shareholders.
Pursuant to the Distribution Plans adopted by the Trust, the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Shares of the Fund and
for the provision of certain shareholder services with respect to the Shares.
Payments to the Distributor are for various types of activities, including: (1)
payments to broker-dealers who advise shareholders regarding the purchase, sale
or retention of Shares and who provide shareholders with personal services and
account maintenance services ("service fees"), (2) payments to employees of the
Distributor, and (3) printing and advertising expenses. Pursuant to the Class A
Plan, the amount of their reimbursement from each Fund may not exceed on an
annual basis 0.25% of the average daily net assets of the Fund represented by
Class A Shares outstanding during the period for which payment is being made.
Pursuant to both the Class B Plan and the Class C Plan, the amount of this
reimbursement from the Fund for distribution related activities (other than
service fees) may not exceed on an annual basis 0.75% of the average daily net
assets of the Fund represented by Class B Shares and Class C Shares,
respectively, outstanding during the period for which payment is being made. The
aggregate fees paid to the Distributor pursuant to the Class B Plan and Class C
Plan, respectively, and to Shareholder Servicing Agents pursuant to the
Administrative Services Plan will not exceed on an annual basis 1.00% of the
Fund's average daily net assets represented by Class B Shares and Class C
Shares, respectively, outstanding during the period for which payment is being
made. Salary expense of BISYS personnel who are responsible for marketing shares
of the various portfolios of the Trust may be allocated to such portfolios on
the basis of average net assets; travel expense is allocated to, or divided
among, the particular portfolios for which it is incurred.
Any payment by the Distributor or reimbursement of the Distributor from
the Fund made pursuant to the Distribution Plans is contingent upon the Board of
Trustees' approval. The Fund is not liable for distribution and shareholder
servicing expenditures made by the Distributor in any given year in excess of
the maximum amount payable under the Distribution Plans in that year.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Class A Shares, Class B Shares and Class C 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 Class A Shares, the
Class B Shares, the Class C Shares or the Adviser Shares by a majority vote of
shareholders of that class. The Administrative Services Plan may not
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<PAGE> 204
be amended to increase materially the amount of permitted expenses thereunder
with respect to the Class A Shares, Class B Shares, Class C 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.
FUND ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
and the Portfolio including, among other responsibilities, assisting in the
preparation and filing of all documents required for compliance by the Fund and
the Portfolio with applicable laws and regulations and arranging for the
maintenance of books and records of the Fund and the Portfolio. For its services
to the Bond Fund, BISYS receives from the Fund fees payable monthly equal on an
annual basis (for the Fund's then-current fiscal year) to 0.05% of the Fund's
average daily net assets up to $1 billion; 0.04% of the next $1 billion of such
assets; and 0.035% of such assets in excess of $2 billion. For providing similar
services to the Portfolio, BISYS (Ireland) receives from the Portfolio fees
payable monthly equal on an annual basis (for the Portfolio's then-current
fiscal year) to 0.05% of the first $1 billion of the Portfolio's average daily
net assets; 0.04% of the next $1 billion of such assets; and 0.035% of such
assets in excess of $2 billion.
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. For the year ended October 31,
1998, the Fund accrued administration fees of $__________, of which $ _________
was waived.
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.
BISYS provides persons satisfactory to the respective Boards of
Trustees to serve as officers of the Trust and the Portfolio Trust. Such
officers, as well as certain other employees of the Trust and of the Portfolio
Trust, may be directors, officers or employees of BISYS or its affiliates.
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with Investors
Bank & Trust Company ("IBT") and BISYS, pursuant to which IBT acts as transfer
agent for the Fund with respect to the Class A Shares and BISYS acts as transfer
agent for the Fund with respect to the Class B Shares and Class C Shares (the
"Transfer Agents"), and the Portfolio Trust has entered into a Transfer Agent
Agreement with Investors Fund Services (Ireland) Limited (also a "Transfer
Agent"). The Transfer Agents maintain an account for each shareholder of the
Fund (unless such account is maintained by the shareholder's securities-broker,
if applicable, or Shareholder Servicing Agent), performs other transfer agency
functions, and act as dividend disbursing agent for the Fund. The principal
business address of IBT is 200 Clarendon Street,
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<PAGE> 205
Boston, Massachusetts 02117. The principal business address of BISYS is 3435
Stelzer Road, Columbus, OH 43219.
Pursuant to an agreement, as of April 1, 1999, BISYS will provide all
services with respect to each class of shares of the Fund.
CUSTODIAN
Pursuant to a Custodian Agreement, with respect to domestic assets,
Republic acts as the custodian of the Fund's assets. With respect to foreign
assets, IBT serves as custodian for the Fund and the Portfolio (together, with
Republic, the "Custodian"). The Custodians' responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
fund accounting and other required books and accounts in order to calculate the
daily net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, the Custodians receive such compensation as may from
time to time be agreed upon by it and the Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent, including
Republic, pursuant to which a Shareholder Servicing Agent, as agent for its
customers, among other things: answers customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of
Class A Shares, Class B Shares, and Class C Shares of the Fund may be effected
and certain other matters pertaining to the Fund; assists shareholders in
designating and changing dividend options, account designations and addresses;
provides necessary personnel and facilities to establish and maintain
shareholder accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Fund's shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Fund or the Trust; and provides such other related services as the Trust
or a shareholder may request. With respect to Class A Shares and Class B Shares,
each Shareholder Servicing Agent receives a fee from the Fund for these
services, which may be paid periodically, determined by a formula based upon the
number of accounts serviced by such Shareholder Servicing Agent during the
period for which payment is being made, the level of activity in accounts
serviced by such Shareholder Servicing Agent during such period, and the
expenses incurred by such Shareholder Servicing Agent. The aggregate fees paid
to the Distributor pursuant to the Class B Plan and Class C Plan, respectively,
and to Shareholder Servicing Agents pursuant to the Administrative Services Plan
will not exceed on an annual basis 1.00% the of the Fund's average daily net
assets represented by Class B Shares and Class C Shares, respectively,
outstanding during the period for which payment is being made.
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<PAGE> 206
The Trust understands that some Shareholder Servicing Agents also may
impose certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such as
requiring a different minimum initial or subsequent investment, account fees (a
fixed amount per transaction processed), compensating balance requirements (a
minimum dollar amount a customer must maintain in order to obtain the services
offered), or account maintenance fees (a periodic charge based on a percentage
of the assets in the account or of the dividends paid on those assets). Each
Shareholder Servicing Agent has agreed to transmit to its customers who are
holders of Shares appropriate prior written disclosure of any fees that it may
charge them directly and to provide written notice at least 30 days prior to the
imposition of any transaction fees. Conversely, the Trust understands that
certain Shareholder Servicing Agents may credit to the accounts of their
customers from whom they are already receiving other fees amounts not exceeding
such other fees or the fees received by the Shareholder Servicing Agent from the
Fund with respect to those accounts.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do not expect that
shareholders of the Fund would suffer any adverse financial consequences as a
result of these occurrences.
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 Class A Shares, Class B Shares and Class C 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. Expenses for each class of shares
must include payments made pursuant to their respective Distribution Plan and
shareholder servicing agent fees paid pursuant to the Administrative Services
Plan.
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.
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<PAGE> 207
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.
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<PAGE> 208
PURCHASE OF SHARES
Shares may be purchased through the Distributor Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are effected on the same day the purchase order is received by the
Transfer Agent provided such order is received prior to 4:00 p.m., New York
time, on any Fund Business Day. The Trust intends the Funds to be as fully
invested at all times as is reasonably practicable in order to enhance the yield
on their assets. Each Shareholder Servicing Agent or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
While there is no sales load on purchases of Class B Shares and Class C
Shares, the Distributor may receive fees from the Funds. Other funds which have
investment objectives similar to those of the Funds but which do not pay some or
all of such fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares at
net asset value without a sales charge for Shares of the same class offered with
the same or lower sales charge by any of the Trust's other Funds. Exchanges for
Shares with a higher sales charge may be made upon payment of the sales charge
differential. An exchange of Class B Shares or Class C Shares will not affect
the holding period of the Class B Shares or Class C Shares for purposes of
determining the CDSC, if any, upon redemption, or, with respect to Class B
Shares, the time of conversion to Class A Shares. An exchange may result in a
change in the number of Shares held, but not in the value of such Shares
immediately after the exchange. Each exchange involves the redemption of the
Shares to be exchanged and the purchase of the shares of the other Republic Fund
which may produce a gain or loss for tax purposes.
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified in writing to discontinue further investments. Due
to the varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the Fund Business
Day that both the check and the bank withdrawal data are received in required
form by the Transfer Agent. Further information about the plan may be obtained
from BISYS at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder
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<PAGE> 209
Servicing Agents and securities brokers may offer services to their customers,
including specialized procedures for the purchase and redemption of Shares, such
as pre-authorized or automatic purchase and redemption programs. Each
Shareholder Servicing Agent and securities broker may establish its own terms,
conditions and charges, including limitations on the amounts of transactions,
with respect to such services. Charges for these services may include fixed
annual fees, account maintenance fees and minimum account balance requirements.
The effect of any such fees will be to reduce the net return on the investment
of customers of that Shareholder Servicing Agent or securities broker.
Conversely, certain Shareholder Servicing Agents may (although they are not
required by the Trust to do so) credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding such other fees
or the fees received by the Shareholder Servicing Agent from each Fund, which
will have the effect of increasing the net return on the investment of such
customers of those Shareholder Servicing Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to a Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker or a
Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent (see back cover for address
and phone number).
SALES CHARGES
CLASS A SHARES
The public offering price of the Class A Shares of the Fund equals net
asset value plus the applicable sales charge. BISYS receives this sales charge
as distributor and may reallow it as dealer discounts and brokerage commissions
as follows:
<TABLE>
<CAPTION>
EQUITY FUND
SALES CHARGE AS:
--------------------------------------
Discount to
Size of Transaction at % Of Offering % Of net Amount Selected Dealers
Offering Price Price Invested as a Percentage of
Offering Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.00%
$50,000 but less than $100,000 2.50% 2.56% 2.00%
$100,000 but less than $250,000 1.50% 1.52% 1.15%
$250,000 but less than $500,000 1.00% 1.01% 0.75%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
An investor may obtain reduced sales charges on Class A Shares under the
circumstances described below under "Reduced Sales Charges -- Class A Shares."
EXISTING SHAREHOLDERS. Shareholders of the Fund who are shareholders as of
December 31, 1997 will be grandfathered with respect to the Fund and will be
exempt from paying sales charges on future purchases of Class A Shares of the
Fund.
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<PAGE> 210
REDUCED SALES CHARGES--CLASS A SHARES. Customers of Republic National Bank of
New York and its affiliates meeting certain criteria may purchase shares of the
Fund at a discounted sales charge. The maximum sales charge, in the case of the
Fund will be 3.25% of the public offering price.
<TABLE>
<CAPTION>
EQUITY FUND
SALES CHARGE AS:
------------------------------------
Discount to
Size of Transaction at % Of Offering % Of net Amount Selected Dealers
Offering Price Price Invested as a Percentage
of Offering Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.25% 3.36% 2.75%
$50,000 but less than $100,000 2.25% 2.30% 1.75%
$100,000 but less than $250,000 1.25% 1.27% 0.90%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares by or on behalf of (1) purchasers for whom Republic or one of its
affiliates acts in a fiduciary, advisory, custodial or similar capacity, (2)
employees and retired employees (including spouses, children and parents of
employees and retired employees) of Republic, BISYS and any affiliates thereof,
(3) Trustees of the Trust, (4) directors and retired directors (including
spouses and children of directors and retired directors) of Republic and any
affiliates thereof, (5) purchasers who use proceeds from an account for which
Republic or one of its affiliates acts in a fiduciary, advisory, custodial or
similar capacity, to purchase Class A Shares of a Fund, (6) brokers, dealers and
agents who have a sales agreement with the Distributor, and their employees (and
the immediate family members of such individuals), (7) investment advisers or
financial planners that have entered into an agreement with the Distributor and
that place trades for their own accounts or the accounts of eligible clients and
that charge a fee for their services, and clients of such investment advisers or
financial planners who place trades for their own accounts if such accounts are
linked to the master account of the investment adviser or financial planner on
the books and records of a broker or agent that has entered into an agreement
with the Distributor, and (8) orders placed on behalf of other investment
companies distributed by BISYS, The BISYS Group, Inc., or their affiliated
companies. In addition, the Distributor may waive sales charges for the purchase
of the Fund's Class A Shares with the proceeds from the recent redemption of
shares of a non-money market mutual fund (except one of the other funds of the
Trust) sold with a sales charge. The purchase must be made within 60 days of the
redemption, and the Distributor must be notified in writing by the investor, or
by his or her financial institution, at the time the purchase is made. A copy of
the investor's account statement showing such redemption must accompany such
notice. To receive a sales charge waiver in conjunction with any of the above
categories, Shareholders must, at the time of purchase, give the Transfer Agent
or the Distributor sufficient information to permit confirmation of
qualification.
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<PAGE> 211
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining "concurrent purchases" of Class A Shares of the funds.
For example, if a Shareholder concurrently purchases Class A Shares in one of
the funds of the Trust sold with a sales charge at the total public offering
price of $25,000 and Class A Shares in another fund sold with a sales charge at
the total public offering price of $75,000, the sales charge would be that
applicable to a $100,000 purchase as shown in the appropriate table above. The
investor's "concurrent purchases" described above shall include the combined
purchases of the investor, the investor's spouse and children under the age of
21 and the purchaser's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Shareholders must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information
to permit confirmation of qualification. This privilege, however, may be
modified or eliminated at any time or from time to time by the Trust without
notice.
LETTERS OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Class A Shares of the Funds at a designated total public offering price within a
designated 13-month period. Each purchase of Class A Shares under a Letter of
Intent will be made at the net asset value plus the sales charge applicable at
the time of such purchase to a single transaction of the total dollar amount
indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of
Intent may include purchases of Class A Shares made not more than 90 days prior
to the date such investor signs a Letter of Intent; however, the 13-month period
during which the Letter of Intent is in effect will begin on the date of the
earliest purchase to be included. An investor will receive as a credit against
his/her purchase(s) of Class A Shares during this 90-day period at the end of
the 13-month period, the difference, if any, between the sales load paid on
previous purchases qualifying under the Letter of Intent and the Applicable
Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Class A Shares purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
of the investor) to secure payment of the higher sales charge applicable to the
Class A Shares actually purchased if the full amount indicated is not purchased,
and such escrowed Class A Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed Class A Shares,
whether paid in cash or reinvested in additional Class A Shares, are not subject
to escrow. The escrowed Class A Shares will not be available for disposal by the
investor until all purchases pursuant to the Letter of Intent have been made or
the higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated in the Letter of Intent and qualifies for
a further reduced sales charge, the sales charge will be adjusted for the entire
amount purchased at the end of the 13-month period. The difference in sales
charge will be used to purchase additional Class A Shares of such Fund at the
then current public offering price subject to the rate of sales charge
applicable to the actual amount of the aggregate purchases. For further
information about Letters of Intent, interested investors should contact the
Trust at 1-888-525-5757. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
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<PAGE> 212
RIGHTS OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Funds at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Funds then being purchased plus (b) an amount equal to the then current net
asset value of the "purchaser's combined holdings" of the Class A Shares of all
of the Funds of the Trust sold with a sales charge. Class A Shares sold to
purchasers for whom Republic or one of its affiliates acts in a fiduciary,
advisory, custodial (other than retirement accounts), agency, or similar
capacity are not presently subject to a sales charge. The "purchaser's combined
holdings" described above shall include the combined holdings of the purchaser,
the purchaser's spouse and children under the age of 21 and the purchaser's
retirement plan accounts. To receive the applicable public offering price
pursuant to the right of accumulation, Shareholders must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This right of accumulation, however, may
be modified or eliminated at any time or from time to time by the Trust without
notice.
CONTINGENT DEFERRED SALES CHARGE ("CDSC") - CLASS B SHARES
Class B Shares of the Fund which are redeemed less than three years
after purchase will be subject to a declining CDSC. The CDSC will be based on
the lesser of the net asset value at the time of purchase of the Class B Shares
being redeemed or the net asset value of such Shares at the time of redemption.
Accordingly, a CDSC will not be imposed on amounts representing increases in net
asset value above the net asset value at the time of purchase. In addition, a
CDSC will not be assessed on Class B Shares purchased through reinvestment of
dividends or capital gains distributions, or that are purchased by
"Institutional Investors" such as corporations, pension plans, foundations,
charitable institutions, insurance companies, banks and other banking
institutions, and non-bank fiduciaries.
Solely for purposes of determining the amount of time which has elapsed
from the time of purchase of any Class B Shares, all purchases during a month
will be aggregated and deemed to have been made on the last day of the month. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner that results in the lowest possible charge being assessed.
In this regard, it will be assumed that the redemption is first of Class B
Shares held for more than three years for Income Funds or four years for Equity
Funds or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
The CDSC is waived on redemptions of Class B Shares (i) following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a Shareholder, (ii) to the extent that the redemption represents a
minimum required distribution from an IRA or a Custodial Account under Code
Section 403(b)(7) to a Shareholder who has reached age 70 1/2, and (iii) to the
extent the redemption represents the minimum distribution from retirement plans
under Code Section 401(a) where such redemptions are necessary to make
distributions to plan participants.
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
Contingent Deferred Sales Charge ("CDSC") -- Class B Shares" except that the
references to three years and four years in the first paragraph of that section
shall
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<PAGE> 213
mean one year in the case of Class C Shares. Class C Shares are subject to an
annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B Shares, Class C Shares have no conversion feature and,
accordingly, an investor that purchases Class C Shares will be subject to 12b-1
fees applicable to Class C Shares for an indefinite period subject to annual
approval by each Fund's Board of Trustees and regulatory limitations.
The higher fees mean a higher expense ratio, so Class C Shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A Shares. A Fund will not normally accept any purchase of Class C Shares in the
amount of $500,000 or more. Broker-dealers and other financial intermediaries
whose clients have purchased Class C Shares may receive a trailing commission
equal to 1.00% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Trailing commissions will commence immediately with respect to shares eligible
for exemption from the CDSC normally applicable to Class C Shares.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
account at any time at the net asset value next determined after a redemption
order in proper form is furnished by the shareholder to the Transfer Agent, with
respect to Shares purchased directly through the Distributor, or to his
securities broker or his Shareholder Servicing Agent, and is transmitted to and
received by the Transfer Agent. Redemptions are effected on the same day the
redemption order is received by the Transfer Agent provided such order is
received prior to 4:00 p.m., New York time, on any Fund Business Day. Shares
redeemed earn dividends up to and including the day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day following the date on which the redemption
is effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if
an emergency exists. To be in a position to eliminate excessive expenses, the
Trust reserves the right to redeem upon not less than 30 days' notice all Shares
in an account which has a value below $50, provided that such involuntary
redemptions will not result from fluctuations in the value of Fund Shares. A
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
Unless Shares have been purchased directly from the Distributor, a
shareholder may redeem Shares only by authorizing his securities broker, if
applicable, or his Shareholder Servicing Agent to redeem such Shares on his
behalf (since the account and records of such a shareholder are established and
maintained by his securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem Shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
SYSTEMATIC WITHDRAWAL PLAN.
Any shareholder who owns Shares with an aggregate value of $10,000 or
more may establish a Systematic Withdrawal Plan under which he redeems at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the
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<PAGE> 214
investor's principal. Investors contemplating participation in this Plan should
consult their tax advisers. No additional charge to the shareholder is made for
this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR.
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Class A Shares to be redeemed,
account number and the Fund. The letter must be signed in exactly the same way
the account is registered (if there is more than one owner of the Shares, all
must sign). In connection with a written redemption request, all signatures of
all registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
Redemption by wire or telephone. An investor may redeem Shares by wire
or by telephone if he has checked the appropriate box on the Purchase
Application or has filed a Telephone Authorization Form with the Trust. These
redemptions may be paid from the applicable Fund by wire or by check. The Trust
reserves the right to refuse telephone wire redemptions and may limit the amount
involved or the number of telephone redemptions. The telephone redemption
procedure may be modified or discontinued at any time by the Trust. Instructions
for wire redemptions are set forth in the Purchase Application. The Trust
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. For instance, the following information must be verified
by the shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities broker or bank. If the Trust fails to follow these or
other established procedures, it may be liable for any losses due to
unauthorized or fraudulent instructions.
CONVERSION FEATURE
Five years after the original purchase of Income Fund Class B shares
which have been exchanged for Class B Shares of the Fund and six years after the
original purchase of Equity Fund Class B shares which have been exchanged for
Class B Shares of the Fund, Class B Shares of the Fund will convert
automatically to Class A Shares. The purpose of the conversion is to relieve a
holder of Class B Shares of the higher ongoing expenses charged to those Shares,
after enough time has passed to allow the Distributor to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Class A Shares as he or she had of Class B Shares. For Class B Shares
that were exchanged from Income Fund Class B shares, the conversion occurs five
years after the beginning of the calendar month in which the Income Fund Class B
shares were purchased. For Class B shares that were exchanged from Equity Fund
Class B shares, the conversion occurs six years after the beginning of the
calendar month in which the Equity Fund Class B shares were purchased. As a
result of the conversion, the converted Shares are relieved of the Rule 12b-1
fees borne by Class B Shares, although they are subject to the Rule 12b-1 fees
borne by Class A Shares.
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<PAGE> 215
RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred
retirement plans. Application forms and further information about these plans,
including applicable fees, are available from the Trust or the Sponsor upon
request. The tax law governing tax-deferred retirement plans is complex and
changes frequently. Before investing in the Fund through one or more of these
plans, an investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS.
Shares of the Fund may be used as a funding medium for an IRA. An
Internal Revenue Service-approved IRA plan may be available from an investor's
Shareholder Servicing Agent. In any event, such a plan is available from the
Sponsor naming BISYS as custodian. The minimum initial investment for an IRA is
$250; the minimum subsequent investment is $100. IRAs are available to
individuals who receive compensation or earned income and their spouses whether
or not they are active participants in a tax- qualified or Government-approved
retirement plan. An IRA contribution by an individual who participates, or whose
spouse participates, in a tax-qualified or Government-approved retirement plan
may not be deductible, in whole or in part, depending upon the individual's
income. Individuals also may establish an IRA to receive a "rollover"
contribution of distributions from another IRA or a qualified plan. Tax advice
should be obtained before planning a rollover.
DEFINED CONTRIBUTION PLANS.
Investors who are self-employed may purchase shares of the Fund for
retirement plans for self-employed persons which are known as Defined
Contribution Plans (formerly Keogh or H.R. 10 Plans). Republic offers a
prototype plan for Money Purchase and Profit Sharing Plans.
SECTION 457 PLAN, 401(k) PLAN, 403(b) PLAN.
The Fund may be used as a vehicle for certain deferred compensation
plans provided for by Section 457 of the Internal Revenue Code of 1986, as
amended, (the "Code") with respect to service for state governments, local
governments, rural electric cooperatives and political subdivisions, agencies,
instrumentalities and certain affiliates of such entities. The Fund may also be
used as a vehicle for both 401(k) plans and 403(b) plans.
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of the Fund's net investment income daily as a
dividend to the Fund shareholders. Dividends substantially equal to the Fund's
net investment income earned during the month are distributed in that month to
the Fund's shareholders of record. Generally, the Fund's net investment income
consists of the interest and dividend income it earns, less expenses. In
computing interest income, premiums are not amortized nor are discounts accrued
on long-term debt securities in the Portfolio, except as required for federal
income tax purposes.
The Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated investment companies. Unless a shareholder elects to receive
dividends in cash, dividends are distributed in the form of additional shares of
the Fund (purchased at their net asset value without a sales charge).
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DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.001 per share) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the Fund is
divided into four classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the Trust it is necessary
or desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of each class of a series represent an equal pro rata interest in such
series and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
shall have a different designation; (b) each class of shares shall bear any
class expenses; and (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement, and each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
The series of the Portfolio Trust will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of a Fund, shareholders
of the Fund would be entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
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The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
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.
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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.
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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.
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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 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) and classes of shares within each series at any time
in the future. Establishment and offering of additional class 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.
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INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors 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 preparation of filings with the
SEC. The address of KPMG Peat Marwick LLP is 99 High Street, Boston,
Massachusetts 02110.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
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, 1998 of each
of the Fund are hereby incorporated herein by reference from the Annual Report
of the Fund dated October 31, 1998 as filed with the SEC. Copies of such reports
will be provided without charge to each person receiving this Statement of
Additional Information.
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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".
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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.
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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:
o Leading market positions in well established
industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
o 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.
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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.
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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.
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REPUBLIC OVERSEAS EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
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 eight 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 three separate classes, Class A (the "Class
A Shares"), Class B (the "Class B Shares") and Class C (the "Class C Shares").
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 ___________, 1999 (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.
___________, 1999
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TABLE OF CONTENTS
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................................1
Derivatives...........................................................2
Options and Futures...................................................2
Forward Foreign Currency Contracts and Options on Foreign Currencies..3
Foreign Securities....................................................3
Depositary Receipts...................................................4
High Yield/High Risk Securities.......................................5
Fixed Income Securities...............................................5
U.S. Government Securities............................................5
Convertible Securities................................................6
Warrants..............................................................6
Repurchase Agreements.................................................6
Illiquid Investments..................................................7
Loans of Portfolio Securities.........................................7
Firm Commitment Agreements And When-Issued Securities.................8
Portfolio Turnover....................................................8
Investment Restrictions...............................................8
Percentage and Rating Restrictions...................................10
Portfolio Transactions...............................................10
PERFORMANCE INFORMATION.......................................................11
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST...............................12
Trustees and Officers................................................12
Compensation Table...................................................14
Investment Manager...................................................14
The Investment Sub-Adviser...........................................16
Distribution Plans...................................................16
Distributor And Sponsor..............................................16
Administrative Services Plan.........................................17
Fund Administrator...................................................18
Transfer Agent.......................................................18
Custodian and Fund Account Agents....................................19
Shareholder Servicing Agents.........................................19
Expenses.............................................................20
DETERMINATION OF NET ASSET VALUE..............................................20
PURCHASE OF SHARES............................................................21
Exchange Privilege...................................................21
Automatic Investment Plan............................................22
Through a Shareholder Servicing Agent or a Securities Broker.........22
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SALES CHARGES.................................................................22
Class A Shares.......................................................22
Sales Charge Waivers.................................................23
Concurrent Purchases.................................................24
Letters of Intent....................................................24
Rights of Accumulation...............................................25
Contingent Deferred Sales Charge ("CDSC") - Class B Shares...........25
Level Load Alternative -- Class C Shares.............................26
REDEMPTION OF SHARES..........................................................26
Systematic Withdrawal Plan ..........................................27
Redemption of Shares Purchased Directly Through the Distributor......27
Conversion Feature...................................................27
RETIREMENT PLANS..............................................................28
Individual Retirement Accounts.......................................28
Defined Contribution Plans...........................................28
Section 457 Plan, 401(k), 403(b) Plan................................28
DIVIDENDS AND DISTRIBUTIONS...................................................28
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES..........................29
TAXATION .....................................................................30
Options, Futures, and Forward Contracts..............................31
Swap Agreements......................................................32
Investment in Passive Foreign Investment Companies...................32
Disposition of Shares................................................33
OTHER INFORMATION.............................................................34
Capitalization.......................................................34
Independent Auditors.................................................34
Counsel..............................................................34
Registration Statement...............................................34
FINANCIAL STATEMENTS..........................................................35
References in this Statement of Additional Information to the "Prospectus" are
to the Prospectus, dated ___________, 1999, 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, policies and risks of the Portfolio discussed in the Prospectus.
The investment objective of the Overseas Equity Fund is to seek
long-term growth of capital and future income through investment primarily in
securities of non-U.S. issuers (including American Depository Receipts ("ADRs")
and U.S. registered securities) and securities whose principal markets are
outside of the United States. The investment characteristics of the Fund
correspond to those of the International Equity Fund. The International Equity
Portfolio (the "Portfolio") will normally invest at least 80% of its total
assets in equity securities of foreign corporations, consisting of common
stocks, and other securities with equity characteristics, including preferred
stock, warrants, rights, securities convertible into common stock ("convertible
securities"), trust certificates, limited partnership interests and equity
participations. The common stock in which the Portfolio may invest includes the
common stock of any class or series or any similar equity interest, such as
trust or limited partnership interests. These equity investments may or may not
pay dividends and may or may not carry voting rights. The principal investments
of the Portfolio will be in equity securities of companies organized and
domiciled in developed nations outside the United States or for which the
principal trading market is outside the United States, including Europe, Canada,
Australia and the Far East, although the Portfolio may invest up to 20% of its
assets in equity securities of companies in emerging markets.
The Portfolio intends to have at least three different countries
represented in its portfolio. It is the current intention of the Portfolio to
invest primarily in companies with large market capitalizations. The Portfolio
seeks to outperform the Morgan Stanley Capital International EAFE (Europe,
Australia and Far East) Index, a capitalization-weighted index containing
approximately 1,100 equity securities of companies located outside the United
States. The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic
over-the-counter markets, and may invest in certain restricted or unlisted
securities.
Under exceptional conditions abroad or when, in the opinion of Capital
Guardian Trust Company ("CGTC" or the "Sub-Adviser"), economic or market
conditions warrant, the Portfolio may temporarily invest part or all of its
assets in fixed income securities denominated in foreign currencies, obligations
of domestic or foreign governments and their political subdivisions ("Government
Securities"), and nonconvertible preferred stock, or hold its assets in cash or
equivalents. Debt securities purchased by the Portfolio will be limited to those
rated, at the time of investment, in the four highest rating categories by a
nationally recognized statistical rating organization ("NRSRO") or, if unrated,
determined by the Sub-Adviser to be of comparable quality. Securities rated by a
NRSRO in the fourth highest rating category are considered to have some
speculative characteristics. When the total return opportunities in a foreign
bond market appear attractive in local currency terms, but, in the Sub-Adviser's
judgment, unacceptable currency risk exists, currency futures, forwards and
options may be used to hedge the currency risk.
CGTC uses a system of multiple portfolio managers pursuant to which the
Portfolio is divided into segments which are assigned to individual portfolio
managers. Within investment guidelines, each portfolio manager makes individual
decisions as to company, country, industry, timing and percentage based on
extensive field research and direct company contact.
Because of the risks associated with common stocks and other equity
investments, the Portfolio is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on short-term
stock market movements. The Sub-Adviser seeks to reduce these risks by
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diversifying the portfolio as well as by monitoring broad economic trends and
corporate and legislative developments.
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known
as derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile or
less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There is a
range of risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Portfolio may use derivatives for hedging purposes, cash management purposes, as
a substitute for investing directly in fixed income instruments, and to enhance
return when their Sub-Advisers believe the investment will assist the Portfolio
in achieving its investment objectives.
OPTIONS AND FUTURES
The Portfolio may invest in foreign currency futures contracts and
options on foreign currencies and foreign currency futures. The Portfolio may
only do so for hedging purposes. Futures contracts provide for the sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and price. An option is a legal contract that gives
the holder the right to buy or sell a specified amount of the underlying
security, currency or futures contract at a fixed or determinable price upon the
exercise of the option. A call option conveys the right to buy and a put option
conveys the right to sell a specified quantity of the underlying instrument.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the return of the Portfolio and the Fund. While the use
of these instruments by the Portfolio and the Fund may reduce certain risks
associated with owning its portfolio securities, these techniques themselves
entail certain other risks. If the Sub-Adviser applies a strategy at an
inappropriate time or judges market conditions or trends incorrectly, options
and futures strategies may lower the Portfolio's or Fund's return. Certain
strategies limit the potential of the Portfolio or the Fund to realize gains as
well as limit their exposure to losses. The Portfolio and the Fund could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments. There can be no assurance that a liquid
market will exist at a time when the Portfolio or the Fund seeks to close out a
futures contract or a futures option position. Most futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures contract prices
during a single day; once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio and the Fund from liquidating an
unfavorable position and the Portfolio or the Fund would remain obligated to
meet margin requirements until the position is closed. In addition, the
Portfolio and the Fund will incur transaction costs, including trading
commissions and options premiums, in connection with their futures and options
transactions, and these transactions could significantly increase a Portfolio or
Fund turnover rate.
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FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. By entering into
transactions in Forward Contracts, however, the Portfolio may be required to
forego the benefits of advantageous changes in exchange rates. Forward Contracts
are traded over-the-counter and not on organized commodities or securities
exchanges. As a result, such contracts operate in a manner distinct from
exchange-traded instruments and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on
exchanges.
A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security.
FOREIGN SECURITIES
The Portfolio may invest in foreign securities. Investing in securities
issued by companies whose principal business activities are outside the United
States may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, other taxes imposed by the foreign country on the Fund's
earnings, assets, or transactions, limitation on the removal of cash or other
assets of the Portfolios, political or financial instability, or diplomatic and
other developments which could affect such investments. Further, economies of
particular countries or areas of the world may differ favorably or unfavorably
from the economy of the United States. Changes in foreign exchange rates will
affect the value of securities denominated or quoted in currencies other than
the U.S. dollar. For example, significant uncertainty surrounds the proposed
introduction of the euro (a common currency for the European Union) in January
1999 and its effect on the value of securities denominated in local European
currencies. These and other currencies in which a Fund's assets are denominated
may be devalued against the U.S. dollar, resulting in a loss to the Fund.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Furthermore,
dividends and interest payments from foreign securities may be withheld at the
source. Additional costs associated with an investment in foreign securities may
include higher custodial fees than apply to domestic custodial arrangements, and
transaction costs of foreign currency conversions.
Emerging Markets. The Portfolio may invest in emerging markets, which
presents greater risk than investing in foreign issuers in general. A number of
emerging markets restrict foreign investment in stocks. Repatriation of
investment income, capital, and the proceeds of sales by foreign investors may
require governmental registration and/or approval in some emerging market
countries. A number of the currencies of developing countries have experienced
significant declines against the U.S. dollar in recent years, and devaluation
may occur subsequent to investments in these currencies by the Portfolio.
Inflation and rapid fluctuations in inflation rates have had and may continue to
have negative effects on the
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economies and securities markets of certain emerging market countries. Many of
the emerging securities markets are relatively small, have low trading volumes,
suffer periods of relative illiquidity, and are characterized by significant
price volatility. There is the risk that a future economic or political crisis
could lead to price controls, forced mergers of companies, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies, any of which could have a detrimental effect on the Portfolio's
investments.
Investing in formerly communist East European countries involves the
additional risk that the government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the fall of communism and could follow radically different political and/or
economic policies to the detriment of investors, including non-market oriented
policies such as the support of certain industries at the expense of other
sectors or a return to a completely centrally planned economy. The Portfolio
does not currently intend to invest a significant portion of its assets in
formerly communist East European countries.
With respect to the Portfolio, "emerging markets" include any country
which in the opinion of the Sub-Adviser is generally considered to be an
emerging or developing country by the International Bank for Reconstruction and
Development (the World Bank) and the International Monetary Fund. Currently,
these countries generally include every country in the world except Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, United Kingdom and United States. The International Equity
Portfolio may invest up to 20% of its assets in the equity securities of
companies based in emerging markets.
With respect to the Portfolio, a company in an emerging market is one
that: (i) is domiciled and has its principal place of business in an emerging
market or (ii) (alone or on a consolidated basis) derives or expects to derive
at least 50% of its total revenue from either goods produced, sales made or
services performed in emerging markets.
Sovereign and Supranational Debt Obligations. Debt instruments issued
or guaranteed by foreign governments, agencies, and supranational organizations
("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.
DEPOSITARY RECEIPTS
The Portfolio may invest in American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs"), and
International Depositary Receipts ("IDRs"), or other similar securities
convertible into securities of foreign issuers. ADRs (sponsored or unsponsored)
are receipts typically issued by a U.S. bank or trust company evidencing the
deposit with such bank or company of a security of a foreign issuer, and are
publicly traded on exchanges or over-the-counter in the United States. In
sponsored programs, an issuer has made arrangements to have its securities trade
in the form of ADRs. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program.
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EDRs, which are sometimes referred to as Continental Depositary
Receipts, are receipts issued in Europe typically by foreign bank and trust
companies that evidence ownership of either foreign or domestic underlying
securities. IDRs are receipts typically issued by a European bank or trust
company evidencing ownership of the underlying foreign securities. GDRs are
receipts issued by either a U.S. or non-U.S. banking institution evidencing
ownership of the underlying foreign securities.
HIGH YIELD/HIGH RISK SECURITIES
As stated in the Prospectus, the Portfolio may invest in lower rated,
high-yield, "junk" bonds. These securities are generally rated lower than Baa by
Moody's or lower than BBB by S&P. 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 that may be associated with
lower rated, high-yield bonds include their relative insensitivity to
interest-rate changes; the exercise of any of their redemption or call
provisions in a declining market which may result in their replacement by lower
yielding bonds; and legislation, from time to time, which may adversely affect
their market. Since the risk of default is higher among lower rated, high-yield
bonds, the Sub-Adviser's research and analyses are important ingredients in the
selection of lower rated, high-yield bonds. Through portfolio diversification,
good credit analysis and attention to current developments and trends in
interest rates and economic conditions, investment risk can be reduced, although
there is no assurance that losses will not occur. The Portfolio does not have
any minimum rating criteria applicable to the fixed-income securities in which
it invests.
FIXED INCOME SECURITIES
To the extent the Portfolio invests in fixed income securities, the net
asset value of the Portfolio may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. The Portfolio's investments in
fixed income securities with longer terms to maturity or greater duration are
subject to greater volatility than the Portfolio's shorter-term obligations.
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
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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.
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.
WARRANTS
The Portfolio may invest up to 10% of its net assets in warrants,
except that this limitation does not apply to warrants acquired in units or
attached to securities. A warrant is an instrument issued by a corporation that
gives the holder the right to subscribe to a specific amount of the
corporation's capital stock at a set price for a specified period of time.
Warrants do not represent ownership of the securities, but only the right to buy
the securities. The prices of warrants do not necessarily move parallel to the
prices of underlying securities. Warrants may be considered speculative in that
they have no voting rights, pay no dividends, and have no rights with respect to
the assets of a corporation issuing them. Once a warrant expires, it has no
value in the market. Warrant positions will not be used to increase the leverage
of the Portfolio. Consequently, warrant positions are generally accompanied by
cash positions equivalent to the required exercise amount.
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.
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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
Advisor or Sub-Advisers will continually monitor the value of the underlying
securities to ensure that their value, including accrued interest, always equals
or exceeds the repurchase price. 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.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that
are illiquid by virtue of the absence of a readily available market, or because
of legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 that are determined to be
liquid in accordance with guidelines established by the Portfolio Trust's Board
of Trustees. There may be delays in selling these securities and sales may be
made at less favorable prices. The Portfolio has a policy that no more than 10%
of its net assets may be invested in restricted securities which are restricted
as to resale, including Rule 144A and Section 4(2) securities.
The Sub-Adviser may determine that a particular Rule 144A security is
liquid and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that the Sub-Adviser must consider in determining whether a particular Rule 144A
security is liquid include the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and the nature of the market for the
security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's or
Fund's illiquidity to the extent that qualified institutions might become, for a
time, uninterested in purchasing these securities.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend securities to qualified brokers, dealers, banks
and other financial institutions for the purpose of realizing additional income.
Loans of securities will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not end its portfolio securities to
the extent that greater than one-third of the Portfolio's total assets, at fair
market value, would be committed to loans at that time.
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FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or
firm-commitment basis, in which a security's price and yield are fixed on the
date of the commitment but payment and delivery are scheduled for a future date.
On the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid securities equal (on a daily marked-to-market basis) to
the amount of its commitment to purchase the securities on a when-issued basis.
PORTFOLIO TURNOVER
The Sub-Adviser manages the Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio and the
Fund will not trade for short-term profits, but when circumstances warrant,
investments may be sold without regard to the length of time held. The portfolio
turnover rate for the International Equity Portfolio was __% for the year ended
October 31, 1998 and it is expected that in subsequent years the annual turnover
rate for the Portfolio will not exceed __%.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain, and maintain the availability
of, execution at the most favorable prices and in the most effective manner
possible.
INVESTMENT RESTRICTIONS
The Portfolio Trust (with respect to the Portfolio) and the Trust (with
respect to the Fund) have 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;
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(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.
The Portfolio and the Fund are 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;
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(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
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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, October 31, 1997, and October, 1998, the Portfolio paid aggregate
brokerage commissions equal to $352,429, $295,571 and $___________,
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
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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:
CLASS A SHARES (without Sales Charge):
Annual Total Return - Year Ended October 31, 1998: _____%.
Average Annual Total Return - January 9, 1995 (commencement of
operations) to October 31, 1997: _____%.
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 _____%
and the average annual total return for the period from January 9, 1995 to
October 31, 1997 would have been _____%.
CLASS B SHARES: Class B Shares were not offered prior to January 2, 1998.
Annual Total Return - January 2, 1998 (commencement of operations)
October 31, 1998: _____%.
CLASS C SHARES: Class C Shares were not offered prior to November 3, 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 business and affairs of the Trust and the Portfolio Trust are
managed under the direction of their respective Boards of Trustees. 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
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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).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
ANTHONY J. FISCHER, Vice President
Employee of BISYS Fund Services, Inc., April, 1998 to present; Employee
of SEI Investments and Merrill Lynch prior to April 1998.
PENNY D. GRANDOMINICO*, Vice President
Employee of BISYS Fund Services, Inc., April 1995 to present; Financial
Consultant, Smith Barney, July 1992 to April 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.
ELLEN STOUTAMIRE, Secretary
Employee of BISYS Fund Services, Inc., April, 1997 to present; Attorney
in private practice prior to April 1997.
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. Grimm, Fischer and Waters and Mss. Grandominico, Brady,
Stoutamire and Metz also are officers of certain other investment companies of
which BISYS or an affiliate is the administrator.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
Retirement
Pension of Total
Benefits Accrued Estimated Compensation
Aggregate as Part of Annual From Fund
Compensation Fund Benefits Upon Complex* to
Name of 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, 1998. 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 ______________, 1998, 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 - _____% (Class A Shares); and BHC
Securities, Inc., One Commerce Square, 2005 Market Square, Philadelphia,
Pennsylvania 19103 - _____%. 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
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<PAGE> 244
October 31, 1997, investment management fees aggregated $0, $243,751 and
$466,480 (of which the entire amount was waived), respectively. For the fiscal
year ended October 31, 1998, investment management fees aggregated $_________
(of which $__________ was waived).
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Fund or
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased. 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. Republic has informed the Trust that, in making its
investment decisions, it does not obtain or use material inside information in
the possession of any division or department of Republic or in the possession of
any affiliate of Republic.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Fund and Portfolio
will not violate the Glass-Steagall Act or other applicable banking laws or
regulations. However, future statutory or regulatory changes, as well as future
judicial or administrative decisions and interpretations of present and future
statutes and regulations, could prevent Republic from continuing to perform such
services for the Fund and Portfolio. If Republic were prohibited from acting as
investment manager to the Fund and Portfolio, it is expected that the Trust's
Board of Trustees would recommend to Fund shareholders approval of a new
investment advisory agreement with another qualified investment adviser selected
by the Board or that the Board would recommend other appropriate action.
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.
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<PAGE> 245
THE INVESTMENT 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. For the fiscal year
ended October 31, 1998, sub-advisory fees aggregated $______________.
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.
DISTRIBUTION PLANS
Three Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Class A Shares (the "Class A Plan"),
the Class B Shares (the "Class B Plan") and the Class C Shares (the "Class C
Plan). The Distribution Plans provide that they may not be amended to increase
materially the costs which either the Class A Shares, the Class B Shares or the
Class C Shares may bear pursuant to the Class A Plan, Class B Plan or Class C
Plan without approval by shareholders of the Class A Shares, Class B Shares or
Class C 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, Class B Plan and Class C Plan, the Trustees
considered alternative methods to distribute the Class A Shares, Class B Shares
and Class C 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 Class A Shares, Class B
Shares or Class C 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. During the
fiscal period ended October 31, 1998, the Fund incurred expenses pursuant to
the distribution plans in the amount of $___________.
DISTRIBUTOR AND SPONSOR
BISYS acts as sponsor and principal underwriter and distributor of
Shares of the Fund pursuant to a Distribution Contract with the Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares. Such compensation may include financial
assistance
16
<PAGE> 246
to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
the Fund, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to certain dealers whose
representatives have sold a significant amount of such Shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. None
of the aforementioned compensation is paid by the Fund or its Shareholders.
Pursuant to the Distribution Plans adopted by the Trust, the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Shares of the Fund and
for the provision of certain shareholder services with respect to the Shares.
Payments to the Distributor are for various types of activities, including: (1)
payments to broker-dealers who advise shareholders regarding the purchase, sale
or retention of Shares and who provide shareholders with personal services and
account maintenance services ("service fees"), (2) payments to employees of the
Distributor, and (3) printing and advertising expenses. Pursuant to the Class A
Plan, the amount of their reimbursement from each Fund may not exceed on an
annual basis 0.25% of the average daily net assets of the Fund represented by
Class A Shares outstanding during the period for which payment is being made.
Pursuant to both the Class B Plan and the Class C Plan, the amount of this
reimbursement from the Fund for distribution related activities (other than
service fees) may not exceed on an annual basis 0.75% of the average daily net
assets of the Fund represented by Class B Shares and Class C Shares,
respectively, outstanding during the period for which payment is being made. The
aggregate fees paid to the Distributor pursuant to the Class B Plan and Class C
Plan, respectively, and to Shareholder Servicing Agents pursuant to the
Administrative Services Plan will not exceed on an annual basis 1.00% of the
Fund's average daily net assets represented by Class B Shares and Class C
Shares, respectively, outstanding during the period for which payment is being
made. Salary expense of BISYS personnel who are responsible for marketing shares
of the various portfolios of the Trust may be allocated to such portfolios on
the basis of average net assets; travel expense is allocated to, or divided
among, the particular portfolios for which it is incurred.
Any payment by the Distributor or reimbursement of the Distributor from
the Fund made pursuant to the Distribution Plans is contingent upon the Board of
Trustees' approval. The Fund is not liable for distribution and shareholder
servicing expenditures made by the Distributor in any given year in excess of
the maximum amount payable under the Distribution Plans in that year.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Class A Shares, Class B Shares and Class C 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 Class A Shares, the
Class B Shares or the Class C 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 Class
A Shares, Class B Shares or Class C 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.
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<PAGE> 247
FUND ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
and the Portfolio including, among other responsibilities, assisting in the
preparation and filing of all documents required for compliance by the Fund and
the Portfolio with applicable laws and regulations and arranging for the
maintenance of books and records of the Fund and the Portfolio. For its services
to the Bond Fund, BISYS receives from the Fund fees payable monthly equal on an
annual basis (for the Fund's then-current fiscal year) to 0.05% of the Fund's
average daily net assets up to $1 billion; 0.04% of the next $1 billion of such
assets; and 0.035% of such assets in excess of $2 billion. For providing similar
services to the Portfolio, BISYS (Ireland) receives from the Portfolio fees
payable monthly equal on an annual basis (for the Portfolio's then-current
fiscal year) to 0.05% of the first $1 billion of the Portfolio's average daily
net assets; 0.04% of the next $1 billion of such assets; and 0.035% of such
assets in excess of $2 billion.
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 fiscal year ended October 31, 1998, the Portfolio
accrued administration fees of $______, of which $________was waived. 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. For the fiscal year ended October
31, 1998, the Fund accrued administration fees of $______, of which $________was
waived.
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.
BISYS provides persons satisfactory to the respective Boards of
Trustees to serve as officers of the Trust and the Portfolio Trust. Such
officers, as well as certain other employees of the Trust and of the Portfolio
Trust, may be directors, officers or employees of BISYS or its affiliates.
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with Investors
Bank & Trust Company ("IBT") and BISYS, pursuant to which IBT acts as transfer
agent for the Fund with respect to the Class A Shares and BISYS acts as transfer
agent for the Fund with respect to the Class B Shares and Class C Shares (the
"Transfer Agents"), and the Portfolio Trust has entered into a Transfer Agent
Agreement with Investors Fund Services (Ireland) Limited (also a "Transfer
Agent"). The Transfer Agents maintain an account for each shareholder of the
Fund (unless such account is maintained by the shareholder's securities-broker,
if applicable, or Shareholder Servicing Agent), performs other transfer agency
functions, and act as dividend disbursing agent for the Fund. The principal
business address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117.
The principal business address of BISYS is 3435 Stelzer Road, Columbus, OH
43219.
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Pursuant to an agreement, as of April 1, 1999, BISYS will provide all
services with respect to each class of shares of the Fund.
CUSTODIAN AND FUND ACCOUNT AGENTS
Pursuant to a Custodian Agreement, with respect to domestic assets,
Republic acts as the custodian of the Fund's assets. With respect to foreign
assets, IBT serves as custodian for the Fund and the Portfolio (together, with
Republic, the "Custodian"). The Custodians' responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
fund accounting and other required books and accounts in order to calculate the
daily net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, the Custodians receive such compensation as may from
time to time be agreed upon by it and the Trust. IBT Fund Services (Canada) Inc.
serves as the fund accounting agent for the Portfolio.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent, including
Republic, pursuant to which a Shareholder Servicing Agent, as agent for its
customers, among other things: answers customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of
Class A Shares, Class B Shares, and Class C Shares of the Fund may be effected
and certain other matters pertaining to the Fund; assists shareholders in
designating and changing dividend options, account designations and addresses;
provides necessary personnel and facilities to establish and maintain
shareholder accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Fund's shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Fund or the Trust; and provides such other related services as the Trust
or a shareholder may request. With respect to Class A Shares and Class B Shares,
each Shareholder Servicing Agent receives a fee from the Fund for these
services, which may be paid periodically, determined by a formula based upon the
number of accounts serviced by such Shareholder Servicing Agent during the
period for which payment is being made, the level of activity in accounts
serviced by such Shareholder Servicing Agent during such period, and the
expenses incurred by such Shareholder Servicing Agent. The aggregate fees paid
to the Distributor pursuant to the Class B Plan and Class C Plan, respectively,
and to Shareholder Servicing Agents pursuant to the Administrative Services Plan
will not exceed on an annual basis 1.00% the of the Fund's average daily net
assets represented by Class B Shares and Class C Shares, respectively,
outstanding during the period for which payment is being made.
The Trust understands that some Shareholder Servicing Agents also may
impose certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such as
requiring a different minimum initial or subsequent investment, account fees (a
fixed amount per transaction processed), compensating balance requirements (a
minimum dollar amount a
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<PAGE> 249
customer must maintain in order to obtain the services offered), or account
maintenance fees (a periodic charge based on a percentage of the assets in the
account or of the dividends paid on those assets). Each Shareholder Servicing
Agent has agreed to transmit to its customers who are holders of Shares
appropriate prior written disclosure of any fees that it may charge them
directly and to provide written notice at least 30 days prior to the imposition
of any transaction fees. Conversely, the Trust understands that certain
Shareholder Servicing Agents may credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding such other fees
or the fees received by the Shareholder Servicing Agent from the Fund with
respect to those accounts.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do not expect that
shareholders of the Fund would suffer any adverse financial consequences as a
result of these occurrences.
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 Class A Shares, Class B Shares and Class C 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. Expenses for each class of shares
must include payments made pursuant to their respective Distribution Plan and
shareholder servicing agent fees paid pursuant to the Administrative Services
Plan.
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
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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.
PURCHASE OF SHARES
Shares may be purchased through the Distributor Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are effected on the same day the purchase order is received by the
Transfer Agent provided such order is received prior to 4:00 p.m., New York
time, on any Fund Business Day. The Trust intends the Funds to be as fully
invested at all times as is reasonably practicable in order to enhance the yield
on their assets. Each Shareholder Servicing Agent or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
While there is no sales load on purchases of Class B Shares and Class C
Shares, the Distributor may receive fees from the Funds. Other funds which have
investment objectives similar to those of the Funds but which do not pay some or
all of such fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares at
net asset value without a sales charge for Shares of the same class offered with
the same or lower sales charge by any of the Trust's other Funds. Exchanges for
Shares with a higher sales charge may be made upon payment of the sales charge
differential. An exchange of Class B Shares or Class C Shares will not affect
the holding period of the Class B Shares or Class C Shares for purposes of
determining the CDSC, if any, upon redemption, or, with respect to Class B
Shares, the time of conversion to Class A Shares. An exchange may result in a
change in the number of Shares held, but not in the value of such Shares
immediately after the exchange. Each exchange involves the redemption of the
Shares to be exchanged and the purchase of the shares of the other Republic Fund
which may produce a gain or loss for tax purposes.
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<PAGE> 251
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified in writing to discontinue further investments. Due
to the varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the Fund Business
Day that both the check and the bank withdrawal data are received in required
form by the Transfer Agent. Further information about the plan may be obtained
from BISYS at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder Servicing Agents and
securities brokers may offer services to their customers, including specialized
procedures for the purchase and redemption of Shares, such as pre- authorized or
automatic purchase and redemption programs. Each Shareholder Servicing Agent and
securities broker may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees will
be to reduce the net return on the investment of customers of that Shareholder
Servicing Agent or securities broker. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from each Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to the Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker or a
Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent (see back cover for address
and phone number).
SALES CHARGES
CLASS A SHARES
The public offering price of the Class A Shares of the Fund equals net
asset value plus the applicable sales charge. BISYS receives this sales charge
as distributor and may reallow it as dealer discounts and brokerage commissions
as follows:
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OVERSEAS EQUITY FUND
SALES CHARGE AS:
--------------------
<TABLE>
<CAPTION>
Discount to
Size of Transaction at % Of Offering Price % Of net Amount Selected Dealers
Offering Price Invested as a Percentage of
Offering Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.00%
$50,000 but less than $100,000 2.50% 2.56% 2.00%
$100,000 but less than $250,000 1.50% 1.52% 1.15%
$250,000 but less than $500,000 1.00% 1.01% 0.75%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
An investor may obtain reduced sales charges on Class A Shares under the
circumstances described below under "Reduced Sales Charges -- Class A Shares."
EXISTING SHAREHOLDERS. Shareholders of the Fund who are shareholders as of
December 31, 1997 will be grandfathered with respect to the Fund and will be
exempt from paying sales charges on future purchases of Class A Shares of the
Funds.
REDUCED SALES CHARGES--CLASS A SHARES. Customers of Republic National Bank of
New York and its affiliates meeting certain criteria may purchase shares of the
Fund at a discounted sales charge. The maximum sales charge, in the case of the
Fund will be 3.25% of the public offering price.
OVERSEAS EQUITY FUND
SALES CHARGE AS:
--------------------
<TABLE>
<CAPTION>
Discount to
Size of Transaction at % Of Offering % Of net Amount Selected Dealers
Offering Price Price Invested as a Percentage of
Offering Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.25% 3.36% 2.75%
$50,000 but less than $100,000 2.25% 2.30% 1.75%
$100,000 but less than $250,000 1.25% 1.27% 0.90%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares by or on behalf of (1) purchasers for whom Republic or one of its
affiliates acts in a fiduciary, advisory, custodial or similar capacity, (2)
employees and retired employees (including spouses, children and parents of
employees and retired employees) of Republic, BISYS and any affiliates thereof,
(3) Trustees of the Trust, (4) directors and retired directors (including
spouses and children of directors and retired directors) of Republic and any
affiliates thereof, (5) purchasers who use proceeds from an account for which
Republic or one of its
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affiliates acts in a fiduciary, advisory, custodial or similar capacity, to
purchase Class A Shares of the Fund, (6) brokers, dealers and agents who have a
sales agreement with the Distributor, and their employees (and the immediate
family members of such individuals), (7) investment advisers or financial
planners that have entered into an agreement with the Distributor and that place
trades for their own accounts or the accounts of eligible clients and that
charge a fee for their services, and clients of such investment advisers or
financial planners who place trades for their own accounts if such accounts are
linked to the master account of the investment adviser or financial planner on
the books and records of a broker or agent that has entered into an agreement
with the Distributor, and (8) orders placed on behalf of other investment
companies distributed by BISYS, The BISYS Group, Inc., or their affiliated
companies. In addition, the Distributor may waive sales charges for the purchase
of the Fund's Class A Shares with the proceeds from the recent redemption of
shares of a non-money market mutual fund (except one of the other funds of the
Trust) sold with a sales charge. The purchase must be made within 60 days of the
redemption, and the Distributor must be notified in writing by the investor, or
by his or her financial institution, at the time the purchase is made. A copy of
the investor's account statement showing such redemption must accompany such
notice. To receive a sales charge waiver in conjunction with any of the above
categories, Shareholders must, at the time of purchase, give the Transfer Agent
or the Distributor sufficient information to permit confirmation of
qualification.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining "concurrent purchases" of Class A Shares of the funds.
For example, if a Shareholder concurrently purchases Class A Shares in one of
the funds of the Trust sold with a sales charge at the total public offering
price of $25,000 and Class A Shares in another fund sold with a sales charge at
the total public offering price of $75,000, the sales charge would be that
applicable to a $100,000 purchase as shown in the appropriate table above. The
investor's "concurrent purchases" described above shall include the combined
purchases of the investor, the investor's spouse and children under the age of
21 and the purchaser's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Shareholders must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information
to permit confirmation of qualification. This privilege, however, may be
modified or eliminated at any time or from time to time by the Trust without
notice.
LETTERS OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Class A Shares of the Funds at a designated total public offering price within a
designated 13-month period. Each purchase of Class A Shares under a Letter of
Intent will be made at the net asset value plus the sales charge applicable at
the time of such purchase to a single transaction of the total dollar amount
indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of
Intent may include purchases of Class A Shares made not more than 90 days prior
to the date such investor signs a Letter of Intent; however, the 13-month period
during which the Letter of Intent is in effect will begin on the date of the
earliest purchase to be included. An investor will receive as a credit against
his/her purchase(s) of Class A Shares during this 90-day period at the end of
the 13-month period, the difference, if any, between the sales load paid on
previous purchases qualifying under the Letter of Intent and the Applicable
Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Class A Shares purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
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<PAGE> 254
of the investor) to secure payment of the higher sales charge applicable to the
Class A Shares actually purchased if the full amount indicated is not purchased,
and such escrowed Class A Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed Class A Shares,
whether paid in cash or reinvested in additional Class A Shares, are not subject
to escrow. The escrowed Class A Shares will not be available for disposal by the
investor until all purchases pursuant to the Letter of Intent have been made or
the higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated in the Letter of Intent and qualifies for
a further reduced sales charge, the sales charge will be adjusted for the entire
amount purchased at the end of the 13-month period. The difference in sales
charge will be used to purchase additional Class A Shares of such Fund at the
then current public offering price subject to the rate of sales charge
applicable to the actual amount of the aggregate purchases. For further
information about Letters of Intent, interested investors should contact the
Trust at 1-888-525-5757. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
RIGHTS OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Funds at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Funds then being purchased plus (b) an amount equal to the then current net
asset value of the "purchaser's combined holdings" of the Class A Shares of all
of the Funds of the Trust sold with a sales charge. Class A Shares sold to
purchasers for whom Republic or one of its affiliates acts in a fiduciary,
advisory, custodial (other than retirement accounts), agency, or similar
capacity are not presently subject to a sales charge. The "purchaser's combined
holdings" described above shall include the combined holdings of the purchaser,
the purchaser's spouse and children under the age of 21 and the purchaser's
retirement plan accounts. To receive the applicable public offering price
pursuant to the right of accumulation, Shareholders must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This right of accumulation, however, may
be modified or eliminated at any time or from time to time by the Trust without
notice.
CONTINGENT DEFERRED SALES CHARGE ("CDSC") - CLASS B SHARES
Class B Shares of the Fund which are redeemed less than three years
after purchase will be subject to a declining CDSC. The CDSC will be based on
the lesser of the net asset value at the time of purchase of the Class B Shares
being redeemed or the net asset value of such Shares at the time of redemption.
Accordingly, a CDSC will not be imposed on amounts representing increases in net
asset value above the net asset value at the time of purchase. In addition, a
CDSC will not be assessed on Class B Shares purchased through reinvestment of
dividends or capital gains distributions, or that are purchased by
"Institutional Investors" such as corporations, pension plans, foundations,
charitable institutions, insurance companies, banks and other banking
institutions, and non-bank fiduciaries.
Solely for purposes of determining the amount of time which has elapsed
from the time of purchase of any Class B Shares, all purchases during a month
will be aggregated and deemed to have been made on the last day of the month. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner that results in the lowest possible charge being assessed.
In this regard, it will be assumed that the redemption is first of Class B
Shares held for more than three years for Income Funds or four years for Equity
Funds or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
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<PAGE> 255
The CDSC is waived on redemptions of Class B Shares (i) following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a Shareholder, (ii) to the extent that the redemption represents a
minimum required distribution from an IRA or a Custodial Account under Code
Section 403(b)(7) to a Shareholder who has reached age 70-1/2, and (iii) to the
extent the redemption represents the minimum distribution from retirement plans
under Code Section 401(a) where such redemptions are necessary to make
distributions to plan participants.
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
Contingent Deferred Sales Charge ("CDSC") -- Class B Shares" except that the
references to three years and four years in the first paragraph of that section
shall mean one year in the case of Class C Shares. Class C Shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B Shares, Class C Shares have no conversion feature and,
accordingly, an investor that purchases Class C Shares will be subject to 12b-1
fees applicable to Class C Shares for an indefinite period subject to annual
approval by each Fund's Board of Trustees and regulatory limitations.
The higher fees mean a higher expense ratio, so Class C Shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A Shares. A Fund will not normally accept any purchase of Class C Shares in the
amount of $500,000 or more. Broker-dealers and other financial intermediaries
whose clients have purchased Class C Shares may receive a trailing commission
equal to 1.00% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Trailing commissions will commence immediately with respect to shares eligible
for exemption from the CDSC normally applicable to Class C Shares.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
account at any time at the net asset value next determined after a redemption
order in proper form is furnished by the shareholder to the Transfer Agent, with
respect to Shares purchased directly through the Distributor, or to his
securities broker or his Shareholder Servicing Agent, and is transmitted to and
received by the Transfer Agent. Redemptions are effected on the same day the
redemption order is received by the Transfer Agent provided such order is
received prior to 4:00 p.m., New York time, on any Fund Business Day. Shares
redeemed earn dividends up to and including the day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day following the date on which the redemption
is effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if
an emergency exists. To be in a position to eliminate excessive expenses, the
Trust reserves the right to redeem upon not less than 30 days' notice all Shares
in an account which has a value below $50, provided that such involuntary
redemptions will not result from fluctuations in the value of Fund Shares. A
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
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<PAGE> 256
Unless Shares have been purchased directly from the Distributor, a
shareholder may redeem Shares only by authorizing his securities broker, if
applicable, or his Shareholder Servicing Agent to redeem such Shares on his
behalf (since the account and records of such a shareholder are established and
maintained by his securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem Shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or
more may establish a Systematic Withdrawal Plan under which he redeems at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Class A Shares to be redeemed,
account number and the Fund. The letter must be signed in exactly the same way
the account is registered (if there is more than one owner of the Shares, all
must sign). In connection with a written redemption request, all signatures of
all registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
Redemption by wire or telephone. An investor may redeem Shares by wire
or by telephone if he has checked the appropriate box on the Purchase
Application or has filed a Telephone Authorization Form with the Trust. These
redemptions may be paid from the applicable Fund by wire or by check. The Trust
reserves the right to refuse telephone wire redemptions and may limit the amount
involved or the number of telephone redemptions. The telephone redemption
procedure may be modified or discontinued at any time by the Trust. Instructions
for wire redemptions are set forth in the Purchase Application. The Trust
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. For instance, the following information must be verified
by the shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities broker or bank. If the Trust fails to follow these or
other established procedures, it may be liable for any losses due to
unauthorized or fraudulent instructions.
CONVERSION FEATURE
Five years after the original purchase of Income Fund Class B shares
which have been exchanged for Class B Shares of the Fund and six years after the
original purchase of Equity Fund Class B shares which have been exchanged for
Class B Shares of the Fund, Class B Shares of the Fund will convert
automatically to Class A Shares. The purpose of the conversion is to relieve a
holder of Class B Shares of the higher ongoing expenses charged to those Shares,
after enough time has passed to allow the Distributor
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to recover approximately the amount it would have received if a front-end sales
charge had been charged. The conversion from Class B Shares to Class A Shares
takes place at net asset value, as a result of which an investor receives
dollar-for-dollar the same value of Class A Shares as he or she had of Class B
Shares. For Class B Shares that were exchanged from Income Fund Class B shares,
the conversion occurs five years after the beginning of the calendar month in
which the Income Fund Class B shares were purchased. For Class B shares that
were exchanged from Equity Fund Class B shares, the conversion occurs six years
after the beginning of the calendar month in which the Equity Fund Class B
shares were purchased. As a result of the conversion, the converted Shares are
relieved of the Rule 12b-1 fees borne by Class B Shares, although they are
subject to the Rule 12b-1 fees borne by Class A Shares.
RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred
retirement plans. Application forms and further information about these plans,
including applicable fees, are available from the Trust or the Sponsor upon
request. The tax law governing tax-deferred retirement plans is complex and
changes frequently. Before investing in the Fund through one or more of these
plans, an investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be used as a funding medium for an IRA. An
Internal Revenue Service-approved IRA plan may be available from an
investor's Shareholder Servicing Agent. In any event, such a plan is
available from the Sponsor naming BISYS as custodian. The minimum
initial investment for an IRA is $250; the minimum subsequent
investment is $100. IRAs are available to individuals who receive
compensation or earned income and their spouses whether or not they are
active participants in a tax-qualified or Government-approved
retirement plan. An IRA contribution by an individual who participates,
or whose spouse participates, in a tax-qualified or Government-approved
retirement plan may not be deductible, in whole or in part, depending
upon the individual's income. Individuals also may establish an IRA to
receive a "rollover" contribution of distributions from another IRA or
a qualified plan. Tax advice should be obtained before planning a
rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase shares of the Fund for
retirement plans for self-employed persons which are known as Defined
Contribution Plans (formerly Keogh or H.R. 10 Plans). Republic offers a
prototype plan for Money Purchase and Profit Sharing Plans.
SECTION 457 PLAN, 401(k) PLAN, 403(b) PLAN
The Fund may be used as a vehicle for certain deferred compensation
plans provided for by Section 457 of the Internal Revenue Code of 1986,
as amended, (the "Code") with respect to service for state governments,
local governments, rural electric cooperatives and political
subdivisions, agencies, instrumentalities and certain affiliates of
such entities. The Fund may also be used as a vehicle for both 401(k)
plans and 403(b) plans.
DIVIDENDS AND DISTRIBUTIONS
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The Trust declares all of the Fund's net investment income daily as a
dividend to the Fund shareholders. Dividends substantially equal to the Fund's
net investment income earned during the month are distributed in that month to
the Fund's shareholders of record. Generally, the Fund's net investment income
consists of the interest and dividend income it earns, less expenses. In
computing interest income, premiums are not amortized nor are discounts accrued
on long-term debt securities in the Portfolio, except as required for federal
income tax purposes.
The Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated investment companies. Unless a shareholder elects to receive
dividends in cash, dividends are distributed in the form of additional shares of
the Fund (purchased at their net asset value without a sales charge).
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.001 per share) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the
Overseas Equity Fund is divided into three classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the Trust it is necessary
or desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of each class of a series represent an equal pro rata interest in such
series and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
shall have a different designation; (b) each class of shares shall bear any
class expenses; and (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement, and each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
The series of the Portfolio Trust will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the
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right to remove one or more Trustees without a meeting by a declaration in
writing subscribed to by a specified number of shareholders. Upon liquidation or
dissolution of a Fund, shareholders of the Fund would be entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
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.
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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.
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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,
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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 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 minimum 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.
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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.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors 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 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, 1775 Eye Street, N.W., Washington, D.C. 20006,
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.
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<PAGE> 264
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, 1998 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1998 as filed with the SEC.
Copies of such reports will be provided without charge to each person receiving
this Statement of Additional Information.
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REPUBLIC OPPORTUNITY FUND
3435 Stelzer Road
Columbus, Ohio 43219-3035
(888) 525-5757
Republic National Bank of New York - Investment Manager
("Republic" or the "Manager")
MFS Institutional Advisors, Inc. - Sub-Adviser
("Sub-Adviser")
BISYS Fund Services -
Administrator of the Fund Distributor and Sponsor
("BISYS" or the "Administrator of the Fund" or the
"Distributor" or the "Sponsor")
BISYS Fund Services (Ireland), Limited -
Administrator of the Portfolio
("BISYS (Ireland)")
STATEMENT OF ADDITIONAL INFORMATION
Republic Opportunity Fund (the "Fund") is a separate series of Republic
Funds (the "Trust"), an open-end, management investment company which currently
consists of eight 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 three separate classes Class A (the "Class A Shares"), Class B (the
"Class B Shares") and Class C Shares (the "Class C Shares").
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 ___________, 1999 (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.
___________, 1999
<PAGE> 266
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS...............................1
Foreign Securities...................................................2
Emerging Markets.....................................................2
American Depositary Receipts.........................................5
Repurchase Agreements................................................5
Lending on Portfolio Securities......................................6
Options and Futures..................................................7
Fixed-Income Securities.............................................15
High Yield/High Risk Securities.....................................15
Illiquid Investments................................................16
Portfolio Turnover..................................................16
Investment Restrictions.............................................16
Percentage and Rating Restrictions..................................20
PORTFOLIO TRANSACTIONS.......................................................20
PERFORMANCE INFORMATION......................................................21
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST..............................22
Trustees And Officers...............................................22
Compensation Table..................................................24
Investment Manager..................................................25
Sub-Adviser.........................................................26
Distribution Plans..................................................26
Distributor And Sponsor.............................................27
Administrative Services Plan........................................27
Fund Administrator..................................................28
Transfer Agent......................................................28
Custodian and Fund Account Agents...................................29
Shareholder Servicing Agents........................................29
Expenses............................................................30
DETERMINATION OF NET ASSET VALUE.............................................31
PURCHASE OF SHARES...........................................................31
Exchange Privilege..................................................31
Automatic Investment Plan...........................................32
Through a Shareholder Servicing Agent or a Securities Broker........32
SALES CHARGES................................................................33
Sales Charge Waivers................................................34
Concurrent Purchases................................................34
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Letters of Intent...................................................34
Rights of Accumulation..............................................35
Contingent Deferred Sales Charge ("CDSC") - Class B Shares..........35
Level Load Alternative -- Class C Shares............................36
REDEMPTION OF SHARES.........................................................36
Systematic Withdrawal Plan..........................................37
Redemption of Shares Purchased Directly Through the Distributor.....37
Conversion Feature..................................................38
RETIREMENT PLANS.............................................................38
Individual Retirement Accounts......................................38
Defined Contribution Plans..........................................38
Section 457 Plan, 401(k) Plan, 403(b) Plan..........................39
DIVIDENDS AND DISTRIBUTIONS..................................................39
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.........................39
TAXATION.....................................................................40
Options, Futures and Forward Contracts..............................42
Investment in Passive Foreign Investment Companies..................42
Disposition of Shares...............................................43
OTHER INFORMATION............................................................44
Capitalization......................................................44
Independent Auditors................................................44
Counsel.............................................................44
Registration Statement..............................................44
FINANCIAL STATEMENTS.........................................................45
References in this Statement of Additional Information to the "Prospectus" are
to the Prospectus, dated ___________, 1999, 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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<PAGE> 268
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective, policies and risks of the Portfolio discussed under the caption
"Investment Objective and Policies" in the Prospectus.
The investment objective of the Opportunity Fund is to seek long-term
growth of capital by investing, under normal market conditions, at least 80% of
its investible assets in equity securities of small- and medium-sized companies
that are early in their life cycle but which may have potential to become major
enterprises ("emerging growth companies"). The Trust seeks to achieve the
investment objective of the Opportunity Fund by investing all of the Fund's
investible assets in the Small Cap Equity Portfolio, which has the same
investment objective as the Fund.
The Small Cap Equity Portfolio seeks to achieve its objective by
investing, under normal market conditions, at least 80% of its assets in equity
securities (consisting of common stocks, preferred stocks, and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities) of emerging growth
companies. Emerging growth companies generally would have small (under $1
billion) market capitalizations and would have annual gross revenues ranging
from $10 million to $1 billion, would be expected to show earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation, and would have the products, management and market opportunities
which are usually necessary to become more widely recognized. However, the Small
Cap Equity Portfolio may also invest in more established companies whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand or basic
changes in the economic environment. The Small Cap Equity Portfolio may invest
up to 20% (and generally expects to invest between 5% and 10%) of its assets in
foreign securities (excluding ADRs).
Although the Small Cap Equity Portfolio will invest primarily in common
stocks, the Portfolio may, to a limited extent, seek appreciation in other types
of securities such as foreign or convertible securities and warrants when
relative values make such purchases appear attractive either as individual
issues or as types of securities in certain economic environments.
When MFS Institutional Advisers (the "Adviser") believes that investing
for temporary defensive reasons is appropriate, such as during times of
international, political or economic uncertainty or turmoil, or in order to meet
anticipated redemption requests, part or all of the Small Cap Equity Portfolio's
assets may be invested in cash (including foreign currency) or cash equivalent
short-term obligations including, but not limited to, certificates of deposit,
commercial paper, short-term notes and U.S. Government Securities. U.S.
Government Securities that the Small Cap Equity Portfolio may invest in
includes: (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance, including: U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to ten
years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, some of which are backed by the full
faith and credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association; some of which are supported by the
right of the issuer to borrow from the U.S. Government, e.g., obligations of
Federal Home Loan Banks; and some of which are backed only by the credit of the
issuer itself, e.g., obligations of the Student Loan Marketing Association.
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FOREIGN SECURITIES
The Portfolio may invest in foreign securities. Investing in securities
issued by companies whose principal business activities are outside the United
States may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, other taxes imposed by the foreign country on the Fund's
earnings, assets, or transactions, limitation on the removal of cash or other
assets of the Portfolio, political or financial instability, or diplomatic and
other developments which could affect such investments. Further, economies of
particular countries or areas of the world may differ favorably or unfavorably
from the economy of the United States. Changes in foreign exchange rates will
affect the value of securities denominated or quoted in currencies other than
the U.S. dollar. For example, significant uncertainty surrounds the proposed
introduction of the euro (a common currency for the European Union) in January
1999 and its effect on the value of securities denominated in local European
currencies. These and other currencies in which a Fund's assets are denominated
may be devalued against the U.S. dollar, resulting in a loss to the Fund.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Furthermore,
dividends and interest payments from foreign securities may be withheld at the
source. Additional costs associated with an investment in foreign securities may
include higher custodial fees than apply to domestic custodial arrangements, and
transaction costs of foreign currency conversions.
The Portfolio may invest in securities of foreign growth companies,
whose rates of earnings growth are expected to accelerate because of special
factors, such as rejuvenated management, new products, changes in consumer
demand, or basic changes in the economic environment or which otherwise
represent opportunities for long-term growth. The Portfolio may also invest in
securities of issuers located in countries with relatively low gross national
product per capita compared to the world's major economies, and in countries or
regions with the potential for rapid economic growth ("Emerging Markets").
EMERGING MARKETS
The Portfolio may invest in emerging markets, which presents greater
risk than investing in foreign issuers in general. A number of emerging markets
restrict foreign investment in stocks. Repatriation of investment income,
capital, and the proceeds of sales by foreign investors may require governmental
registration and/or approval in some emerging market countries. A number of the
currencies of developing countries have experienced significant declines against
the U.S. dollar in recent years, and devaluation may occur subsequent to
investments in these currencies by the Portfolio. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Many of the emerging securities markets are relatively small, have
low trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is the risk that a future
economic or political crisis could lead to price controls, forced mergers of
companies, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which could have a detrimental effect
on the Portfolio's investments.
Investing in formerly communist East European countries involves the
additional risk that the government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the fall of communism and could follow radically different political
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and/or economic policies to the detriment of investors, including non-market
oriented policies such as the support of certain industries at the expense of
other sectors or a return to a completely centrally planned economy.
With respect to the Small-Cap Equity Portfolio, "emerging markets"
include any country: (i) having an "emerging stock market" as defined by the
International Finance Corporation; (ii) with low- to middle-income economies
according to the International Bank for Reconstruction and Development (the
"World Bank"); (iii) listed in World Bank publications as developing; or (iv)
determined by the Adviser to be an emerging market as defined above.
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
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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
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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.
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.
REPURCHASE AGREEMENTS
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 a Sub-Adviser has determined to be
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of comparable creditworthiness. Repurchase agreements are transactions by which
a fund or portfolio purchases a security and simultaneously commits to resell
that security to the seller (a bank or securities dealer) at an agreed upon
price on an agreed upon date (usually within seven days of purchase). The
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 Advisor will continually monitor the value
of the underlying securities to ensure that their value, including accrued
interest, always equals or exceeds the repurchase price. Repurchase agreements
are considered to be loans collateralized by the underlying security under the
1940 Act, and therefore will be fully collateralized.
The use of repurchase agreements involves certain risks. For example,
if the seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its interest in the
underlying securities.
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 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 Portfolio has the right to make margin calls at any time if the
value of the securities falls below the agreed upon margin.
LENDING ON PORTFOLIO SECURITIES
The Portfolio may seek to increase its income by lending portfolio
securities to entities deemed creditworthy by the Sub-Adviser. The Portfolio may
lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income. Loans of securities
will be collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned securities. In addition,
the Portfolio will not lend its portfolio securities to the extent that greater
than one-third of its total assets, at fair market value, would be committed to
loans at that time. 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
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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 AND FUTURES
The Portfolio may invest in options and futures contracts. The use of
options and futures is a highly specialized activity which involves investment
strategies and risks different from those associated with ordinary portfolio
securities transactions, and there can be no guarantee that their use will
increase the return of the Portfolio. While the use of these instruments by the
Portfolio may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Sub-Adviser applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower
Portfolio's return. Certain strategies limit the potential of the Portfolio to
realize gains as well as limit their exposure to losses. The Portfolio could
also experience losses if the prices of its options and futures positions were
poorly correlated with its other investments. There can be no assurance that a
liquid market will exist at a time when the Portfolio seeks to close out a
futures contract or a futures option position.
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
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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.
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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
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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
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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
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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 a Forward Contract
on one currency in order to hedge against risk of loss arising from fluctuations
in the value of a second currency (referred to as a "cross hedge") if, in the
judgment of the Small Cap Equity Sub-Adviser, a reasonable degree of correlation
can be expected between movements in the values of the two currencies.
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 of losses which will reduce its gross income. 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. Forward Contracts are traded over-the-counter and not
on organized commodities or securities exchanges. As a result, such contracts
operate in a manner distinct from exchange-traded instruments and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges.
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
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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
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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 the 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.
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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.
FIXED INCOME SECURITIES
To the extent Portfolio invests in fixed income securities, the net
asset value of the Portfolio may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. The Portfolio's investments in
fixed income securities with longer terms to maturity or greater duration are
subject to greater volatility than the Fund's or Portfolio's shorter-term
obligations.
HIGH YIELD/HIGH RISK SECURITIES
The Portfolio may invest in lower rated, high-yield, "junk" bonds.
These securities are generally rated lower than Baa by Moody's or lower than BBB
by S&P. In general, the market for lower rated, high-yield bonds is more limited
than the market for higher rated bonds, and because their markets may be thinner
and less active, the market prices of lower rated, high-yield bonds may
fluctuate more than the prices of higher rated bonds, particularly in times of
market stress. In addition, while the market for high-yield, corporate debt
securities has been in existence for many years, the market in recent years
experienced a dramatic increase in the large-scale use of such securities to
fund highly leveraged corporate acquisitions and restructurings. Accordingly,
past experience may not provide an accurate indication of future performance of
the high-yield bond market, especially during periods of economic recession.
Other risks which may be associated with lower rated, high-yield bonds include
their relative insensitivity to interest-rate changes; the exercise of any of
their redemption or call provisions in a declining market which may result in
their replacement by lower yielding bonds; and legislation, from time to time,
which may adversely affect their market. Since the risk of default is higher
among lower rated, high-yield bonds, the Sub-Adviser's research and analyses are
important ingredients in the selection of lower rated, high-yield bonds.
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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 Portfolio does not have any minimum rating criteria applicable to the
fixed-income securities in which it invests.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that
are illiquid by virtue of the absence of a readily available market, or because
of legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 that are determined to be
liquid in accordance with guidelines established by the Portfolio Trust's Board
of Trustees. There may be delays in selling these securities and sales may be
made at less favorable prices. The Portfolio has a policy that no more than 10%
of its net assets may be invested in restricted securities which are restricted
as to resale, including Rule 144A and Section 4(2) securities.
Each Sub-Adviser may determine that a particular Rule 144A security is
liquid and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that a Sub-Adviser must consider in determining whether a particular Rule 144A
security is liquid include the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and the nature of the market for the
security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's or
Fund's illiquidity to the extent that qualified institutions might become, for a
time, uninterested in purchasing these securities.
PORTFOLIO TURNOVER
The Sub-Adviser manages the Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. The portfolio turnover
rate for the Small Cap Equity Portfolio for fiscal year ended October 31, 1998
was __%. It is anticipated that in subsequent years the portfolio turnover rate
for the Small Cap Equity Portfolio will not exceed ___%.
INVESTMENT RESTRICTIONS.
The Portfolio Trust (with respect to the Portfolio) and the Trust (with
respect to the Fund) have 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):
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(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.
The Portfolio and the Fund are 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:
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(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;
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<PAGE> 286
(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
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<PAGE> 287
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
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<PAGE> 288
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. For the year ended October 31, 1998, the Portfolio paid
aggregate brokerage commissions equal to $________, [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 that 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.
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<PAGE> 289
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:
CLASS A SHARES (without Sales Charge):
Annual Total Return - Year Ended October 31, 1998: _____%.
Average Annual Total Return - September 3, 1996 (commencement of
operations) to October 31, 1998: _____%.
Had the sales charge been in effect during the relevant periods, the
annual total return for the year ended October 31, 1998 would have been ____%
and the average annual total return for the period from September 3, 1996 to
October 31, 1998 would have been ____%.
CLASS B SHARES: Class B Shares were not offered prior to January 2, 1998.
Annual Total Return - January 2, 1998 (commencement of operations) to
October 31, 1998: _____%.
CLASS C SHARES: Class C Shares were not offered prior to November 3, 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 business and affairs of the Trust and the Portfolio Trust are
managed under the direction of their respective Boards of Trustees. 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
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<PAGE> 290
"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).
WALTER B. GRIMM*, President and Secretary
Employee of BISYS Fund Services, Inc., June, 1992 to present; prior to
June, 1992 President of Leigh Investments Consulting (investment firm).
ANTHONY J. FISCHER, Vice President
Employee of BISYS Fund Services, Inc., April, 1998 to present; Employee
of SEI Investments and Merrill Lynch prior to April 1998.
PENNY D. GRANDOMINICO*, Vice President
Employee of BISYS Fund Services, Inc., April 1995 to present; Financial
Consultant, Smith Barney, July 1992 to April 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.
ELLEN STOUTAMIRE, Secretary
Employee of BISYS Fund Services, Inc., April, 1997 to present; Attorney
in private practice prior to April 1997.
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.
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<PAGE> 291
*Messrs. Grimm, Fischer and Waters and Mss. Grandominico, Brady,
Stoutamire and Metz also are officers of certain other investment companies of
which BISYS or an affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Retirement Total
Pension of Estimated Compensation
Aggregate Benefits Accrued Annual From Fund
Compensation as Part of Fund Benefits Upon Complex* to
Name of 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, 1998. 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 ___________, 1998, 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 - _____% (Class A Shares); BHC Securities, Inc., One Commerce Square, 2005
Market Square, Philadelphia, Pennsylvania 19103 - _____% (Class A Shares); and
Republic New York Securities Corp. (as Custodian), 452 Fifth Avenue, Tower 14,
New York, New York 10018 - ____% (Class A 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.
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<PAGE> 292
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. For the fiscal year ended
October 31, 1998, investment management fees aggregated $_________ [OF WHICH
$__________ WAS WAIVED].
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Fund or
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased. 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. Republic has informed the Trust that, in making its
investment decisions, it does not obtain or use material inside information in
the possession of any division or department of Republic or in the possession of
any affiliate of Republic.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Fund and Portfolio
will not violate the Glass-Steagall Act or other applicable banking laws or
regulations. However, future statutory or regulatory changes, as well as future
judicial or administrative decisions and interpretations of present and future
statutes and regulations, could prevent Republic from continuing to perform such
services for the Fund and Portfolio. If Republic were prohibited from acting as
investment manager to the Fund and Portfolio, it is expected that the Trust's
Board of Trustees would recommend to Fund shareholders approval of a new
investment advisory agreement with another qualified investment adviser selected
by the Board or that the Board would recommend other appropriate action.
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<PAGE> 293
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. For the fiscal year ended October 31, 1998, sub-advisory fees
aggregated $______.
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.
DISTRIBUTION PLANS
Three Distribution Plans have been adopted by the Trust (the
"Distribution Plans") with respect to the Class A Shares (the "Class A Plan"),
the Class B Shares (the "Class B Plan") and the Class C Shares (the "Class C
Plan). The Distribution Plans provide that they may not be amended to increase
materially the costs which either the Class A Shares, the Class B Shares or the
Class C Shares may bear pursuant to the Class A Plan, Class B Plan or Class C
Plan without approval by shareholders of the Class A Shares, Class B Shares or
Class C 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, Class B Plan and Class C Plan, the Trustees
considered alternative methods to distribute the Class A Shares, Class B Shares
and Class C Shares and to reduce each class's per share expense ratio and
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<PAGE> 294
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 Class A Shares, Class B
Shares or Class C 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. During the
fiscal period ended October 31, 1998, the Fund incurred expenses pursuant to
the distribution plans in the amount of $__________.
DISTRIBUTOR AND SPONSOR
BISYS acts as sponsor and principal underwriter and distributor of
Shares of the Fund pursuant to a Distribution Contract with the Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares. Such compensation may include financial
assistance to dealers in connection with conferences, sales or training programs
for their employees, seminars for the public, advertising campaigns regarding
the Fund, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to certain dealers whose
representatives have sold a significant amount of such Shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. None
of the aforementioned compensation is paid by the Fund or its Shareholders.
Pursuant to the Distribution Plans adopted by the Trust, the
Distributor is reimbursed from the Fund monthly for costs and expenses incurred
by the Distributor in connection with the distribution of Shares of the Fund and
for the provision of certain shareholder services with respect to the Shares.
Payments to the Distributor are for various types of activities, including: (1)
payments to broker-dealers who advise shareholders regarding the purchase, sale
or retention of Shares and who provide shareholders with personal services and
account maintenance services ("service fees"), (2) payments to employees of the
Distributor, and (3) printing and advertising expenses. Pursuant to the Class A
Plan, the amount of their reimbursement from each Fund may not exceed on an
annual basis 0.25% of the average daily net assets of the Fund represented by
Class A Shares outstanding during the period for which payment is being made.
Pursuant to both the Class B Plan and the Class C Plan, the amount of this
reimbursement from the Fund for distribution related activities (other than
service fees) may not exceed on an annual basis 0.75% of the average daily net
assets of the Fund represented by Class B Shares and Class C Shares,
respectively, outstanding during the period for which payment is being made. The
aggregate fees paid to the Distributor pursuant to the Class B Plan and Class C
Plan, respectively, and to Shareholder Servicing Agents pursuant to the
Administrative Services Plan will not exceed on an annual basis 1.00% of the
Fund's average daily net assets represented by Class B Shares and Class C
Shares, respectively, outstanding during the period for which payment is being
made. Salary expense of BISYS personnel who are responsible for marketing shares
of the various portfolios of the Trust may be allocated to such portfolios on
the basis of average net assets; travel expense is allocated to, or divided
among, the particular portfolios for which it is incurred.
Any payment by the Distributor or reimbursement of the Distributor from
the Fund made pursuant to the Distribution Plans is contingent upon the Board of
Trustees' approval. The Fund is not liable for distribution and shareholder
servicing expenditures made by the Distributor in any given year in excess of
the maximum amount payable under the Distribution Plans in that year.
ADMINISTRATIVE SERVICES PLAN
An Administrative Services Plan has been adopted by the Trust with
respect to the Class A Shares, Class B Shares and Class C Shares, and continues
in effect indefinitely if such continuance is specifically
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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 Class A Shares, the Class B Shares or the Class C 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 Class A Shares, Class B Shares or Class C 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.
FUND ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Fund with
general office facilities and supervises the overall administration of the Fund
and the Portfolio including, among other responsibilities, assisting in the
preparation and filing of all documents required for compliance by the Fund and
the Portfolio with applicable laws and regulations and arranging for the
maintenance of books and records of the Fund and the Portfolio. For its services
to the Fund, BISYS receives from the Fund fees payable monthly equal on an
annual basis (for the Fund's then-current fiscal year) to 0.05% of the Fund's
average daily net assets up to $1 billion; 0.04% of the next $1 billion of such
assets; and 0.035% of such assets in excess of $2 billion. For providing similar
services to the Portfolio, BISYS (Ireland) receives from the Portfolio fees
payable monthly equal on an annual basis (for the Portfolio's then-current
fiscal year) to 0.05% of the first $1 billion of the Portfolio's average daily
net assets; 0.04% of the next $1 billion of such assets; and 0.035% of such
assets in excess of $2 billion.
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, 1998, 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. For the fiscal year ended October 31, 1998, the
Portfolio accrued administration fees equal to $_____ and the Fund accrued
administration fees equal to $______, [NONE OF WHICH FEES WERE WAIVED.]
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.
BISYS provides persons satisfactory to the respective Boards of
Trustees to serve as officers of the Trust and the Portfolio Trust. Such
officers, as well as certain other employees of the Trust and of the Portfolio
Trust, may be directors, officers or employees of BISYS or its affiliates.
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with Investors
Bank & Trust Company ("IBT") and BISYS, pursuant to which IBT acts as transfer
agent for the Fund with respect to the Class A
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<PAGE> 296
Shares and BISYS acts as transfer agent for the Fund with respect to the Class B
Shares and Class C Shares (the "Transfer Agents"), and the Portfolio Trust has
entered into a Transfer Agent Agreement with Investors Fund Services (Ireland)
Limited (also a "Transfer Agent"). The Transfer Agents maintain an account for
each shareholder of the Fund (unless such account is maintained by the
shareholder's securities-broker, if applicable, or Shareholder Servicing Agent),
performs other transfer agency functions, and act as dividend disbursing agent
for the Fund. The principal business address of IBT is 200 Clarendon Street,
Boston, Massachusetts 02117. The principal business address of BISYS is 3435
Stelzer Road, Columbus, OH 43219.
Pursuant to an agreement, as of April 1, 1999, BISYS will provide all
services with respect to each class of shares of the Fund.
CUSTODIAN AND FUND ACCOUNT AGENTS
Pursuant to a Custodian Agreement, with respect to domestic assets,
Republic acts as the custodian of the Fund's assets. With respect to foreign
assets, IBT serves as custodian for the Fund and the Portfolio (together, with
Republic, the "Custodian"). The Custodians' responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
fund accounting and other required books and accounts in order to calculate the
daily net asset value of Shares of the Fund. Securities held for the Fund may be
deposited into the Federal Reserve-Treasury Department Book Entry System or the
Depository Trust Company. The Custodians do not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, the Custodians receive such compensation as may from
time to time be agreed upon by it and the Trust. IBT Fund Services (Canada) Inc.
serves as the fund accounting agent for the Portfolio.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a
"Servicing Agreement") with each Shareholder Servicing Agent, including
Republic, pursuant to which a Shareholder Servicing Agent, as agent for its
customers, among other things: answers customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of
Class A Shares, Class B Shares, and Class C Shares of the Fund may be effected
and certain other matters pertaining to the Fund; assists shareholders in
designating and changing dividend options, account designations and addresses;
provides necessary personnel and facilities to establish and maintain
shareholder accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust, proxy
statements, annual reports, updated prospectuses and other communications from
the Trust to the Fund's shareholders; receives, tabulates and transmits to the
Trust proxies executed by shareholders with respect to meetings of shareholders
of the Fund or the Trust; and provides such other related services as the Trust
or a shareholder may request. With respect to Class A Shares and Class B Shares,
each Shareholder Servicing Agent receives a fee from the Fund for these
services, which may be paid periodically, determined by a formula based upon the
number of accounts serviced by such Shareholder Servicing Agent during the
period for which payment is being made, the level of activity in accounts
serviced by such Shareholder Servicing Agent during such period, and the
expenses incurred by such Shareholder Servicing Agent. The aggregate fees paid
to the Distributor
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<PAGE> 297
pursuant to the Class B Plan and Class C Plan, respectively, and to Shareholder
Servicing Agents pursuant to the Administrative Services Plan will not exceed on
an annual basis 1.00% the of the Fund's average daily net assets represented by
Class B Shares and Class C Shares, respectively, outstanding during the period
for which payment is being made.
The Trust understands that some Shareholder Servicing Agents also may
impose certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such as
requiring a different minimum initial or subsequent investment, account fees (a
fixed amount per transaction processed), compensating balance requirements (a
minimum dollar amount a customer must maintain in order to obtain the services
offered), or account maintenance fees (a periodic charge based on a percentage
of the assets in the account or of the dividends paid on those assets). Each
Shareholder Servicing Agent has agreed to transmit to its customers who are
holders of Shares appropriate prior written disclosure of any fees that it may
charge them directly and to provide written notice at least 30 days prior to the
imposition of any transaction fees. Conversely, the Trust understands that
certain Shareholder Servicing Agents may credit to the accounts of their
customers from whom they are already receiving other fees amounts not exceeding
such other fees or the fees received by the Shareholder Servicing Agent from the
Fund with respect to those accounts.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that the
Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities of
banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent a
bank from continuing to perform all or part of its servicing activities. If a
bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing the
servicing of such shareholders would be sought. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by such bank might
no longer be able to avail himself of any automatic investment or other services
then being provided by such bank. The Trustees of the Trust do not expect that
shareholders of the Fund would suffer any adverse financial consequences as a
result of these occurrences.
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 Class A Shares, Class B Shares and Class C 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. Expenses for each class of shares
must include payments made pursuant to their respective Distribution Plan and
shareholder servicing agent fees paid pursuant to the Administrative Services
Plan.
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<PAGE> 298
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.
PURCHASE OF SHARES
Shares may be purchased through the Distributor Shareholder Servicing
Agents or through securities brokers that have entered into a dealer agreement
with the Distributor ("Securities Brokers"). Shares may be purchased at their
net asset value next determined after an order is transmitted to and accepted by
the Transfer Agent or is received by a Shareholder Servicing Agent or a
Securities Broker if it is transmitted to and accepted by the Transfer Agent.
Purchases are effected on the same day the purchase order is received by the
Transfer Agent provided such order is received prior to 4:00 p.m., New York
time, on any Fund Business Day. The Trust intends the Funds to be as fully
invested at all times as is reasonably practicable in order to enhance the yield
on their assets. Each Shareholder Servicing Agent or Securities Broker is
responsible for and required to promptly forward orders for shares to the
Transfer Agent.
While there is no sales load on purchases of Class B Shares and Class C
Shares, the Distributor may receive fees from the Funds. Other funds which have
investment objectives similar to those of the Funds but which do not pay some or
all of such fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares at
net asset value without a sales charge for Shares of
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<PAGE> 299
the same class offered with the same or lower sales charge by any of the Trust's
other Funds. Exchanges for Shares with a higher sales charge may be made upon
payment of the sales charge differential. An exchange of Class B Shares or Class
C Shares will not affect the holding period of the Class B Shares or Class C
Shares for purposes of determining the CDSC, if any, upon redemption, or, with
respect to Class B Shares, the time of conversion to Class A Shares. An exchange
may result in a change in the number of Shares held, but not in the value of
such Shares immediately after the exchange. Each exchange involves the
redemption of the Shares to be exchanged and the purchase of the shares of the
other Republic Fund which may produce a gain or loss for tax purposes.
AUTOMATIC INVESTMENT PLAN
If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified in writing to discontinue further investments. Due
to the varying procedures to prepare, process and forward the bank withdrawal
information to the Trust, there may be a delay between the time of bank
withdrawal and the time the money reaches the Fund. The investment in a Fund
will be made at the net asset value per share determined on the Fund Business
Day that both the check and the bank withdrawal data are received in required
form by the Transfer Agent. Further information about the plan may be obtained
from BISYS at the telephone number listed on the back cover.
For further information on how to purchase Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Shares are being offered to the public, to customers of a Shareholder
Servicing Agent and to customers of a securities broker that has entered into a
dealer agreement with the Distributor. Shareholder Servicing Agents and
securities brokers may offer services to their customers, including specialized
procedures for the purchase and redemption of Shares, such as pre- authorized or
automatic purchase and redemption programs. Each Shareholder Servicing Agent and
securities broker may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees will
be to reduce the net return on the investment of customers of that Shareholder
Servicing Agent or securities broker. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from each Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to a Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker or a
Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent (see back cover for address
and phone number).
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<PAGE> 300
SALES CHARGES
CLASS A SHARES
The public offering price of the Class A Shares of the Fund equals net
asset value plus the applicable sales charge. BISYS receives this sales charge
as distributor and may reallow it as dealer discounts and brokerage commissions
as follows:
<TABLE>
<CAPTION>
OPPORTUNITY FUND
SALES CHARGE AS:
-------------------------------------
Discount to
Size of Transaction at % Of Offering Price % Of net Amount Selected Dealers
Offering Price Invested as a Percentage of
Offering Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.00%
$50,000 but less than $100,000 2.50% 2.56% 2.00%
$100,000 but less than $250,000 1.50% 1.52% 1.15%
$250,000 but less than $500,000 1.00% 1.01% 0.75%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
An investor may obtain reduced sales charges on Class A Shares under the
circumstances described below under "Reduced Sales Charges -- Class A Shares."
EXISTING SHAREHOLDERS. Shareholders of the Fund who are shareholders as of
December 31, 1997 will be grandfathered with respect to the Fund and will be
exempt from paying sales charges on future purchases of Class A Shares of the
Fund.
REDUCED SALES CHARGES--CLASS A SHARES. Customers of Republic National Bank of
New York and its affiliates meeting certain criteria may purchase shares of the
Fund at a discounted sales charge. The maximum sales charge, in the case of the
Fund will be 3.25% of the public offering price.
<TABLE>
<CAPTION>
OPPORTUNITY FUND
SALES CHARGE AS:
---------------------------------------
Discount to
Size of Transaction at % Of Offering % Of net Amount Selected Dealers as
Offering Price Price Invested a Percentage of
Offering Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.25% 3.36% 2.75%
$50,000 but less than $100,000 2.25% 2.30% 1.75%
$100,000 but less than $250,000 1.25% 1.27% 0.90%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 and over 0.00% 0.00% 0.00%
</TABLE>
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<PAGE> 301
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares by or on behalf of (1) purchasers for whom Republic or one of its
affiliates acts in a fiduciary, advisory, custodial or similar capacity, (2)
employees and retired employees (including spouses, children and parents of
employees and retired employees) of Republic, BISYS and any affiliates thereof,
(3) Trustees of the Trust, (4) directors and retired directors (including
spouses and children of directors and retired directors) of Republic and any
affiliates thereof, (5) purchasers who use proceeds from an account for which
Republic or one of its affiliates acts in a fiduciary, advisory, custodial or
similar capacity, to purchase Class A Shares of a Fund, (6) brokers, dealers and
agents who have a sales agreement with the Distributor, and their employees (and
the immediate family members of such individuals), (7) investment advisers or
financial planners that have entered into an agreement with the Distributor and
that place trades for their own accounts or the accounts of eligible clients and
that charge a fee for their services, and clients of such investment advisers or
financial planners who place trades for their own accounts if such accounts are
linked to the master account of the investment adviser or financial planner on
the books and records of a broker or agent that has entered into an agreement
with the Distributor, and (8) orders placed on behalf of other investment
companies distributed by BISYS, The BISYS Group, Inc., or their affiliated
companies. In addition, the Distributor may waive sales charges for the purchase
of the Fund's Class A Shares with the proceeds from the recent redemption of
shares of a non-money market mutual fund (except one of the other funds of the
Trust) sold with a sales charge. The purchase must be made within 60 days of the
redemption, and the Distributor must be notified in writing by the investor, or
by his or her financial institution, at the time the purchase is made. A copy of
the investor's account statement showing such redemption must accompany such
notice. To receive a sales charge waiver in conjunction with any of the above
categories, Shareholders must, at the time of purchase, give the Transfer Agent
or the Distributor sufficient information to permit confirmation of
qualification.
CONCURRENT PURCHASES
For purposes of qualifying for a lower sales charge, investors have the
privilege of combining "concurrent purchases" of Class A Shares of the funds.
For example, if a Shareholder concurrently purchases Class A Shares in one of
the Funds of the Trust sold with a sales charge at the total public offering
price of $25,000 and Class A Shares in another Fund sold with a sales charge at
the total public offering price of $75,000, the sales charge would be that
applicable to a $100,000 purchase as shown in the appropriate table above. The
investor's "concurrent purchases" described above shall include the combined
purchases of the investor, the investor's spouse and children under the age of
21 and the purchaser's retirement plan accounts. To receive the applicable
public offering price pursuant to this privilege, Shareholders must, at the time
of purchase, give the Transfer Agent or the Distributor sufficient information
to permit confirmation of qualification. This privilege, however, may be
modified or eliminated at any time or from time to time by the Trust without
notice.
LETTERS OF INTENT
An investor may obtain a reduced sales charge by means of a written
Letter of Intent which expresses the intention of such investor to purchase
Class A Shares of the Funds at a designated total public offering price within a
designated 13-month period. Each purchase of Class A Shares under a Letter of
Intent will be made at the net asset value plus the sales charge applicable at
the time of such purchase to a single transaction of the total dollar amount
indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of
Intent may include purchases of Class A Shares made not more than 90 days prior
to the date such investor signs a Letter of Intent; however, the 13-month period
during which the Letter of
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<PAGE> 302
Intent is in effect will begin on the date of the earliest purchase to be
included. An investor will receive as a credit against his/her purchase(s) of
Class A Shares during this 90-day period at the end of the 13-month period, the
difference, if any, between the sales load paid on previous purchases qualifying
under the Letter of Intent and the Applicable Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Class A Shares purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
of the investor) to secure payment of the higher sales charge applicable to the
Class A Shares actually purchased if the full amount indicated is not purchased,
and such escrowed Class A Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed Class A Shares,
whether paid in cash or reinvested in additional Class A Shares, are not subject
to escrow. The escrowed Class A Shares will not be available for disposal by the
investor until all purchases pursuant to the Letter of Intent have been made or
the higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. To the extent that an investor purchases
more than the dollar amount indicated in the Letter of Intent and qualifies for
a further reduced sales charge, the sales charge will be adjusted for the entire
amount purchased at the end of the 13-month period. The difference in sales
charge will be used to purchase additional Class A Shares of such Fund at the
then current public offering price subject to the rate of sales charge
applicable to the actual amount of the aggregate purchases. For further
information about Letters of Intent, interested investors should contact the
Trust at 1-888-525-5757. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
RIGHTS OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Funds at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Funds then being purchased plus (b) an amount equal to the then current net
asset value of the "purchaser's combined holdings" of the Class A Shares of all
of the Funds of the Trust sold with a sales charge. Class A Shares sold to
purchasers for whom Republic or one of its affiliates acts in a fiduciary,
advisory, custodial (other than retirement accounts), agency, or similar
capacity are not presently subject to a sales charge. The "purchaser's combined
holdings" described above shall include the combined holdings of the purchaser,
the purchaser's spouse and children under the age of 21 and the purchaser's
retirement plan accounts. To receive the applicable public offering price
pursuant to the right of accumulation, Shareholders must, at the time of
purchase, give the Transfer Agent or the Distributor sufficient information to
permit confirmation of qualification. This right of accumulation, however, may
be modified or eliminated at any time or from time to time by the Trust without
notice.
CONTINGENT DEFERRED SALES CHARGE ("CDSC") - CLASS B SHARES
Class B Shares of the Fund which are redeemed less than three years
after purchase will be subject to a declining CDSC. The CDSC will be based on
the lesser of the net asset value at the time of purchase of the Class B Shares
being redeemed or the net asset value of such Shares at the time of redemption.
Accordingly, a CDSC will not be imposed on amounts representing increases in net
asset value above the net asset value at the time of purchase. In addition, a
CDSC will not be assessed on Class B Shares purchased through reinvestment of
dividends or capital gains distributions, or that are purchased by
"Institutional Investors" such as corporations, pension plans, foundations,
charitable institutions, insurance companies, banks and other banking
institutions, and non-bank fiduciaries.
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<PAGE> 303
Solely for purposes of determining the amount of time which has elapsed
from the time of purchase of any Class B Shares, all purchases during a month
will be aggregated and deemed to have been made on the last day of the month. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner that results in the lowest possible charge being assessed.
In this regard, it will be assumed that the redemption is first of Class B
Shares held for more than three years for Income Funds or four years for Equity
Funds or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
The CDSC is waived on redemptions of Class B Shares (i) following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a Shareholder, (ii) to the extent that the redemption represents a
minimum required distribution from an IRA or a Custodial Account under Code
Section 403(b)(7) to a Shareholder who has reached age 70 1/2, and (iii) to the
extent the redemption represents the minimum distribution from retirement plans
under Code Section 401(a) where such redemptions are necessary to make
distributions to plan participants.
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
Contingent Deferred Sales Charge ("CDSC") -- Class B Shares" except that the
references to three years and four years in the first paragraph of that section
shall mean one year in the case of Class C Shares. Class C Shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B Shares, Class C Shares have no conversion feature and,
accordingly, an investor that purchases Class C Shares will be subject to 12b-1
fees applicable to Class C Shares for an indefinite period subject to annual
approval by each Fund's Board of Trustees and regulatory limitations.
The higher fees mean a higher expense ratio, so Class C Shares pay
correspondingly lower dividends and may have a lower net asset value than Class
A Shares. A Fund will not normally accept any purchase of Class C Shares in the
amount of $500,000 or more. Broker-dealers and other financial intermediaries
whose clients have purchased Class C Shares may receive a trailing commission
equal to 1.00% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Trailing commissions will commence immediately with respect to shares eligible
for exemption from the CDSC normally applicable to Class C Shares.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
account at any time at the net asset value next determined after a redemption
order in proper form is furnished by the shareholder to the Transfer Agent, with
respect to Shares purchased directly through the Distributor, or to his
securities broker or his Shareholder Servicing Agent, and is transmitted to and
received by the Transfer Agent. Redemptions are effected on the same day the
redemption order is received by the Transfer Agent provided such order is
received prior to 4:00 p.m., New York time, on any Fund Business Day. Shares
redeemed earn dividends up to and including the day prior to the day the
redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day following the date on which the redemption
is effected, but in any event within seven days.
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The right of any shareholder to receive payment with respect to any redemption
may be suspended or the payment of the redemption proceeds postponed during any
period in which the New York Stock Exchange is closed (other than weekends or
holidays) or trading on such Exchange is restricted or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists. To be in a position to
eliminate excessive expenses, the Trust reserves the right to redeem upon not
less than 30 days' notice all Shares in an account which has a value below $50,
provided that such involuntary redemptions will not result from fluctuations in
the value of Fund Shares. A shareholder will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
Unless Shares have been purchased directly from the Distributor, a
shareholder may redeem Shares only by authorizing his securities broker, if
applicable, or his Shareholder Servicing Agent to redeem such Shares on his
behalf (since the account and records of such a shareholder are established and
maintained by his securities broker or his Shareholder Servicing Agent). For
further information as to how to direct a securities broker or a Shareholder
Servicing Agent to redeem Shares, a shareholder should contact his securities
broker or his Shareholder Servicing Agent.
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or
more may establish a Systematic Withdrawal Plan under which he redeems at net
asset value the number of full and fractional shares which will produce the
monthly, quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR
Redemption by Letter. Redemptions may be made by letter to the Transfer
Agent specifying the dollar amount or number of Class A Shares to be redeemed,
account number and the Fund. The letter must be signed in exactly the same way
the account is registered (if there is more than one owner of the Shares, all
must sign). In connection with a written redemption request, all signatures of
all registered owners or authorized parties must be guaranteed by an Eligible
Guarantor Institution, which includes a domestic bank, broker, dealer, credit
union, national securities exchange, registered securities association, clearing
agency or savings association. The Fund's transfer agent, however, may reject
redemption instructions if the guarantor is neither a member or not a
participant in a signature guarantee program (currently known as "STAMP",
"SEMP", or "NYSE MPS"). Corporations, partnerships, trusts or other legal
entities may be required to submit additional documentation.
Redemption by wire or telephone. An investor may redeem Shares by wire
or by telephone if he has checked the appropriate box on the Purchase
Application or has filed a Telephone Authorization Form with the Trust. These
redemptions may be paid from the applicable Fund by wire or by check. The Trust
reserves the right to refuse telephone wire redemptions and may limit the amount
involved or the number of telephone redemptions. The telephone redemption
procedure may be modified or discontinued at any time by the Trust. Instructions
for wire redemptions are set forth in the Purchase Application. The Trust
employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. For instance, the following information must be verified
by the shareholder or securities broker at the time a request for a telephone
redemption is effected: (1) shareholder's account number; (2) shareholder's
social security number; and (3) name and account number of shareholder's
designated securities broker or bank. If
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the Trust fails to follow these or other established procedures, it may be
liable for any losses due to unauthorized or fraudulent instructions.
CONVERSION FEATURE
Five years after the original purchase of Income Fund Class B shares
which have been exchanged for Class B Shares of the Fund and six years after the
original purchase of Equity Fund Class B shares which have been exchanged for
Class B Shares of the Fund, Class B Shares of the Fund will convert
automatically to Class A Shares. The purpose of the conversion is to relieve a
holder of Class B Shares of the higher ongoing expenses charged to those Shares,
after enough time has passed to allow the Distributor to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Class B Shares to Class A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Class A Shares as he or she had of Class B Shares. For Class B Shares
that were exchanged from Income Fund Class B shares, the conversion occurs five
years after the beginning of the calendar month in which the Income Fund Class B
shares were purchased. For Class B shares that were exchanged from Equity Fund
Class B shares, the conversion occurs six years after the beginning of the
calendar month in which the Equity Fund Class B shares were purchased. As a
result of the conversion, the converted Shares are relieved of the Rule 12b-1
fees borne by Class B Shares, although they are subject to the Rule 12b-1 fees
borne by Class A Shares.
RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred
retirement plans. Application forms and further information about these plans,
including applicable fees, are available from the Trust or the Sponsor upon
request. The tax law governing tax-deferred retirement plans is complex and
changes frequently. Before investing in the Fund through one or more of these
plans, an investor should consult his or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be used as a funding medium for an IRA. An
Internal Revenue Service-approved IRA plan may be available from an investor's
Shareholder Servicing Agent. In any event, such a plan is available from the
Sponsor naming BISYS as custodian. The minimum initial investment for an IRA is
$250; the minimum subsequent investment is $100. IRAs are available to
individuals who receive compensation or earned income and their spouses whether
or not they are active participants in a tax- qualified or Government-approved
retirement plan. An IRA contribution by an individual who participates, or whose
spouse participates, in a tax-qualified or Government-approved retirement plan
may not be deductible, in whole or in part, depending upon the individual's
income. Individuals also may establish an IRA to receive a "rollover"
contribution of distributions from another IRA or a qualified plan. Tax advice
should be obtained before planning a rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase shares of the Fund for
retirement plans for self-employed persons that are known as Defined
Contribution Plans (formerly Keogh or H.R. 10 Plans). Republic offers a
prototype plan for Money Purchase and Profit Sharing Plans.
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SECTION 457 PLAN, 401(k) PLAN, 403(b) PLAN
The Fund may be used as a vehicle for certain deferred compensation
plans provided for by Section 457 of the Internal Revenue Code of 1986, as
amended, (the "Code") with respect to service for state governments, local
governments, rural electric cooperatives and political subdivisions, agencies,
instrumentalities and certain affiliates of such entities. The Fund may also be
used as a vehicle for both 401(k) plans and 403(b) plans.
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of the Fund's net investment income daily as a
dividend to the Fund shareholders. Dividends substantially equal to the Fund's
net investment income earned during the month are distributed semi-annually to
the Fund's shareholders of record. Generally, the Fund's net investment income
consists of the interest and dividend income it earns, less expenses. In
computing interest income, premiums are not amortized nor are discounts accrued
on long-term debt securities in the Portfolio, except as required for federal
income tax purposes.
The Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4% non-
deductible federal excise tax on certain undistributed income and net capital
gains of regulated investment companies. Unless a shareholder elects to receive
dividends in cash, dividends are distributed in the form of additional shares of
the Fund (purchased at their net asset value without a sales charge).
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.001 per share) and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has eight
series of shares, each of which constitutes a separately managed fund. The Trust
reserves the right to create additional series of shares. Currently, the Fund is
divided into three classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust is not required and has no current intention to hold annual
meetings of shareholders, although the Trust will hold special meetings of Fund
shareholders when in the judgment of the Trustees of the Trust it is necessary
or desirable to submit matters for a shareholder vote. Shareholders of each
series generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust. Under certain circumstances the
shareholders of one or more series could control the outcome of these votes.
Shares of each class of a series represent an equal pro rata interest in such
series and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, terms and conditions, except that: (a) each class
shall have a different designation; (b) each class of shares shall bear any
class expenses; and (c) each class shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution
arrangement, and each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class.
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The series of the Portfolio Trust will vote separately or together in
the same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of a Fund, shareholders
of the Fund would be entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Funds or the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record. Any shares so voted by a
Shareholder Servicing Agent will be deemed represented at the meeting for
purposes of quorum requirements.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
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.
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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.
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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.
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
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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.
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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.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors 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 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, 1775 Eye Street, N.W., Washington, D.C. 20006,
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.
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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, 1998 of each
of the Fund and the Portfolio are hereby incorporated herein by reference from
the Annual Report of the Fund dated October 31, 1998 as filed with the SEC.
Copies of such reports will be provided without charge to each person receiving
this Statement of Additional Information.
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PART C
ITEM 23. EXHIBITS
(a)(1) Amended and Restated Declaration of Trust, with establishments
and designations of series and further amendments. 1
(a)(2) Establishment and designation of series for Republic Taxable
Bond Fund, Republic Overseas Equity Fund and Republic
Opportunity Fund. 7
(b) By-Laws. 1
(c) Specimen certificate of shares of beneficial interest of
Republic Funds. 1
(d)(1) Master Investment Advisory Contract, with supplements
regarding Republic New York Tax-Free Bond Fund, Republic New
York Tax-Free Money Market Fund and Republic Equity Fund. 1
(d)(2) Amended and Restated Second Master Investment Advisory
Contract, with supplement regarding Republic U.S. Government
Money Market Fund. 1
(d)(3) Subadvisory Agreement between Alliance Capital Management L.P.
and Republic National Bank of New York regarding Republic
Equity Fund. 9
(d)(4) Subadvisory Agreement between Brinson Partners, Inc. and
Republic National Bank of New York regarding Republic Equity
Fund. 9
(e) Distribution Agreement regarding Republic U.S. Government
Money Market Fund, Republic New York Tax Free Money Market
Fund, Republic New York Tax Free Bond Fund, Republic Equity
Fund, Republic Taxable Bond Fund, Republic Overseas Equity
Fund and Republic Opportunity Fund. 9
(f) Not applicable.
(g)(1) Custodian Agreement - IBT. 1
(g)(2) Transfer Agency and Service Agreement - IBT. 1
(g)(3) Form of Custodian Agreement - Republic (to be filed by
amendment).
(g)(4) Form of Transfer Agency and Service Agreement - BISYS. 11
(h)(1) Form of Service Agreement. 1
<PAGE> 314
(h)(2) Administrative Agreement regarding Republic U.S. Government
Money Market Fund, Republic New York Tax-Free Money Market
Fund, Republic New York Tax-Free Bond Fund, Republic Equity
Fund, Republic Bond Fund, Republic Overseas Equity Fund and
Republic Opportunity Fund. 9
(h)(3) Amended and Restated Administrative Services Plan. 6
(i) Opinion of Counsel. 2
(j) Consent of Independent Auditors - (to be filed by amendment).
(k) Not applicable.
(l)(1) Initial Investor Representation letter regarding Republic
International Equity Fund and Republic Fixed Income Fund. 3
(l)(2) Initial Investor Representation letter regarding Republic
Equity Fund. 2
(m) Amended and Restated Master Distribution Plan, with
supplements regarding Republic U.S. Government Money Market
Fund, Republic New York Tax-Free Money Market Fund, Republic
New York Tax-Free Bond Fund, Republic Equity Fund, Republic
Bond Fund, Republic Overseas Equity Fund and Republic
Opportunity Fund. 6
(n) Schedule of Performance Computations. 1
(o) Multiple Class Plan. 5
(p)(1) Powers of Attorney of Trustees and Officers of Registrant and
Republic Portfolios. 8
(p)(2) Power of Attorney for Adrian Waters. 10
(p)(3) Power of Attorney for Walter B. Grimm. 12
------------------------------------
1. Incorporated herein by reference from post-effective amendment No.
35 to the registration statement on Form N-1A of the Registrant (File no.
33-7647) (the "Registration Statement") as filed with the Securities and
Exchange Commission (the "SEC") on January 23, 1996.
2. Incorporated herein by reference from post-effective amendment No.
33 to the Registration Statement as filed with the SEC on June 27, 1995.
3 . Incorporated herein by reference from post-effective amendment No.
29 to the Registration Statement as filed with the SEC on December 20, 1994.
<PAGE> 315
4. Incorporated herein by reference from post-effective amendment No.
36 to the Registration Statement as filed with the SEC on March 1, 1996.
5. Incorporated herein by reference from post-effective amendment No.
37 to the Registration Statement as filed with the SEC on April 4, 1996.
6. Incorporated herein by reference from post-effective amendment No.
39 to the Registration Statement as filed with the SEC on June 17, 1996.
7. Incorporated herein by reference from post-effective amendment No.
40 to the Registration Statement as filed with the SEC on November 27, 1996.
8. Incorporated herein by reference from post-effective amendment No.
42 to the Registration Statement filed with the SEC on January 31, 1997.
9. Incorporated herein by reference from post-effective amendment No.
46 to the Registration Statement as filed with the SEC on February 28, 1997.
10. Incorporated herein by reference from post-effective amendment No.
50 to the Registration Statement as filed with the SEC on January 2, 1998.
11. Incorporated herein by reference from post-effective amendment No.
52 to the Registration Statement as filed with the SEC on March 12, 1998.
12. Incorporated herein by reference from post-effective amendment No.
54 to the Registration Statement as filed with the SEC on August 24, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
<PAGE> 316
ITEM 25. INDEMNIFICATION
Reference is hereby made to Article IV of the Registrant's Declaration
of Trust. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees or officers of the
Registrant by the Registrant pursuant to the Declaration of Trust or otherwise,
the Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Investment Company Act of 1940 and, therefore, is unenforceable.
If a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees or officers
of the Registrant in connection with the successful defense of any act, suit or
proceeding) is asserted by such trustees or officers in connection with the
shares being registered, the Registrant will, unless in the opinion of its
Counsel, the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
Republic National Bank of New York ("Republic") acts as investment
adviser to Republic Funds and Republic Advisor Funds Trust, and is a subsidiary
of Republic New York Corporation ("RNYC"), 452 Fifth Avenue, New York, New York
10018, a registered bank holding company. Republic's directors and principal
executive officers, and their business and other connections for at least the
past two years, are as follows (unless otherwise noted by footnote, the address
of all directors and officers is 452 Fifth Avenue, New York, New York 10018):
NAME -- BUSINESS AND OTHER CONNECTIONS
KURT ANDERSEN
Vice Chairman and a Director of Republic New York Corporation ("RNYC") and
Republic Bank.
ANTHONY G. CHAPPELL
Executive Vice President and Director of Republic Bank.
CYRIL S. DWEK
Vice Chairman of the Board and Director of Republic Bank and RNYC.
ERNEST GINSBERG
Vice Chairman of the Board and Director of RNYC and Republic Bank.
NATHAN HASSON
Vice Chairman of the Board, Director and Treasurer of Republic Bank and Vice
Chairman of the Board and Director of RNYC.
<PAGE> 317
JEFFREY C. KEIL
President and Director of RNYC and Vice Chairman of the Board and Director of
Republic Bank.
PETER KIMMELMAN
A private investor and a Director of RNYC and Republic Bank.(1)
PAUL L. LEE
Executive Vice President and Director of Republic Bank; Executive Vice President
and General Counsel of RNYC.
LEONARD LIEBERMAN
Director of various companies, including Consolidated Cigar Corporation and
Outlet Communications, Inc.; Director of RNYC and Republic Bank.
WILLIAM C. MACMILLEN, JR.
President, William C. MacMillen & Co., Inc. (Investment Banking) and a Director
of RNYC and Republic Bank.(2)
PETER J. MANSBACH
Director and Chairman of the Executive Committee of Republic Bank and RNYC.
MARTIN F. MERTZ
Director of RNYC and Republic Bank.
CHARLES G. MEYER, JR.
President of Cord Meyer Development Co. and Director of Republic Bank.(3)
JAMES L. MORICE
Partner in the management consulting and executive search firm of Mirtz Morice,
Inc. and a Director of RNYC and Republic Bank.(4)
E. DANIEL MORRIS
President, Corsair Capital Corporation and Director of RNYC.
DR. JANET L. NORWOOD
Senior Fellow at The Urban Institute (research organization); Director of RNYC
and Republic Bank.
JOHN A. PANCETTI
Director of RNYC and Republic Bank.
VITO S. PORTERA
Vice Chairman of the Board, and a Director of RNYC and Republic Bank. Also,
Chairman of the Board of Republic International Bank of New York, the Florida
Edge Act subsidiary of Republic Bank.
<PAGE> 318
WILLIAM P. ROGERS
Partner, Rogers & Wells and Director of RNYC and Republic Bank.
SILAS SAAL
Vice Chairman and Director of Republic Bank and RNYC; Chief Trading Officer of
Republic Bank.
DOV C. SCHLEIN
President and Chief Operating Officer of Republic Bank, and a Director of RNYC
and Republic Bank.
RICHARD C. SPIKERMAN
Executive Vice President and Director of Republic Bank.
JOHN TAMBERLANE
Director of Republic Bank; President of the Consumer Bank Division of Republic
Bank.
WALTER H. WEINER
Chairman of the Board, Director and Chief Executive Officer of Republic Bank and
RNYC.
GEORGE T. WENDLER
Vice Chairman and Director of Republic Bank; Senior Credit Officer of Republic
Bank.
PETER WHITE
Senior Consultant and a Director of RNYC and Republic Bank.
- -----------------------------------
(1) 1270 Avenue of the Americas, Suite 3010, New York 10020.
(2) 254 Victoria Place, Lawrence, New York 11559.
(3) 111-15 Queens Boulevard, 2nd Floor, Forest Hills, New York, New York 11375.
(4) One Dock Street, Stamford, CT 06902
ITEM 27. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services (the "Sponsor") and its affiliates serve as
distributor and administrator for other registered investment companies.
(b) The information required by this Item 29 with respect to each
director or officer of BISYS is hereby incorporated herein by reference from
Form BD as filed by the Sponsor pursuant to the Securities Exchange Act of 1934
(File No. 8-32480).
<PAGE> 319
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of: Republic National
Bank of New York, 452 Fifth Avenue, New York, New York 10018; BISYS Fund
Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035; and Investors Bank &
Trust Company, N.A., 89 South Street, Boston, Massachusetts 02110.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
(a) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the Act were applicable to the Registrant
except that the request referred to in the third full paragraph thereof may only
be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value or
values of shares held by such requesting shareholders.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Republic Funds certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
registration statement on Form N-1A (File No. 33-7647) (the "Registration
Statement") to be signed on its behalf by the undersigned, thereto duly
authorized on the 30th day of December, 1998.
REPUBLIC FUNDS
By WALTER B. GRIMM**
- ---------------------------
Walter B. Grimm
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on December 30, 1998.
<PAGE> 320
WALTER B. GRIMM**
- ------------------------------
Walter B. Grimm
President
ADRIAN WATERS**
- ------------------------------
Adrian Waters
Treasurer and Principal Accounting
and Financial Officer
ALAN S. PARSOW*
- ------------------------------
Alan S. Parsow
Trustee
LARRY M. ROBBINS*
- ------------------------------
Larry M. Robbins
Trustee
MICHAEL SEELY*
- ------------------------------
Michael Seely
Trustee
FREDERICK C. CHEN*
- ------------------------------
Frederick C. Chen
Trustee
*By /S/ DAVID J. HARRIS
- ------------------------------
David J. Harris, as attorney-in-fact pursuant to a power of attorney filed as
Exhibit 19 to post-effective amendment No. 40.
**By /S/ CATHERINE BRADY
- ------------------------------
Catherine Brady, as attorney-in-fact pursuant to powers of attorney filed as
Exhibit 19 to post-effective amendment No. 40, Exhibit 19 to post-effective
amendment No. 46 and Exhibit 19 to post-effective amendment No. 52.
Republic Portfolios (the "Portfolio Trust") has duly caused this
amendment to the registration statement on Form N-1A (File No. 33-7647)
("Registration Statement") of Republic
<PAGE> 321
Funds (the "Trust") to be signed on its behalf by the undersigned, thereto duly
authorized on the 30th day of December, 1998.
REPUBLIC PORTFOLIOS
By WALTER B. GRIMM**
--------------------------
Walter B. Grimm
President
Pursuant to the requirements of the Securities Act of 1933, the
post-effective amendment to the Trust's Registration Statement has been signed
below by the following persons in the capacities indicated on December 30,
1998.
WALTER B. GRIMM**
- ----------------------------
Walter B. Grimm
President
ADRIAN WATERS**
- ----------------------------
Adrian Waters
Treasurer and Principal Accounting and Financial Officer of the Portfolio Trust
ALAN S. PARSOW*
- --------------------------
Alan S. Parsow
Trustee of the Portfolio Trust
LARRY M. ROBBINS*
- --------------------------
Larry M. Robbins
Trustee of the Portfolio Trust
MICHAEL SEELY*
- --------------------------
Michael Seely
Trustee of the Portfolio Trust
FREDERICK C. CHEN*
- --------------------------
Frederick C. Chen
Trustee of the Portfolio Trust
<PAGE> 322
*By /S/ DAVID J. HARRIS
--------------------------
David J. Harris, as attorney-in-fact pursuant to a power of attorney filed as
Exhibit 19 to post-effective amendment No. 40.
** /S/CATHERINE BRADY
--------------------------
Catherine Brady, as attorney-in-fact pursuant to powers of attorney filed as
Exhibit 19 to post-effective amendment No. 40, Exhibit 19 to post-effective
amendment No. 46 and Exhibit 19 to post-effective amendment No. 52.
