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Registration Nos. 33-7647
811-4782
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 71 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 72 [X]
(Check appropriate box or boxes)
HSBC INVESTOR FUNDS
(Exact name of registrant as specified in charter)
3435 Stelzer Road
Columbus, Ohio 43219-3035
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (617) 470-8000
Walter B. Grimm
3435 Stelzer Road
Columbus, Ohio 43219-3035
(Name and address of agent for service)
Please send copies of all communications to:
Allan S. Mostoff
Dechert
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
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on [date] pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)
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on [date] pursuant to paragraph (a) of Rule 485
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X 75 days after filing pursuant to paragraph (a)
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HSBC INVESTOR LIMITED MATURITY BOND FUND
Prospectus dated [ ]
a Series of
HSBC INVESTOR FUNDS
THESE SECURITIES HAVE BEEN NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
HSBC INVESTOR FUNDS TABLE OF CONTENTS
<S> <C>
Carefully review this important section, -- RISK/RETURN SUMMARY AND FUND EXPENSES
which summarizes the Fund's HSBC Investor Limited Maturity Bond Fund
investments, risks, and fees.
Review this section for information on -- INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
investment strategies and risks.
Review this section for details on the -- FUND MANAGEMENT
people and organizations who The Investment Adviser
provide services to the Fund. Portfolio Manager
The Distributor and Administrator
The Two-Tier Fund Structure
Review this section for details on how -- SHAREHOLDER INFORMATION
shares are valued, and how to purchase, Pricing of Fund Shares
sell and exchange shares. This section Purchasing and Adding to Your Shares
also describes related charges, and Selling Your Shares
payments of dividends and distributions. Distribution Arrangements/Sales Charge
Exchanging Your Shares
Dividends, Distributions and Taxes
</TABLE>
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RISK/RETURN SUMMARY AND FUND EXPENSES
The following is a summary of certain key information about the HSBC Investor
Limited Maturity Bond Fund (the "Fund"). You will find additional information
about the Fund, including a detailed description of the risks of an investment
in the Fund, after this summary.
<TABLE>
<CAPTION>
HSBC INVESTOR LIMITED MATURITY
BOND FUND
<S> <C>
Investment Objective The investment objective of the Fund is to realize
above-average total return, consistent with reasonable
risk, through investment primarily in a diversified
investment grade portfolio of U.S. Government
securities, corporate bonds, mortgage-backed securities
and other fixed income securities.
Principal The Fund seeks to achieve its investment objective by
Investment Strategies investing all of its assets in the HSBC Investor
Limited Maturity Bond 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
Limited Maturity Bond Fund or "feeder fund") is
investing all its assets in a second fund (the
Portfolio or "master fund").
The Portfolio invests primarily in investment grade
fixed income securities (with a stated maturity of
between 1 and 10 years) 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 Market Risk: The Fund's performance per share will
change daily based on many factors, including the
quality of the instruments in the Portfolio'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.
</TABLE>
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<TABLE>
<S> <C>
Credit Risk: The Fund could lose money if the issuer
of a fixed income security owned by the Portfolio
defaults on its financial obligation.
Interest Rate Risk: Changes in interest rates will
affect the yield and value of the Portfolio's
investments in debt securities.
Derivatives Risk: The Portfolio may invest in
derivative instruments (e.g., options and futures
contracts) to help achieve its investment objective.
The Portfolio intends to do so primarily for hedging
purposes. These investments could increase the Fund's
price volatility or reduce the return on your
investment.
Foreign Investment Risk: The Portfolio's investments
in foreign securities are riskier than 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, and lack of adequate company information.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF HSBC BANK
USA ("HSBC") AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
</TABLE>
4
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<TABLE>
<S> <C>
WHO MAY WANT TO INVEST? Consider investing in the Fund if you are:
Looking to add a monthly income component to
your investment portfolio
Seeking higher potential returns than
provided by money market funds
Willing to accept the risks of price and
income fluctuations
Investing short-term reserves
This Fund will not be appropriate for anyone:
Investing emergency reserves
Seeking safety of principal
The investment objective and strategies of the
Fund are not fundamental and may be changed
without approval of 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 will be
achieved.
</TABLE>
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PERFORMANCE BAR CHART AND TABLE
Performance bar chart and table for the Fund are not shown because shares of the
Fund were not offered prior to [ ], 2000.
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RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES*
As an investor in the Fund, you will pay the following fees and expenses.
Shareholder transactions fees are paid from your account. Annual operating
expenses are paid out of Fund assets, and are reflected in the share price.
Some share classes impose a back end sales charge (load) if you sell your shares
before a certain period of time has elapsed. This is called a Contingent
Deferred Sales Charge.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A SHARES B SHARES C SHARES Y SHARES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C> <C> <C> <C>
Maximum sales charge (load) on purchases (as a percentage of 5.00% None None None
offering price)
Maximum deferred sales charge (load) None 4.00% 1.00% None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
A SHARES B SHARES C SHARES Y SHARES
<S> <C> <C> <C> <C>
Management fee 0.40% 0.40% 0.40% 0.40%
Distribution (12b-1) fee 0.00%** 0.75% 0.75% 0.00%
Shareholder servicing fee 0.25% 0.25% 0.25% 0.00%
Other operating expenses 0.55% 0.55% 0.55% 0.55%
Total other expenses: 0.00% 0.00% 0.00% 0.00%
Fee waiver and/or expense reimbursement *** 0.10% 0.10% 0.10% 0.10%
Total Fund operating expenses 1.10% 1.85% 1.85% 0.85%
</TABLE>
*This table reflects the combined fees for both the HSBC Investor Limited
Maturity Bond Fund and the HSBC Investor Limited Maturity Bond Portfolio.
**There is a 12b-1 plan for Class A shares, which authorizes payments up to
0.25% of the Fund's assets. To date, no payments under the 12b-1 plan have been
made.
*** Pursuant to an expense limitation agreement
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RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE*
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year, the Fund's
operating expenses remain the same and the reinvestment of any dividends and
distributions. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 3
YEAR YEAR
<S> <C> <C>
CLASS A SHARES $607 $853
CLASS B SHARES
Assuming redemption $588 $803
Assuming no redemption $188 $603
CLASS C SHARES
Assuming redemption $288 $603
Assuming no redemption $188 $603
CLASS Y SHARES $87 $293
</TABLE>
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* The table reflects the combined fees for both the HSBC Investor Limited
Maturity Bond Fund and the HSBC Investor Limited Maturity Bond Portolio.
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INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The investment objective of the Fund is to realize above-average total return,
consistent with reasonable risk, through investment primarily in a diversified
portfolio of investment grade securities including 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 HSBC Investor Limited Maturity Bond Portfolio, which has the same
investment objective as the Fund. The Fund's investment objective is not
fundamental and may be changed without the approval of Fund shareholders.
Consistent with the investment objective of the Fund, the Portfolio:
normally will 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 it securities to brokers, dealers, and other financial
institutions for the purpose of realizing additional income. The Portfolio
also may 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. The
Portfolio will use derivative instruments for hedging purposes.
may engage in repurchase transactions, where the portfolio 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 of commercial banks and savings and loan
associations. These instruments include certificates of deposit, time,
deposits, and bankers' acceptances.
may purchase and sell securities on a when-issued basis, in which a
security's price and yield are fixed on the date of commitment but payment
and delivery are scheduled for a future date.
may take temporary defensive positions that are inconsistent with the
Portfolio's principal investment strategies in attempting to respond to
adverse market, economic, political, or other conditions. This may prevent
the Portfolio from achieving its investment objective.
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HSBC Asset Management (Americas) Inc. ("HSBC" or "Adviser") selects securities
for the Portfolio based on various factors, including the outlook for the
economy, and anticipated changes in interest rates and inflation. The Adviser
may sell securities when it believes that expected risk-adjusted return is low
compared to other investment opportunities.
10
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RISK FACTORS
An investment in the Fund is subject to investment risks, including the possible
loss of the principal amount invested. The Fund's performance per share will
change daily based on many factors, including fluctuation in interest rates, the
quality of the instruments in the Fund's investment portfolio, national and
international economic conditions and general market conditions.
The Fund and the Portfolio will be subject to the following risks:
Fixed Income Securities: Fixed income securities may accrue income that is
distributable to shareholders even though the income may not yet have been
paid to the Portfolio. If so, the Portfolio may need to liquidate some of
its holdings and forego the purchase of additional income-producing assets.
Credit Risks: The Fund could lose money if the issuer of a fixed income
security owned by the Portfolio is unable to meet its financial
obligations.
Interest Rate Risk: The risk that debt prices overall will decline over
short or even long periods due to rising interest rates. A rise in
interest rates typically causes a fall in values while a fall in rates
typically causes a rise in values.
Market Risk: The risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably. These fluctuations may
cause a security to be worth less than the price originally paid for
it, or less than it was worth at an earlier time. Market risk may
affect a single issuer, industrial sector of the economy or the market
as a whole.
Derivatives: The Portfolio may invest in various types of derivative
securities for hedging purposes. 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, many 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
Portfolio or protect its assets from declining in value. In fact,
investments in derivative securities may actually lower the Fund's return
and increase the volatility of the Fund's net asset value 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 Portfolio from selling unfavorable positions,
which could result in adverse consequences.
The Portfolio may invest in different kinds of derivative securities. The
Fund's Statement of Additional Information ("SAI") contains a detailed
description of the derivative securities in which the Portfolio may invest
and a discussion of the risks associated with each security. To request an
SAI, please refer to the back cover of the Prospectus.
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Swap: A swap is an agreement to change the return generated by one
instrument for the return generated by another instrument. The use of
swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary
portfolio securities transactions. If the other party to the swap
defaults, the Portfolio may lose interest payments that it is
contractually entitled to receive and may, in some cases, lose the
entire principal value of the investment security.
Mortgage-Backed Securities: Mortgage- and asset-backed securities are debt
instruments that are secured by interests in pools of mortgage loans or
other financial assets. 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 duration's 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 Portfolio may not receive all or
part of its principal because the issuer has defaulted on its obligations.
"When-Issued" Securities: The price and yield of 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) 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 Portfolio's payment obligation with respect to that
security.
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 underlying securities at a time when the value
of these securities has declined, the Portfolio 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.
Foreign Securities: 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, liquidity, and government regulation.
Illiquid Securities: The Portfolio may, at times, hold securities that are
illiquid, by virtue of the absence of a readily available market for
certain of its investments, or because of legal or contractual restrictions
on sale. The Fund could lose money if the Portfolio is unable to dispose of
an investment at a time that is most beneficial to the Portfolio. The
Portfolio may invest up to 15% of its assets in illiquid securities.
Returns Are Not Guaranteed: An investment in the Fund is neither insured
nor guaranteed by the U.S. Government. Shares of the Fund are not deposits
or obligations of, or guaranteed
12
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or endorsed by HSBC 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.
13
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FUND MANAGEMENT
THE INVESTMENT ADVISER
HSBC Asset Management (Americas) Inc., 140 Broadway, New York, NY 10005 is the
adviser for the Fund. HSBC manages more than $6.1 billion of assets of
individuals, pension plans, corporations and institutions. Through its portfolio
management team, HSBC makes the day-to-day investment decisions and continuously
reviews, supervises and administers the Fund's investment programs. For these
advisory services, the Fund will pay the Adviser 0.40% based on the Fund's
average net assets.
PORTFOLIO MANAGER
Mr. Edward Merkle is responsible for the day-to-day management of the Fund's
portfolio. Mr. Merkle joined the Adviser in 1984 and is responsible for managing
institutional and retail fixed income portfolios.
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THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Fund's administrator (the "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 (the "Distributor") of Fund 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.
The SAI has more detailed information about the Investment Adviser and other
service providers.
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THE TWO-TIER FUND STRUCTURE
The Fund seeks to achieve its investment objectives by investing all of its
assets in the HSBC Investor Limited Maturity Bond Portfolio a series of a
separate open-end investment company, having the same investment objectives as
the Fund. This is referred to as a "master/feeder" arrangement because one fund
(the "feeder" fund) "feeds" its assets into another fund (the "master fund").
Shareholders should carefully consider the risk of investing in the two-tier
investment structure. For example, other mutual funds and institutional
investors may invest in the Portfolio on the same terms and conditions as the
Fund (although they may have different sales commissions and other operating
expenses that may generate different returns). As with traditionally structured
funds that 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 Fund ("feeder funds"). Additionally, the
Portfolio may become less diverse, resulting in increased Portfolio operating
expenses.
Except as permitted, whenever the Fund is requested to vote on a matter
pertaining to its 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 Fund may withdraw its investment in the 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.
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SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
HOW NAV IS CALCULATED
The NAV for each class of shares is calculated by dividing the total value of
the Fund's investments and other assets attributable to a class, less any
liabilities, by the total number of outstanding shares of that class:
Total Assets - Liabilities
--------------------------
NAV = Number of Shares
Outstanding
The value of assets in the Fund's portfolio or held by the Portfolio is
determined on the basis of their market or other fair value.
The net asset value per share (NAV) 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.
The New York Stock Exchange is open every weekday except for the days on which
national holidays are observed.
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. If you sell Class B Shares or Class C Shares, a contingent deferred
sales load may apply, which would reduce the amount of money paid to you by the
Fund. For more information about sales charges, see the section on "Distribution
Arrangements/Sales Charges."
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PURCHASING AND ADDING TO YOUR SHARES
You may purchase shares of the Fund through the 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>
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MINIMUM
INITIAL MINIMUM
ACCOUNT TYPE INVESTMENT SUBSEQUENT
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<S> <C> <C>
CLASS A, CLASS B, CLASS C
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Regular $ 1,000 $ 100
(non-retirement)
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Retirement (IRA) $ 250 $ 100
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Automatic $ 250 $ 25
Investment Plan
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CLASS Y* $1,000,000 N/A
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</TABLE>
* HSBC clients that maintain an investment management account are not subject to
the minimum initial investment requirements.
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.
The Fund may waive its minimum purchase requirement, and the Distributor may
reject a purchase order if the Distributor considers it in the best interest of
the Fund and its shareholders.
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AVOID 31% TAX WITHHOLDING
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemption's paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules, or if you have been notified by the IRS that you are subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the IRS ensures it will collect taxes otherwise due. Any amounts withheld
may be credited against your U.S. federal income tax liability. To avoid tax
withholding. make sure you provide your correct Tax Identification Number
(Social Security Number for most investors) on your account application.
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INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL OR BY OVERNIGHT SERVICE
Initial Investment:
1. If purchasing through your financial advisor or brokerage account,
simply tell your advisor or broker that you wish to purchase shares of
the Fund and he or she will take care of the necessary documentation.
For all other purchases, follow the instructions below.
2. Carefully read, complete, and sign the account application.
Establishing your account privileges now saves you the inconvenience
of having to add them later.
3. Make check, bank draft or money order payable to "HSBC Investor Funds"
and include the name of the appropriate Fund(s) on the check.
Mail to: HSBC Investor Funds, P.O. Box 182845, Columbus, Ohio 43218-2845.
Subsequent:
4. Use the investment slip attached to your account statement.
Or, if unavailable,
5. Include the following information in writing:
Fund name
Share class
Amount invested
Account name
Account number
6. Mail investment slip and check to: HSBC Investor Funds, P.O. Box
182845, Columbus, Ohio 43218-2845.
Include your account number on your check.
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PURCHASING AND ADDING TO YOUR SHARES CONTINUED
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.
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
1-800-782-8183. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-782-8183 to arrange a transfer from your bank account.
BY WIRE TRANSFER
For information on how to request a wire transfer, call 1-800-782-8183.
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SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES CONTINUED
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in the Fund from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $25, once
you've invested the $250 minimum required to open the account.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application. Make
sure you note:
Your bank name, address and account number
The amount you wish to invest automatically (minimum $25)
How often you want to invest (every month, 4 times a year, twice a year
or once a year)
Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-782-8183 for an enrollment form.
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another HSBC Investor Fund without a sales charge.
You must maintain the minimum balance in each Fund into which you plan to
reinvest dividends or the reinvestment will be suspended and your dividends paid
to you. The Fund may modify or terminate this reinvestment option without
notice. You can change or terminate your participation in the reinvestment
option at any time by calling 1-800-782-8183.
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 Class C Shares,
because Class A Shares have lower operating expenses. Class Y Shares receive the
highest dividends because they have the lowest operating expenses. Capital gains
are distributed at least annually.
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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, which
may be taxable.
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 accepted 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".
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 sections on "Distribution Arrangements/Sales
Charges" and "Exchanging your Shares" 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 that will affect your redemption. For all
other sales transactions, follow the instructions below.
BY TELEPHONE
(unless you have declined telephone sales privileges)
1. Call 1-800-782-8183 with instructions as to how you wish to receive
your funds (mail, wire, electronic transfer). (See "General Policies
on Selling Shares -- Verifying Telephone Redemptions")
BY MAIL OR OVERNIGHT SERVICE
(See "General Policies on Selling Shares -- Redemption's in Writing Required")
1. Call 1-800-782-8183 to request redemption forms or write a letter of
instruction indicating:
your Fund and account number
22
<PAGE>
amount you wish to redeem
address where your check should be sent
account owner signature
2. Mail to: HSBC Investor Funds, P.O. Box 182845, Columbus, Ohio
48218-2845.
23
<PAGE>
SHAREHOLDER INFORMATION
SELLING YOUR SHARES CONTINUED
WIRE TRANSFER
You must indicate this option on your account application.
Call 1-800-782-8183 to request a wire transfer.
If you call by 12:00 p.m. Eastern time, your payment will normally be wired to
your bank on the same business day. 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 will normally be wired on the second business day after your call.
The Fund may charge a wire transfer fee.
NOTE: Your financial institution may also charge a separate fee.
ELECTRONIC REDEMPTIONS
Call 1-800-782-8183 to request an electronic redemption. Your bank must
participate in the Automated Clearing House (ACH) and must be a U.S. bank. If
you call by 4:00 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds credited within 7 days. Your bank
may charge for this service.
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 1-800-782-8183.
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.
24
<PAGE>
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 any
of the following:
Redemptions over $10,000;
Your account registration or the name(s) on 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; or
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 that 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 he 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.
25
<PAGE>
SHAREHOLDER INFORMATION
SELLING YOUR SHARES CONTINUED
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.
CLOSING OF SMALL ACCOUNTS
If your account falls below $50 due to redemptions, 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.
26
<PAGE>
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 Fund.
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales Charge (Load) Front-end sales charge: No front-end No front-end No front-end
reduced sales charges sales charge. A sales sales charge.
available Sales Sales contingent charge. A
Charge As Charge As deferred sales contingent
A % Of A % Of charge (CDSC) deferred
Offering Your may be imposed sales charge
Price Investment on shares (CDSC) may
redeemed within be imposed
four years after on shares
purchase; shares redeemed
up to $49,999 5.00% 5.26% automatically within one
$50,000 up to $99,999 4.50% 4.71% convert to Class year after
$100,000 up to $249,999 3.75% 3.90% A shares after 6 purchase.
$250,000 up to $499,999 2.50% 2.56% years
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above 1.00% 1.01%
Distribution (12-1) Subject to combined annual Subject to Subject to No
Fee and Service distribution and shareholder combined annual combined distribution or
Fees servicing fees of up to 0.25% distribution annual services fees.
annually of the Fund's total and shareholder distribution
average total net assets. servicing fees and
of up to 1.00% shareholder
annually of the servicing
Fund's average fees of up
daily net assets. to 1.00%
annually of the
Fund's average
daily net
assets.
Fund Expenses Lower annual expenses than Higher annual Higher annual Lower annual
Class B, Class C. expenses than expenses than expenses than
Class A or Class A Class A, B, or
or Class Y shares. shares. C shares
</TABLE>
27
<PAGE>
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES CONTINUED
CLASS B SHARES AND CLASS C SHARES
Although Class B Shares and Class C Shares are not subject to a sales charge
when a shareholder exchanges Class B Shares and Class C Shares of another Trust
portfolio, they may be subject to a contingent deferred sales charge (CDSC) when
redeemed. See "Exchanging Your Shares." In addition, Class B and Class C Shares
are subject to an aggregate annual distribution and shareholder servicing fees
of up to 1.00% of the Funds' assets. Shareholders of Class B Shares and Class C
Shares pay higher annual expenses than shareholders of Class A Shares, and
Class Y Shares.
DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES
The Fund has adopted Distribution ("12b-l") plans for Class A, Class B, and
Class C Shares. 12b-1 fees compensate the Distributor and other dealers and
investment representatives for services and expenses relating to the sale and
distribution of the Funds' 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 0.25% 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 and Class Y Shares.
Class Y Shares do not pay a 12b-1 fee.
The higher 12b-1 fees 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 Shares are subject to a shareholder
servicing fee of up to 0.25%. Class B and Class C Shares are subject to a
shareholder servicing fee of up to 1.00%.
The aggregate of the 12b-1 fees and shareholder servicing fees will not exceed
0.25% for the Class A Shares, and 1.00% 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.
28
<PAGE>
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARES 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 investment advisers or
their affiliates or invested in any of the Funds.
Shares purchased for trust or other advisory accounts established with the
investment advisers or their affiliates.
Shares purchased by directors, trustees, employees, and family members of
the investment 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
investment 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. You can combine accounts of multiple Funds
(excluding the Money Market Funds) or accounts of immediate family
household members (spouse and children under 21) to achieve reduced sales
charges.
29
<PAGE>
CLASS B SHARES
Class B Shares of the Fund 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"). They are redeemed less than three years after purchase. In such
cases, the CDSC will be as illustrated in the chart.
Class B Shares of the Fund will be subject to a declining CDSC if Class B Shares
are redeemed within four years after purchase. In such cases, the CDSC will be
as illustrated in the chart.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CDSC AS A % OF DOLLAR
YEARS SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
--------------------------------------------------------------------------------
<S> <C>
0-1 4.00%
1-2 3.00%
2-3 2.00%
3-4 1.00%
More than four 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. There is no CDSC on reinvested dividends or
distribution.
If you sell some but not all of your Class B Shares, 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).
30
<PAGE>
DISTRIBUTION ARRANGEMENTS/SALES CHARES CONTINUED
CONVERSION FEATURE - CLASS B SHARES
Class B Shares will convert automatically to Class A Shares of the same
Fund six years 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 Class B shares
converted.
CLASS C SHARES
Class C Shares of the Fund 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 Fund, your redemption may be subject to a 1.00%
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.
31
<PAGE>
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
HSBC Investor Fund, usually without paying additional sales charges (see "Notes
on Exchanges"). 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.
Exchanges may be made by sending a written request to HSBC Investor Funds, P.O.
Box 182845, Columbus, Ohio 43218-2845 or by calling 1-800-782-8183. 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.
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 carefully the Prospectus of any Fund into which you wish to
exchange shares.
32
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information is meant as a general summary for U.S. taxpayers.
Please see the SAI for more information. Because everyone's tax situation
is unique, you should rely on your own tax advisor for advice about the
particular federal, state and local tax consequences to you of investing in
the Fund.
The Fund generally will not have to pay income tax on amounts it
distributes to shareholders, although shareholders will be taxed on
distributions they receive.
Any income the Fund receives in the form of interest and dividends is paid
out, less expenses, to its shareholders. Shares begin accruing interest and
dividends on the day they are purchased.
Dividends are paid monthly. Capital gains 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 generally taxable as ordinary income.
If the Fund designates a dividend as a capital gain distribution (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more
than 12 months), you will pay tax on that dividend at the long-term capital
gains tax rate, no matter how long you have held your Fund shares.
Dividends are taxable in the year in which they are paid or deemed paid,
even if they appear on your account statement the following year. If the
Fund declares a dividend in October, November, or December of a year and
distributes the dividend in January of the next year, you may be taxed as
if you received it in the year declared rather than the year received.
There may be tax consequences to you if you dispose of your shares in the
Fund, 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 held them.
You will be notified before February 1 of 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.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you
if you fail to provide the Fund with your correct taxpayer identification
number or to make required certifications, or if you have been notified by
the IRS that you are subject to backup withholding. Backup withholding is
33
<PAGE>
not an additional tax, but is a method in which the IRS ensures that it
will collect taxes otherwise due. Any amounts withheld may be credited
against your U.S. federal income tax liability.
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 or capital gains 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.
34
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
YOU CAN GET FREE COPIES OF FUNDS OF REPORTS AND THE SAI, PROSPECTUSES OF OTHER
FUNDS IN THE HSBC 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:
HSBC Investor Funds
P.O. Box 182845, Columbus, Ohio 43218-2845
Telephone: 1-800-782-8183
You can review and copy the Fund's annual and semi-annual reports and SAIs at
the Public Reference Room of the Securities and Exchange Commission. You can get
text-only copies:
For a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-0102 or by electronic request at
[email protected]. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 202-942-8090 or
800-SEC-0330.
Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-4782.
35
<PAGE>
HSBC INVESTOR GROWTH AND INCOME FUND
Prospectus dated [ ], 2000
a Series of
HSBC INVESTOR FUNDS
THESE SECURITIES HAVE BEEN NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
HSBC INVESTOR FUNDS TABLE OF CONTENTS
<S> <C>
Carefully review this important section, -- RISK/RETURN SUMMARY AND FUND EXPENSES
which summarizes the Fund's HSBC Investor Growth and Income Fund
investments, risks, and fees.
Preview this section for information on -- INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
investment strategies and risks.
Review this section for details on the -- FUND MANAGEMENT
people and organizations who The Investment Adviser
provide services to the Fund. Portfolio Manager
Similar Fund Performance
The Distributor and Administrator
Review this section for details on how -- SHAREHOLDER INFORMATION
shares are valued, and how to purchase, Pricing of Fund Shares
sell and exchange shares. This section also Purchasing and Adding to Your Shares
describes related charges, and payments of Selling Your Shares
dividends and distributions. Distribution Arrangements/Sales Charge
Exchanging Your Shares
Dividends, Distributions and Taxes
</TABLE>
1
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
The following is a summary of certain key information about the HSBC Growth and
Income Fund (the "Fund"). You will find additional information about the Fund,
including a detailed description of the risks of an investment in the Fund,
after this summary.
<TABLE>
<CAPTION>
HSBC INVESTOR GROWTH AND INCOME FUND
<S> <C>
INVESTMENT OBJECTIVE The Fund's investment objective is long-term growth of
capital and current income.
PRINCIPAL The Fund normally invests at least 65% of its total
INVESTMENT STRATEGIES assets in common stocks, preferred stocks, and
convertible securities. The Fund may invest the balance
of its assets in various types of fixed income
securities and in money market instruments. These fixed
income securities may include U.S. Government
securities, corporate bonds, asset-backed securities
(including mortgage-backed securities), obligations of
savings and loans and U.S. and foreign banks,
commercial paper and related repurchase agreements. The
Adviser selects securities for the portfolio that
appear to be undervalued, some of which will be
income-producing. In selecting securities, the Adviser
uses quantitative and fundamental research to identify
stocks meeting either or both growth and income
criteria. Investments will be sold if they no longer
meet the Fund's criteria for income-oriented or
growth-oriented instruments.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL INVESTMENT RISKS Market Risk: Risk that the value of a Fund's
investments will fluctuate as the stock market
fluctuates and that stock prices overall may decline
over short or longer-term periods.
Interest Rate Risk: Risk that changes in interest rates
will affect the value of a Fund's investments in
income-producing or fixed-income or debt securities.
Increases in interest rates may cause the value of the
Fund's investments to decline.
Credit Risk: Risk that the issuer of a debt security
will be unable or unwilling to make timely payments of
interest or principal, or to otherwise honor its
obligations.
Prepayment Risk: With respect to mortgage-backed
securities, the risk that the principal amount of the
underlying mortgages' will be repaid prior to the
bond's maturity date. When such repayment occurs, no
additional interest will be paid on the investment.
Security-Specific Risk: Risk that the issuer will be
unable to achieve its earnings or growth expectations.
Other important things for you to note:
You may lose money by investing in the Fund.
Because the value of the Fund's investments will
fluctuate with market conditions, so will the
value of your investment in the Fund.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF
HSBC BANK USA ("HSBC")AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
GOVERNMENT AGENCY.
RISK/RETURN SUMMARY AND FUND EXPENSES
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
This Fund will not be appropriate for anyone:
seeking monthly income
pursuing a short-term goal or investing
emergency reserves
seeking safety of principal
The investment objective and strategies of the Fund are
not fundamental and may be changed without approval of
Fund shareholders. If there is a change in the
investment objective and strategies of the Fund,
shareholders should consider whether the Fund remains
an appropriate investment in light of their then
current financial position and needs.
</TABLE>
4
<PAGE>
PERFORMANCE BAR CHART AND TABLE
Performance bar chart and table for the Fund are not shown because shares of the
Fund were not offered prior to [ ] ____________, 2000. HSBC's track record in
managing a similar mutual fund is discussed under "Fund Management."
5
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
As an investor in the Fund, you will pay the following fees and expenses.
Shareholder transactions fees are paid from your account. Annual operating
expenses are paid out of Fund assets, and are reflected in the share price.
Some share classes impose a back end sales charge (load) if you sell your shares
before a certain period of time has elapsed. This is called a Contingent
Deferred Sales Charge.
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES A SHARES B SHARES C SHARES Y SHARES
(FEES PAID BY YOU DIRECTLY)
<S> <C> <C> <C> <C>
Maximum sales charge (load) on purchases 5.00% None None None
Maximum deferred sales charge (load) None 4.00% 1.00% None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(FEES PAID FROM FUND ASSETS)
A SHARES B SHARES C SHARES Y SHARES
<S> <C> <C> <C> <C>
Management fee 0.55% 0.55% 0.55% 0.55%
Distribution (12b-1) fee 0.00%* 0.75% 0.75% None
Shareholder servicing fee 0.25% 0.25% 0.25% None
Other operating expenses 0.31% 0.31% 0.31% 0.31%
0.56% 0.56% 0.56% 0.31%
Total other expenses: 0.56% 0.56% 0.56% 0.31%
Total Fund operating expenses 1.11% 1.86% 1.86% 0.86%
</TABLE>
*There is a 12b-1 plan for Class A shares, which authorizes payments up to 0.25%
of the Fund's assets. To date, no payments under the 12b-1 plan have been made.
6
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
EXPENSE EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumed that your investment has a 5% return each year the Fund's
operating expenses remain the same and the reinvestment of any dividends and
distributions. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 3
YEAR YEAR
<S> <C> <C>
Class A Shares $608 $835
Class B Shares
Assuming redemption $589 $785
Assuming no redemption $189 $585
Class C Shares
Assuming redemption $289 $585
Assuming no redemption $189 $585
Class Y Shares $ 88 $274
</TABLE>
7
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
This section of the Prospectus provides a more complete description of the
principal investment objective and policies of the Fund. Of course, there can be
no assurance that the Fund will achieve its investment objective. Additional
descriptions of the Fund's risks, strategies, and investments, as well as other
strategies and investments not described below, may be found in the Fund's
Statement of Additional Information or SAI.
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
The Fund's investment objective is long-term growth of capital and current
income. The Fund seeks to achieve this objective by investing at least 65% of
its total assets in common stocks, preferred stocks, and convertible securities.
The Fund may invest up to 35% of its total assets in fixed income securities and
money market instruments. The fixed income securities may include U.S.
Government securities, corporate bonds, asset-backed securities (including
mortgage-backed securities), obligations of savings and loans and U.S. and
foreign banks, commercial paper and related repurchase agreements.
The Fund's criteria for selecting equity securities are the issuer's managerial
strength, competitive position, price to earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value. The
Fund's Adviser uses quantitative and fundamental research to identify stocks
meeting either or both growth and income criteria and selects securities for the
portfolio that appear to be undervalued. The Fund may invest in securities that
appear to be undervalued because the value or potential for growth has been
overlooked by many investors or because recent changes in the economy, industry
or the company have not yet been reflected in the price of the securities. In
order to increase the Fund's portfolio income, the Fund may invest in securities
that provide current dividends or, in the opinion of the Adviser, have a
potential for dividend growth in the future. Investments will be sold if they no
longer meet the Fund's criteria for income-oriented or growth-oriented
instruments.
The Fund will place greater emphasis on capital appreciation as compared to
income, although changes in market conditions and interest rates will cause the
Fund to vary emphasis of these two elements of its investment program in order
to meet its investment objective.
8
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
RISK AND CONSIDERATIONS
The principal risk of investing in the Fund is market risk, which is the risk
that the value of a Fund's investments will fluctuate as the stock market
fluctuates and that stock prices overall will generally decline over short or
longer-term periods. In addition, there is the risk that stocks selected because
they represent value will remain undervalued or out-of-favor. Therefore, the
Fund could underperform other stock investments. The Fund's investments in
fixed-income securities and money market securities may have interest rate risk,
prepayment risk and credit risk. Increases in interest rates may cause the value
of the Fund's investments to decline. Prepayment risk may expose the Fund to
potentially lower return upon subsequent reinvestment of the principal.
Portfolio Turnover. The Fund is actively managed and, in some cases the Fund's
portfolio turnover, may exceed 100%. A higher rate of portfolio turnover
increases brokerage and other expenses, which must be borne by the Fund and its
shareholders and may result in a lower net asset value. High portfolio turnover
(over 100%) also may result in the realization of substantial net short-term
capital gains, which when distributed are taxable to shareholders. The trading
costs and tax affects associated with turnover may adversely affect the Fund's
performance.
Temporary Defensive Positions. In order to meet liquidity needs or for temporary
defensive purposes, the Fund may invest up to 100% of its assets in fixed income
securities, money market securities, certificates of deposit, bankers'
acceptances, commercial paper or in equity securities which, in the Adviser's
opinion, are more conservative than the types of securities that the Fund
typically invests in. To the extent the Fund is engaged in temporary or
defensive investments, the Fund will not be pursuing its investment objective.
9
<PAGE>
FUND MANAGEMENT
THE INVESTMENT ADVISER
HSBC Asset Management (Americas) Inc. (the "Adviser"), 452 Fifth Avenue, New
York, NY 10018 is the adviser for the Fund. The Adviser manages more than $6.1
billion of assets of individuals, pension plans, corporations and institutions.
Through its portfolio management team, HSBC makes the day-to-day investment
decisions and continuously reviews, supervises and administers the Fund's
investment programs. For these advisory services, the Fund will pay the Adviser
0.55% based on the Funds average net assets.
PORTFOLIO MANAGER
Mr. Fredric Lutcher III, Managing Director, U.S. Equities, is responsible for
the day-to-day management of the Fund. Prior to joining the Adviser in late
1997, Mr. Lutcher worked as Vice President and Senior Mutual Fund Portfolio
Manager at Merrill Lynch Asset Management for nine years.
SIMILAR FUND PERFORMANCE
The following table provides information concerning the historical total return
performance of the Class A Shares class of the HSBC Growth and Income Fund (the
"Similar Fund"), a series of the HSBC Mutual Funds Trust. The Similar Fund's
investment objectives, policies and strategies are substantially similar to
those of the Fund and is currently managed by the same portfolio manager. While
the investment objectives, policies and risks of the Similar Fund and the Fund
are similar, they are not identical, and the performance of the Similar Fund and
the Fund will vary. The data is provided to illustrate the past performance of
the Adviser in managing a substantially similar investment portfolio and does
not represent the past performance of the Fund or the future performance of the
Fund or its portfolio manager. Consequently, potential investors should not
consider this performance data as an indication of the future performance of the
Fund or of its portfolio manager.
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
10
<PAGE>
AVERAGE ANNUAL TOTAL RETURN FOR THE SIMILAR FUND AND FOR ITS BENCHMARK INDEX FOR
PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SINCE INCEPTION
SIMILAR FUND/BENCHMARK 1 YEAR 5 YEARS 10 YEARS (OCTOBER 9, 1992)
---------------------- ------ ------- -------- ----------------
<S> <C> <C> <C> <C>
HSBC GROWTH AND INCOME FUND -2.22% 13.77% 18.87% 15.27%
S&P 500(R) INDEX* 21.03% 27.56% 28.54% 21.53%
</TABLE>
-----------------
* The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index
containing common stocks of 500 industrial, transportation, utility and
financial companies, regarded as generally representative of the U.S. stock
market. The Index reflects income and distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing.
11
<PAGE>
THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Fund's administrator (the "Administrator").
Management and administrative services of BISYS include providing office space,
equipment and clerical personnel to the Funds and supervising custodial,
auditing, valuation, bookkeeping, legal and dividend disbursing services.
BISYS also serves as the distributor (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.
The Fund's Statement of Additional Information has more detailed information
about the Adviser, Distributor and Administrator, and other service providers.
12
<PAGE>
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
HOW NAV IS CALCULATED
The NAV for each class of shares is calculated by dividing the total value of a
Fund's investments and other assets attributable to a class, less any
liabilities, by the total number of outstanding shares of that class:
Total Assets - Liabilities
--------------------------
NAV = Number of Shares
Outstanding
The net asset value per share (NAV) 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. The New York Stock Exchange is open every weekday
except for the days on which national holidays are observed. 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. If you sell
Class B Shares or Class C Shares, a contingent deferred sales load may apply,
which would reduce the amount of money paid to you by the Fund. For more
information about sales charges, see the section on "Distribution
Arrangements/Sales Charges."
13
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
You may purchase shares of the Fund through the 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 SUBSEQUENT
INVESTMENT
<S> <C> <C>
CLASS A, CLASS B, CLASS C
Regular $ 1,000 $100
Retirement (IRA) $ 250 $100
Automatic $ 250 $ 25
CLASS Y SHARES* $1,000,000 N/A
</TABLE>
* HSBC clients that maintain an investment management account are not subject to
the minimum initial investment requirements.
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.
The Fund may waive its minimum purchase requirement, and the Distributor may
reject a purchase order if the Distributor 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, or if you have been notified by the IRS that you are subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the IRS ensures it will collect taxes otherwise due. Any amounts withheld
may be credited against your U.S. federal income tax liability. To avoid tax
withholding, make sure you provide your correct Tax Identification Number
(Social Security Number for most investors) on your account application.
14
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
BY REGULAR MAIL OR BY OVERNIGHT SERVICE
Initial Investment:
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Fund 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 "HSBC Investor" Funds
and include the name of the appropriate Fund(s) on the check.
3. Mail to: HSBC Investor Funds, PO Box 182845, Columbus, Ohio 43218-2845.
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
3. Mail to: HSBC Investor Funds, PO Box 182845, Columbus, Ohio 43218-2845.
15
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
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.
1. Mail investment slip and check to: HSBC Investor Funds, PO Box 182845,
Columbus, Ohio 43218-2845.
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
1-800-782-8183. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-782-8183 to arrange a transfer from your bank account.
BY WIRE TRANSFER
For information on how to request a wire transfer, call 1-800-782-8183.
16
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES CONTINUED
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in the Fund from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $25, once
you've invested the $250 minimum required to open the account.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application. Make
sure you note:
Your bank name, address and account number
The amount you wish to invest automatically (minimum $25)
How often you want to invest (every month, 4 times a year, twice a year
or once a year)
Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-782-8183 for an enrollment form.
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another HSBC Investor Fund without a sales charge.
You must maintain the minimum balance in each Fund into which you plan to
reinvest dividends or the reinvestment will be suspended and your dividends paid
to you. The Fund may modify or terminate this reinvestment option without
notice. You can change or terminate your participation in the reinvestment
option at any time by calling 1-800-782-8183.
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 Class C Shares,
because Class A Shares have lower operating expenses. Class Y Shares receive the
highest dividends because they have the lowest operating 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, which
may be taxable.
17
<PAGE>
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 accepted 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."
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 sections on "Distribution Arrangements/Sales
Charges" and "Exchanging your Shares."
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 that will affect your redemption. For all
other sales transactions, follow the instructions below.
BY TELEPHONE
(unless you have declined telephone sales privileges)
1. Call 1-800-782-8183 with instructions as to how you wish to receive
your funds (mail, wire, electronic transfer). (See "General Policies on Selling
Shares -- Verifying Telephone Redemptions")
BY MAIL OR OVERNIGHT SERVICE
(See "General Policies on Selling Shares -- Redemptions in Writing Required")
1. Call 1-800-782-8183 to request redemption forms or write a letter of
instruction indicating:
your Fund and account number
amount you wish to redeem
address where your check should be sent
account owner signature
2. Mail to: HSBC Investor Funds, PO Box 182845, Columbus, Ohio 43218-2845.
18
<PAGE>
SHAREHOLDER INFORMATION
SELLING YOUR SHARES CONTINUED
WIRE TRANSFER
You must indicate this option on your account application.
Call 1-800-782-8183 to request a wire transfer.
If you call by 12:00 p.m. Eastern time, your payment will normally be wired to
your bank on the same business day. 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 will normally be wired on the second business day after your call.
The Fund may charge a wire transfer fee.
NOTE: Your financial institution may also charge a separate fee.
ELECTRONIC REDEMPTIONS
Call 1-800-782-8183 to request an electronic redemption.
Your bank must participate in the Automated Clearing House (ACH) and must be a
U.S. bank.
If you call by 12:00 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds credited within 7 days.
Your bank may charge for this service.
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 1-800-782-8183.
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.
19
<PAGE>
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
[any] of the following:
Redemptions over $10,000;
Your account registration or the name(s) on 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; or
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 that must be considered when requesting their guarantee. The
Transfer Agent may reject any signature guarantee if it believes the transaction
would otherwise be improper.
20
<PAGE>
SHAREHOLDER INFORMATION
SELLING YOUR SHARES CONTINUED
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 he 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.
CLOSING OF SMALL ACCOUNTS
If your account falls below $50 due to redemptions, 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.
21
<PAGE>
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 Fund.
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C> <C> <C>
Sales Charge (Load) Front-end sales charge: No front-end No front-end No front-end
reduced sales charges sales charge. A sales sales charge.
Distribution available Sales Sales contingent charge. A
(12-1) Fee and Charge As Charge As deferred sales contingent
Service Fees A % Of A % Of charge (CDSC) deferred
Offering Your may be imposed sales charge
Price Investment on shares (CDSC) may
redeemed within be imposed
four years after on shares
purchase; shares redeemed
Your Investment ----------- ---------- automatically within one
Up to $49,999 5.00% 5.26% convert to Class year after
$50,000 up to $99,999 4.50% 4.71% A shares for 6 purchase.
$100,000 up to $249,999 3.75% 3.90% years
$250,000 up to $499,999 3.75% 2.56%
$1,000,000 and above 2.00% 2.04%
1.00% 1.01%
Subject to combined annual
distribution and shareholder Subject to Subject to No
servicing fees of -up to .25% combined annual combined distribution
annually of the Fund's total distribution annual or services
average total net assets. and shareholder distribution fees.
servicing fees and
of up to 1.00% shareholder
annually of the servicing
Fund's average fees of up
daily net assets. to 1.00%
annually of
the Fund's
average
daily net
assets.
Fund Expenses Lower annual expenses than Higher annual Higher Lower annual
Class B, Class C, or Class Y expenses than annual expenses
Shares Class A or Class expenses than Class
Y Shares. than Class A A, B, or C
shares. shares
</TABLE>
22
<PAGE>
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES CONTINUED
CLASS B SHARES AND CLASS C SHARES
Although Class B Shares and Class C Shares are not subject to a sales charge
when a shareholder exchanges Class B Shares and Class C Shares of another Trust
portfolio, they may be subject to a contingent deferred sales charge (CDSC) when
redeemed. See "Exchanging Your Shares." In addition, Class B and Class C Shares
are subject to an aggregate annual distribution and shareholder servicing fees
of up to 1.00% of the Fund's assets. Shareholders of Class B Shares and Class C
Shares pay higher annual expenses than shareholders of Class A Shares, and Class
Y Shares.
23
<PAGE>
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES CONTINUED
DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES
The Fund has adopted Distribution ("12b-l") plans for Class A, Class B, and
Class C Shares. 12b-1 fees compensate the Distributor and other dealers and
investment representatives for services and expenses relating to the sale and
distribution of the Funds' 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 0.25% 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, and Class Y
Shares.
Class Y Shares do not pay a 12b-1 fee.
The higher 12b-1 fees on Class B and Class C Shares, together with the CDSC,
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 Shares are subject to a shareholder
servicing fee of up to 0.60%. Class B and Class C Shares are subject to a
shareholder servicing fee of up to 0.25%.
The aggregate of the 12b-1 fees and shareholder servicing fees will not exceed
0.60% for the Class A Shares, and 1.00% 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.
24
<PAGE>
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 investment
advisers or their affiliates or invested in any of the Funds.
Shares purchased for trust or other advisory accounts established with
the investment advisers or their affiliates.
Shares purchased by directors, trustees, employees, and family members
of the investment 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 investment 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. You can combine accounts of multiple Funds
(excluding the Money Market Funds) or accounts of immediate family
household members (spouse and children under 21) to achieve reduced
sales charges.
25
<PAGE>
CLASS B SHARES
Investors purchasing shares of the Fund will ordinarily purchase either Class A
Shares, or Class Y Shares. If you exchange shares of other HSBC Investor Funds
for shares of the Funds and wish to sell your shares, Class B Shares may be
subject to a contingent deferred sales charge ('CDSC').
Class B Shares of the Fund will be subject to a declining CDSC if Class B Shares
of the Fund are exchanged for Class B Shares of any of the Money Market Funds
and redeemed within 4 years. The CDSC will be:
<TABLE>
<CAPTION>
CDSC AS A % OF DOLLAR
YEARS SINCE PURCHASE AMOUNT SUBJECT TO CHARGE
<S> <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. There is no CDSC on reinvested dividends or
distributions.
If you sell some but not all of your Class B Shares, 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).
26
<PAGE>
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES CONTINUED
CONVERSION FEATURE - CLASS B SHARES
Class B Shares will convert automatically to Class A Shares of the same Fund six
years 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 Class B shares converted.
CLASS C SHARES
Similarly, if you exchange Class C Shares of other HSBC Investor Funds for Class
C Shares of the Funds and wish to sell your shares, your redemption may be
subject to a 1.00% CDSC if the shares are redeemed less than one year after the
original purchase of the Class C Shares. The CDSC will be assessed the lesser of
the current NAV or the NAV at the time of purchase.
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.
27
<PAGE>
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
HSBC Investor Fund, usually without paying additional sales charges (see "Notes
on Exchanges"). 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.
Exchanges may be made by sending a written request to HSBC Investor Funds, P.O.
Box 182845, Columbus, Ohio 43218-2845 or by calling 1-800-782-8183. 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.
28
<PAGE>
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
CONTINUED
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 carefully the Prospectus of any Fund into which you wish to
exchange shares.
29
<PAGE>
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
Because everyone's tax situation is unique, you should rely on your own tax
advisor for advice about the particular federal, state and local tax
consequences to you of investing in a Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
Any income the Fund receives in the form of interest and dividends is paid out,
less expenses, to its shareholders. Shares begin accruing interest and dividends
on the day they are purchased.
Dividends are usually paid semi-annually. Capital gains 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 generally taxable as ordinary income.
If the Fund designates a dividend as a capital gain distribution (e.g., when the
Fund has a gain from the sale of an asset the Fund held for more than 12
months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
Dividends are taxable in the year in which they are paid or deemed paid, even if
they appear on your account statement the following year. If the Fund declares a
dividend in October, November, or December of a year and distributes the
dividend in January of the next year, you may be taxed as if you received it in
the year declared rather than the year received.
There may be tax consequences to you if you dispose of your shares in the Fund,
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 held them.
You will be notified before February I of 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.
30
<PAGE>
SHAREHOLDER INFORMATION
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
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 or capital gains 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.
31
<PAGE>
For more information about the Fund. the following documents are available free
upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
YOU CAN GET FREE COPIES OF FUNDS OF REPORTS AND THE SAI, PROSPECTUSES OF OTHER
FUNDS IN THE HSBC INVESTOR 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:
HSBC Investor Funds
PO Box 182845, Columbus, Ohio 43218-2845
Telephone: 1-800-782-8183
You can review and copy the Fund's reports and SAIs at the Public Reference Room
of the Securities and Exchange Commission. You can get text-only copies:
For a duplicating fee, by writing the Public Reference Section
of the Commission, Washington, D.C. 20549-0102 or by
electronic request at [email protected]. Information on the
operation of the Public Reference Room may be obtained by
calling the Commission at 202-942-8090.
Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-4782.
32
<PAGE>
HSBC INVESTOR U.S. TREASURY
MONEY MARKET FUND
--------------------------------------------------------------------------------
PROSPECTUS
[ ] ____, 2000
HSBC INVESTOR U.S. TREASURY MONEY MARKET FUND
THESE SECURITIES HAVE BEEN NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
HSBC INVESTOR FUNDS TABLE OF CONTENTS
<S> <C>
Carefully review this important -- RISK/RETURN SUMMARY AND FUND EXPENSES
section, which summarizes the HSBC Investor U.S. Treasury Money Market Fund
Fund's investments, risks, past
performance, and fees.
Preview this section for -- INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
information on investment
strategies and risks.
Review this section for details on -- FUND MANAGEMENT
the people and organizations who The Investment Adviser
provide services to the Fund. Portfolio Manager
Similar Fund Performance
The Distributor and Adminstrator
Review this section for details on -- SHAREHOLDER INFORMATION
how shares are valued, and how Pricing of Fund Shares
to purchase, sell and exchange Purchasing and Adding to Your Shares
shares. This section also Selling Your Shares
describes related charge, and Distribution Arrangements/Sales Charge
payments of dividends and Exchanging Your Shares
distributions. Dividends, Distributions and Taxes
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
The following is a summary of certain key information about the Fund. You will
find additional information about the Fund, including a detailed description of
the risks of an investment in the Fund, after this Summary.
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The investment objective of the HSBC
Investor U.S. Treasury Money
Market Fund (the "Fund") is to
provide as high a level of current
income as is consistent with
preservation of capital and
liquidity.
PRINCIPAL INVESTMENT STRATEGIES The Fund is a "money market fund"
that seeks to maintain a stable net
asset value of $1.00 per share.
The Fund invests exclusively in
obligations of the U.S. Government
and related repurchase agreements.
</TABLE>
3
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
<TABLE>
<S> <C>
PRINCIPAL
INVESTMENT RISKS Interest Rate Risk: Risk that
changes in interest rates will affect
the value of the Fund's investments
in fixed-income or debt securities.
Increases in interest rates may cause
the value of the Fund's investments
to decline.
Credit Risk: Risk that the issuer or
guarantor of a security will be
unable or unwilling to make timely
interest or principal payments, or to
otherwise honor its obligations. The
degree of risk for a particular
security may be reflected in its
credit rating. Credit risk includes
the possibility that the Fund's
investments will have their credit
ratings downgraded.
AN INVESTMENT IN THE FUND IS NOT A
DEPOSIT OF HSBC BANK USA ("HSBC") AND
IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE
THE VALUE OF YOUR INVESTMENT AT $1.00
PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
WHO MAY WANT TO INVEST? Consider investing in the Fund if you:
Are seeking preservation of capital
Are investing short-term reserves
The Fund will not be appropriate if you are:
Seeking high total returns
Pursuing a long-term goal or investing
for retirement
The investment objective and
strategies of the Fund are not
fundamental and may be changed
without approval of Fund
shareholders. If there is a change in
the investment objective and
strategies of the Fund, shareholders
should consider whether the Fund
remains an appropriate investment in
light of their then current financial
position and needs.
</TABLE>
4
<PAGE>
PERFORMANCE BAR CHART AND TABLE
Performance bar chart and table for the Fund are not shown because shares of the
Fund were not offered prior to [ ] ___, 2000. HSBC's track record in managing a
similar mutual fund is discussed under "Fund Management."
5
<PAGE>
FEES AND EXPENSES
As an investor in the Fund, you may pay the following fees and expenses if you
buy and hold shares of the Fund. Shareholder 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
FEES
(FEES PAID
DIRECTLY FROM YOUR A B C D Y
INVESTMENT) SHARES SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C> <C>
Maximum sales
charge (load)
on purchase None None None None None
Maximum deferred sales charge
(load) on redemptions None 4.00% 1.00% None None
<CAPTION>
ANNUAL FUND
OPERATING
EXPENSES A B C D Y
(EXPENSES THAT ARE DEDUCTED SHARES SHARES SHARES SHARES SHARES
FROM FUND ASSETS
<S> <C> <C> <C> <C> <C>
Management fee 0.20% 0.20% 0.20% 0.20% 0.20%
Distribution (12b-1) fee 0.00%* 0.75% 0.75% 0.00%* None
Shareholder servicing fees 0.60% 0.25% 0.25% 0.25% None
Other operating 0.34% 0.34% 0.34% 0.34% 0.34%
expenses** 0.94% 0.59% 0.59% 0.59% 0.34%
Total other expenses 0.94% 0.59% 0.59% 0.59% 0.34%
Total operating expenses 1.14% 1.54% 1.54% 0.79% 0.54%
[Fee Waivers and Expense [ ] [ ] [ ] [ ] [ ]
Reimbursement]
[Net Operating Expenses] [ ] [ ] [ ] [ ] [ ]
</TABLE>
* There are 12b-1 Plans for Class A and Class D Shares, which authorizes
payments up to .25% of the Fund's assets. To date, no payments under the 12b-1
Plans have been made.
** Other operating expenses are based upon estimated amount for the current
fiscal year.
6
<PAGE>
The Fund offers five different types of shares:
CLASS A SHARES (or "Investor Shares") are offered to the public, customers of
Shareholder Servicing Agents and certain securities brokers on a continuous
basis with no sales charge on purchases.
CLASS B AND CLASS C SHARES are not offered for sale but are only offered as an
exchange option. See "Exchanging your Shares."
CLASS D SHARES (or "Private Investor Shares") are identical to Class A Shares,
except that Class D Shares are offered only to domestic private banking clients
and are subject to lower operating expenses.
ADVISER (CLASS Y) SHARES ("Class Y Shares") are continuously offered for sale
only to customers of Shareholder Servicing Agents. At present, the only
Shareholder Servicing Agents for Adviser (Class Y) Shares are the Investment
Adviser ("HSBC") and its affiliates.
The Fund's Statement of Additional Information contains more detailed discussion
of the different classes of shares.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual 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 (unless otherwise indicated)
no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
may be higher or lower.
<TABLE>
<CAPTION>
HSBC INVESTOR U.S. TREASURY 1 3
MONEY MARKET FUND YEAR YEAR
<S> <C> <C>
CLASS A SHARES $116 $362
CLASS B SHARES
Assuming Redemption $557 $686
Assuming no Redemption $157 $486
CLASS C SHARES
Assuming Redemption $257 $486
Assuming no Redemption $157 $486
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
CLASS D SHARES $ 81 $252
CLASS Y SHARES $ 55 $173
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND STRATEGY
INVESTMENT OBJECTIVES
The investment objective of the Fund is to provide as high a level of current
income as is consistent with preservation of capital and liquidity.
The Fund invests exclusively in direct obligations of the U.S. Treasury and
certain repurchase agreements. The Fund will not invest in obligations issued
or guaranteed by agencies or instrumentalities of the U.S. Government and will
not enter into loans of its portfolio securities.
INVESTMENT POLICIES AND STRATEGY
As a money market fund, the Fund must meet the requirements of Rule 2a-7 of the
Investment Company Act of 1940. This Rule imposes strict requirements on the
investment quality, maturity, and diversification of the Fund's investments.
Under Rule 2a-7, the Fund's investments must have a remaining maturity of no
more than 397 days and its investments must maintain an average weighted
maturity that does not exceed 90 days.
The Fund will attempt to increase its yields by trading to take advantage of
short-term market variations. The Fund's Adviser evaluates investments based on
credit analysis and the interest rate outlook.
The Fund invests exclusively in different obligations of the U.S. Treasury and
certain repurchase agreements. The Fund will not invest in obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government and will not
enter into loans of its portfolio securities.
8
<PAGE>
RISK FACTORS
The Fund's primary risks are interest rate risk and credit risk. Because the
Fund invests in short-term securities, a decline in interest rates will affect
the Fund's yield as these securities mature or are sold and the Fund purchases
new short-term securities with lower yields. Generally, an increase in interest
rates causes the value of a debt instrument to decrease. The change in value for
shorter-term securities is usually smaller than for securities with longer
maturities. Because the Fund invests in securities with short maturities and
seeks to maintain a stable net asset value of $1.00 per share, it is possible
that an increase in interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating will be
downgraded or that the issuer of the security will default (fail to make
scheduled interest and principal payments). The Fund invests in highly-rated
securities to minimize credit risk. Under Rule 2a-7, 95% of a money market
fund's holdings, must be rated in the highest credit category (e.g., A-1 or
A-1+) and the remaining 5% must be rated no lower than the second highest credit
category.
9
<PAGE>
FUND MANAGEMENT
THE INVESTMENT ADVISER
HSBC Asset Management (Americas), Inc. (the "Adviser"), 452 Fifth Avenue, New
York, New York 10018, is the investment adviser for the Fund, pursuant to an
Investment Advisory Contract with the HSBC Investor Funds (the "Trust"). The
Adviser is a wholly owned subsidiary of HSBC, which is a wholly owned subsidiary
of HSBC USA, Inc., a registered bank holding company. HSBC currently provides
investment advisory services for individuals, trusts, estates and institutions.
HSBC manages more than $80 billion in assets.
Through its portfolio management team, the Adviser makes the day-to-day
investment decisions and continuously reviews, supervises and administers the
Fund's investment programs.
For these advisory services, the Fund pays a management fee of 0.20% of its
average net assets.
PORTFOLIO MANAGER
[ ]
SIMILAR FUND PERFORMANCE
The following table provides information concerning the historical total return
performance of the Class A Shares of the HSBC U.S. Treasury Money Market Fund
(the "Similar Fund"), a series of HSBC Funds Trust. The Similar Fund's
investment objective, policies and strategies are substantially similar to those
of the Fund and is currently managed by the same portfolio manager. While the
investment objectives, policies and risks of the Similar Fund and the Fund are
similar, they are not identical, and the performance of the Similar Fund and the
Fund will vary. The data is provided to illustrate the past performance of the
Adviser in managing a substantially similar investment portfolio and does not
represent the past performance of the Fund or the future performance of the Fund
or its portfolio manager. Consequently, potential investors should not consider
this performance data as an indication of the future performance of the Fund or
of its portfolio manager.
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
10
<PAGE>
AVERAGE ANNUAL TOTAL RETURN FOR THE SIMILAR FUND AND FOR ITS BENCHMARK INDEX FOR
PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SIMILAR FUND/BENCHMARK 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------------------- ------ ------- -------- ---------------
<S> <C> <C> <C> <C>
HSBC U.S. TREASURY MONEY MARKET FUND 4.39% 4.79% 4.69% MAY 31, 1983
LIPPER TREASURY MONEY MARKET FUND 4.30% 4.81% 4.69% N/A
</TABLE>
THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road,
Columbus, Ohio 43219-3035, serves as the Fund's administrator (the
"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
disbursing services.
BISYS also serves as the distributor (the "Distributor") of the Fund's
shares. BISYS may provide financial assistance to the Fund 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.
The Fund's Statement of Additional Information has more detailed
information about the Adviser, Distributor and Administrator, and other service
providers.
11
<PAGE>
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 net asset value per share (NAV) of the Fund is determined daily 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. The New York Stock Exchange is open every
weekday except for the days on which national holidays are observed.
The Fund values its securities at their amortized cost. This method involves
valuing an instrument at its cost and thereafter applying a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the investment.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is received by the Fund (whether by mail, overnight
service, or telephone). This is what is known as the offering price. If you sell
Class B Shares or Class C Shares, a contingent deferred sales load may apply,
which would reduce the amount of money paid to you by the Fund, as noted in the
section on "Distribution Arrangements/Sales Charges."
12
<PAGE>
PURCHASING AND ADDING TO YOUR SHARES
You may purchase the Fund through the HSBC Investor 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>
MINIMUM
ACCOUNT TYPE INITIAL INVESTMENT MINIMUM SUBSEQUENT
CLASS A AND
CLASS D SHARES
<S> <C> <C>
Regular $1,000 $100
(non-retirement)
Retirement (IRA) $250 $100
Automatic Investment Plan $250 $ 25
CLASS Y SHARES* $1,000,000 N/A
</TABLE>
* HSBC clients that maintain an investment management account are not subject to
the minimum initial investment requirements.
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.
The Fund may waive its minimum purchase requirement, and the Distributor may
reject a purchase order if the Distributor considers it in the best interest of
the Fund and its shareholders.
Class B Shares and Class C Shares of the Fund are not offered for sale but are
only offered as an exchange option for Class B and Class C Shareholders of HSBC
Investor Fund's other investment portfolios.
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, or if you have been notified by the IRS that you are subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the IRS ensures it will collect taxes otherwise due. Any amounts withheld
may be credited against your U.S. federal income tax liability. To avoid tax
withholding, make sure you provide your correct Tax Identification Number
(Social Security Number for most investors) on your account application.
13
<PAGE>
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL OR BY OVERNIGHT SERVICE
Initial Investment:
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Fund 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 "HSBC Investor Funds"
and include the name of the Fund on the check.
Mail to: HSBC Investor Funds, PO Box 182845, Columbus, Ohio 43218-2845.
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.
3. Mail investment slip and check to: HSBC Investor Funds, PO Box 182845,
Columbus, Ohio 43218-2845.
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.
14
<PAGE>
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
1-800-782-8183. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-782-8183 to arrange a transfer from your bank account.
BY WIRE TRANSFER
For information on how to request a wire transfer, call 1-800-782-8183.
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in the Fund from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $25, once
you've invested the $250 minimum required to open the account.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application.
Make sure you note:
Your bank name, address and account number
The amount you wish to invest automatically (minimum $25)
How often you want to invest (every month, 4 times a year, twice a year
or once a year)
Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-782-8183 for an enrollment form.
DIRECTED DIVIDEND OPTION
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in
15
<PAGE>
another HSBC Investor Fund without a sales charge. You must maintain the minimum
balance in each Fund into which you plan to reinvest dividends or the
reinvestment will be suspended and your dividends paid to you. The Fund may
modify or terminate this reinvestment option without notice. You can change or
terminate your participation in the reinvestment option at any time.
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 operating expenses. Class D Shares receive a higher
dividend than Class A Shares because Class D Shares have lower operating
expenses. Class Y Shares receive the highest dividends, because they have the
lowest operating 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, which
may be taxable.
16
<PAGE>
SELLING YOUR SHARES
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is accepted 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."
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 sections on "Distribution Arrangements/Sales
Charges" and "Exchanging your Shares" 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.
BY TELEPHONE
(unless you have declined telephone sales privileges)
1. Call 1-800-782-8183 with instructions as to how you wish to
receive your funds (mail, wire, electronic transfer). (See
"General Policies on Selling Shares--Verifying Telephone
Redemptions")
BY MAIL OR OVERNIGHT SERVICE
(See "General Policies on Selling Shares--Redemptions in Writing Required")
1. Call 1-800-782-8183 to request redemption forms or write a letter of
instruction indicating:
your Fund and account number
amount you wish to redeem
address where your check should be sent
17
<PAGE>
account owner signature
2. Mail to: HSBC Investor Funds, PO Box 182845, Columbus, Ohio 43218-2845.
WIRE TRANSFER
You must indicate this option on your account application.
Call 1-800-782-8183 to request a wire transfer.
If you call by 12:00 p.m. Eastern time, your payment will normally be wired to
your bank on the same business day. 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 will normally be wired on the second business day after your call.
The Fund may charge a wire transfer fee.
NOTE: Your financial institution may also charge a separate fee.
ELECTRONIC REDEMPTIONS
Call 1-800-782-8183 to request an electronic redemption.
Your bank must participate in the Automated Clearing House (ACH) and must be a
U.S. bank.
If you call by 12:00 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds credited within 7 days.
Your bank may charge for this service.
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
1-800-782-8183.
Include a voided personal check.
Your account must have a value of $10,000 or more to start withdrawals.
18
<PAGE>
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.
CHECK REDEMPTION SERVICE
You may write checks in amounts of $250 or more on your account in the Fund. To
obtain checks, complete the signature card section of the Account Application or
contact the Fund to obtain a signature card. Dividends and distributions will
continue to be paid up to the day the check is presented for payment. The check
writing feature may be modified or terminated upon 30-days written notice. You
may not close your Fund account by writing a check.
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
19
<PAGE>
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.
CLOSING OF SMALL ACCOUNTS
If your account falls below $50 due to redemptions, 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.
20
<PAGE>
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 Fund.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES CLASS Y SHARES
<S> <C> <C> <C>
Sales Charge (Load) No front-end sales No front-end sales No front-end sales
charge. charge. charge.
Distribution (12b-1) Subject to Subject to No distribution or
and Service Fees aggregate annual aggregate annual service fees.
distribution and distribution and
shareholder servicing shareholder
fees of up to .60% servicing fees of
of the Fund's total up to .25% of the
assets. Fund's total assets.
Fund Expenses Lower annual Lower annual Lower annual
expenses than expenses than expenses than
Class B or C shares. Class A, B or C Class A, B, C
shares. or D shares.
</TABLE>
CLASS B SHARES AND CLASS C SHARES
Class B Shares and Class C Shares are not being sold but are only offered as an
exchange option for Class B shareholders and Class C shareholders of other funds
in the HSBC Investor Family of Funds who wish to exchange some or all of those
shares for Class B Shares or Class C Shares, respectively, of the Fund. Although
Class B Shares and Class C Shares are not subject to a sales charge when a
shareholder exchanges Class B Shares and Class C Shares of another HSBC Investor
Fund, they may be subject to a contingent deferred sales charge (CDSC) when
redeemed. See "Exchanging Your Shares" below. In addition, Class B and Class C
Shares are subject to an aggregate annual distribution and shareholder servicing
fees of up to 1.00% of the Fund's assets. Shareholders of Class B Shares and
Class C Shares pay higher annual expenses than shareholders of Class A Shares,
Class D Shares and Class Y Shares.
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<PAGE>
DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES
The Fund has adopted 12b-1 plans for Class A, Class B, Class C and Class D
Shares. 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 0.25% 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, Class D Shares, and Class Y
Shares.
Class D Shares may pay a 12b-1 fee of up to 0.25% of the average
daily net assets of the applicable Fund.
Class Y Shares do not pay a 12b-1 fee.
The higher 12b-1 fees on Class B and Class C Shares, together with the
CDSC, 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 Shares are subject to a
shareholder servicing fee of up to 0.60%. Class B, Class C and Class D
Shares are subject to a shareholder servicing fee of up to 0.25%.
The aggregate of the 12b-1 fees and shareholder servicing fees will not
exceed 0.60% for the Class A Shares, 1.00% for the Class B and Class C
Shares, and 0.25% for Class D 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.
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<PAGE>
CLASS B SHARES
Investors purchasing shares of the Fund will ordinarily purchase either Class A
Shares, Class D Shares or Class Y Shares. Investors will only receive Class B
Shares or Class C Shares by exchanging from the Class B Shares or Class C Shares
of other HSBC Investor Funds. If you exchange shares of other HSBC Investor
Funds for shares of the Fund and wish to sell your shares, Class B Shares may be
subject to a contingent deferred sales charge ("CDSC").
Specifically, Class B Shares of the Fund will be subject to a declining CDSC if
Class B Shares of any of the HSBC Investor Income Funds (currently, the HSBC
Investor Bond Fund, HSBC Investor New York Tax-Free Bond Fund and HSBC Investor
Limited Maturity Bond Fund) or any of the HSBC Investor Equity Funds (currently,
the HSBC Investor Equity Fund, HSBC Investor Overseas Equity Fund, HSBC Investor
Opportunity Fund and HSBC Investor Mid-Cap Fund) are exchanged for Class B
Shares of the Fund and redeemed within 4 years. Generally*, the CDSC will be:
<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>
*CLASS B SHARES OF THE HSBC INVESTOR INCOME FUNDS PURCHASED PRIOR TO JUNE 19,
2000 ARE SUBJECT TO A CDSC IN EFFECT AT THE TIME OF PURCHASE.
The CDSC will be based upon the lower of the NAV at the time of purchase or the
NAV at the time of redemption. There is no CDSC on reinvested dividends or
distributions.
If you sell some but not all of your Class B Shares, 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).
Conversion Feature--Class B Shares
Class B Shares of the Fund will convert automatically to Class A of the
same Fund (or Class D Shares, depending on your eligibility), after six
years from the beginning of the calendar month in which the Class B
Shares were originally purchased.
23
<PAGE>
After conversion, your shares will be subject to the lower distribution
and shareholder servicing fees charged on Class A Shares (or Class D
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 (or Class D Shares) you receive will equal the
dollar value of the B shares converted.
CLASS C SHARES
Similarly, if you exchange Class C Shares of other HSBC Investor Funds for Class
C Shares of the Fund and wish to sell your shares, your redemption may be
subject to a 1.00% CDSC if the shares are redeemed less than one year after the
original purchase of the Class C Shares. The CDSC will be assessed the lesser of
the current NAV or the NAV at the time of purchase.
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.
24
<PAGE>
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
HSBC Investor 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.
Exchanges may be made by sending a written request to HSBC Investor Funds, PO
Box 182845, Columbus, Ohio 43218-2845 or by calling 1-800-782-8183. 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 Fund, due to market timing
strategies, exchange activity may be limited.
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.
25
<PAGE>
Class B Shares of the HSBC Investor Income Funds (currently, the HSBC Investor
Bond Fund and HSBC Investor Fixed-Income Fund) or HSBC Investor Equity Funds
(currently, the HSBC Investor Equity Fund, HSBC Investor Overseas Equity Fund
and HSBC Investor Opportunity Fund) may be exchanged for Class D Shares of the
Fund only if you are otherwise eligible to receive them. In all other cases, you
will receive Class A Shares of the Fund in exchange for your Class B Shares of
the HSBC Investor Income or HSBC Investor Equity Funds.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
Because everyone's tax situation is unique, you should rely on your own tax
advisor for advice about the particular federal, state and local tax
consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it
distributes to shareholders, although shareholders will be taxed on
distributions they receive.
Any income the Fund receives in the form of interest and dividends is
paid out, less expenses, to its shareholders. Shares begin accruing
interest and dividends on the day they are purchased.
Dividends on the Fund are paid monthly. Capital gains for the Fund 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 generally taxable as ordinary income; however,
distributions of tax-exempt interest income earned by the Fund are
expected to be exempt from the regular federal income tax.
If the Fund designates a dividend as a capital gain distribution (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for
more than 12 months), you will pay tax on that dividend at the
long-term capital gains tax rate, no matter how long you have held your
Fund shares.
Dividends are taxable in the year in which they are paid or deemed
paid, even if they appear on your account statement the following year.
If the Fund declares a dividend in October, November, or December of a
year and distributes the dividend in January of the next year, you may
be taxed as if you received it in the year declared rather than the
year received.
26
<PAGE>
There may be tax consequences to you if you dispose of your shares in
the Fund, 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 held them.
You will be notified before February 1 of 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.
As with all mutual funds, the Fund may be required to withhold U.S.
federal income tax at the rate of 31% of all taxable distributions
payable to you if you fail to provide the Fund with your correct
taxpayer identification number or to make required certifications, or
if you have been notified by the IRS that you are subject to backup
withholding. Backup withholding is not an additional tax, but is a
method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal
income tax liability.
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 or capital
gains 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.
27
<PAGE>
FINANCIAL HIGHLIGHTS
Financial information for the Fund is not shown because shares of the Fund were
not offered prior to [ ] ___, 2000.
28
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. The SAI is 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 HSBC INVESTOR FAMILY OF FUNDS, OR REQUEST OTHER INFORMATION AND DISCUSS
YOUR QUESTIONS ABOUT THE FUNDS, BY CONTACTING A BROKER OR HSBC FINANCIAL
SERVICES AT 1-888-525-5757. OR CONTACT THE FUND AT:
HSBC INVESTOR FUNDS
P.O. BOX 182845
COLUMBUS, OHIO 43218-2845
TELEPHONE: 1-800-782-8183
You can review the Fund's SAI 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. 20549-0102, or by electronic
request at [email protected]. Information on the operation of
the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090.
Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-4782.
29
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HSBC LIMITED MATURITY BOND FUND
P.O. Box 182845
Columbus, Ohio 43218-2845
General and Account Information (800) 782-8183 (Toll Free)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
HSBC Asset Management (Americas) Inc. BISYS Fund Services
Investment Adviser Mid-Cap Fund Administrator, Distributor and Sponsor
(an "Adviser") ("BISYS," "Administrator," "Distributor," or
"Sponsor")
</TABLE>
The HSBC Limited Maturity Fund (the "Fund") is a series of the HSBC Investor
Funds (the "Trust"), an open-end, management investment company that currently
consists of thirteen series, each of which has different and distinct investment
objectives and policies. The Fund is described in this Statement of Additional
Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS ONLY
AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE
FUND DATED [ ] (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.
References in this Statement of Additional Information to the "Prospectus" are
to the Prospectus, dated [ ] 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.
[ ]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS...................................................................1
Fixed Income Securities..................................................................................2
U.S. Government Securities...............................................................................2
Derivatives..............................................................................................3
Options and Futures......................................................................................3
Swaps, Caps, Floors and Collars.........................................................................11
Foreign Securities......................................................................................12
Forward Foreign Currency Contracts and Options on Foreign Currencies....................................13
Foreign Currency Exchange-Related Securities............................................................14
Mortgage-Related and Other Asset Backed Securities......................................................16
Banking Industry and Savings and Loan Industry Obligations..............................................22
Firm Commitment Agreements and When-Issued Securities...................................................22
Zero Coupon Obligations.................................................................................23
Eurodollar and Yankee Bank Obligations..................................................................23
Sovereign and Supranational Debt Obligations............................................................23
Brady Bonds.............................................................................................24
Repurchase Agreements...................................................................................24
Variable Rate Instruments...............................................................................25
Inverse Floating Rate Obligations.......................................................................26
Illiquid Investments, Rule 144A Securities, and Section 4(2) Securities.................................27
Portfolio Turnover......................................................................................27
Portfolio Management....................................................................................27
Portfolio Transactions..................................................................................28
INVESTMENT RESTRICTIONS..........................................................................................29
PERFORMANCE INFORMATION..........................................................................................32
MANAGEMENT OF THE TRUST..........................................................................................34
Trustees and Officers...................................................................................34
Compensation Table......................................................................................36
Investment Adviser......................................................................................36
Distribution Plans - Class A, Class B, and Class C Shares Only..........................................37
The Distributor and Sponsor.............................................................................38
Administrative Services Plan............................................................................39
Administrator...........................................................................................39
Fees....................................................................................................39
Transfer Agent..........................................................................................40
Custodian and Fund Accounting Agent.....................................................................40
Shareholder Servicing Agents............................................................................40
Federal Banking Law.....................................................................................41
Expenses................................................................................................42
DETERMINATION OF NET ASSET VALUE.................................................................................42
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Purchase of Shares......................................................................................44
Exchange Privilege......................................................................................46
Automatic Investment Plan...............................................................................47
Purchases Through a Shareholder Servicing Agent or a Securities Broker..................................47
SALES CHARGES....................................................................................................48
Class A Shares..........................................................................................48
Sales Charge Waivers....................................................................................48
Concurrent Purchases....................................................................................49
Letter of Intent........................................................................................49
Right of Accumulation...................................................................................50
Contingent Deferred Sales Charge ("CDSC") - Class B Shares..............................................50
Level Load Alternative -- Class C Shares................................................................51
REDEMPTION OF SHARES.............................................................................................51
Systematic Withdrawal Plan..............................................................................52
Redemption of Shares Purchased Directly Through the Distributor.........................................52
RETIREMENT PLANS.................................................................................................53
Individual Retirement Accounts..........................................................................53
Defined Contribution Plans..............................................................................53
Section 457 Plan, 401(k) Plan, 403(b) Plan..............................................................53
DIVIDENDS AND DISTRIBUTIONS......................................................................................53
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.............................................................54
TAXATION.........................................................................................................55
Tax Status of the Fund..................................................................................56
The Portfolio...........................................................................................56
Distributions...........................................................................................57
Dispositions............................................................................................57
Backup Withholding......................................................................................58
Other Taxation..........................................................................................58
Fund Investments........................................................................................58
OTHER INFORMATION................................................................................................61
Capitalization..........................................................................................61
Independent Auditors....................................................................................61
Counsel.................................................................................................61
Code of Ethics..........................................................................................61
Registration Statement..................................................................................62
FINANCIAL STATEMENTS.............................................................................................62
Shareholder Inquiries...................................................................................62
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following information supplements the discussion of the investment objective
and policies of the Fund discussed under the caption "Investment Objective and
Strategies" in the prospectus. The Fund invests all of its assets in a master
portfolio (a "Portfolio") that has substantially similar investment objectives.
The investment objective of the Portfolio is to realize above-average total
return consistent with reasonable risk, through investment in a diversified
portfolio of investment grade securities including U.S. Government securities,
corporate 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 HSBC Investor
Limited Maturity Bond Portfolio (the "Portfolio"), which has the same investment
objective as the Fund.
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-through,
mortgage- backed bonds, collateralized mortgage obligations ("CMOs") and other
asset- backed securities; variable and floating rate debt securities;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities; obligations of international agencies or supranational
entities; and foreign currency exchange-related securities.
The Adviser will seek to achieve the Portfolio's objective by investing 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 Adviser to be of
comparable quality.
From time to time, the 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
Adviser determines that the quality of the investment, the quality of the
issuer, and market conditions warrant such investments. Mortgage- backed
securities issued by private issuers will be rated investment grade by Moody's
or S&P or, if unrated, deemed by the 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
1
<PAGE>
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 assets may be invested in bonds and other fixed
income securities denominated in foreign currencies if, in the opinion of the
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
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 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.
FIXED INCOME SECURITIES
The Portfolio may invest in fixed income securities. To the extent the Portfolio
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 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
The Portfolio may invest in U.S. Government Securities. 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.
2
<PAGE>
Treasury; others, such as securities issued by the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agencies' obligations; and others are supported only
by the credit of the issuing or guaranteeing instrumentality. There is no
assurance that the U.S. Government will provide financial support to an
instrumentality it sponsors when it is not obligated by law to do so.
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 the Portfolio 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. A description of the derivatives that the Portfolio may use and some
of their associated risks follows.
OPTIONS AND FUTURES
The Portfolio may invest in options and futures contracts. The use of options
and futures is a highly specialized activity that 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 Adviser applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower the Portfolio's return.
Certain strategies limit the 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 invest in options on securities. 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 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
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may be exercised and the Portfolio will then be required to purchase or sell the
security at a disadvantageous price, which might only partially be offset by the
amount of the premium.
The Portfolio may write options in connection with buy-and-write transactions;
that is, the Portfolio may purchase a security and then write a call option
against that security. The exercise price of the call option the Portfolio
determines to write depends upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Portfolio in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Portfolio
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Portfolio will be required to sell the underlying security at a below market
price. This loss may be offset, however, in whole or in part, by the premiums
received on the writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be exercised. The
writing of straddles will likely be effective, therefore, only where the price
of a security remains stable and neither the call nor the put is exercised. In
an instance where one of the options is exercised, the loss on the purchase or
sale of the underlying security may exceed the amount of the premiums received.
By writing a call option on a portfolio security, the Portfolio limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Portfolio assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Portfolio solely for hedging purposes, and
may involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are written for hedging purposes,
such transactions will constitute only a partial hedge against declines in the
value of portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Portfolio may also purchase put and call options. Put options are purchased
to hedge against a decline in the value of securities held in the Portfolio's
portfolio. If such a decline occurs, the put options will permit the Portfolio
to sell the securities underlying such options at the exercise price, or to
close out the options at a profit. The Portfolio will purchase call options to
hedge against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. If such an increase occurs, the call
option will permit the Portfolio to purchase the securities underlying such
option at the exercise price or to close out the option at a profit. The premium
paid for a call or put option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises or declines sufficiently, the
option may expire worthless to the Portfolio. In addition, in the event
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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 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
Advisers intend to limit the Portfolio's writing of over-the-counter options in
accordance with the following procedure. Except as provided below, the
portfolio intends to write over-the-counter options only with primary U.S.
government securities dealers recognized by the federal reserve bank of new
york. Also, the contracts the portfolio has in place with such primary dealers
will provide that the portfolio has the absolute right to repurchase an option
it writes at any time at a price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula in the contract.
Although the specific formula may vary between contracts with different primary
dealers, the formula will generally be based on a multiple of the premium
received by the portfolio for writing the option, plus the amount, if any, of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The portfolio will treat all or a portion of the
formula as illiquid for purposes of the SEC illiquidity ceiling imposed by the
sec staff. The portfolio may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such sec illiquidity
ceiling.
Options on Securities Indices. The Portfolio may cover call options on
securities indices by owning securities whose price changes, in the opinion of
the 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
securities 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 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
Portfolio in cash or cash equivalents in a segregated account with its
custodian. The Portfolio 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 Portfolio 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
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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
securities 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 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
indices 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 securities indices to hedge its
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 securities 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 securities indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
Futures Contracts. The Portfolio may invest in 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 Portfolio's 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.
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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.
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.
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 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 liquid instruments from the portfolio of the Portfolio
in an amount equal to the difference between the
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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 Portfolio 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 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.
The Portfolio will not enter into futures contracts or options thereon to the
extent that its outstanding obligations to purchase securities under these
contracts in combination with its outstanding obligations with respect to
options transactions would exceed 35% of its total assets. The Portfolio will
use financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission, or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such non-hedging positions only to the extent that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Portfolio's net assets. The Portfolio
will segregate assets or "cover" its positions consistent with requirements
under the 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.
Risk Factors: Imperfect Correlation of Hedging Instruments. 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 the 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
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hedging strategy may not be successful and the Portfolio could sustain losses on
its hedging strategy which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the instrument
underlying an option, future contract or forward contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transaction had not
been undertaken. In the case of futures and options based on an index of
securities or individual fixed income securities, the portfolio will not
duplicate the components of the index, and in the case of futures contracts and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contracts. As a
result, the correlation probably will not be exact. Consequently, the Portfolio
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation. In
addition, where the Portfolio enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Portfolio incurs the risk of imperfect correlation between changes in the values
of the two currencies, which could result in losses.
The correlation between prices of securities and prices of options, futures
contracts or forward contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the option, futures
contract and forward contract markets. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the 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 an 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.
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The liquidity of a secondary market in an option or futures contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Portfolio from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and futures contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
futures contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Options on Futures Contracts. In order to profit from the purchase of an option
on a futures contract, it may be necessary to exercise the option and liquidate
the underlying futures contract, subject to all of the risks of futures trading.
The writer of an option on a futures contract is subject to the risks of futures
trading, including the requirement of initial and variation margin deposits.
Additional Risks of Transactions Related to Foreign Currencies and Transactions
Not Conducted on 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.
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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 Adviser believes that the exchange rate at the
time of delivery is unfavorable or if, for any other reason, the Adviser
anticipates favorable movements in such rates.
While the holding of currencies will permit the Portfolio to take advantage of
favorable movements in the applicable exchange rate, it also exposes the
Portfolio to risk of loss if such rates move in a direction adverse to the
Portfolio's position. Such losses could also adversely affect the Portfolio's
hedging strategies. Certain tax requirements may limit the extent to which the
Portfolio will be able to hold currencies.
Restrictions on the Use of Options and Futures. In order to assure that the
Portfolio will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Portfolio enter
into transactions in futures contracts and options on futures contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Portfolio's assets. In addition, the Portfolio must comply with the requirements
of various state securities laws in connection with such transactions.
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.
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.
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The swaps in which the Portfolio may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium) and the other party pays periodic amounts based on the movement of a
specified index.
The Portfolio will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. The Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or 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 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 Adviser is incorrect in its forecasts of market
values, interest rates and currency exchange rates, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
FOREIGN SECURITIES
The Portfolio may invest in securities of foreign issuers. These foreign
investments involve certain special risks described below.
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
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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 Portfolio'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. Currencies in
which the Portfolio's assets are denominated may be devalued against the U.S.
dollar, resulting in a loss to the Portfolio. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Furthermore, dividends or interest on, or
proceeds from the sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may apply. 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. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the United States or in other foreign countries.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Portfolio may invest in 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. 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 not enter
into such contracts for speculative 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. 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 Adviser
believes that the value of a particular foreign currency will increase or
decrease relative to the value of the U.S. dollar, the Portfolio may purchase or
sell such currency, respectively, through a forward contract. If the expected
changes in the value of the currency occur, the Portfolio will realize profits
which will increase its gross income. Where exchange rates do not move in the
direction or to the extent anticipated, however, the Portfolio may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative.
The Portfolio has 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
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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.
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 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 Adviser will attempt to hold such
mismatching to a minimum, there can be no assurance that the 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.
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.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign Currency Warrants. The Portfolio may invest in foreign currency
exchange-related securities. 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
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currency warrants have been issued in connection with U.S. dollar-denominated
debt offerings by major corporate issuers in an attempt to reduce the foreign
currency exchange risk which, from the point of view of prospective purchasers
of the securities, is inherent in the international fixed-income marketplace.
Foreign currency warrants may attempt to reduce the foreign exchange risk
assumed by purchasers of a security by, for example, providing for a
supplemental payment in the event that the U.S. dollar depreciates against the
value of a major foreign currency such as the Japanese yen or German deutsche
mark. The formula used to determine the amount payable upon exercise of a
foreign currency warrant may make the warrant worthless unless the applicable
foreign currency exchange rate moves in a particular direction (e.g., unless the
U.S. dollar appreciates or depreciates against the particular foreign currency
to which the warrant is linked or indexed). Foreign currency warrants are
severable from the debt obligations with which they may be offered and may be
listed on exchanges. Foreign currency warrants may be exercisable only in
certain minimum amounts, and an investor wishing to exercise warrants who
possesses less than the minimum number required for exercise may be required to
either sell the warrants or to purchase additional warrants, thereby incurring
additional transaction costs. In the case of any exercise of warrants, there may
be a time delay between the time a holder of warrants gives instructions to
exercise and the time the exchange rate relating to exercise is determined,
during which time the exchange rate could change significantly, thereby
affecting both the market and cash settlement values of the warrants being
exercised. The expiration date of the warrants may be accelerated if the
warrants should be delisted from an exchange or if their trading should be
suspended permanently, which would result in the loss of any remaining "time
value" of the warrants (i.e., the difference between the current market value
and the exercise value of the warrants) and, in the case the warrants were
"out-of-the-money," in a total loss of the purchase price of the warrants.
Warrants are generally unaccrued obligations of their issuers and are not
standardized foreign currency options issued by the Options Clearing Corporation
(the "OCC"). Unlike foreign currency options issued by the OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate linked
securities ("PERLs"(SM)) are debt obligations the principal on which is payable
at maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at or about that time. The return
on "standard" PERLS is enhanced if the foreign currency to which the security is
linked appreciates against the U.S. dollar, and is adversely affected by
increases in the foreign exchange value of the U.S. dollar; "reverse" PERLS are
like the "standard" securities, except that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the securities are generally
made in U.S. dollars at rates that reflect the degree of foreign currency risk
assumed or given up by the purchaser of the notes (i.e., at relatively higher
interest rates if the purchaser has assumed some of the foreign exchange risk,
or relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). PERLS may in
limited cases be subject to acceleration of maturity
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(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).
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 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
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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 the Portfolio 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.
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
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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 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 industry
concentration restrictions, set forth below under "Investment Restrictions," by
virtue of the exclusion from that test available to all U.S. Government
securities. In the case of privately issued mortgage- related securities, the
Portfolio takes the position that mortgage-related securities do not represent
interests in any particular "industry" or group of industries. The assets
underlying such securities may be represented by a portfolio of first lien
residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or
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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 Portfolio schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking Portfolio 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 Portfolio obligation for any
payment date are paid to the holders of the CMOs as additional sinking Portfolio
payments. Because of the "pass-through" nature of all principal payments
received on the collateral pool in excess of FHLMC's minimum sinking Portfolio
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
Portfolio obligation on the next sinking Portfolio payment date, FHLMC agrees to
make up the deficiency from its general Portfolios. 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
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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 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 also 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.
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
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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 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.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Portfolio may invest in certificates of
deposit, time deposits, bankers' acceptances, and other short- term debt
obligations issued by commercial banks and savings and loan associations
("S&Ls"). Certificates of deposit are receipts from a bank or S&L for funds
deposited for a specified period of time at a specified rate of return. Time
deposits in banks or S&Ls are generally similar to certificates of deposit but
are uncertificated. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international commercial
transactions. The Portfolio may not invest in time deposits maturing in more
than seven days. The Portfolio will limit its investment in time deposits
maturing from two business days through seven calendar days to 15% of its total
assets.
The Portfolio will not invest in any obligation of a commercial bank unless (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal amount of such investment is insured in
full by the Federal Deposit Insurance Corporation (the "FDIC"), (ii) in the case
of U.S. banks, it is a member of the FDIC and (iii) in the case of foreign
branches of U.S. banks, the security is deemed by the Adviser to be of an
investment quality comparable with other debt securities which may be purchased
by the Portfolio.
The Portfolio may also invest in obligations of U.S. banks, foreign branches of
U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee dollars) as
a temporary defensive measure. Euro and Yankee dollar investments will involve
some of the same risks as investing in foreign securities, as described above
and in this 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
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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.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon obligations, which are fixed-income
securities that do not make regular interest payments. Instead, zero coupon
obligations are sold at substantial discounts from their face value. The
Portfolio accrues income on these investments for tax and accounting purposes,
which is distributable to shareholders and which, because no cash is received at
the time of accrual, may require the liquidation of other portfolio securities
to satisfy the Portfolio's distribution obligations, in which case the Portfolio
will forego the purchase of additional income-producing assets with these
Portfolios. 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.
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.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS
To the extent the Portfolio invests in sovereign and supranational debt
instruments issued or guaranteed by foreign governments, agencies, and
supranational entities ("sovereign debt obligations"), especially sovereign debt
obligations of developing countries, an investment in the Fund may be subject to
a high degree of risk, and the sovereign debt obligation 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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BRADY BONDS
The Portfolio may invest in Brady Bonds. The Brady Plan was conceived by the
U.S. Treasury in the 1980's in an attempt to produce a debt restructuring
program that would enable a debtor country to (i) reduce the absolute level of
debt of its creditor banks, and (ii) reschedule its external debt repayments,
based upon its ability to service such debts by persuading its creditor banks to
accept a debt write-off by offering them a selection of options, each of which
represented an attractive substitute for the nonperforming debt. Although it was
envisioned that each debtor country would agree to a unique package of options
with its creditor banks, the plan was that these options would be based upon the
following: (i) a discount bond carrying a market rate of interest (whether fixed
or floating), with principal collateralized by the debtor country with cash or
securities in an amount equal to at least one year of rolling interest; (ii) a
par bond carrying a low rate of interest (whether fixed or floating),
collateralized in the same way as in (i) above; and (iii) retention of existing
debt (thereby avoiding a debt write-off) coupled with an advance of new money or
subscription of new bonds.
Brady Plan debt restructurings totaling approximately $73 billion have been
implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the Philippines,
Uruguay and Venezuela, with the largest proportion of Brady Bonds having been
issued to date by Mexico and Venezuela. Brazil has announced plans to issue
Brady Bonds aggregating approximately $35 billion, based on current estimates.
There can be no assurance that the circumstances regarding the issuance of Brady
Bonds by these countries will not change.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity,
(ii) the collateralized interest payments, (iii) the uncollateralized payments,
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements. A repurchase agreement arises
when a buyer purchases an obligation and simultaneously agrees with the vendor
to resell the obligation
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to the vendor at an agreed-upon price and time, which
is usually not more than seven days from the date of purchase. The resale price
of a repurchase agreement is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time the buyer's
Portfolios are invested in the obligation and which is not related to the coupon
rate on the purchased obligation. Obligations serving as collateral for each
repurchase agreement are delivered to the Portfolios custodian bank either
physically or in book entry form and the collateral is marked to the market
daily to ensure that each repurchase agreement is fully collateralized at all
times. A buyer of a repurchase agreement runs a risk of loss if, at the time of
default by the issuer, the value of the collateral securing the agreement is
less than the price paid for the repurchase agreement. The restrictions and
procedures that govern the investment of the Portfolios assets in repurchase
obligations are designed to minimize the Portfolios risk of losses from those
investments. Repurchase agreements are considered collateralized loans under the
1940 Act.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Portfolio will have the right to liquidate the securities. If at the
time the Portfolio is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Portfolio's exercise of
its right to liquidate the securities may be delayed and result in certain
losses and costs to the Portfolio. The Portfolio has adopted and follows
procedures which are intended to minimize the risks of repurchase agreements.
For example, the Portfolio only enters into repurchase agreements after the
Adviser has determined that the seller is creditworthy, and the Adviser monitors
that seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Portfolio has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
All repurchase agreements entered into by the Portfolio are fully collateralized
at all times during the period of the agreement in that the value of the
underlying security is at least equal to the amount of the loan, including the
accrued interest thereon, and the Portfolio or its custodian bank has possession
of the collateral, which the Trust's Board of Trustees believes gives the
Portfolio a valid, perfected security interest in the collateral. The Trust's
Board of Trustees believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio. Repurchase agreements give rise to
income which does not qualify as tax-exempt income when distributed to Fund
shareholders.
VARIABLE RATE INSTRUMENTS
The Portfolio may invest in variable rate instruments, which 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
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designated base rate, such as rates on Treasury bonds or bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on short notice at par plus accrued interest. While there is usually
no established secondary market for issues of this type of security, the dealer
that sells an issue of such securities frequently also offers to repurchase such
securities at any time, at a repurchase price which varies and may be more or
less than the amount the bondholder paid for them.
Because of the variable rate nature of the instruments, during periods when
prevailing interest rates decline, the Portfolio'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 Portfolio'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. The value of these instruments may be
more volatile than other floating rate municipal obligations.
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,"
below.
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 Portfolio 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 Portfolio through the demand feature, an
obligation matures on a specified date which may range up to 30 years from the
date of issuance.
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.
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ILLIQUID INVESTMENTS, RULE 144A SECURITIES, AND SECTION 4(2) SECURITIES
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 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 Adviser may determine that a particular Rule 144A or Section 4(2) 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 Adviser must consider in determining whether a particular Rule
144A security is liquid include the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, dealer undertakings to make a market in
the security, and the nature of the security and the nature of the market for
the security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's
illiquidity to the extent that qualified institutions might become, for a time,
uninterested in purchasing these securities.
PORTFOLIO TURNOVER
The 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 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 Adviser engages in portfolio trading for
the Portfolio if it believes a transaction net of costs (including custodian
charges) will help achieve the investment objective of the Portfolio. In
managing the Portfolio's portfolio, the Adviser seeks to take advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. Expenses to the Portfolio, including brokerage commissions, and the
realization of capital gains which are taxable to the Portfolio's shareholders
tend to increase as the portfolio turnover increases.
PORTFOLIO MANAGEMENT
The Adviser's investment strategy for achieving the Portfolio's investment
objective has two basic components: maturity and duration management and value
investing.
Maturity And Duration Management. Maturity and duration management decisions are
made in the context of an intermediate maturity orientation. The maturity
structure of the Portfolio is adjusted in anticipation of cyclical interest rate
changes. Such adjustments are not made in an
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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 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 Adviser's investment strategy for
the Portfolio is value investing, whereby the 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.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policy established
by the Trustees, the Adviser is primarily responsible for portfolio decisions
and the placing of portfolio transactions. In placing orders, it is the policy
of the Portfolio to obtain the best results taking into account 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
involved. Brokerage may be allocated to the Distributor to the extent and in the
manner permitted by applicable law, provided that in the judgment of the
investment adviser the use of the Distributor is likely to result in an
execution at least as favorable as that of other qualified brokers. While the
Adviser generally seeks reasonably competitive spreads or commissions, the
Portfolio will not necessarily be paying the lowest spread or commission
available.
Investment decisions for the Portfolio concerning specific portfolio securities
are made independently from those for other clients advised by its Adviser. Such
other investment clients may invest in the same securities as the Portfolio.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which the Adviser
believes to be equitable to each client, including the Portfolio. In some
instances, this investment procedure may adversely affect the price paid or
received by the Portfolio or the size of the position obtained or sold for the
Portfolio. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Generally, money market securities are traded on a net basis and do not involve
brokerage commissions. Under the 1940 Act, persons affiliated with HSBC Bank,
the Adviser, the Portfolio or BISYS Fund Services are prohibited from dealing
with the Portfolio as a principal in the purchase and sale of securities except
in accordance with regulations adopted by the Securities and Exchange
Commission. The Portfolio may purchase Municipal Obligations from underwriting
syndicates of which the Distributor or other affiliate is a member under certain
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conditions in accordance with the provisions of a rule adopted under the 1940
Act. Under the 1940 Act, persons affiliated with the Adviser, the Portfolio or
BISYS Fund Services may act as a broker for the Portfolio. In order for such
persons to effect any portfolio transactions for the Portfolio, the commissions,
fees or other remuneration received by such persons must be reasonable and fair
compared to the commissions, fees or other remunerations paid to other brokers
in connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. This
standard would allow the affiliate to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arms-length transaction. The Trustees of the Trust regularly review
the commissions paid by the Portfolio to affiliated brokers. The Portfolio will
not do business with nor pay commissions to affiliates of the Adviser in any
portfolio transactions where they act as principal.
As permitted by Section 28(e) of the "Securities Exchange Act of 1934 (the "1934
Act") the Adviser may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the 1934 Act) to the Adviser an
amount of disclosed commission for effecting a securities transaction for the
Portfolio in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
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 view and information of securities firms.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Portfolio as a factor in the
selection of broker-dealers to execute portfolio transactions for the Portfolio.
The Adviser may cause the Portfolio to pay commissions higher than another
broker-dealer would have charged if the Adviser believes the commission paid is
reasonable in relation to the value of the research services incurred by the
Adviser.
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 M 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.
As a matter of fundamental policy, the Fund will not (except that none of the
following investment restrictions shall prevent the Trust from investing all of
the Fund's assets in a separate registered investment company with substantially
the same investment objectives):
(1) invest in physical commodities or contracts on physical
commodities;
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(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interest in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objective and policies, or entering into repurchase
agreements, and (ii) by lending its portfolio securities;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such investment) of
the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any
issuer if, as the result, more than 5% of the Portfolio's (Fund's) total assets,
taken at market value at the time of such investment, would be invested in the
securities of such issuer, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(6) underwrite the securities of other issuers (except to the extent
that the Portfolio (Fund) may be deemed to be an underwriter within the meaning
of the 1933 Act in the disposition of restricted securities);
(7) acquire any securities of companies within one industry if as a
result of such acquisition, more than 25% of the value of the Portfolio's
(Fund's) total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio (Fund) adopts a temporary defensive
position; and provided further that mortgage-backed securities shall not be
considered a single industry for the purposes of this investment restriction;
(8) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving mortgage-backed
securities or similar investment techniques entered into for leveraging
purposes), except that the Portfolio (Fund) may borrow as a temporary measure to
satisfy redemption requests or for extraordinary or emergency purposes, provided
that the Portfolio (Fund) maintains asset coverage of at least 300% for all such
borrowings;
(9) issue senior securities, except as permitted under the 1940 Act.
In applying fundamental policy number seven, mortgage-backed securities
shall not be considered a single industry. Mortgage-backed securities issued by
governmental agencies and government-related organizations shall be excluded
from the limitation in fundamental policy number seven. Private mortgage-backed
securities (i.e., not issued or guaranteed by a governmental agency or
government-related organization) that are backed by mortgages on commercial
properties shall be treated as a separate industry from private mortgage-backed
securities backed by mortgages on residential properties.
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Non-Fundamental Investment Policies. The Fund is also subject to the following
restrictions which may be changed by its 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 Fund will not:
(1) 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;
(2) 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;
(3) 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);
(4) 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);
(5) purchase or retain securities of an issuer if those officers and
Trustees of the Portfolio Trust or the Manager or Adviser owning more than 1/2
of 1% of such securities together own more than 5% of such securities;
(6) pledge, mortgage or hypothecate any of its assets to an extent
greater than one-third of its total assets at fair market value;
(7) 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").
31
<PAGE>
(8) invest more than 25% of its assets in Restricted Securities
(including Rule 144A Securities);
(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
Portfolio shall not invest in the shares of any open-end investment company
unless (1) the Portfolio's Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge in connection
with the investment;
(11) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign government or
political subdivisions thereof) which have (with predecessors) a record of less
than three years' continuous operations;
(12) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases.
PERFORMANCE INFORMATION
From time to time the Trust may provide annualized "yield," "effective yield"
and "tax equivalent yield" quotations for the Fund in advertisements,
shareholder reports or other communications to shareholders and prospective
investors. The methods used to calculate the Fund's yield, effective yield and
tax equivalent yield are mandated by the Securities and Exchange Commission.
Quotations of yield for the Fund will be based on all investment income per
share (as defined by the SEC during a particular 30-day (or one month) period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and are computed by dividing net investment income by
the maximum offering price per share on the last day of the period, according to
the following formula:
a-b 6
YIELD = 2[(-- + 1) - 1]
cd
where
a = dividends and interest earned during the period,
b =- expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
32
<PAGE>
d - the maximum offering price per share on the last day of the
period.
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund over periods of 1, 5 and 10 years (or up to the life of
the Fund), calculated pursuant to the following formula: P H + T)n = ERV (where
P = a hypothetical initial payment of $1,000, T = the average annual total
return, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The Fund also may, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accompanied by standardized total return information.
Performance information for the Fund may be compared, in reports and promotional
literature, to: (i) unmanaged indices, including, but not limited to the S&P 500
Stock Index. Investors may compare the Fund's results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general, (ii) other groups of mutual funds tracked by
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies (including IBC/Donoghue's Money Fund
Reports), publications, or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment of dividends but generally do
not reflect deductions for administrative and management costs and expenses.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the yield of the Fund varies based on the type, quality
and maturities of the obligations held for the Fund, fluctuations in short-term
interest rates, and changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate yields should be
considered when comparing the yield of the Fund to yields published for other
investment companies or other investment vehicles.
A Shareholder Servicing Agent or a securities broker, if applicable, may charge
its customers direct fees in connection with an investment in the Fund, which
will have the effect of reducing the net return on the investment of customers
of that Shareholder Servicing Agent or that securities broker. Specifically,
investors who purchase and redeem shares of the Fund through a Shareholder
Servicing Agent may be charged one or more of the following types of fees as
agreed upon by the Shareholder Servicing Agent and the investor, with respect to
the customer services provided by the Shareholder Servicing Agent: 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 upon a percentage
of the assets in the account or of the dividends paid an those assets). Such
fees will have the effect of reducing the yield and effective yield of the Fund
for those investors.
Conversely, the Trust has been advised 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
33
<PAGE>
Fund, which will have the effect of increasing the net return on the investment
of such customers of those Shareholder Servicing Agents. Such customers may be
able to obtain through their Shareholder Servicing Agent or securities broker
quotations reflecting such decreased or increased return.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the Trust
for the past five years are listed below. Asterisks indicate that those Trustees
and officers are "interested persons" (as defined in the 1940 Act) of the Trust.
The address of each, unless otherwise indicated, is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
<S> <C> <C>
FREDERICK C. CHEN Trustee Management Consultant
126 Butternut Hollow Road
Greenwich, Connecticut 06830
LARRY M. ROBBINS Trustee Director for the Center of Teaching
University of Pennsylvania and Learning, University of
College of Arts & Sciences Pennsylvania
120 Logan Hall
Philadelphia, PA 19104
ALAN S. PARSOW Trustee General Partner of Parsow
2222 Skyline Drive Partnership, Ltd. (investments)
Elkhorn, NE 68022
MICHAEL SEELY Trustee President of Investor Access
475 Lexington Avenue Corporation (investor relations
New York, New York 10017 consulting firm)
LESLIE E. BAINS** Trustee Senior Executive Vice President,
HSBC Bank USA HSBC Bank USA, 1990-present; Senior
452 Fifth Avenue Vice President. The Chase Manhattan
New York, New York 10018 Bank, N.A., 1980-1990
WALTER B. GRIMM* President Employee of BISYS Fund Services,
Inc.. June, 1992 to
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C>
present; prior to June, 1992
President of Leigh Investments
Consulting (investment firm)
MARK L. SUTER Vice President Employee of BISYS Fund Services,
Inc., January 2000 to present; VP,
Seligman Data Corp., June 1997 to
January 2000; Capital Link
Consulting, February 1997 to June
1997; US Trust NY, June 1986 to
February 1991
SUE A. WALTERS* Vice President Employee of BISYS Fund Services,
Inc., July 1990 to present
NADEEM YOUSAF* Treasurer Employee of BISYS Fund Services,
Inc., August 1999 to present;
Director. IBT, Canadian Operations,
May 1995 to March 1997; Assistant
Manager, PriceWaterhouse. 1994 to
May 1995
LISA M. HURLEY* Secretary Senior Vice President and General
Counsel of BISYS Fund Services, May
1998 to present; General Counsel of
Moore Capital Management, Inc.;
October 1993 to May 1996, Senior
Vice President and General Counsel
of Northstar Investment Management
Corporation
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
</TABLE>
*Messrs. Grimm and Yousaf and Mss. Walters, Hurley, and Metz also are officers
of certain other investment companies of which BISYS or an affiliate is the
administrator.
35
<PAGE>
**Ms. Bains is an "interested person" as that term is defined in the 1940 Act.
COMPENSATION TABLE
AGGREGATE COMPENSATION FROM:
<TABLE>
<CAPTION>
Trustee Total Compensation from Fund Complex(*)
<S> <C>
Frederick C. Chen $ 9,600
Alan S. Parsow $ 9,600
Larry M. Robbin $11,600
Michael Seely $ 9,600
</TABLE>
(*) The compensation table above reflects the fees received by the Trustees
from the Fund Complex for the year ended October 31, 1999. For the fiscal year
ended October 31, 1999, the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust received from the Fund Complex an
annual retainer of $3,600 and a fee of $1,500 for each meeting of the Board of
Trustees or committee thereof attended, except that Mr. Robbins received an
annual retainer of $4,600 and a fee of $1,725 for each meeting attended. The
Fund Complex includes the Trust, Republic Advisor Funds Trust, the Portfolio
Trust, offshore feeders into the Portfolio Trust, and three stand-alone
offshore funds. The fees paid by the Fund Complex are allocated pro rata among
the Funds based upon the net assets of each 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 positions as officers
with the Trust, unless, as to liability to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
The Fund retains HSBC Asset Management (Americas) Inc. ("Adviser") to act as the
adviser for the Fund. The Adviser is a North American investment affiliate of
HSBC Holdings plc and is located at 140 Broadway, New York, New York 10005.
The Advisory Contract for the Fund provides that the Adviser will manage the
portfolio of the Fund and will furnish to the Fund investment guidance and
policy direction in connection
36
<PAGE>
therewith. The Adviser has agreed to provide to the Trust, among other things,
information relating to composition, credit conditions and average maturity of
the portfolio of the Fund. Pursuant to the Advisory Contract, the Adviser also
furnishes to the Trust's Board of Trustees periodic reports on the investment
performance of the Fund. The Adviser has also agreed in the Advisory Contract to
provide administrative assistance in connection with the operation of the Fund.
Administrative services provided by the Adviser include, among other things, (i)
data processing, clerical and bookkeeping services required in connection with
maintaining the financial accounts and records for the Fund, (ii) compiling
statistical and research data required for the preparation of reports and
statements which are periodically distributed to the Fund's officers and
Trustees, (iii) handling general shareholder relations with Fund investors, such
as advice as to the status of their accounts, the current yield and dividends
declared to date and assistance with other questions related to their accounts,
and (iv) compiling information required in connection with the Fund's filings
with the Securities and Exchange Commission.
If the Adviser were prohibited from performing any of its services for the
Trust, it is expected that the Board of Trustees would recommend to the Fund's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board.
DISTRIBUTION PLANS - CLASS A, CLASS B, AND CLASS C SHARES ONLY
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 Class C Shares (the "Class C Plan"), Fund, as
applicable. The Distribution Plans provide that they may not be amended to
increase materially the costs which either the Class A Shares, Class B Shares,
and Class C Shares may bear pursuant to the Class A Plan, Class B Plan and Class
C Plan and Class D Plan without approval by shareholders of the Class A Shares,
Class B Shares, and 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 the Board of Trustees
and by the Qualified Trustees, by vote cast in person at a meeting called for
the purpose of voting on the Distribution Plans. In adopting the Class A Plan,
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 expense ratio and concluded that there was a reasonable likelihood
that each Distribution Plan will benefit their respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Class A
Shares, Class B Shares, and 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.
THE DISTRIBUTOR AND SPONSOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, acts as sponsor and distributor to the Fund under a
Distribution Contract with the Trust.
37
<PAGE>
The Distributor may, out of its own resources, make payments to broker-dealers
for their services in distributing Shares. BISYS and its affiliates also serve
as administrator or distributor to other investment companies. BISYS is a wholly
owned subsidiary of BISYS Group, Inc.
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 Class A Shares, Class B
Shares, and Class C Shares of the Fund and for the provision of certain
shareholder services with respect to these Shares. Payments to the Distributor
are for various types of activities, including: (1) payments to broker-dealers
which advise shareholders regarding the purchase, sale or retention of Class A
Shares, Class B Shares, and Class C Shares of the Fund and which 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 the 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 the Class B Plan
and Class C Plan, respectively, such payments by the Distributor to
broker-dealers may be in amounts on an annual basis of up to 0.75% of the Fund's
average daily net assets as presented 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 series of the Trust may be allocated to such series on the basis
of average net assets; travel expense is allocated to, or divided among, the
particular series 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.
38
<PAGE>
ADMINISTRATIVE SERVICES PLAN
The Trust has adopted an Administrative Services Plan which provides that the
Trust may obtain the services of an administrator, transfer agent, custodian,
and one or more Shareholder Servicing Agents, and may enter into agreements
providing for the payment of fees for such services. The Administrative Services
Plan 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, Class B Shares, Class C Shares, or Trust 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, Trust 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.
ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Trust with general
office facilities and supervises the overall administration of the Trust and 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. BISYS provides persons satisfactory to the Board of Trustees of the Trust
to serve as officers of the Trust. Such officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
BISYS or its affiliates.
FEES
As compensation for its advisory and management services, the Adviser is paid a
monthly fee by the Fund at the following annual rates:
<TABLE>
<S> <C>
Portion of Average Daily Value of Net Assets of the Fund
Advisory
Not exceeding $400 million [ ]%
In excess of $400 million but [ ]%
not exceeding $800 million
In excess of $800 million but [ ]%
not exceeding $1.2 billion
In excess of $1.2 billion but [ ]%
not exceeding $1.6 billion
In excess of $1.6 billion but [ ]%
not exceeding $2 billion
In excess of $2 billion [ ]%
</TABLE>
Except for the expenses paid by the Adviser under the Advisory Contract and by
BISYS Fund Services, Inc. under the Management and Administration Agreement, the
Fund bears all costs of its operations. Expenses attributable to the Fund are
charged against the assets of the Fund.
39
<PAGE>
The Advisory Contract, Distribution Contract and Management and Administration
Agreement (upon expiration of its initial term on September 1, 1999) will
continue in effect with respect to the Fund from year to year provided such
continuance is approved annually M by the holders of a majority of the
outstanding voting securities of such Fund or by the Trust's Trustees and (ii)
by a majority of the Trustees who are not parties to such contracts or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party ("non-interested Trustees"). Each contract may be terminated with
respect to the Fund at any time, without payment of any penalty, by a Vote of a
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company Act of 1940) or by a vote of a majority of the Trustees on 60
days' written notice, except in the case of the Management and Administration
Agreement which requires written notice of non-renewal given at least 90 days
prior to expiration of the then current term. The Advisory Contract,
Administrative Services Contract and the Distribution Contract shall terminate
automatically in the event of their assignment (as defined in the Investment
Company Act of 1940).
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with BISYS, pursuant to
which BISYS acts as transfer agent (the "Transfer Agent"). The Transfer Agent
maintains 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 BISYS is 3435
Stelzer Road, Columbus, OH 43219.
CUSTODIAN AND FUND ACCOUNTING AGENT
Pursuant to a Custodian Agreement, HSBC also acts as the custodian of the Fund's
assets (the "Custodian"). The Custodian's 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 Custodian does not determine the investment
policies of the or decide which securities will be purchased or sold for the
Fund. For its services, HSBC receives such compensation as may from time to time
be agreed upon by it and the Trust. BISYS 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 HSBC, 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, Class C Shares, Trust 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
40
<PAGE>
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 Funds' 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, Class B Shares, and Class C 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 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.
FEDERAL BANKING LAW
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, HSBC's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. HSBC believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of HSBC to perform these services, the Board of Trustees would review
the Trust's relationship with HSBC and consider taking all action necessary in
the circumstances, which could include recommending to shareholders the
selection of another qualified advisor or, if that course of action appeared
impractical, that the Fund be liquidated.
EXPENSES
Except for the expenses paid by the Adviser and the Distributor, the Fund bears
all costs of its operations. Expenses attributable to a class ("Class Expenses")
shall be allocated to that class
41
<PAGE>
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 the 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 Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of each share of each class of the Fund is determined on
each day on which the New York Stock Exchange is open for trading. As of the
date of this Statement of Additional Information, the New York Stock Exchange is
open every weekday except for the days on which the following holidays are
observed: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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.
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. The 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
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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.
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 a 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.
The accounting records of each 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 a Fund purchases securities which are restricted as to resale
or for which current market quotations are not available, the Advisers will
value such securities based upon all relevant factors as outlined in FRR 1.
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Subject to the Trust's compliance with applicable regulations, the Trust on
behalf of a 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 a Portfolio (instead of cash), as applicable. 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 a
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
The following information supplements and should be read in conjunction with the
sections in the Fund's Prospectus entitled "Purchasing and Adding to Your
Shares." The Prospectus contains a general description of how investors may buy
shares of the Fund and states whether the Fund offer more than one class of
shares. Class A shares are generally sold with a sales charge payable at the
time of purchase. The prospectus contains a table of applicable sales charges.
Certain purchases of Class A shares may be exempt from a sales charge. Class B
and C shares may be subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The prospectus
contains a table of applicable CDSCs. After being held for six years, Class B
shares will automatically convert into Class A shares which are not subject to
sales charges or a CDSC. Class B and C shares are offered without an initial
sales charge. The Fund may sell shares without a sales charge or CDSC pursuant
to special purchase plans the Trust signs.
When purchasing Fund shares, you must specify which Class is being purchased.
The decision as to which Class of shares is most beneficial to you depends on
the amount and the intended length of your investment. You should consider
whether, during the anticipated life of your investment in the Fund, the
accumulated distribution fee, service fee and CDSC, if any, on Class B shares or
Class C shares would be less than the accumulated distribution fee and initial
sales charge on Class A shares purchased at the same time, and to what extent,
if any, such differential would be offset by the return on Class A shares
respectively. Additionally, investors qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution and service fees on Class B or Class C shares exceed the
accumulated distribution fee and initial sales charge on Class A shares during
the life of the investment. Finally, you should consider the effect of the CDSC
period and any conversion rights of the Classes in the context of your own
investment time frame. For example, while Class C shares have a shorter CDSC
period than Class B shares, Class C shares do not have a conversion feature and,
therefore, are subject to ongoing distribution and service fees. Thus, Class B
shares may be more attractive than Class C shares to investors with longer term
investment outlooks. Generally, Class A shares will be most appropriate for
investors who invest $1,000,000 or more in Fund shares, and Class A shares will
not be appropriate for investors who invest less than $50,000 in Fund shares.
A broker-dealer may receive different levels of compensation depending on which
class of shares is sold. The Distributor may also provide different additional
compensation to dealers in
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connection with selling shares of the Fund or for their own company-sponsored
sales programs. Additional compensation or assistance may be provided to dealers
and includes, but is not limited to, payment or reimbursement for educational,
training and sales conferences or programs for their employees. In some cases,
this compensation may only be available to dealers whose representatives have
sold or are expected to sell significant amounts of shares. The Distributor will
make these payments from its own resources and none of the aforementioned
additional compensation is paid for by the applicable Fund or its shareholders.
Shares of the Fund are offered on a continuous basis at net asset value, plus
any applicable sales charge, by the Distributor as an investment vehicle for
institutions, corporations, fiduciaries and individuals.
The sales charge applicable to the purchase of Fund shares will be waived on the
following purchases: (1) by Trustees and officers of the Trust and of Republic
Funds Trust. and members of their immediate families (parents. spouses,
children, brothers and sisters), (2) by directors, employees and retirees of
Marine Midland Bank and its affiliates, and members of their immediate families,
(3) by financial institutions or corporations on behalf of their customers or
employees, or on behalf of any trust, pension, profit-sharing or other benefit
plan for such customers or employees, (4) by directors and employees of the
Distributor, selected broker-dealers and affiliates and members of their
immediate families, (5) by charitable organizations as defined in Section
501(c)(3) of the Internal Revenue Code ("Charitable Organizations") or for
charitable remainder trusts or life income pools established for the benefit of
Charitable Organizations, (6) by registered representatives of selling brokers
and members of their immediate families, (7) by individuals who have terminated
their Employee Benefit Trust ("EBT") Plan or have retired and are purchasing
shares in the Fund with the proceeds of their benefits checks (the EBT Plan must
currently own shares of the Fund at the time of the individual's purchase), (8)
by corporations, their officers or directors, partnerships, and their partners
which are customers or prospective customers of Marine Midland Bank when
authorized by an officer of Marine Midland Bank, and (9) by individuals who, as
determined by an officer of the Fund in accordance with guidelines established
by the Fund's Trustees, have purchased shares under special circumstances not
involving sales expenses to dealers or the Distributor. Eligible investors
should contact the Adviser for details.
The sales load does not apply in any instance to reinvested dividends.
From time to time dealers who receive dealer discounts and broker commissions
from the Distributor may reallow all or a portion of such dealer discounts and
broker commissions to other dealers or brokers. The Distributor, at its expense,
may also provide additional compensation to dealers in connection with sales of
shares of the Fund. 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 one or more
Funds of the Trust, and/or other dealer-sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold a significant number of such shares. Compensation will
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.
Compensation may also include the following types of non-cash compensation
offered through sales contests:
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<PAGE>
(1) vacation trips, including the provision of travel arrangements and lodging
at luxury resorts at an exotic location, (2) tickets for entertainment events
(such as concerts, cruises and sporting events) and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of the Fund's
Shares to qualify for the compensation to the extent such may be prohibited by
the laws of any state or any self- regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
Stock certificates will not be issued with respect to the shares. The Transfer
Agent shall keep accounts upon the book of the Trust for recordholders of such
shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or his
securities broker, a shareholder of the HSBC Investor Money Market Funds may
exchange some or all of his Shares for shares of an identical class of one or
more of the following investment companies: HSBC Investor U.S. Government Money
Market Fund, HSBC Investor Fund, HSBC Investor Overseas Equity Fund, Republic
Opportunity Fund, HSBC Investor New York Tax-Free Fund, HSBC Investor New York
Tax-Free Money Market Fund, HSBC Investor Equity Fund, and such other HSBC
Investor Funds or other registered investment companies for which HSBC serves as
investment adviser as HSBC may determine (the "HSBC Investor Funds"). By
contacting the Transfer Agent or his Shareholder Servicing Agent or his
securities broker, a shareholder of the Retail Funds 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 investor will receive Class A Shares of the Fund in exchange for Class A
shares of other HSBC Investor Funds. Class B Shares, Class C Shares, and Trust
Shares may be exchanged for shares of the same class of one or more of the HSBC
Investor Funds at net asset value without a front-end sales charge provided that
the amount to be exchanged meets the applicable minimum investment requirements
and the exchange is made in states where it is legally authorized. Holders of
the Fund's Class B Shares may not exchange their Shares for shares of any other
class. Exchanges of Fund Investor Shares for Investor shares of one or more HSBC
Investor Funds may be made upon payment of the applicable sales charge, unless
otherwise exempt. Shareholders of Class A Shares of the Fund who are
shareholders as of December 31, 1997 will be grandfathered with respect to the
HSBC Investor Funds and will be exempt from having to pay a sales charge on any
new purchases of Class A or Shares of the Fund. 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. 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 HSBC Investor Funds, which may produce a gain or loss for tax purposes.
The exchange privilege (or any aspect of it) may be changed or discontinued upon
60 days' written notice to shareholders and is available only to shareholders in
states in which such exchanges may be legally made. A shareholder considering an
exchange should obtain and read
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the prospectus of the other Republic Funds and consider the differences in
investment objectives and policies before making any exchange.
An exchange is considered a sale of shares and may result in a capital gain or
loss for federal income tax purposes. A Shareholder wishing to exchange his or
her Shares may do so by contacting the Trust at 800-782-8183, by contacting his
or her broker-dialer or by providing written instruction to the Distributor.
AUTOMATIC INVESTMENT PLAN
The Trust offers a plan for regularly investing specified dollar amounts ($25.00
minimum in monthly, quarterly, semi-annual or annual intervals) in the Fund. If
an Automatic Investment Plan is selected, subsequent investments will be
automatic and will continue until such time as the Trust and the investor's bank
are notified to discontinue further investments. Due to the varying procedures
to prepare, process and to forward bank withdrawal information to the Trust,
there may be a delay between the time of the bank withdrawal and the time the
money reaches the Fund. The investment in the Fund will be made at the net asset
value per share determined on the day that both the check and the bank
withdrawal data are received in required form by the Distributor. 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 Investor Shares from the Distributor,
an investor should contact the Distributor directly (see back cover for address
and phone number).
PURCHASES THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
The Fund's 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. Trust Shares of the Fund are only being
offered to customers of Shareholder Servicing Agents and securities brokers, if
applicable, 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 and "sweep" checking programs. Each
Shareholder Servicing Agent and securities broker may establish its own terms,
conditions and charges, including limitations on the amounts of transactions,
with respect to such services. Charges for these services may include fixed
annual fees, account maintenance fees and minimum account balance requirements.
The effect of any such fees will be to reduce the net return on the investment
of customers of that Shareholder Servicing Agent or securities broker.
Conversely, certain Shareholder Servicing Agents may (although they are not
required by the Trust to do so) credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding such other fees
or the fees received by the Shareholder Servicing Agent from the Fund, which
will have the effect of increasing the net return on the investment of such
customers of those Shareholder Servicing Agents.
Shareholder Servicing Agents and securities brokers may transmit purchase
payments on behalf of their customers by wire directly to the Fund's custodian
bank by following the procedures described above.
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For further information on how to direct a securities broker, if applicable. or
a Shareholder Servicing Agent to purchase Shares, an investor should contact his
securities broker or his Shareholder Servicing Agent.
SALES CHARGES
CLASS A SHARES
BISYS receives this sales charge as distributor and may reallow it as dealer
discounts and brokerage commissions as follows:
SALES CHARGE AS:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Size of Transaction at % Of Offering % Of net
Offering Price Price Amount
Invested
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Up to $49,999 5.00% 5.26%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.75% 3.90%
$250,000 up to $499,999 2.50% 2.56%
$500,000 and up to $999,999 2.00% 2.04%
$1,000,000 and up 1.00% 1.01%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A Shares of
the Funds by or on behalf of (1) purchasers for whom HSBC 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 HSBC, 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 HSBC and any affiliates
thereof, (5) purchasers who use proceeds from an account for which HSBC or one
of its 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.
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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 any fund in
the HSBC Investor 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.
LETTER 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 Fund 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 the
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<PAGE>
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 1-800-782-8183. This program, however, may be modified or eliminated at
any time or from time to time by the Trust without notice.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to purchase Class
A Shares of the Fund at the public offering price applicable to the total of (a)
the total public offering price of the Class A Shares of the Fund 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 the Fund. Class A
Shares sold to purchasers for whom HSBC 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 four 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.
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>
LEVEL LOAD ALTERNATIVE -- CLASS C SHARES
Class C Shares of the Fund are sold at net asset value without an initial sales
charge but are subject to a CDSC of 1.00% 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 1.00% 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. The 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 accountant at
any time at the net asset value next determined after a redemption order in
proper form 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. Class A Shares and Class Y Shares may be redeemed without charge
while Class B Shares and Class C Shares may be subject to a contingent deferred
sales charge. See "Contingent Deferred Sales Charge ("CDSC") -- Class B Shares
and Class C Shares" above. 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 for the Fund, 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
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<PAGE>
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 redeem
Shares, a shareholder should contact his securities broker or his Shareholder
Serving 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 Class A, Class B and
Class C Shares of the Fund 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
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established procedures, it may be liable for any losses due to unauthorized or
fraudulent instructions.
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
The shares may be used as the 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 Fund, except as required for federal income
tax purposes.
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Shares begin accruing dividends on the day they are purchased Dividends are
distributed monthly. Unless a shareholder elects to receive dividends in cash
(subject to the policies of the shareholder's Shareholder Servicing Agent or
securities broker), dividends are distributed in the form of additional shares
of the Fund at the rate of one share (and fraction thereof) of the Fund for each
one dollar (and fraction thereof) of dividend income.
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% nondeductible 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 nine 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 of the Fund, if applicable, 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.
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Fund shareholders to elect Trustees or for other purposes. It is not
anticipated that the Trust will hold shareholders' meetings unless required by
law or the Declaration of Trust. In this regard, the Trust will be required to
hold a meeting to elect Trustees to fill any existing vacancies on the Board if,
at any time, fewer than a majority of the Trustees have been elected by the
shareholders
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of the Trust. In addition, the Declaration of Trust provides that the holders of
not less than two-thirds of the outstanding shares of the Trust may remove
persons serving as Trustee either by declaration in writing or at a meeting
called for such purpose. The Trustees are required to call a meeting for the
purpose of considering the removal of persons serving as Trustee if requested in
writing to do so by the holders of not less than 10% of the outstanding shares
of the Trust.
The Trust's shares do not have cumulative voting rights, so that the holders of
more than 50% of the outstanding shares may elect the entire Board of Trustees,
in which case the holders of the remaining shares would not be able to elect any
Trustees.
Shareholders of the Fund have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of the Fund,
shareholders of the Fund would be entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
The Trust'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
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. 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 ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisers with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state or foreign country
or other taxing jurisdiction.
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TAX STATUS OF THE FUND
The Fund intends to be taxed as a regulated investment company under Subchapter
M of the Code. Accordingly, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by a the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such a distribution will be taxable to shareholders in the calendar year
in which the distribution is declared, rather than the calendar year in which it
is received.
THE PORTFOLIO
The Portfolio has obtained a ruling from the Internal Revenue Service that the
Portfolio will be treated as a partnership for federal income tax purposes. For
purposes of determining whether a Fund satisfies the income and diversification
tests to maintain its status as a regulated investment company, the Fund, as an
investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income and assets.
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DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares (see below for
information concerning exempt-interest dividends and capital gain dividends).
Dividends paid by the Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received by the Fund from U.S.
corporations, may, subject to limitation, be eligible for the dividends received
deduction. However, the alternative minimum tax applicable to corporations may
reduce the value of the dividends received deduction.
The excess of net long-term capital gains over net short-term capital losses
realized, distributed and properly designated by the Fund, whether paid in cash
or reinvested in Fund shares. will generally be taxable to shareholders as
long-term capital gain, regardless of how long a shareholder has held Fund
shares. Such capital gain distributions are subject to a maximum federal income
tax rate of 20% under current law. Net capital gains from assets held for one
year or less will be taxed as ordinary income.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares. A
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands, and the rate of tax will depend upon the
shareholder's holding period for the shares. If the shareholder has held the
shares as a capital asset for more than 12 months, the maximum current federal
income tax rate is 20%. Any loss realized on a redemption, sale or exchange will
be disallowed to the extent the shares disposed of are replaced (including
through reinvestment of dividends) within a period of 61 days, beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case the
basis of the shares acquired will be adjusted to reflect the disallowed loss. If
a shareholder holds Fund shares for six months or less and during that period
receives a distribution taxable to the shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term loss to the extent of such distribution.
If, within 90 after purchasing Fund shares with a sales charge, a shareholder
exchanges the shares and acquires new shares at a reduced (or without any) sales
charge pursuant to a right acquired with the original shares, then the
shareholder may not take the original sales charge into account in determining
the shareholder's gain or loss on the disposition of the shares. Gain or
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loss will generally be determined by excluding all or a portion of the sales
charge from the shareholder's tax basis in the exchanged shares, and the amount
excluded will be treated as an amount paid for the new shares.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid (other than exempt-interest
dividends), capital gain distributions, and redemption proceeds to shareholders
if (1) the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number or social security number. (2) the IRS notifies
the shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
FUND INVESTMENTS
MARKET DISCOUNT. If the Portfolio purchases a debt security at a price
lower than the stated redemption price of such debt security, the excess of the
stated redemption price over the purchase price is "market discount". If the
amount of market discount is more than a the minimis amount, a portion of such
market discount must be included as ordinary income (not capital gain) by the
Portfolio in each taxable year in which the Portfolio owns an interest in such
debt security and receives a principal payment on it. In particular, the
Portfolio will be required to allocate that principal payment first to the
portion of the market discount on the debt security that has accrued but has not
previously been includable in income. In general, the amount of market discount
that must be included for each period is equal to the lesser of (i) the amount
of market discount accruing during such period (plus any accrued market discount
for prior periods not previously taken into account) or (ii) the amount of the
principal payment with respect to such period. Generally. market discount
accrues on a daily basis for each day the debt security is held by the Portfolio
at a constant rate over the time remaining to the debt security's maturity or,
at the election of the Portfolio, at a constant yield to maturity which takes
into account the semi-annual compounding of interest. Gain realized on the
disposition of a market discount obligation must be recognized as ordinary
interest income (not capital gain) to the extent of the "accrued market
discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by
the Portfolio may be treated as debt securities that were originally issued at a
discount. Very generally, original issue discount is defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Although no cash income on account of such discount is
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actually received by the Portfolio, original issue discount that accrues on a
debt security 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 applicable to regulated investment companies. Some
debt securities may be purchased by the Portfolio at a discount that exceeds the
original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).
CMO RESIDUALS. Under certain circumstances, the Portfolio may be taxed
on income deemed to be earned from certain CMO residuals.
OPTIONS FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Portfolio may invest may be "section 1256 contracts." Gains (or
losses) on these contracts generally are considered to be 60% long-term and 40%
short-term capital gains or losses. Also, section 1256 contracts held by the
Portfolio at the end of each taxable year (and on certain other dates prescribed
in the Code) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and 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 the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Portfolio may make with
respect to its straddle positions may also affect the amount, character and
timing of the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Portfolio are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the Portfolio, which is taxed as ordinary income when
distributed to shareholders. 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 shareholders as ordinary income or long-term
capital gain may be increased or decreased substantially as compared to the Fund
that did not engage in such transactions.
CONSTRUCTIVE SALES. Under certain circumstances, the Portfolio may
recognize gain from a constructive sale of an "appreciated financial position"
it holds if it enters into a short sale, forward contract or other transaction
that substantially reduces the risk of loss with respect to the appreciated
position. In that event, the Portfolio 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 Portfolio'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 Portfolio's holding period
and the application of various loss deferral provisions of the Code.
Constructive sale treatment does not apply to transactions closed in the 90-day
period ending with the 30th day after the close of the taxable year, if certain
conditions are met.
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SECTION 988 GAINS OR LOSSES. Gains or losses attributable to
fluctuations in exchange rates which 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 ordinary loss. Similarly, on disposition of some investments,
including debt securities and certain forward contracts denominated in a foreign
currency, gains or losses attributable to fluctuations in the value of the
foreign currency between the acquisition an disposition of the position also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains or losses, increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to its
shareholders as ordinary income. If section 988 losses exceed other investment
company taxable income during a taxable year, the Portfolio would not be able to
make any ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Portfolio shares.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Portfolio may invest in
shares of foreign corporations that 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 Portfolio itself may be subject to a tax on a portion of the
excess distribution, whether or not the corresponding income is distributed by
the Portfolio to shareholders. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Portfolio held the PFIC shares. The Portfolio will itself be subject
to tax on the portion, if any, of an excess distribution that is so allocated to
prior Portfolio 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 Portfolio may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Portfolio 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 were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Portfolio's PFIC shares at the end of each taxable year,
with the result that unrealized gains would be 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.
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
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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 Funds will inform
shareholders annually as to the dollar amount of distributions derived from
interest payments on private activity securities.
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, Fund Trust Tax-Free Trust (organized on July 30,
1986) and Fund Vest (organized on July 17, 1984, and since renamed Fund Source).
Prior to October 3, 1994 the name of the Trust was "Fund Trust".
The capitalization of the Trust consists solely of an unlimited number of shares
of beneficial interest with a par value of $0.001 each. The Board of Trustees
may establish additional series (with different investment objectives and
fundamental policies) and classes of shares within each series at any time in
the future. Establishment and offering of additional classes or series will not
alter the rights of the Fund's shareholders. When issued, shares are fully paid,
nonassessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of the Fund, each shareholder is
entitled to receive his pro rata share of the net assets of the Fund.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG LLP as independent auditors of the
Trust. KPMG LLP will audit the Trust's annual financial statements, prepare the
Trust's income tax returns, and assist in the filings with the Securities and
Exchange Commission. KPMG LLP's address is 2 Nationwide Plaza, Columbus, Ohio
43215.
COUNSEL
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006, passes upon certain
legal matters in connection with the shares of the Fund offered by the Trust,
and also acts as counsel to the Trust.
CODE OF ETHICS
HSBC Investor Funds, the Adviser and BISYS each have adopted a code of ethics,
as required by applicable law, which is designed to prevent affiliated persons
of the Fund, the Adviser and BISYS from engaging in deceptive, manipulative, or
fraudulent activities in connection with securities held or to be acquired by
the Fund (which may also be held by persons subject to a code). There can be no
assurance that the codes will be effective in preventing such activities.
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REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
the information included in the Trust's registration statement filed with the
Securities and Exchange Commission under the 1933 Act with respect to shares of
the Fund, certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund is expected to commence operations [ ], 2000. Therefore, the
performance information (including annual and average annual total returns) for
a full calendar year is not yet available.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust, P.O. Box 182845.
Columbus, Ohio 43218-2845.
GENERAL AND ACCOUNT INFORMATION: (800) 782-8183 (TOLL/FREE)
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STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
HSBC INVESTOR GROWTH AND INCOME FUND
P.O. Box 182845
Columbus, Ohio 43218-2845
General and Account Information (800) 782-8183 (Toll Free)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
HSBC Asset Management (Americas) Inc. BISYS Fund Services
Investment Adviser Growth and Income Fund Administrator, Distributor and Sponsor
(an "Adviser") ("BISYS," "Administrator," "Distributor," or
"Sponsor")
</TABLE>
The HSBC Growth and Income Fund (the "Fund") is a series of the HSBC
Investor Funds (the "Trust"), an open-end, management investment company that
currently consists of thirteen series, each of which has different and distinct
investment objectives and policies. The Fund is described in this Statement of
Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS
FOR THE FUND DATED [ ], 2000 (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.
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated [ ], 2000 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.
[ ], 2000
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS..................................................................1
Short-Term Trading.......................................................................................1
Depository Receipts......................................................................................1
Foreign Securities.......................................................................................2
Writing Covered Calls....................................................................................3
Stock Index Options......................................................................................3
Stock Index Futures Contracts............................................................................4
Options on Stock Index Futures...........................................................................5
Option Premiums..........................................................................................7
U.S. Government Securities...............................................................................7
Mortgage-Related Securities..............................................................................7
Asset-Backed Securities..................................................................................9
Zero Coupon Securities..................................................................................10
Variable and Floating Rate Demand and Master Demand Notes...............................................10
Loans of Portfolio Securities...........................................................................11
Repurchase Agreements...................................................................................11
Illiquid Securities.....................................................................................12
Investment Company Securities...........................................................................13
Long-term and Short-term Corporate Debt Obligations.....................................................13
Convertible Securities..................................................................................14
When-Issued and Delayed-Delivery Securities.............................................................15
Portfolio Transactions..................................................................................15
INVESTMENT RESTRICTIONS..........................................................................................16
PERFORMANCE INFORMATION..........................................................................................18
MANAGEMENT OF THE TRUST..........................................................................................20
Trustees and Officers...................................................................................20
Compensation Table......................................................................................22
Investment Adviser......................................................................................22
Distribution Plans - Class A, Class B, and Class C Shares Only..........................................23
The Distributor and Sponsor.............................................................................23
Administrative Services Plan............................................................................24
Administrator...........................................................................................25
Fees ...............................................................................................25
Transfer Agent..........................................................................................26
Custodian and Fund Accounting Agent.....................................................................26
Shareholder Servicing Agents............................................................................26
Federal Banking Law.....................................................................................27
Expenses................................................................................................27
DETERMINATION OF NET ASSET VALUE.................................................................................28
PURCHASE OF SHARES...............................................................................................28
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Exchange Privilege......................................................................................30
Automatic Investment Plan...............................................................................31
SALES CHARGES....................................................................................................32
Class A Shares..........................................................................................32
Sales Charge Waivers....................................................................................32
Concurrent Purchases....................................................................................33
Letter of Intent........................................................................................33
Right of Accumulation...................................................................................34
Contingent Deferred Sales Charge ("CDSC") - Class B Shares..............................................34
Level Load Alternative -- Class C Shares................................................................35
REDEMPTION OF SHARES.............................................................................................36
Systematic Withdrawal Plan..............................................................................37
Redemption of Shares Purchased Directly Through the Distributor.........................................37
Retirement Plans........................................................................................37
Individual Retirement Accounts..........................................................................38
Defined Contribution Plans..............................................................................38
Section 457 Plan, 401(k) Plan, 403(b) Plan..............................................................38
DIVIDENDS AND DISTRIBUTIONS......................................................................................38
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.............................................................39
TAXATION ........................................................................................................40
Tax Status of the Fund..................................................................................40
Distributions...........................................................................................41
Dispositions............................................................................................42
Backup Withholding......................................................................................42
Other Taxation..........................................................................................42
Fund Investments Market Discount........................................................................43
Original Issue Discount.................................................................................43
CMO Residuals...........................................................................................43
Options Futures and Forward Contracts...................................................................43
Constructive Sales......................................................................................44
Section 988 Gains or Losses.............................................................................44
Passive Foreign Investment Companies....................................................................44
Alternative Minimum Tax.................................................................................45
OTHER INFORMATION CAPITALIZATION.................................................................................45
Shares of Beneficial Interest...........................................................................45
Independent Auditors....................................................................................46
Counsel.................................................................................................46
Code of Ethics..........................................................................................46
Registration Statement..................................................................................46
FINANCIAL STATEMENTS.............................................................................................46
Shareholder Inquiries...................................................................................47
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INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of the Fund is to provide investors with
long-term growth of capital and current income.
The Fund seeks to achieve its objective by investing, under ordinary
market conditions, primarily in common stocks, preferred stocks and securities
convertible into or with rights to purchase common stocks ("equity securities").
As a matter of fundamental policy, during normal market conditions, at least 65%
of the value of the Fund's total assets will be invested in equity securities.
The balance of the Fund's assets may be invested in various types of fixed
income securities and in money market instruments. Most of the Fund's
investments will be securities listed on the New York or American Stock
Exchanges or on NASDAQ and may also consist of American Depository Receipts
("ADRs") and investment company securities (see "Other Investment Practices of
the Funds" in this Prospectus for further information on these investments). The
Adviser expects that the Fund's investments will consist of companies which will
be of various sizes and in various industries and may in many cases be leaders
in their fields. In addition, the Fund may, within certain limitations as set
forth below, lend portfolio securities, enter into repurchase agreements, invest
in when-issued and delayed delivery securities and write covered call options.
The Fund may use stock index futures, related options and options on stock
indices for the sole purpose of hedging the portfolio. The Fund's investments in
fixed income securities will primarily consist of securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, and
investment grade debt obligations issued or guaranteed by domestic corporations
or commercial banks. From time to time, the Fund may also invest up to 5% of its
total assets in the debt obligations of foreign issuers. The types of debt
obligations in which the Fund will invest include, among others, bonds, notes,
debentures, commercial paper, variable and floating rate demand and master
demand notes, zero coupon securities and asset-backed and mortgage-related
securities.
The Fund intends to stay invested in the equity securities described
above to the extent practicable in light of its investment objective and
long-term investment perspective. Under ordinary market conditions, therefore,
no more than 35% of the Fund's total assets will be invested in fixed income
securities and money market instruments for purposes of meeting the Fund's
investment objective of current income. However, for temporary defensive
purposes, e.g., during periods in which adverse market changes or other adverse
economic conditions warrant as determined by the Adviser, the Fund may invest up
to 100% of its total assets in money market instruments as described below.
SHORT-TERM TRADING. Although the Fund will not make a practice of
short- term trading, purchases and sales of securities will be made whenever
necessary or desirable in the management's view to achieve the investment
objective of the Fund. Management does not expect that in pursuing the Fund's
investment objective unusual portfolio turnover will be required and intends to
keep turnover to a minimum consistent with such investment objective. The
management believes unsettled market economic conditions during certain periods
require greater portfolio turnover in pursuing the Fund's investment objectives
than would otherwise be the case. A higher incidence of portfolio turnover will
result in greater transaction costs to the Fund.
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DEPOSITORY RECEIPTS. The Fund may invest in American Depository
Receipts ("ADRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depositary Receipts
("CDRs"), are receipts issued in Europe typically by non-United States banks and
trust companies that evidence ownership of either foreign or domestic
securities. GDRs are issued globally and evidence a similar ownership
arrangements. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe and GDRs are designed for trading in non-U.S. securities
markets. The International Equity Fund may invest in ADRs, EDRs, CDRs and GDRs
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without participation
by the issuer of the deposited security. Holders of unsponsored depositary
receipts generally bear all the costs of such facilities and the depositary of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or
to pass through voting rights to holders of such receipts in respect of the
deposited securities. The Fund intends to invest less than 20% of the Fund's
total net assets in ADRs.
There are certain risks associated with investments in unsponsored
depositary programs. Because the non-U.S. company does not actively participate
in the creation of the depositary program, the underlying agreement for service
and payment will be between the depositary and the shareholder. The company
issuing the stock underlying the depositary receipts pays nothing to establish
the unsponsored facility, as fees for depositary receipt issuance and
cancellation are paid by brokers. Investors directly bear the expenses
associated with certificate transfer, custody and dividend payment. In an
unsponsored depositary program, there also may be several depositaries with no
defined legal obligations to the non-U.S. company. The duplicate depositaries
may lead to marketplace confusion because there would be no central source of
information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
In addition, with respect to all depositary receipts, there is always
the risk of loss due to currency fluctuations.
FOREIGN SECURITIES. Investment in securities of foreign issuers may
subject the Fund to risks of foreign political, economic and legal conditions
and developments that an investor would not encounter investing in equity
securities issued by U.S. domestic companies. Such conditions or developments
might include favorable or unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Fund invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid as, and may be more
volatile than, comparable domestic common stocks. In addition, foreign
securities markets are generally not as developed or efficient as those in the
United States. There is generally less government supervision and regulation of
foreign securities exchanges, brokers and companies than in the United States.
Furthermore, issuers of foreign securities are subject to different, often less
comprehensive, accounting, reporting and disclosure requirements than
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domestic issuers. The Fund, in connection with its purchases and sales of
foreign securities, other than securities denominated in United States Dollars,
is influenced by the returns on the currencies in which the securities are
denominated. Currency risk is the risk that changes in foreign exchange rates
will affect, favorably or unfavorably, the value of foreign securities held by
the Fund. In a period when the U.S. Dollar generally rises against foreign
currencies, the value of foreign stocks for a U.S. investor will be diminished.
By contrast, in a period when the U.S. Dollar generally declines, the value of
foreign securities will be enhanced. Further, brokerage costs in purchasing and
selling securities in foreign securities markets generally are higher than such
costs in comparable transactions in domestic securities markets, and foreign
custodial costs relating to the Fund's portfolio securities are higher than
domestic custodial costs.
Investment in emerging market countries presents risks in greater
degree than, and in addition to, those presented by investment in foreign
issuers in general. A number of emerging market countries restrict, to varying
degrees, foreign investment in stocks. Repatriation of investment income,
capital, and the proceeds of sales of 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 Fund. Inflation and rapid fluctuations in
inflation rates have had and may continue to have a negative effect on the
economies and securities markets of certain emerging market countries.
WRITING COVERED CALLS. The Fund may seek to earn premiums by writing
covered call options against some of the securities in its portfolio provided
the options are listed on a national securities exchange. A call option is
"covered" if the Fund owns the underlying securities covered by the call. The
purchaser of the call option obtains the right to acquire these securities at a
fixed price (which may be less than, the same as, or greater than the current
market price of such securities) during a specified period of time. The Fund, as
the writer of the option, forgoes the opportunity to profit from an increase in
the market price of the underlying security above the exercise price except
insofar as the premium represents such a profit.
The Fund retains the risk of loss should the price of the underlying
security decline below the purchase price of the underlying security minus the
premium. The aggregate value of the securities subject to options written by the
Fund may not exceed 25% of the value of the Fund's net assets.
To the extent permitted below, the Fund may engage in transactions for
the purchase and sale of stock index options, stock index futures contracts and
options on stock index futures.
STOCK INDEX OPTIONS. The Fund may purchase and write put and call
options on stock indexes listed on national securities exchanges for the purpose
of hedging their portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index. Some stock index options are based
on a broad market index such as the New York Stock Exchange Composite Index, or
a narrower market index such as the Standard & Poor's 100. Indexes are also
based on an industry or market segment such as the American Stock Exchange Oil &
Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock, except that
(a) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make
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delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the difference between
the closing level of the stock index upon which the option is based and the
exercise price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
STOCK INDEX FUTURES CONTRACTS. The Fund may enter into stock index
futures contracts in order to protect the value of their common stock
investments. A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined by
the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock index
futures contract, and the purchaser will realize a loss in that amount. Stock
index futures contracts expire on a fixed date, currently one to seven months
from the date of the contract, and are settled upon expiration of the contract.
The Fund will sell stock index futures only if the amount resulting from the
multiplication of the then current level of the indices upon which such futures
contracts are based, and the number of futures contracts which would be
outstanding, do not exceed one-third of the value of the Fund's net assets.
When a futures contract is executed, each party deposits with a broker
or in a segregated custodial account up to 5% of the contract amount, called the
"initial margin," and during the term of the contract, the amount of the deposit
is adjusted based on the current value of the futures contract by payments of
variation margin to or from the broker or segregated account.
The Fund intends to utilize stock index futures contracts only for the
purpose of attempting to protect the value of its common stock portfolio in the
event of a decline in stock prices and, therefore, usually will be the seller of
stock index futures contracts. This risk management strategy is an alternative
to selling securities in a portfolio and investing in money market instruments.
Also, stock index futures contracts may be purchased to protect the Fund against
an increase in prices of stocks which the Fund intends to purchase. If the Fund
is unable to invest its cash (or cash equivalents) in stock in an orderly
fashion, the Fund could purchase a stock index futures contract which may be
used to offset any increase in the price of the stock. However, it is possible
that the market may decline instead, resulting in a loss on the stock index
futures contract. If the Fund then concludes not to invest in stock at that
time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract that
is not offset by a reduction in the price of securities purchases.
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The Fund also may buy or sell stock index futures contracts to close out
existing futures positions.
OPTIONS ON STOCK INDEX FUTURES. The Fund may purchase and write call
and put options on stock index futures contracts which are traded on a United
States or foreign exchange or board of trade. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the option period. Upon exercise of the option, the writer of the option is
obligated to convey the appropriate futures position to the holder of the
option. If an option is exercised on the last trading day before the expiration
date of the option, a cash settlement will be made in an amount equal to the
difference between the closing price of the futures contract and the exercise
price of the option.
The Fund may use options on stock index futures contracts solely for
bona fide hedging or other appropriate risk management purposes. If the Fund
purchases a call (put) option on a futures contract, it benefits from any
increase (decrease) in the value of the futures contract, but is subject to the
risk of decrease (increase) in value of the futures contract. The benefits
received are reduced by the amount of the premium and transaction costs paid by
the Fund for the option. If market conditions do not favor the exercise of the
option, the Fund's loss is limited to the amount of such premium and transaction
costs paid by the Fund for the option.
If the Fund writes a call (put) option on a stock index futures
contract, the Fund receives a premium but assumes the risk of a rise (decline)
in value in the underlying futures contract. If the option is not exercised, the
Fund gains the amount of the premium, which may partially offset unfavorable
changes due to interest rate or currency exchange rate fluctuations in the value
of the securities held or to be acquired for the Fund's portfolio. If the option
is exercised, the Fund will incur a loss, which will be reduced by the amount of
the premium it receives. However, depending on the degree of correlation between
changes in the value of its portfolio securities (or the currency in which they
are denominated) and changes in the value of futures positions, the Fund's
losses from writing options on futures may be partially offset by favorable
changes in the value of portfolio securities or in the cost of securities to be
acquired.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market. The Fund will sell options
on futures and on stock indices only to close out existing hedge positions.
Writing of options involves the risk that there will be no market in
which to effect a closing transaction. An exchange-traded option may be closed
out only on an exchange that provides a secondary market for an option of the
same series. Over-the- counter ("OTC") options are not generally terminable at
the option of the writer and may be closed out only by negotiation with the
holder. There is also no assurance that a liquid secondary market on an exchange
will exist. In addition, because OTC options are issued in privately negotiated
transactions exempt from registration under the Securities Act of 1933, there is
no assurance that the Fund will succeed in negotiating a closing out of a
particular OTC option at any particular time. If the Fund, as covered call
option writer, is unable to effect a closing purchase transaction in the
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secondary market or otherwise, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
The staff of the United States Securities and Exchange Commission (the
"SEC") has taken the position that purchased options not traded on registered
domestic securities exchanges and the assets used as cover for written options
not traded on such exchanges are generally illiquid securities. However, the
staff has also opined that, to the extent a mutual fund sells an OTC option to a
primary dealer that it considers creditworthy and contracts with such primary
dealer to establish a formula price at which the fund would have the absolute
right to repurchase the option, the fund would only be required to treat as
illiquid the portion of the assets used to cover such option equal to the
formula price minus the amount by which the option is in- the-money. Pending
resolution of the issue, the Fund will treat such options and, except to the
extent permitted through the procedure described in the preceding sentence,
assets as subject to the Fund's limitation on investments in securities that are
not readily marketable.
The Fund's successful use of stock index futures contracts, options on
such contracts and options on indices depends upon the Adviser's ability to
predict the direction of the market and is subject to various additional risks.
The correlation between movements in the price of the futures contract and the
price of the securities being hedged is imperfect and the risk from imperfect
correlation increases in the case of stock index futures as the composition of
the Fund's portfolio diverges from the composition of the relevant index. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
may expose the Fund to risk of loss. In addition, if the Fund purchases futures
to hedge against market advances before it can invest in common stock in an
advantageous manner and the market declines, the Fund might create a loss on the
futures contract. Particularly in the case of options on stock index futures and
on stock indices, the Fund's ability to establish and maintain positions will
depend on market liquidity. The successful utilization of hedging and risk
management transactions requires skills different form those needed in the
selection of the Fund's portfolio securities. The Fund believes that the Adviser
possesses the skills necessary for the successful utilization of hedging and
risk management transactions.
Positions in options, futures and options on futures may be closed out
only on an exchange which provides a secondary market for such purposes. There
can be no assurance that a liquid secondary market will exist for any particular
option, futures contract or related option at any specific time. Thus, it may
not be possible to close such an option or futures position which could have an
adverse impact on the Fund's ability to effectively hedge its securities. The
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
Pursuant to undertakings with the Commodity Futures Trading Commission
("CFTC"), (i) the Fund has agreed to restrict the use of futures and related
options only for the purpose of hedging, as such term is defined in the CFTC's
rules and regulations; (ii) the Fund will not enter into futures and related
transactions if, immediately thereafter, the sum of the margin deposits on the
Fund's existing futures and related options positions and the premiums paid for
related options would exceed 5% of the market value of such Fund's total assets
after taking into account unrealized profits and unrealized losses on any such
contract; (iii) the Fund will not market, and are not marketing, themselves as
commodity pools or otherwise as vehicles for
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trading in commodity futures and related options; and (iv) the Fund will
segregate assets to cover the futures and options.
OPTION PREMIUMS. In order to comply with certain state securities
regulations, the Fund has agreed to limit maximum premiums paid on put and call
options on other than futures contracts to less than 2% of the Fund's net assets
at any one time.
U.S. GOVERNMENT SECURITIES. The Fund may invest in all types of
securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities, including U.S.
Treasury obligations with varying interest rates, maturities and dates of
issuance, such as U.S. Treasury bills (maturities of one year or less) U.S.
Treasury notes (generally maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years) and obligations issued or
guaranteed by U.S. Government agencies or which are supported by the full faith
and credit pledge of the U.S. Government. In the case of U.S. Government
obligations which are not backed by the full faith and credit pledge of the
United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States in the event the agency or instrumentality is
unable to meet its commitments. Such securities may also include securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and participations in loans made to foreign governments or
their agencies that are substantially guaranteed by the U.S. Government (such as
Government Trust Certificates). See "Mortgage-Related Securities" and
"Asset-Backed Securities" below.
MORTGAGE-RELATED SECURITIES. The Fund may, consistent with its
investment objective and policies, invest in mortgage-related securities.
Mortgage-related securities, for purposes of the Fund's Prospectus and
this SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government National Mortgage
Association and government-related organizations such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as
by non-governmental issuers such as commercial banks, savings and loan
institutions, mortgage bankers, and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If the Fund purchases a mortgage-related security
at a premium, that portion may be lost if there is a decline in the market value
of the security whether resulting from changes in interest rates or prepayments
in the underlying mortgage collateral. As with other interest-bearing
securities, the prices of such securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true since in
periods of declining interest rates the mortgages underlying the securities are
prone to prepayment. For this and other reasons, a mortgage-related security's
stated maturity may be shortened by unscheduled prepayments on the underlying
mortgages and, therefore, it is not possible to predict accurately the
security's return to the Fund. Similarly, because the average life of mortgage
related securities may lengthen with increases in interest rates, the portfolio
weighted average life of the mortgage-related securities in which the Fund
invests may at times lengthen due to this effect. Under these circumstances, the
Adviser may, but is not required to, sell securities in order to maintain an
appropriate portfolio average life.
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Regular payments received in respect of mortgage-related securities
include both interest and principal. No assurance can be given as to the yield
and total return the Fund will receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities,
and among the securities that they issue. Mortgage-related securities created by
the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as
to the timely payment of principal and interest and such guarantee is backed by
the full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Government to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a government-
sponsored organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
currently guarantees timely payment of interest and either timely payment of
principal or eventual payment of principal depending upon the date of issue.
When the FHLMC does not guarantee timely payment of principal, FHLMC may remit
the amount due based on its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
In addition to GNMA, FNMA or FHLMC certificates, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, the Fund also may invest in mortgage
pass-through securities, where all interest payments go to one class of holders
("Interest Only Securities" or "IOs") and all principal payments go to a second
class of holders ("Principal Only Securities" or "POs"). These securities are
commonly referred to as mortgage-backed security strips or MBS strips. The
yields to maturity on IOs and POs are particularly sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in IOs. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the return on POs could be adversely
affected. The Fund will treat IOs and POs as illiquid securities except for IOs
and POs issued by U.S. Government agencies and instrumentalities backed by
fixed-rate mortgages, whose liquidity is monitored by the Adviser subject to the
supervision of the Board of Trustees.
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The Fund may also invest in certain Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs") which are
hybrid instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Interest and prepaid principal on a CMO or
REMIC are paid monthly or semi-annually. CMOs and REMICs 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. CMOs and
REMICs are structured into multiple classes, with each class bearing a different
expected maturity. Payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes generally receive principal only after the earlier
classes have been retired. To the extent a particular CMO or REMIC is issued by
an investment company, the Fund's ability to invest in such CMOs or REMICs will
be limited. The Fund will not invest in the residual interests of REMICs.
The Adviser expects that new types of mortgage-related securities may
be developed and offered to investors. The Adviser will, consistent with the
Fund's investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
The yield characteristics of mortgage-related securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund purchases a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.
Like other bond investments, the value of mortgage-backed securities
will tend to rise when interest rates fall and to fall when interest rates rise.
Their value may also be affected by changes in the market's perception of the
creditworthiness of the entity issuing or guaranteeing them or by changes in
government regulations and tax policies. The magnitude of these fluctuations
generally will be greater when the average maturity of the Fund's portfolio
securities is longer.
Assumptions generally accepted by the industry concerning the
probability of early payment may be used in the calculation of maturities for
debt securities that contain put or call provisions, sometimes resulting in a
calculated maturity different than the stated maturity of the security.
ASSET-BACKED SECURITIES. Through the use of trusts and special purpose
subsidiaries, various types of assets, primarily home equity loans and
automobile and credit card receivables, are being securitized in pass-through
structures similar to the mortgage pass-through structures described above or in
a pay-through structure similar to the collateralized mortgage structure.
Consistent with the Fund's investment objectives, policies and quality
standards, the Fund may invest in these and other types of asset-backed
securities which may be developed in the future.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the
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complete benefit of a security interest in the related collateral. For example,
credit card receivables generally are unsecured and the debtors are entitled to
the protection of a number of state and Federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds from
repossessed collateral may not always be sufficient to support payments on these
securities. The risks associated with asset-backed securities are often reduced
by the addition of credit enhancements as a letter of credit from a bank, excess
collateral or a third-party guarantee.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities.
A zero coupon security pays no interest to its holder during its life and is
sold at a discount to its face value at maturity. The market prices of zero
coupon securities generally are more volatile than the market prices of
securities that pay interest periodically and are more sensitive to changes in
interest rates than non-zero coupon securities having similar maturities and
credit qualities.
The Fund may invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently. Under the STRIPS (Separate Trading of
Registered Interest and Principal of Securities) program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Current Federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue discount
on such security that accrues that year, even though the holder receives no cash
payments of interest during the year.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES. The Fund
may, from time to time, buy variable or floating rate demand notes issued by
corporations, bank holding companies and financial institutions and similar
taxable and tax-exempt instruments issued by government agencies and
instrumentalities. These securities will typically have a maturity over one year
but carry with them the right of the holder to put the securities to a
remarketing agent or other entity at designated time intervals and on specified
notice. The obligation of the issuer of the put to repurchase the securities may
be backed by a letter of credit or other obligation issued by a financial
institution. The purchase price is ordinarily par plus accrued and unpaid
interest. Generally, the remarketing agent will adjust the interest rate every
seven days (or at other specified intervals) in order to maintain the interest
rate at the prevailing rate for securities with a seven-day or other designated
maturity. The Fund's investment in demand instruments which provide that the
Fund will not receive the principal note amount within seven days' notice, in
combination with the Fund's other investments which are not readily marketable,
will be limited to an aggregate total of 15% of the Fund's net assets.
The Fund may also buy variable rate master demand notes. The terms of
the obligations permit the Fund to invest fluctuating amounts at varying rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount and the borrower may repay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
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Because the notes are direct lending arrangements between the Fund and
the borrower, it is not generally contemplated that they will be traded, and
there is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, the Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the criteria set
forth in this Prospectus for investment in money market instruments.
LOANS OF PORTFOLIO SECURITIES. The Fund may, subject to the
restrictions set forth under "Investment Restrictions," make loans of portfolio
securities to brokers, dealers and financial institutions if cash or cash
equivalent collateral, including letters of credit, equal to at least 102% of
the current market value of the securities loaned (including accrued dividends
and interest thereon) plus the interest payable with respect to the loan is
maintained by the borrower with the lending Fund in a segregated account. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. In determining whether to lend a security to
a particular broker, dealer or financial institution, the Adviser will consider
all relevant facts and circumstances, including the creditworthiness of the
broker, dealer or financial institution and whether the income to be earned from
the loan justifies the attendant risks. The Fund will not enter into any
portfolio security lending arrangement having a duration of longer than one
year. Any securities which the Fund may receive as collateral will not become
part of the Fund's portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof which is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the Fund an amount equal to any accrued income on those securities, and the
Fund may invest the cash collateral and earn additional income or receive an
agreed upon fee from a borrower which has delivered cash equivalent collateral.
The Fund will not loan securities having an aggregate value which
exceeds 33-1/3% of the current value of the Fund's total assets. Loans of
securities will be subject to termination at the lender's or the borrower's
option. The Fund may pay reasonable administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or the
placing broker. Borrowers and placing brokers may not be affiliated, directly or
indirectly, with the Fund, its investment adviser or subadviser.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements, whereby the seller agrees to repurchase such securities
at the Fund's cost plus interest within a specified time (generally one day).
While repurchase agreements involve certain risks not associated with direct
investments in the underlying securities, the Fund will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with large, well-capitalized banks and registered
broker-dealers having creditworthiness determined by the Adviser to be
substantially equivalent to that of issuers of debt securities rated investment
grade. In addition, the Fund's repurchase agreements will provide that the value
of the collateral underlying the repurchase agreement will always be at
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least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement, and that the Fund's custodian will take possession of
such collateral. In the event of a default or bankruptcy by the seller, the Fund
will seek to liquidate such collateral. The Adviser will continually monitor the
value of the underlying securities to ensure that their value always equals or
exceeds the repurchase price plus accrued interest. However, the exercise of the
Fund's right to liquidate such collateral could involve certain costs or delays
and, to the extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a loss.
Repurchase agreements are considered to be loans by an investment company under
the 1940 Act. It is the current policy of the Fund (except the International
Fund) not to enter into repurchase agreements exceeding in the aggregate 10%
(15% in the case of the Fixed Income Fund) of the market value of the Fund's
total assets.
Repurchase agreements may involve certain risks. If the seller in the
transaction becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code, recent amendments to the Bankruptcy Code permit the Fund to
exercise a contractual right to liquidate the underlying securities. However, if
the seller is a stockbroker or other entity not afforded protection under the
Bankruptcy Code, an agency having jurisdiction over the insolvent entity may
determine that the Fund does not have the immediate right to liquidate the
underlying securities. If the seller defaults, the Fund might incur a loss if
the value of the underlying securities declines. The Fund may also incur
disposition costs in connection with the liquidation of the securities. While
the Fund's management acknowledges these risks, it is expected that they can be
controlled through selection criteria established by the Board of Trustees and
monitoring procedures.
ILLIQUID SECURITIES. The Fund will not invest in illiquid securities if
immediately after such investment more than 15% of such Fund's net assets (taken
at market value) would be invested in such securities. Historically, illiquid
securities have included securities subject to contractual or legal restrictions
on resale because they have not been registered under the Securities Act of
1933, as amended ("Securities Act"), securities that are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities that have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
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The Fund may also invest in restricted securities issued under Section
4(2) of the Securities Act, which exempts from registration "transactions by an
issuer not involving any public offering." Section 4(2) instruments are
restricted in the sense that they can only be resold through the issuing dealer
and only to institutional investors; they cannot be resold to the general public
without registration. Restricted securities issued under Section 4(2) of the
Securities Act will be treated as illiquid and subject to the Fund's investment
restriction on illiquid securities.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restrictions on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. The Adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
Consequently, it is the intent of the Fund to invest, pursuant to procedures
established by the Board of Trustees and subject to applicable investment
restrictions, in securities eligible for resale under Rule 144A which are
determined to be liquid based upon the trading markets for the securities.
The Adviser will monitor the liquidity of restricted securities in the
Fund's portfolio under the supervision of the Trustees. In reaching liquidity
decisions, the Adviser will consider, among other things, the following factors:
(1) the frequency of trades and quotes for the security over the course of six
months or as determined in the discretion of the Adviser; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers over the course of six months or as determined in the
discretion of the Adviser; (3) dealer undertakings to make a market in the
security; (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer); and (5) other factors, if
any, which the Adviser deems relevant. The Adviser will also monitor the
purchase of Rule 144A securities to assure that the total of all Rule 144A
securities held by the Fund does not exceed 15% of the respective Fund's average
daily net assets. Rule 144A securities which are determined to be liquid based
upon their trading markets will not, however, be required to be included among
the securities considered to be illiquid for purposes of Investment Restriction
No. 8.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 10% of its
total assets in securities issued by other investment companies. Such securities
will be acquired by the Fund within the limits prescribed by the Investment
Company Act of 1940, as amended (the "1940 Act"), which include a prohibition
against the Fund investing more than 10% of the value of its total assets in
such securities. Investors should recognize that the purchase of securities of
other investment companies results in duplication of expenses such that
investors indirectly bear a proportionate share of the expenses of such
companies including operating costs, and investment advisory and administrative
services fees. The Fund may not invest more than 5% of its total assets in the
securities of any one investment company.
LONG-TERM AND SHORT-TERM CORPORATE DEBT OBLIGATIONS. The Fund may
invest in U.S. dollar-denominated debt obligations issued or guaranteed by U.S.
corporations or U.S. commercial banks, U.S. dollar-denominated obligations of
foreign issuers and debt obligations of
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foreign issuers denominated in foreign currencies. Such debt obligations
include, among others, bonds, notes, debentures, commercial paper and variable
rate demand notes. The bank obligations in which the Fund may invest are
certificates of deposit, bankers' acceptances, and fixed time deposits. The
Adviser, in choosing corporate debt securities on behalf of the Fund will
evaluate each issuer based on (i) general economic and financial conditions;
(ii) the specific issuer's (a) business and management, (b) cash flow, (c)
earnings coverage of interest and dividends, (d) ability to operate under
adverse economic conditions, (e) fair market value of assets, and (f) in the
case of foreign issuers, unique political, economic or social conditions
applicable to such issuer's country; and (iii) other considerations the Adviser
deems appropriate. Except for temporary defensive purposes, the International
Fund is limited to 20% of its total assets in these types of securities and the
Fund is limited to 5% of its total assets.
The Fund will not purchase corporate debt securities rated below Baa by
Moody's Investors Service ("Moody's") or BBB by Standard & Poor's Corporation
("S&P") or to the extent certain U.S. or foreign debt obligations are unrated or
rated by other rating agencies, result in comparable quality. While "Baa"/"BBB"
and comparable unrated securities may produce a higher return than higher rated
securities, they are subject to a greater degree of market fluctuation and
credit risk than the higher quality securities in which the Fund may invest and
may be regarded as having speculative characteristics as well.
After purchase by the Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Adviser will consider such event in its determination of whether the Fund should
continue to hold the security. A security which has had its rating downgraded or
revoked may be subject to greater risk of principal and income, and often
involve greater volatility of price, than securities in the higher rating
categories. Such securities are also subject to greater credit risks (including,
without limitation, the possibility of default by or bankruptcy of the issuers
of such securities) than securities in higher rating categories. To the extent
the ratings given by a rating agency may change as a result of changes in such
organization or its rating systems, the Fixed Income Fund will attempt to
conform its ratings systems to such changes as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
Investment in obligations of foreign issuers may present a greater
degree of risk than investment in domestic securities because of less publicly
available financial and other information, less securities regulation, potential
imposition of foreign withholding and other taxes, war, expropriation or other
adverse governmental actions.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities
which have characteristics similar to both fixed income and equity securities.
Convertible securities pay a stated rate of interest and generally are
convertible into the issuer's common stock at a stated conversion price prior to
call or redemption. Because of the conversion feature, the market value of
convertible securities tends to move together with the market value of the
underlying stock. As a result, the Fund's selection of convertible securities is
based, to a great extent, on the potential for capital appreciation that may
exist in t he underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer and any
call provisions.
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WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed-delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the transaction. The when- issued securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
on a when-issued basis is a form of leveraging and can involve a risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself in which case there could
be an unrealized loss at the time of delivery.
The Fund will maintain liquid assets in segregated accounts with its
custodian in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
It is the current policy of the International Equity Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
The Fund's investments in money market instruments will consist of (i)
short-term obligations of the U.S. Government, its agencies and
instrumentalities; (ii) other short-term debt securities rated A or higher by
Moody's or S&P or, if unrated, of comparable quality in the opinion of the
Adviser; (iii) commercial paper, including master demand notes; (iv) bank
obligations, including certificates of deposit, bankers' acceptances and time
deposits; and (v) repurchase agreements. At the time the Fund invests for
temporary defensive purposes in any commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or S&P, or the issuer's parent corporation must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by S&P or, if no such ratings
are available, the investment must be of comparable quality in the opinion the
Adviser. During times when the Fund is maintaining a temporary defensive
posture, it may be unable to achieve fully its investment objective.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Trustees, the Adviser is primarily responsible for portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Fund to obtain the best results taking into account 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 involved. Brokerage may be allocated to the Distributor to the extent
and in the manner permitted by applicable law, provided that in the judgment of
the investment adviser the use of the Distributor is likely to result in an
execution at least as favorable as that of other qualified brokers. While the
Adviser generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by its
Adviser. Such other investment clients may invest in the same securities as the
Fund. When purchases or sales of the same security are
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made at substantially the same time on behalf of such other clients,
transactions are averaged as to price and available investments allocated as to
amount, in a manner which the Adviser believes to be equitable to each client,
including the Fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold for the Fund. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for such other investment clients in order to obtain best
execution.
Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the 1940 Act, persons affiliated with HSBC
Bank, the Adviser, the Fund or BISYS Fund Services are prohibited from dealing
with the Fund as a principal in the purchase and sale of securities except in
accordance with regulations adopted by the Securities and Exchange Commission.
The Fund may purchase Municipal Obligations from underwriting syndicates of
which the Distributor or other affiliate is a member under certain conditions in
accordance with the provisions of a rule adopted under the 1940 Act. Under the
1940 Act, persons affiliated with the Adviser, the Fund or BISYS Fund Services
may act as a broker for the Fund. In order for such persons to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by such persons must be reasonable and fair compared to the
commissions, fees or other remunerations paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on an exchange during a comparable period of time. This standard would
allow the affiliate to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Trustees of the Trust regularly review the commissions paid by
the Fund to affiliated brokers. The Fund will not do business with nor pay
commissions to affiliates of the Adviser in any portfolio transactions where
they act as principal.
As permitted by Section 28(e) of the "Securities Exchange Act of 1934
(the "1934 Act") the Adviser may cause the Fund to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to the
Adviser an amount of disclosed 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.
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 view and information of securities firms.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, 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. The Adviser may
cause the Fund to pay commissions higher than another broker-dealer would have
charged if the Adviser believes the commission paid is reasonable in relation to
the value of the research services incurred by the Adviser.
INVESTMENT RESTRICTIONS
The Fund observes the following fundamental investment restrictions
which can be changed only when permitted by law and approved by a majority of
the Fund's outstanding
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voting securities. A "majority of the Fund's outstanding voting securities"
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented in person or by proxies or
(ii) more than 50% of the outstanding shares.
Except as otherwise noted, the Fund may not:
(1) purchase securities on margin or purchase real estate or interest
therein, commodities or commodity contracts, but may purchase and
make margin payments in connection with financial futures
contracts and related options);
(2) with respect to 75% of its total assets (taken at market value),
purchase a security if as a result (1) more than 5% of its total
assets (taken at market value) would be invested in the
securities (including securities subject to repurchase
agreements), of any one issuer, other than obligations which are
issued or guaranteed by the United States Government, its
agencies or instrumentalities or (2) the Fund would own more than
10% of the outstanding voting securities of such issuer;
(3) engage in the underwriting of securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter in
selling, as part of an offering registered under the Securities
Act of 1933, as amended, securities which it has acquired;
(4) effect a short sale of any security (other than index options or
hedging strategies to the extent otherwise permitted), or issue
senior securities except as permitted in paragraph (5). For
purposes of this restriction, the purchase and sale of financial
futures contracts and related options does not constitute the
issuance of a senior security;
(5) borrow money, except that the Fund may borrow from banks where
such borrowings would not exceed 33-1/3% of its total assets
(including the amount borrowed) taken at market value; or pledge,
mortgage or hypothecate its assets, except to secure indebtedness
permitted by this paragraph and then only if such pledging,
mortgaging or hypothecating does not exceed 33-1/3% of the Fund's
total assets taken at market value;
(6) invest for the purpose of exercising control over management of
any company;
(7) invest more than 10% of its total assets in the securities of
other investment companies;
(8) invest in any security, including repurchase agreements maturing
in over seven days or other illiquid investments which are
subject to legal or contractual delays on resale or which are not
readily marketable, if as a result more than 15% of the market
value or respective Fund's total assets would be so invested;
(9) purchase interests in oil, gas, or other mineral exploration
programs of real estate and real estate mortgage loans except as
provided in the Prospectus of the Fund; however, this policy will
not prohibit the acquisition of securities of companies
17
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engaged in the production or transmission of oil, gas, other
minerals or companies which purchase or sell real estate or real
estate mortgage loans;
(10) have dealings on behalf of the Fund with Officers and Trustees of
the Fund, except for the purchase or sale of securities on an
agency or commission basis, or make loans to any officers,
directors or employees of the Fund;
(11) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the Fund's
investments in that industry would exceed 25% of the current
value of the Fund's total assets, provided that (a) there is no
limitation with respect to investments in obligations of the
United States Government, its agencies or; (b) wholly-owned
finance companies will be considered to be in the industries of
their parents; and (c) utilities will be divided according to
their services. For example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate
industry; and
(12) make loans, except that the Fund may make loans or lend its
portfolio securities if, as a result, the aggregate of such loans
does not exceed 33-1/3% of the value of the Fund's total assets.
PERFORMANCE INFORMATION
From time to time the Trust may provide annualized "yield," "effective
yield" and "tax equivalent yield" quotations for the Fund in advertisements,
shareholder reports or other communications to shareholders and prospective
investors. The methods used to calculate the Fund's yield, effective yield and
tax equivalent yield are mandated by the Securities and Exchange Commission.
Quotations of yield for the Fund will be based on all investment income
per share (as defined by the SEC during a particular 30-day (or one month)
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
YIELD 2[(-- + 1) - 1]
cd
where
a - dividends and interest earned during the period,
b - expenses accrued for the period (net of reimbursements),
c - the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d - the maximum offering price per share on the last day of the
period.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (or up to
the life of the Fund), calculated pursuant to the following formula: P H + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
18
<PAGE>
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. The Fund also may, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accompanied by standardized total return information.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices, including, but not limited to
the S&P 500 Stock Index. Investors may compare the Fund's results with those of
a group of unmanaged securities widely regarded by investors as representative
of the securities markets in general, (ii) other groups of mutual funds tracked
by Lipper Analytical Services, a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies (including IBC/Donoghue's Money Fund
Reports), publications, or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment of dividends but generally do
not reflect deductions for administrative and management costs and expenses.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the yield of the Fund varies based on the type,
quality and maturities of the obligations held for the Fund, fluctuations in
short-term interest rates, and changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate yields should
be considered when comparing the yield of the Fund to yields published for other
investment companies or other investment vehicles.
A Shareholder Servicing Agent or a securities broker, if applicable,
may charge its customers direct fees in connection with an investment in the
Fund, which will have the effect of reducing the net return on the investment of
customers of that Shareholder Servicing Agent or that securities broker.
Specifically, investors who purchase and redeem shares of the Fund through a
Shareholder Servicing Agent may be charged one or more of the following types of
fees as agreed upon by the Shareholder Servicing Agent and the investor, with
respect to the customer services provided by the Shareholder Servicing Agent:
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 upon a percentage of the assets in the account or of the dividends paid an
those assets). Such fees will have the effect of reducing the yield and
effective yield of the Fund for those investors.
Conversely, the Trust has been advised 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, which will have
the effect of increasing the net return on the investment of such customers of
those Shareholder Servicing Agents. Such customers may be able to obtain through
their Shareholder Servicing Agent or securities broker quotations reflecting
such decreased or increased return.
19
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the Trust
for the past five years are listed below. Asterisks indicate that those Trustees
and officers are "interested persons" (as defined in the 1940 Act) of the Trust.
The address of each, unless otherwise indicated, is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
<S> <C> <C>
FREDERICK C. CHEN Trustee Management Consultant
126 Butternut Hollow Road,
Greenwich, Connecticut 06830
LARRY M. ROBBINS Trustee Director for the Center of Teaching
University of Pennsylvania and Learning, University of
College of Arts & Sciences Pennsylvania
120 Logan Hall
Philadelphia, PA 19104
ALAN S. PARSOW Trustee General Partner of Parsow
2222 Skyline Drive Partnership, Ltd. (investments)
Elkhorn, NE 68022
MICHAEL SEELY Trustee President of Investor Access
475 Lexington Avenue Corporation (investor relations
New York, New York 10017 consulting firm)
LESLIE E. BAINS** Trustee Senior Executive Vice President,
HSBC Bank USA HSBC Bank USA, 1990-present;
452 Fifth Avenue Senior Vice President. The Chase
New York, New York 10018 Manhattan Bank, N.A., 1980-1990
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)
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
MARK L. SUTER Vice President Employee of BISYS Fund Services,
Inc., January 2000 to present; VP,
Seligman Data Corp., June 1997 to
January 2000; Capital Link
Consulting, February 1997 to June
1997; US Trust NY, June 1986 to
February 1991
RICHARD F. FROIO* Vice President Employee of BISYS Fund
Services, Inc.
NADEEM YOUSAF* Treasurer Employee of BISYS Fund
Services, Inc., August 1999 to
present; Director. IBT, Canadian
Operations, May 1995 to March 1997;
Assistant Manager, PriceWaterhouse.
1994 to May 1995
LISA M. HURLEY* Secretary Senior Vice President and General
Counsel of BISYS Fund Services, May
1998 to present; General Counsel of
Moore Capital Management, Inc.;
October 1993 to May 1996, Senior
Vice President and General Counsel
of Northstar Investment Management
Corporation
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
</TABLE>
*Messrs. Grimm, Froio and Yousaf and Mss. Hurley and Metz also are officers of
certain other investment companies of which BISYS or an affiliate is the
administrator.
**Ms. Bains is an "interested person" as that term is defined in the 1940 Act.
21
<PAGE>
COMPENSATION TABLE
AGGREGATE COMPENSATION FROM:
<TABLE>
<CAPTION>
Trustee Total Compensation from Fund Complex*
<S> <C>
Frederick C. Chen $ 9,600
Larry M. Robbin $11,600
Michael Seely $ 9,600
</TABLE>
* The compensation table above reflects the fees received by the Trustees from
the Fund Complex for the year ended October 31, 1999. For the fiscal year ended
October 31, 1999, the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust received from the Fund Complex an annual retainer of
$3,600 and a fee of $1,500 for each meeting of the Board of Trustees or
committee thereof attended, except that Mr. Robbins received an annual retainer
of $4,600 and a fee of $1,725 for each meeting attended. The Fund Complex
includes the Trust, HSBC Advisor Funds Trust, HSBC Investor Portfolios Trust,
offshore feeders into the Portfolio Trust, and three stand-alone offshore funds.
The fees paid by the Fund Complex are allocated pro rata among the Funds based
upon the net assets 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 positions as officers
with the Trust, unless, as to liability to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
The Fund retains HSBC Asset Management (Americas) Inc. ("Adviser") to
act as the adviser for the Fund. The Adviser is a North American investment
affiliate of HSBC Holdings plc and is located at 140 Broadway, New York, New
York 10005.
The Advisory Contract for the Fund provides that the Adviser will
manage the portfolio of the Fund and will furnish to the Fund investment
guidance and policy direction in connection therewith. The Adviser has agreed to
provide to the Trust, among other things, information relating to composition,
credit conditions and average maturity of the portfolio of the Fund. Pursuant to
the Advisory Contract, the Adviser also furnishes to the Trust's Board of
Trustees periodic reports on the investment performance of the Fund. The Adviser
has also agreed in the Advisory Contract to provide administrative assistance in
connection with the operation of the Fund. Administrative services provided by
the Adviser include, among other things, (i) data processing, clerical and
bookkeeping services required in connection with maintaining the financial
accounts and records for the Fund, (ii) compiling statistical and research data
required for the preparation of reports and statements which are periodically
distributed to the Fund's
22
<PAGE>
officers and Trustees, (iii) handling general shareholder relations with Fund
investors, such as advice as to the status of their accounts, the current yield
and dividends declared to date and assistance with other questions related to
their accounts, and (iv) compiling information required in connection with the
Fund's filings with the Securities and Exchange Commission.
If the Adviser were prohibited from performing any of its services for
the Trust, it is expected that the Board of Trustees would recommend to the
Fund's shareholders that they approve new agreements with another entity or
entities qualified to perform such services and selected by the Board.
DISTRIBUTION PLANS - CLASS A, CLASS B, AND CLASS C SHARES ONLY
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 Class C Shares (the "Class C
Plan"), Fund, as applicable. The Distribution Plans provide that they may not be
amended to increase materially the costs which either the Class A Shares, Class
B Shares, and Class C Shares may bear pursuant to the Class A Plan, Class B Plan
and Class C Plan and Class D Plan without approval by shareholders of the Class
A Shares, Class B Shares, and 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 the Board of Trustees
and by the Qualified Trustees, by vote cast in person at a meeting called for
the purpose of voting on the Distribution Plans. In adopting the Class A Plan,
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 expense ratio and concluded that there was a reasonable likelihood
that each Distribution Plan will benefit their respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Class A
Shares, Class B Shares, and 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.
THE DISTRIBUTOR AND SPONSOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road,
Columbus, Ohio 43219-3035, acts as sponsor and distributor to the Fund under 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. BISYS and its affiliates also serve as administrator or distributor to
other investment companies. BISYS is a wholly owned subsidiary of BISYS Group,
Inc.
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
23
<PAGE>
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 Class A Shares, Class
B Shares, and Class C Shares of the Fund and for the provision of certain
shareholder services with respect to these Shares. Payments to the Distributor
are for various types of activities, including: (1) payments to broker-dealers
which advise shareholders regarding the purchase, sale or retention of Class A
Shares, Class B Shares, and Class C Shares of the Fund and which 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 the 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 the Class B Plan
and Class C Plan, respectively, such payments by the Distributor to
broker-dealers may be in amounts on an annual basis of up to 0.75% of the Fund's
average daily net assets as presented 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 series of the Trust may be allocated to such series on the basis
of average net assets; travel expense is allocated to, or divided among, the
particular series 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
The Trust has adopted an Administrative Services Plan which provides
that the Trust may obtain the services of an administrator, transfer agent,
custodian, and one or more Shareholder Servicing Agents, and may enter into
agreements providing for the payment of fees for such services. The
Administrative Services Plan 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, Class B Shares, Class C Shares, or Adviser (Class Y)
Shares ("Class Y Shares") by a majority vote of shareholders of that class. The
Administrative Services Plan may not be amended to increase
24
<PAGE>
materially the amount of permitted expenses thereunder with respect to the Class
A Shares, Class B Shares, Class C Shares, Class Y 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.
ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Trust with
general office facilities and supervises the overall administration of the Trust
and 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. BISYS provides persons satisfactory to the Board of
Trustees of the Trust to serve as officers of the Trust. Such officers, as well
as certain other employees and Trustees of the Trust, may be directors, officers
or employees of BISYS or its affiliates.
FEES
As compensation for its advisory and management services, the Adviser
is paid a monthly fee by the Fund at the following annual rates:
<TABLE>
<S> <C>
Portion of Average Daily Value of Net Assets of the Fund Advisory
Not exceeding $400 million [ ]
In excess of $400 million but [ ]
not exceeding $800 million
In excess of $800 million but [ ]
not exceeding $1.2 billion
In excess of $1.2 billion but [ ]
not exceeding $1.6 billion
In excess of $1.6 billion but [ ]
not exceeding $2 billion
In excess of $2 billion [ ]
</TABLE>
Except for the expenses paid by the Adviser under the Advisory Contract
and by BISYS Fund Services, Inc. under the Management and Administration
Agreement, the Fund bears all costs of its operations. Expenses attributable to
the Fund are charged against the assets of the Fund.
The Advisory Contract, Distribution Contract and Management and
Administration Agreement (upon expiration of its initial term on September 1,
1999) will continue in effect with respect to the Fund from year to year
provided such continuance is approved annually by the holders of a majority of
the outstanding voting securities of such Fund or by the Trust's Trustees and
(ii) by a majority of the Trustees who are not parties to such contracts or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party ("non-interested Trustees"). Each contract may be terminated with
respect to the Fund at any time, without payment of any penalty, by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company Act of 1940) or by a vote of a majority of the Trustees on 60
days' written notice, except in the case of the Management and Administration
Agreement which requires written notice of non-renewal given at least 90 days
prior to expiration of the then current term. The Advisory Contract,
Administrative Services Contract and the Distribution
25
<PAGE>
Contract shall terminate automatically in the event of their assignment (as
defined in the Investment Company Act of 1940).
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with BISYS,
pursuant to which BISYS acts as transfer agent (the "Transfer Agent"). The
Transfer Agent maintains 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 BISYS is 3435 Stelzer Road, Columbus, OH 43219.
CUSTODIAN AND FUND ACCOUNTING AGENT
Pursuant to a Custodian Agreement, HSBC also acts as the custodian of
the Fund's assets (the "Custodian"). The Custodian's 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 Custodian does not determine the investment
policies of the or decide which securities will be purchased or sold for the
Fund. For its services, HSBC receives such compensation as may from time to time
be agreed upon by it and the Trust. BISYS 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 HSBC,
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, Class C Shares, Class Y 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, Class B Shares, and Class
C 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
26
<PAGE>
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 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.
FEDERAL BANKING LAW
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, HSBC's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. HSBC believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of HSBC to perform these services, the Board of Trustees would review
the Trust's relationship with HSBC and consider taking all action necessary in
the circumstances, which could include recommending to shareholders the
selection of another qualified advisor or, if that course of action appeared
impractical, that the Fund be liquidated.
EXPENSES
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs of its operations. Expenses attributable to a class ("Class
Expenses") shall be allocated to that class only. Class Expenses with respect to
the 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 the 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 Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of each share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Martin Luther King, Jr.
27
<PAGE>
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Trust. Such procedures include the use of independent pricing
services, which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. All portfolio securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market value.
PURCHASE OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "Purchasing and Adding to
Your Shares." The Prospectus contains a general description of how investors may
buy shares of the Fund and states whether the Fund offer more than one class of
shares. Class A shares are generally sold with a sales charge payable at the
time of purchase. The prospectus contains a table of applicable sales charges.
Certain purchases of Class A shares may be exempt from a sales charge. Class B
and C shares may be subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The prospectus
contains a table of applicable CDSCs. After being held for six years, Class B
shares will automatically convert into Class A shares which are not subject to
sales charges or a CDSC. Class B and C shares are offered without an initial
sales charge. The Fund may sell shares without a sales charge or CDSC pursuant
to special purchase plans the Trust signs.
When purchasing Fund shares, you must specify which Class is being
purchased. The decision as to which Class of shares is most beneficial to you
depends on the amount and the intended length of your investment. You should
consider whether, during the anticipated life of your investment in the Fund,
the accumulated distribution fee, service fee and CDSC, if any, on Class B
shares or Class C shares would be less than the accumulated distribution fee and
initial sales charge on Class A shares purchased at the same time, and to what
extent, if any, such differential would be offset by the return on Class A
shares respectively. Additionally, investors qualifying for reduced initial
sales charges who expect to maintain their investment for an extended period of
time might consider purchasing Class A shares because the accumulated continuing
distribution and service fees on Class B or Class C shares exceed the
accumulated distribution fee and initial sales charge on Class A shares during
the life of the investment. Finally, you should consider the effect of the CDSC
period and any conversion rights of the Classes in the context of your own
investment time frame. For example, while Class C shares have a shorter CDSC
period than Class B shares, Class C shares do not have a conversion feature
28
<PAGE>
and, therefore, are subject to ongoing distribution and service fees. Thus,
Class B shares may be more attractive than Class C shares to investors with
longer term investment outlooks. Generally, Class A shares will be most
appropriate for investors who invest $1,000,000 or more in Fund shares, and
Class A shares will not be appropriate for investors who invest less than
$50,000 in Fund shares.
A broker-dealer may receive different levels of compensation depending
on which class of shares is sold. The Distributor may also provide different
additional compensation to dealers in connection with selling shares of the Fund
or for their own company-sponsored sales programs. Additional compensation or
assistance may be provided to dealers and includes, but is not limited to,
payment or reimbursement for educational, training and sales conferences or
programs for their employees. In some cases, this compensation may only be
available to dealers whose representatives have sold or are expected to sell
significant amounts of shares. The Distributor will make these payments from its
own resources and none of the aforementioned additional compensation is paid for
by the applicable Fund or its shareholders.
Shares of the Fund are offered on a continuous basis at net asset
value, plus any applicable sales charge, by the Distributor as an investment
vehicle for institutions, corporations, fiduciaries and individuals.
The sales charge applicable to the purchase of Fund shares will be
waived on the following purchases: (1) by Trustees and officers of the Trust and
of HSBC Investor Funds Trust. and members of their immediate families (parents.
spouses, children, brothers and sisters), (2) by directors, employees and
retirees of Marine Midland Bank and its affiliates, and members of their
immediate families, (3) by financial institutions or corporations on behalf of
their customers or employees, or on behalf of any trust, pension, profit-sharing
or other benefit plan for such customers or employees, (4) by directors and
employees of the Distributor, selected broker-dealers and affiliates and members
of their immediate families, (5) by charitable organizations as defined in
Section 501(c)(3) of the Internal Revenue Code ("Charitable Organizations") or
for charitable remainder trusts or life income pools established for the benefit
of Charitable Organizations, (6) by registered representatives of selling
brokers and members of their immediate families, (7) by individuals who have
terminated their Employee Benefit Trust ("EBT") Plan or have retired and are
purchasing shares in the Fund with the proceeds of their benefits checks (the
EBT Plan must currently own shares of the Fund at the time of the individual's
purchase), (8) by corporations, their officers or directors, partnerships, and
their partners which are customers or prospective customers of Marine Midland
Bank when authorized by an officer of Marine Midland Bank, and (9) by
individuals who, as determined by an officer of the Fund in accordance with
guidelines established by the Fund's Trustees, have purchased shares under
special circumstances not involving sales expenses to dealers or the
Distributor. Eligible investors should contact the Adviser for details.
The sales load does not apply in any instance to reinvested dividends.
From time to time dealers who receive dealer discounts and broker
commissions from the Distributor may reallow all or a portion of such dealer
discounts and broker commissions to other dealers or brokers. The Distributor,
at its expense, may also provide additional compensation to dealers in
connection with sales of shares of the Fund. Such compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs
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<PAGE>
for their employees, seminars for the public, advertising campaigns regarding
one or more Funds of the Trust, and/or other dealer-sponsored special events. In
some instances, this compensation may be made available only to certain dealers
whose representatives have sold a significant number of such shares.
Compensation will 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. Compensation may also include the following types of non-cash
compensation offered through sales contests: (1) vacation trips, including the
provision of travel arrangements and lodging at luxury resorts at an exotic
location, (2) tickets for entertainment events (such as concerts, cruises and
sporting events) and (3) merchandise (such as clothing, trophies, clocks and
pens). Dealers may not use sales of the Fund's Shares to qualify for the
compensation to the extent such may be prohibited by the laws of any state or
any self- regulatory agency, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
Stock certificates will not be issued with respect to the shares. The
Transfer Agent shall keep accounts upon the book of the Trust for recordholders
of such shares.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder of the Money Market Funds may exchange some
or all of his Shares for shares of an identical class of one or more of the
following investment companies: HSBC Investor U.S. Government Money Market Fund,
HSBC Investor Bond Fund, HSBC Investor Overseas Equity Fund, HSBC Investor
Opportunity Fund, HSBC Investor New York Tax-Free Bond Fund, HSBC Investor New
York Tax-Free Money Market Fund, HSBC Investor Equity Fund, and such other HSBC
Investor Funds or other registered investment companies for which HSBC serves as
investment adviser as HSBC may determine (the "HSBC Investor Funds"). By
contacting the Transfer Agent or his Shareholder Servicing Agent or his
securities broker, a shareholder of the Retail Funds 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 investor will receive Class A Shares of the Fund in exchange for
Class A shares of other HSBC Investor Funds. Class B Shares, Class C Shares, and
Class Y Shares may be exchanged for shares of the same class of one or more of
the HSBC Investor Funds at net asset value without a front-end sales charge
provided that the amount to be exchanged meets the applicable minimum investment
requirements and the exchange is made in states where it is legally authorized.
Holders of the Fund's Class B Shares may not exchange their Shares for shares of
any other class. Exchanges of Fund Investor Shares for Investor shares of one or
more HSBC Investor Funds may be made upon payment of the applicable sales
charge, unless otherwise exempt. Shareholders of Class A Shares of the Fund who
are shareholders as of December 31, 1997 will be grandfathered with respect to
the HSBC Investor Funds and will be exempt from having to pay a sales charge on
any new purchases of Class A or Shares of the Fund. 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
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redemption. 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 HSBC Investor Funds, which may produce a gain or loss for
tax purposes.
The exchange privilege (or any aspect of it) may be changed or
discontinued upon 60 days' written notice to shareholders and is available only
to shareholders in states in which such exchanges may be legally made. A
shareholder considering an exchange should obtain and read the prospectus of the
other HSBC Investor Funds and consider the differences in investment objectives
and policies before making any exchange.
An exchange is considered a sale of shares and may result in a capital
gain or loss for federal income tax purposes. A Shareholder wishing to exchange
his or her Shares may do so by contacting the Trust at 800-782-8183, by
contacting his or her broker-dialer or by providing written instruction to the
Distributor.
AUTOMATIC INVESTMENT PLAN
The Trust offers a plan for regularly investing specified dollar
amounts ($25.00 minimum in monthly, quarterly. semi-annual or annual intervals)
in the Fund. If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified to discontinue further investments. Due to the
varying procedures to prepare, process and to forward bank withdrawal
information to the Trust, there may be a delay between the time of the bank
withdrawal and the time the money reaches the Fund. The investment in the Fund
will be made at the net asset value per share determined on the day that both
the check and the bank withdrawal data are received in required form by the
Distributor. 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 Investor Shares from the
Distributor, an investor should contact the Distributor directly (see back cover
for address and phone number).
PURCHASES THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
The Fund's 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. Class Y Shares of the Fund
are only being offered to customers of Shareholder Servicing Agents and
securities brokers, if applicable, 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 and "sweep"
checking 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
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Servicing Agent from the Fund, which will have the effect of increasing the net
return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents and securities brokers may transmit
purchase payments on behalf of their customers by wire directly to the Fund's
custodian bank by following the procedures described above.
For further information on how to direct a securities broker, if
applicable, or a Shareholder Servicing Agent to purchase Shares, an investor
should contact his securities broker or his Shareholder Servicing Agent.
SALES CHARGES
CLASS A SHARES
The public offering price of the Class A Shares of the Bond and New York
Tax-Free Bond 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:
SALES CHARGE AS:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Size of Transaction at Offering Price % of Offering % of Net
Price Amount
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Up to $49,999 5.00% 5.26%
$50,000 up to $100,000 4.60% 4.71%
$100,000 up to $250,000 3.75% 3.90%
$250,000 up to $500,000 2.50% 2.56%
$500,000 up to $1,000,000 2.00% 2.04%
$1,000,000 and up 1.00% 1.01%
</TABLE>
SALES CHARGE WAIVERS
The Distributor may waive sales charges for the purchase of Class A
Shares of the Fund by or on behalf of (1) purchasers for whom HSBC 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 HSBC, 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 HSBC and any affiliates
thereof, (5) purchasers who use proceeds from an account for which HSBC or one
of its 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,
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<PAGE>
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 any fund in
the HSBC family of 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.
LETTER 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 Fund 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
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<PAGE>
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 the 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 1-800-782-8183. This
program, however, may be modified or eliminated at any time or from time to time
by the Trust without notice.
RIGHT OF ACCUMULATION
Pursuant to the right of accumulation, investors are permitted to
purchase Class A Shares of the Fund at the public offering price applicable to
the total of (a) the total public offering price of the Class A Shares of the
Fund 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 the Fund.
Class A Shares sold to purchasers for whom HSBC 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.
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
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<PAGE>
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 of the Fund are sold at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% 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 121b-1 fee of up to 1.00% 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
121b-1 fees applicable to Class C Shares for an indefinite period subject to
annual approval by the 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. The 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.
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. Class A Shares may be redeemed without charge
while Class B Shares and Class C Shares may be subject to a contingent deferred
sales charge (CDSC). See "Contingent Deferred Sales Charge ("CDSC") -- Class B
Shares and Class C Shares" above. 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 for the Fund, 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
35
<PAGE>
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.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his
accountant at any time at the net asset value next determined after a redemption
order in proper form 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. Class A Shares and Class Y Shares may be
redeemed without charge while Class B Shares and Class C Shares may be subject
to a contingent deferred sales charge (CDSC). See "Contingent Deferred Sales
Charge ("CDSC") -- Class B Shares and Class C Shares" above. 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 for the Fund,
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 redeem Shares, a shareholder should contact his securities
broker or his Shareholder Serving Agent.
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<PAGE>
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 Class A, Class
B and Class C Shares of the Fund 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.
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.
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<PAGE>
INDIVIDUAL RETIREMENT ACCOUNTS
The shares may be used as the 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). HSBC 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 Fund, except as required for federal income
tax purposes.
Shares begin accruing dividends on the day they are purchased Dividends
are distributed monthly. Unless a shareholder elects to receive dividends in
cash (subject to the policies of the shareholder's Shareholder Servicing Agent
or securities broker), dividends are distributed in the form of additional
shares of the Fund at the rate of one share (and fraction thereof) of the Fund
for each one dollar (and fraction thereof) of dividend income.
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%
nondeductible 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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<PAGE>
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 nine
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 of the Fund, if applicable. 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.
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of Fund shareholders to elect Trustees or for other purposes. It
is not anticipated that the Trust will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will be
required to hold a meeting to elect Trustees to fill any existing vacancies on
the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the Declaration of Trust
provides that the holders of not less than two-thirds of the outstanding shares
of the Trust may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Shareholders of the Fund have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a
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meeting of shareholders of the Trust for the purpose of removing one or more
Trustees. Shareholders of the Trust also have the right to remove one or more
Trustees without a meeting by a declaration in writing subscribed to by a
specified number of shareholders. Upon liquidation or dissolution of the Fund,
shareholders of the Fund would be entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Fund 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
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. 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 ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state or foreign country or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, the Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities, or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one
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issuer (other than U.S. Government securities and the securities of other
regulated investment companies).
As a regulated investment company, the Fund generally is not subject to
U.S. federal income tax on income and gains that it distributes to shareholders,
if at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar
year if it is declared by a the Fund in October, November or December of that
year with a record date in such a month and paid by the Fund during January of
the following year. Such a distribution will be taxable to shareholders in the
calendar year in which the distribution is declared, rather than the calendar
year in which it is received.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a
U.S. shareholder as ordinary income, whether paid in cash or shares (see below
for information concerning exempt-interest dividends and capital gain
dividends). Dividends paid by the Fund to a corporate shareholder, to the extent
such dividends are attributable to dividends received by the Fund from U.S.
corporations, may, subject to limitation, be eligible for the dividends received
deduction. However, the alternative minimum tax applicable to corporations may
reduce the value of the dividends received deduction.
The excess of net long-term capital gains over net short-term capital
losses realized, distributed and properly designated by the Fund, whether paid
in cash or reinvested in Fund shares. will generally be taxable to shareholders
as long-term capital gain, regardless of how long a shareholder has held Fund
shares. Such capital gain distributions are subject to a maximum federal income
tax rate of 20% under current law. Net capital gains from assets held for one
year or less will be taxed as ordinary income.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form of
newly issued shares will receive a report as to the net asset value of the
shares received.
If the net asset value of shares is reduced below a shareholder's cost
as a result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying
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shares of the Fund just prior to a distribution. The price of shares purchased
at this time will include the amount of the forthcoming distribution, but the
distribution will generally be taxable to the shareholder.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and the rate of tax will
depend upon the shareholder's holding period for the shares. If the shareholder
has held the shares as a capital asset for more than 12 months, the maximum
current federal income tax rate is 20%. Any loss realized on a redemption, sale
or exchange will be disallowed to the extent the shares disposed of are replaced
(including through reinvestment of dividends) within a period of 61 days,
beginning 30 days before and ending 30 days after the shares are disposed of. In
such a case the basis of the shares acquired will be adjusted to reflect the
disallowed loss. If a shareholder holds Fund shares for six months or less and
during that period receives a distribution taxable to the shareholder as
long-term capital gain, any loss realized on the sale of such shares during such
six-month period would be a long-term loss to the extent of such distribution.
If, within 90 after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by excluding all or a portion of the
sales charge from the shareholder's tax basis in the exchanged shares, and the
amount excluded will be treated as an amount paid for the new shares.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), capital gain distributions, and redemption proceeds
to shareholders if (1) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number or social security number.
(2) the IRS notifies the shareholder or the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Non-U.S.
shareholders may be subject to U.S. tax rules that differ significantly from
those summarized above, including the likelihood that ordinary income dividends
to them would be subject to withholding of U.S. tax at a rate of 30% (or a lower
treaty rate, if applicable).
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FUND INVESTMENTS MARKET DISCOUNT
If the Fund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a the minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the Fund in each
taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally. market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Very generally, original
issue discount is defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income on account of such discount is actually received by such the Fund,
original issue discount that accrues on a debt security 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 applicable to
regulated investment companies. Some debt securities may be purchased by the
Fund at a discount that exceeds the original issue discount on such debt
securities, if any. This additional discount represents market discount for
federal income tax purposes (see above).
CMO RESIDUALS. Under certain circumstances, the Fund may be taxed on income
deemed to be earned from certain CMO residuals.
OPTIONS FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by
the Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
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 the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may
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make with respect to its straddle positions may also affect the amount,
character and timing of the recognition of gains or losses from the affected
positions.
Because only a few regulations implementing the straddle rules have
been promulgated, the consequences of such transactions to the Fund are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. 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 shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to the Fund that did not engage
in such transactions.
CONSTRUCTIVE SALES. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event; 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. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
SECTION 988 GAINS OR LOSSES Gains or losses attributable to fluctuations in
exchange rates which 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 ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition an disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
PASSIVE FOREIGN INVESTMENT COMPANIES The Fund may invest in shares of foreign
corporations that 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
will itself be subject to tax on the portion, if any, of an excess
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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. Under an election that currently is available in some
circumstances, the Fund 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 were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be 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.
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.
OTHER INFORMATION CAPITALIZATION
SHARES OF BENEFICIAL INTEREST
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, Fund Trust Tax-Free Trust
(organized on July 30, 1986) and Fund Vest (organized on July 17, 1984, and
since renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) and classes of shares within each series at any time
in the future. Establishment and offering of additional classes or series will
not alter the rights of the Fund's shareholders. When issued, shares are fully
paid. nonassessable, redeemable and freely transferable. Shares do not have
preemptive rights or
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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 LLP as independent auditors of
the Trust. KPMG LLP will audit the Trust's annual financial statements, prepare
the Trust's income tax returns, and assist in the filings with the Securities
and Exchange Commission. KPMG LLP's address is 2 Nationwide Plaza, Columbus,
Ohio 43215.
COUNSEL
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006, passes upon
certain legal matters in connection with the shares of the Fund offered by the
Trust, and also acts as counsel to the Trust.
CODE OF ETHICS
HSBC Investor Funds, the Adviser and BISYS each have adopted a code of
ethics, as required by applicable law, which is designed to prevent affiliated
persons of HSBC Investor Funds, the Adviser and BISYS from engaging in
deceptive, manipulative, or fraudulent activities in connection with securities
held or to be acquired by the Fund (which may also be held by persons subject to
a code). There can be no assurance that the codes will be effective in
preventing such activities.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the 1933 Act with respect to
shares of the Fund, certain portions of which have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Fund is expected to commence operations [ ], 2000. Therefore, the
performance information (including annual and average annual total returns) for
a full calendar year is not yet available.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust, P.O. Box
182845. Columbus, Ohio 43218-2845.
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GENERAL AND ACCOUNT INFORMATION: (800) 782-8183 (TOLL FREE)
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STATEMENT OF ADDITIONAL INFORMATION
HSBC INVESTOR U.S. TREASURY MONEY MARKET FUND
P.O. Box 182845
Columbus, Ohio 43218-2845
General Account Information: (800) 782-8183 (Toll Free)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
HSBC Asset Management (Americas) Inc. BISYS Fund Services
Investment Adviser Growth and Income Fund Administrator, Distributor and Sponsor
(an "Adviser") ("BISYS," "Administrator," "Distributor," or
"Sponsor")
</TABLE>
HSBC Investor U.S. Treasury Money Market Fund (the "Fund") is a
separate series of HSBC Investor Funds (the "Trust"), an open-end management
investment company which currently consists of thirteen separate 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 is divided into five separate classes, Class A (the "Class A
Shares"), Class B (the "Class B Shares"), Class C (the "Class C Shares")
Class D (the "Class D Shares"), and Adviser (Class Y) (the "Class Y Shares").
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS
FOR THE FUND DATED [ ] __, 2000 (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.
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated [ ], 2000 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.
[ ] __, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS...................................................................3
Repurchase Agreements....................................................................................3
Other Mutual Funds.......................................................................................4
INVESTMENT RESTRICTIONS...........................................................................................4
PERFORMANCE INFORMATION...........................................................................................5
MANAGEMENT OF THE TRUST...........................................................................................8
Trustees and Officers....................................................................................8
Investment Adviser......................................................................................10
Distribution Plans --Class A, Class B, Class C, and Class D Shares Only.................................11
The Distributor and Sponsor.............................................................................12
Administrative Services Plan............................................................................13
Administrator...........................................................................................13
Transfer Agent..........................................................................................14
Custodian...............................................................................................14
Shareholder Servicing Agents............................................................................14
Federal Banking Law.....................................................................................15
Expenses................................................................................................15
DETERMINATION OF NET ASSET VALUE.................................................................................15
PURCHASE OF SHARES...............................................................................................16
Exchange Privilege......................................................................................17
Automatic Investment Plan...............................................................................18
Purchases Through a Shareholder Servicing Agent or a Securities Broker..................................19
REDEMPTION OF SHARES.............................................................................................19
Systematic Withdrawal Plan..............................................................................20
Redemption of Shares Purchased Directly Through the Distributor.........................................20
Check Redemption Service................................................................................21
Contingent Deferred Sales Charge........................................................................21
Conversion Feature......................................................................................23
DIVIDENDS AND DISTRIBUTIONS......................................................................................23
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES.............................................................24
TAXATION.........................................................................................................26
Federal Income Tax......................................................................................26
Alternative Minimum Tax.................................................................................29
</TABLE>
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<TABLE>
<S> <C>
Special Tax Considerations..............................................................................29
Capitalization..........................................................................................29
Independent Auditors....................................................................................30
Counsel.................................................................................................30
Code of Ethics..........................................................................................30
Registration Statement..................................................................................30
Financial Statements....................................................................................30
Shareholder Inquiries...................................................................................31
GENERAL AND ACCOUNT INFORMATION..................................................................................31
</TABLE>
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The following information supplements the discussion of the investment
objective and policies of the Fund discussed under the caption "Investment
Objective and Strategies" in the Prospectus.
The Fund invests exclusively in direct obligations of the United States
Treasury which have remaining maturities not exceeding thirteen months and
certain repurchase agreements. The United States Treasury issues various types
of marketable securities consisting of bills, notes, bonds and other debt
securities. They are direct obligations of the United States Government and
differ primarily in the length of their maturity. Treasury bills, the most
frequently issued marketable United States Government security, have a maturity
of up to one year and are issued on a discount basis. The Fund may not enter
into loans of its portfolio securities.
REPURCHASE AGREEMENTS
Securities held by the Fund may be subject to repurchase agreements. A
repurchase agreement is a transaction in which the seller of a security commits
itself at the time of the sale to repurchase that security from the buyer at a
mutually agreed upon time and price. The repurchase price exceeds the sale
price, reflecting an agreed upon interest rate effective for the period the
buyer owns the security subject to repurchase. The agreed upon rate is unrelated
to the interest rate on that security. The Fund will enter into repurchase
agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the Adviser, present minimal credit risks.
Where the securities underlying a repurchase agreement are not U.S. Government
securities, they must be of the highest quality at the time the repurchase
agreement is entered into (e.g., a long- term debt security would be required to
be rated by S&P as "AAA" or its equivalent). While the maturity of the
underlying securities in a repurchase agreement transaction may be more than one
year, the term of the repurchase agreement is always less than thirteen months.
The maturities of the underlying securities will have to be taken into account
in calculating the Fund's dollar-weighted average portfolio maturities if the
seller of the repurchase agreement fails to perform under such agreement. In
these transactions, the securities acquired by the Fund are held by the Fund's
custodian bank until they are repurchased.
The Adviser will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to ensure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Fund may have problems in exercising its rights to the
underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities. Repurchase agreements are
considered to be loans under the 1940 Act, as amended, collateralized by the
underlying securities.
Repurchase agreements may involve certain risks. If the seller in the
transaction becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code, recent amendments to the Code permit the Fund to exercise a
contractual right to liquidate the underlying securities. However, if the seller
is a stockbroker or other entity not afforded
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protection under the Code, an agency having jurisdiction over the insolvent
entity may determine that the Fund does not have the immediate right to
liquidate the underlying securities. If the seller defaults, the Fund might
incur a loss if the value of the underlying securities declines. The Fund may
also incur disposition costs in connection with the liquidation of the
securities. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through selection criteria established by the Board
of Trustees and careful monitoring procedures. Income from repurchase agreements
is taxable.
OTHER MUTUAL FUNDS
The Fund may invest in shares of other open-end management investment
companies that are money market funds reasonably believed to comply with Rule
2a-7 under the Investment Company Act of 1940, subject to the limitations of the
Investment Company Act of 1940 and subject to such investments being consistent
with the overall objective and policies of the Fund, provided that any such
purchases will be limited to shares of unaffiliated investment companies. The
purchase of securities of other mutual funds results in duplication of expenses
such that investors indirectly bear a proportionate share of the expenses of
such mutual funds including operating costs and investment advisory and
administrative fees.
The investment objective of the Fund and related policies and
activities are not fundamental and may be changed by the Board of Trustees of
the Trust without the approval of shareholders.
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) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short
sales of securities (the deposit or payment by the Fund of
initial or maintenance margin in connection with futures
contracts or related options transactions is not considered
the purchase of a security on margin);
(2) underwrite securities of other issuers, to the extent that the
purchase of municipal obligations, or other permitted
investments, directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such
securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(3) may invest an amount equal to 10% or more of the value of its
net assets in
4
<PAGE>
investments which are illiquid (including repurchase
agreements and fixed time deposits not subject to withdrawal
penalties having maturities of more than seven calendar days);
(4) issue senior securities, borrow money or pledge or mortgage
its assets, except the Fund may borrow from banks up to 33
1/3% of the current value of the total assets of the Fund and
pledge up to 33 1/3% of its assets to secure such borrowings;
(5) make loans or lend its portfolio securities; and
(6) purchase securities other than direct obligations of the
United States Treasury or repurchase agreements pertaining
thereto (there being no limit on the amount of the assets of
the U.S. Treasury Fund which may be invested in the securities
of any one issuer of such obligations).
The Fund's diversification tests are measured at the time of initial
purchase, and calculated as specified in Rule 2a-7 of the Investment Company Act
of 1940, which may allow the Fund to exceed the limits specified in the
Prospectus for certain securities subject to guarantees or demand features. The
Fund will be deemed to satisfy the maturity requirements described in this
Prospectus to the extent that the Funds satisfy Rule 2a-7's maturity
requirements. The definition of issuer for purposes of these investment
restrictions is the same as that described under "Investment Policies" in this
SAI for the purpose of diversification under the 1940 Act.
It is the intention of the Fund, unless otherwise indicated, that with
respect to the Fund's policies that are the result of the application of law,
the Fund will take advantage of the flexibility provided by rules or
interpretations of the SEC currently in existence or promulgated in the future
or changes to such laws.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in the net
or total assets of the Fund, in the securities rating of the investment, or any
other later change.
PERFORMANCE INFORMATION
From time to time the Trust may provide annualized "yield," "effective
yield" and "tax equivalent yield" quotations for the Fund in advertisements,
shareholder reports or other communications to shareholders and prospective
investors. The methods used to calculate a Fund's yield, effective yield and tax
equivalent yield are mandated by the Securities and Exchange Commission. The
"yield" of a Fund refers to the income generated by an investment in the Fund
over a seven day period (which period will be stated in any such advertisement
or communication). This income is then "annualized". That is, the amount of
income generated by the investment during that seven day period is assumed to be
generated each week over a 365 day period and is shown as a percentage of the
investment. Specifically, the yield is calculated by dividing the net change in
the value of an account having a balance of one share at the beginning
5
<PAGE>
of the period by the value of the account at the beginning of the period and
multiplying the quotient by 365/7. The "effective yield" is calculated
similarly, but when annualized the income earned by the investment during that
seven day period is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment. Specifically, the "effective yield" quotation of the Fund is
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the sum to
a power equal to 365/7, and subtracting 1 from the result.
Information on the yield of the Fund is not provided because the shares
of the Fund were not offered prior to [ ] ___, 2000.
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.
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 of the first day of such
period, and (b) subtracting 1 from the results. 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.
Information on the total return of the shares of the Fund is not
provided because the shares of the Fund were not offered prior to [ ] ___, 2000.
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 a 39.6% tax rate, the tax equivalent total
rate of return and the tax equivalent average annual total rate of return shares
of the Fund was as follows:
Information on the Tax Equivalent Total Rate of Return and Tax
Equivalent Average Annual Total Rate of Return for the Fund is not provided
because the shares of the Fund were not offered prior to [ ], 2000.
Since these yield and effective yield quotations are based on
historical earnings and
6
<PAGE>
reflect only the performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based, and since the Fund's
yield and effective yield fluctuate from day to day, these quotations should not
be considered as an indication or representation of the Fund's yield or
effective yield, if applicable, in the future. Any performance information
should be considered in light of the Fund's investment objective and policies,
characteristics and quality of the Fund's portfolio and the market quotations
during the time period indicated, and should not be considered to be
representative of what may be achieved in the future.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities markets in general, (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies
(including IBC/Donoghue's Money Fund Reports), publications, or persons who rank
mutual funds on overall performance or other criteria; and (iii) the Consumer
Price Index (measure for inflation) to assess the real rate of return from an
investment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the yield of the Fund varies based on the type,
quality and maturities of the obligations held for the Fund, fluctuations in
short-term interest rates, and changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate yields should
be considered when comparing the yield of the Fund to yields published for other
investment companies or other investment vehicles.
A Shareholder Servicing Agent or a securities broker, if applicable,
may charge its customers direct fees in connection with an investment in the
Fund, which will have the effect of reducing the net return on the investment of
customers of that Shareholder Servicing Agent or that securities broker.
Specifically, investors who purchase and redeem shares of the Fund through a
Shareholder Servicing Agent may be charged one or more of the following types of
fees as agreed upon by the Shareholder Servicing Agent and the investor, with
respect to the customer services provided by the Shareholder Servicing Agent:
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 upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and
effective yield of the Fund for those investors.
Conversely, the Trust has been advised 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, which will have
the effect of increasing the net return on the investment of such customers of
those Shareholder Servicing Agents. Such customers may be able to obtain through
their Shareholder Servicing Agent or securities broker quotations reflecting
such decreased or increased return.
7
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Trust for the past five years are listed below. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust. The address of each, unless otherwise indicated, is 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH TRUST PRINCIPAL OCCUPATION
---------------- ------------------- --------------------
<S> <C> <C>
FREDERICK C. CHEN Trustee Management Consultant
126 Butternut Hollow Road,
Greenwich, Connecticut 06830
ALAN S. PARSOW Trustee General Partner of Parsow
2222 Skyline Drive Partnership, Ltd. (investments)
Elkhorn, NE 68022
LARRY M. ROBBINS Trustee Director for the Center of Teaching
University of Pennsylvania and Learning, University of
College of Arts & Sciences Pennsylvania
120 Logan Hall
Philadelphia, PA 19104
MICHAEL SEELY Trustee President of Investor Access
475 Lexington Avenue Corporation (investor relations
New York, New York 10017 consulting firm)
LESLIE E. BAINS** Trustee Senior Executive Vice President,
HSBC Bank USA HSBC Bank USA, 1990-present;
452 Fifth Avenue Senior Vice President. The Chase
New York, New York 10018 Manhattan Bank, N.A., 1980-1990
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)
MARK L. SUTER Vice President Employee of BISYS Fund Services,
Inc., January 2000 to present; VP,
Seligman Data Corp., June 1997 to
January 2000; Capital Link
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH TRUST PRINCIPAL OCCUPATION
---------------- ------------------- --------------------
<S> <C> <C>
Consulting, February 1997 to June
1997; US Trust NY, June 1986 to
February 1991
RICHARD F. FROIO* Vice President Employee of BISYS Fund
Services, Inc.
NADEEM YOUSAF* Treasurer Employee of BISYS Fund
Services, Inc., August 1999 to
present; Director. IBT, Canadian
Operations, May 1995 to March 1997;
Assistant Manager, PriceWaterhouse.
1994 to May 1995
LISA M. HURLEY* Secretary Senior Vice President and General
Counsel of BISYS Fund Services, May
1998 to present; General Counsel of
Moore Capital Management, Inc.;
October 1993 to May 1996, Senior
Vice President and General Counsel
of Northstar Investment Management
Corporation
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
</TABLE>
*Messrs. Grimm, Froio and Yousaf and Mss. Hurley and Metz, also are
officers of certain other investment companies of which BISYS or an affiliate is
the administrator.
**Ms. Bains is an "interested person" as that term is defined in the
1940 Act.
***The Fund Complex includes the Trust, HSBC Advisor Funds Trust, and
HSBC Investor Portfolios.
9
<PAGE>
COMPENSATION TABLE
AGGREGATE COMPENSATION FROM:
<TABLE>
<CAPTION>
Trustee Total Compensation from Fund Complex*
<S> <C>
Frederick C. Chen $ 9,600
Larry M. Robbin $11,600
Michael Seely $ 9,600
</TABLE>
* The compensation table above reflects the fees received by the Trustees from
the Fund Complex for the year ended October 31, 1999. For the fiscal year ended
October 31, 1999, the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust received from the Fund Complex an annual retainer of
$3,600 and a fee of $1,500 for each meeting of the Board of Trustees or
committee thereof attended, except that Mr. Robbins received an annual retainer
of $4,600 and a fee of $1,725 for each meeting attended. The Fund Complex
includes the Trust, HSBC Advisor Funds Trust, HSBC Investor Portfolios Trust,
offshore feeders into the Portfolio Trust, and three stand-alone offshore funds.
The fees paid by the Fund Complex are allocated pro rata among the Funds based
upon the net assets 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 positions as
officers with the Trust, unless, as to liability to the Trust or its
shareholders, it is finally adjudicated that they engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in their offices, or unless with respect to any other matter it is
finally adjudicated that they did not act in good faith in the reasonable belief
that their actions were in the best interests of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Contract, HSBC Asset Management
(Americas), Inc. serves as investment adviser to the Fund. The Adviser manages
the investment and reinvestment of the assets of the Fund and continuously
reviews, supervises and administers the investments of the Fund pursuant to an
Investment Advisory Contract (the "Investment Advisory Contract"). The Adviser
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. Subject to such policies as the Board of Trustees may
determine, the Adviser places orders for the purchase and sale of the Fund's
investments directly with brokers or dealers selected by it in its discretion.
See "Portfolio Transactions" above. The Adviser does not place orders with the
Distributor. For its services under the Investment Advisory Contract, the
Adviser receives fees, payable monthly, from the Fund at the annual rate of
0.20% of the Fund's average daily net assets.
10
<PAGE>
The Adviser is a wholly owned subsidiary of HSBC Bank USA ("HSBC"),
which is a wholly owned subsidiary of HSBC USA, Inc., a registered bank holding
company, and currently provides investment advisory services for individuals,
trusts, estates and institutions.
HSBC and its affiliates may have deposit, loan and other commercial
banking relationships with 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. HSBC and its affiliates
deal, trade and invest for their own accounts in U.S. Government and Municipal
obligations and are dealers of various types of U.S. Government and Municipal
obligations. HSBC and its affiliates may sell U.S. Government and Municipal
obligations to, and purchase them from, other investment companies sponsored by
BISYS Fund Services. There is no restriction on the amount or type of U.S.
Government or Municipal obligations available to be purchased for the Fund. The
Adviser 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 HSBC or in the possession of any affiliate of HSBC.
HSBC 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. HSBC, 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, HSBC, its officers and
employees do not express any opinion with respect to the advisability of any
purchase of such securities.
The investment advisory services of HSBC to the Fund are not exclusive
under the terms of the Investment Advisory Contract. HSBC is free to and does
render investment advisory services to others.
The Investment Advisory Contract will continue in effect with respect
to the Fund, provided such continuance is approved annually (i) by the holders
of a majority of the outstanding voting securities of the Fund or by the Board
of Trustees, and (ii) by a majority of the Trustees who are not parties to such
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Contract may be terminated with respect to the Fund without penalty by
either party on 60 days' written notice and will terminate automatically if
assigned. The Contract provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of portfolio
transactions for the Fund, except for willful misfeasance, bad faith or gross
negligence or of reckless disregard of its or their obligations and duties under
the Contract.
Information on the investment advisory fees for the Fund is not
provided because the shares of the Fund was not offered prior to [ ] ___, 2000.
11
<PAGE>
DISTRIBUTION PLANS --CLASS A, CLASS B, CLASS C, AND CLASS D SHARES ONLY
Four 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"), Class C Shares (the "Class C Plan"),
and Class D (the "Class D Plan"). The Distribution Plans provide that they may
not be amended to increase materially the costs which either the Class A Shares,
Class B Shares, Class C Shares and Class D Shares may bear pursuant to the Class
A Plan, Class B Plan, Class C Plan and Class D Plan without approval by
shareholders of the Class A Shares, Class B Shares, Class C Shares and Class D
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 the Board of Trustees and by the Qualified Trustees, by vote cast
in person at a meeting called for the purpose of voting on the Distribution
Plans. In adopting the Class A Plan, Class B Plan, Class C Plan and Class D
Plan, the Trustees considered alternative methods to distribute the Class A
Shares, Class B Shares, Class C Shares and Class D Shares and to reduce each
class's expense ratio and concluded that there was a reasonable likelihood that
each Distribution Plan will benefit their respective class and that class's
shareholders. The Distribution Plans are terminable with respect to the Class A
Shares, Class B Shares, Class C Shares or Class D 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.
Information on the distribution expenses for the Fund is not provided
because the shares of the Fund was not offered prior to [ ] ___, 2000.
THE DISTRIBUTOR AND SPONSOR
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road,
Columbus, Ohio 43219-3035, acts as sponsor and distributor to the Fund under 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. BISYS and its affiliates also serve as administrator or distributor to
other investment companies. BISYS is a wholly owned subsidiary of BISYS Group,
Inc.
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 Class A Shares, Class
B Shares, Class C Shares and Class D Shares of the Fund and for the provision of
certain shareholder services with respect to these Shares. Payments to the
Distributor are for various types of activities, including: (1) payments to
broker-dealers which advise shareholders regarding the purchase, sale or
retention of Class A Shares, Class B Shares, Class C Shares and Class D Shares
of the Fund and which 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
and Class D Plan, the amount of their reimbursement from the Fund may not exceed
on an annual basis
12
<PAGE>
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 the
Class B Plan and Class C Plan, respectively, such payments by the Distributor to
broker-dealers may be in amounts on an annual basis of up to 0.75% of the Fund's
average daily net assets as presented 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. Pursuant to the Class D Plan, the amount of their reimbursement from the
Fund may not exceed on an annual basis 0.25% of the average daily net assets of
the Fund represented by Class D Shares outstanding during the period for which
payment is being made. Salary expense of BISYS personnel who are responsible for
marketing shares of the various series of the Trust may be allocated to such
series on the basis of average net assets; travel expense is allocated to, or
divided among, the particular series 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
The Trust has adopted an Administrative Services Plan which provides
that the Trust may obtain the services of an administrator, transfer agent,
custodian, and one or more Shareholder Servicing Agents, and may enter into
agreements providing for the payment of fees for such services. The
Administrative Services Plan 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, Class B Shares, Class C Shares, Class D Shares or Class
Y 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, Class D Shares or Class Y 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.
ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Trust with
general office facilities and supervises the overall administration of the Trust
and the Fund. BISYS provides persons satisfactory to the Board of Trustees of
the Trust to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of BISYS or its affiliates. For these services and facilities, BISYS
receives from
13
<PAGE>
the Fund fees payable monthly at an annual rate equal to 0.10% of the first $1
billion of the Fund's average daily net assets, 0.08% of the next $1 billion of
such assets; and 0.07% of such assets in excess of $2 billion.
The Administration Agreement will remain in effect until March 31,
2001, and automatically will continue in effect thereafter from year to year
unless terminated upon 60 days' written notice to BISYS. The Administration
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement also provides that neither BISYS nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the administration or management of the Trust, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Administration Agreement.
Information on the administration fees for the Fund is not provided
because the shares of the Fund was not offered prior to [ ] ___, 2000.
TRANSFER AGENT
The Trust has entered into Transfer Agency Agreements with BISYS,
pursuant to which BISYS acts as transfer agent (the "Transfer Agent"). The
Transfer Agent maintains 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 BYSIS is 3435 Stelzer Road, Columbus, OH 43219.
CUSTODIAN
Pursuant to a Custodian Agreement, HSBC also acts as the custodian of
the Fund's assets (the "Custodian"). The Custodian's 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 Custodian does not determine the investment
policies of the Fund or decide which securities will be purchased or sold for
the Fund. For its services, HSBC receives 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 HSBC,
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, Class C Shares, Class D and Class Y 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
14
<PAGE>
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, Class B Shares, Class C, and
Class D 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 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.
FEDERAL BANKING LAW
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, HSBC's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. HSBC believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of HSBC to perform these services, the Board of Trustees would review
the Trust's relationship with HSBC and consider taking all action necessary in
the circumstances, which could include recommending to shareholders the
selection of another qualified advisor or, if that course of action appeared
impractical, that the Fund be liquidated.
EXPENSES
Except for the expenses paid by the Adviser and the Distributor, the
Fund bears all costs
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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, Class C Shares and Class D 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 the Fund expense or the 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 Fund.
Information on the operating expenses for the Fund is not provided
because the shares of the Fund was not offered prior to [ ] ___, 2000.
DETERMINATION OF NET ASSET VALUE
The net asset value of each share of each class of the Fund is
determined on each day on which the New York Stock Exchange is open for trading.
As of the date of this Statement of Additional Information, the New York Stock
Exchange is open every weekday except for the days on which the following
holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The Trust uses the amortized cost method to determine the value of the
Fund's portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing an obligation at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. During these
periods the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund which utilizes a method of valuation based upon
market prices. Thus, during periods of declining interest rates, if the use of
the amortized cost method resulted in a lower value of the Fund's portfolio on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Fund's dollar-weighted average portfolio maturity of
90 days or less must be maintained, and only securities having remaining
maturities of 397 days or less which are determined by the Trust's Board of
Trustees to be of high quality with minimal credit risks may be purchased.
Pursuant to Rule 2a-7, the Board has established procedures designed to
stabilize, to the extent reasonably possible, the price per share of the Fund,
as computed for the purpose of sales and redemptions, at $1.00. Such procedures
include review of the Fund's portfolio holdings by the Board of Trustees, at
such intervals as it may deem appropriate, to determine whether the net asset
value of the Fund calculated by using available market quotations deviates from
the $1.00 per share valuation based on amortized cost. The extent of any
deviation is examined by the Board of Trustees. If such deviation exceeds
$0.003, the Board promptly considers what action, if any, will be initiated. In
the event the Board determines that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
the Board will take such corrective action as it regards as necessary and
appropriate, which may include
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selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends or
establishing a net asset value per share by using available market quotations.
It is anticipated that the net asset value of each class of shares will remain
constant at $1.00, although no assurance can be given that the net asset value
will remain constant on a continuing basis.
PURCHASE OF SHARES
Class A Shares, Class D Shares and Class Y Shares of the Fund are
continuously offered for sale by the Distributor at net asset value (normally
$1.00 per share) with no front-end sales charge 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"). Class A Shares,
Class D Shares and Class Y Shares may be purchased through Shareholder Servicing
Agents or, in the case of Investor Shares only through securities brokers that
have entered into a dealer agreement with the Distributor ("Securities
Brokers"). At present, the only Shareholder Servicing Agents for Class Y Shares
of the Fund are HSBC and its affiliates.
Class B Shares and Class C Shares of the Fund are not offered for sale
but are only offered as an exchange option for Class B shareholders and Class C
shareholders of the Trust's other investment portfolios who wish to exchange
some or all of those Class B shares or Class C shares for Class B Shares or
Class C Shares, respectively, of the Fund. Although Class B Shares and Class C
Shares of the Fund are not subject to a sales charge when a shareholder
exchanges Class B shares or Class C shares of another Trust portfolio for Class
B Shares or Class C Shares of the Fund, they may be subject to a contingent
deferred sales charge when they are redeemed. See "Contingent Deferred Sales
Charge ("CDSC") -- Class B Shares and Class C Shares" below.
Purchases of Class A Shares, Class D Shares and Class Y Shares are
effected on the same day the purchase order is received by the Distributor
provided such order is received prior to 12:00 noon, New York time, on any Fund
Business Day. Shares purchased earn dividends from and including the day the
purchase is effected. The Trust intends the Fund 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 Distributor.
While there is no sales load on purchases of Class A Shares and Class D
Shares, the Distributor may receive fees from the Fund. See "Management of the
Trust -- The Distributor and Sponsor" above. Other funds which have investment
objectives similar to those of the Fund but which do not pay some or all of such
fees from their assets may offer a higher yield.
All purchase payments are invested in full and fractional Shares. The
Trust reserves the right to cease offering Shares for sale at any time or to
reject any order for the purchase of Shares.
An investor may purchase Class A Shares and Class D Shares through the
Distributor directly or by authorizing his Shareholder Servicing Agent or his
securities broker to purchase
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such shares on his behalf through the Distributor. An investor may purchase
Class Y Shares by authorizing his Shareholder Servicing Agent to purchase such
Shares on his behalf through the Distributor.
EXCHANGE PRIVILEGE
By contacting the Transfer Agent or his Shareholder Servicing Agent or
his securities broker, a shareholder may exchange some or all of his Shares for
shares of an identical class of one or more of the following investment
companies: HSBC Investor U.S. Government Fund, HSBC Investor Bond Fund, HSBC
Investor Overseas Equity Fund, HSBC Investor Opportunity Fund, HSBC Investor
California Tax-Free Bond Fund, HSBC Investor California Tax-Free Fund, HSBC
Investor Equity Fund, and such other HSBC Investor Funds or other registered
investment companies for which HSBC serves as investment adviser as HSBC may
determine (the "HSBC Investor Funds"). An investor will receive Class A Shares
of the Fund in exchange for Class A shares of the HSBC Investor Funds, unless
the investor is eligible to receive Class D Shares of the Fund, in which case
the investor will receive Class D Shares of the Fund in exchange for Class A
shares of a HSBC Investor Fund. Class B Shares, Class C Shares and Class Y
Shares may be exchanged for shares of the same class of one or more of the HSBC
Investor Funds at net asset value without a front-end sales charge provided that
the amount to be exchanged meets the applicable minimum investment requirements
and the exchange is made in states where it is legally authorized. Holders of
the Fund's Class B Shares may not exchange their Shares for shares of any other
class. Exchanges of Fund Investor Shares for Investor shares of one or more HSBC
Investor Funds may be made upon payment of the applicable sales charge, unless
otherwise exempt. Shareholders of Class A and Class D Shares of the Fund who are
shareholders as of December 31, 1997 will be grandfathered with respect to the
HSBC Investor Funds and will be exempt from having to pay a sales charge on any
new purchases of Class A or Class D Shares of the Fund. 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. 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 HSBC Investor Funds.
The exchange privilege (or any aspect of it) may be changed or
discontinued upon 60 days' written notice to shareholders and is available only
to shareholders in states in which such exchanges may be legally made. A
shareholder considering an exchange should obtain and read the prospectus of the
other HSBC Investor Funds and consider the differences in investment objectives
and policies before making any exchange.
An exchange is considered a sale of shares and may result in a capital
gain or loss for federal income tax purposes. A Shareholder wishing to exchange
his or her Shares may do so by contacting the Trust at 800-782-8183, by
contacting his or her broker-dialer or by providing written instruction to the
Distributor.
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AUTOMATIC INVESTMENT PLAN
The Trust offers a plan for regularly investing specified dollar
amounts ($25.00 minimum in monthly, quarterly, semi-annual or annual intervals)
in the Fund. If an Automatic Investment Plan is selected, subsequent investments
will be automatic and will continue until such time as the Trust and the
investor's bank are notified to discontinue further investments. Due to the
varying procedures to prepare, process and to forward bank withdrawal
information to the Trust, there may be a delay between the time of the bank
withdrawal and the time the money reaches the Fund. The investment in the Fund
will be made at the net asset value per share determined on the day that both
the check and the bank withdrawal data are received in required form by the
Distributor. 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 Investor Shares from the
Distributor, an investor should contact the Distributor directly (see back cover
for address and phone number).
PURCHASES THROUGH A SHAREHOLDER SERVICING AGENT OR A SECURITIES BROKER
Class A Shares and Class D Shares of the Fund 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.
Class Y Shares of the Fund are only being offered to customers of Shareholder
Servicing Agents. Shareholder Servicing Agents and securities brokers, if
applicable, 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 and "sweep" checking 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.
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, if
applicable, or a Shareholder Servicing Agent to purchase Shares, an investor
should contact his securities broker or his Shareholder Servicing Agent.
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 (normally $1.00 per share) 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. Class
A Shares, Class D Shares and Class Y Shares may be redeemed without charge while
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge (CDSC). See "Contingent Deferred Sales Charge ("CDSC") -- Class B Shares
and Class C Shares" above. Redemptions are effected on the same
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day the redemption order is received by the Transfer Agent provided such order
is received prior to 12:00 noon, 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 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 Investor 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.
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<PAGE>
Redemption by wire or telephone. An investor may redeem Class A or
Class D 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.
CHECK REDEMPTION SERVICE
Shareholders may redeem Class A or Class D Shares by means of a Check
Redemption Service. If Class A or Class D Shares are held in book credit form
and the Check Redemption Service has been elected on the Purchase Application on
file with the Trust, redemptions of shares may be made by using redemption
checks provided by the Trust. There is no charge for this service. Checks must
be written for amounts of $250 or more, may be payable to anyone and negotiated
in the normal way. If more than one shareholder owns the Class A or Class D
Shares, all must sign the check unless an election has been made to require only
one signature on checks and that election has been filed with the Trust.
Class A Shares and Class D Shares represented by a redemption check
continue to earn daily dividends until the check clears the banking system. When
honoring a redemption check, the Trust causes the redemption of exactly enough
full and fractional Class A Shares and Class D Shares of the Fund from an
account to cover the amount of the check. The Check Redemption Services may be
terminated at any time by the Trust.
If the Check Redemption Service is requested for an account in the name
of a corporation or other institution, additional documents must be submitted
with the application, i.e., corporations (Certification of Corporate
Resolution), partnerships (Certification of Partnership) and trusts
(Certification of Trustees). In addition, since the share balance of the Fund
account is changing on a daily basis, the total value of the Fund account cannot
be determined in advance and the Fund account cannot be closed or entirely
redeemed by check.
CONTINGENT DEFERRED SALES CHARGE
Class B Shares
There is no sales charge imposed upon an exchange for Class B Shares of
the Fund, but investors may be subject to a CDSC when Class B Shares are
redeemed.
The CDSC will be based on the lesser of the net asset value at the time
of original purchase of the Class B shares of the Income Fund(s) and/or the
Equity Fund(s) which were exchanged for the Fund Class B Shares now being
redeemed or the net asset value of such Fund
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Class B 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 Income Fund or Equity Fund 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 that
were exchanged from Income Fund Class B shares, Class B Shares held more than
four years for Class B Shares that were exchanged from Equity Fund Class B
shares or Class B Shares acquired pursuant to reinvestment of dividends or
distributions.
For example, assume an investor purchased 100 Class B Shares of an
Equity Fund with a net asset value of $8 per share (i.e., at an aggregate net
asset value of $800) and in the eleventh month after purchase, the net asset
value per share is $10 and, during such time, the investor has acquired five
additional Class B shares of the Equity Fund through dividend reinvestment. If
at such time the investor exchanges all of his Equity Fund Class B shares for
Class B Shares of one of the Fund, the investor will have 1,050 Class B Shares
(assuming a net asset value of $1.00 per share for the Fund). Assume twelve
months later the investor acquires 50 additional Class B Shares of the Fund
through dividend reinvestments. If at such time the investor makes his first
redemption of 500 Fund Class B Shares (producing proceeds of $500), 100 of such
Shares would not be subject to the charge because they were acquired through
dividend reinvestment. With respect to the remaining 400 Class B Shares being
redeemed, the CDSC would be applied only to 320 Class B Shares (representing the
original cost of $8 per share for the Equity Fund) and not to the remaining 80
Class B Shares (representing the increase in net asset value of $2 per share for
the Equity Fund).
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.
Class C Shares
There is no sales charge imposed upon an exchange for Class C Shares of
the Fund, but investors may be subject to a CDSC when Class C Shares are
redeemed. When Class C shares of one of the other investment portfolios of the
HSBC Investor Funds are exchanged for Class C Shares of the Fund and those
shares are redeemed less than one year after the original purchase of the Class
B shares of the other HSBC Investor Funds (calculated from the last day of the
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month in which the shares were purchased), those Class C Shares of the Fund will
be subject to a 1.00% CDSC in most cases. 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 "Class B Shares." Class C Shares are subject to an annual 12b-1 fee
of up to 1.00% 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 the 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 Investor Shares. Broker-dealers and other financial
intermediaries whose clients have purchased Class C Shares may receive a
trailing commission equal to [%] 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.
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 or Class D Shares, depending upon whether the investor
is eligible for Class D 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 or Class D Shares takes place at
net asset value, as a result of which an investor receives dollar-for-dollar the
same value of Class A or Class D 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 Investor Shares.
DIVIDENDS AND DISTRIBUTIONS
The net income of the Fund, as defined below, is determined the Fund
Business Day (and on such other days as the Trustees deem necessary in order to
comply with Rule 22c-1 under the 1940 Act). This determination is made once
during each such day as of 12:00 noon, New York time. All the net income of the
Fund so determined is declared in shares of the Fund as a dividend to
shareholders of record at the time of such determination. Shares begin accruing
dividends on the day they are purchased. Dividends are distributed monthly.
Unless a shareholder elects to receive dividends in cash (subject to the
policies of the shareholder's Shareholder Servicing Agent or securities broker),
dividends are distributed in the form of
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additional shares of the Fund at the rate of one share (and fraction thereof) of
the Fund for each one dollar (and fraction thereof) of dividend income.
For this purpose, the net income of the Fund (from the time of the
immediately preceding determination thereof) consists of (i) all income accrued,
less the amortization of any premium, on the assets of the Fund, less (ii) all
actual and accrued expenses determined in accordance with generally accepted
accounting principles. Interest income includes discount earned (including both
original issue and market discount) on discount paper accrued ratably to the
date of maturity and any net realized gains or losses on the assets of the Fund.
Obligations held in the Fund's portfolio are valued at amortized cost, which the
Trustees of the Trust have determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This method provides certainty in
valuation, but may result in periods during which the stated value of an
obligation held for the Fund is higher or lower than the price the Fund would
receive if the obligation were sold. This valuation method will continue to be
used until such time as the Trustees of the Trust determine that it does not
constitute fair value for such purposes.
Since the net income of the Fund is declared as a dividend each time
the net income of the Fund is determined, the net asset value per share of the
Fund is expected to remain at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in the Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of Shares in his account.
It is expected that the Fund will have a positive net income at the
time of each determination thereof. If, for any reason, the net income of the
Fund determined at any time is a negative amount, which could occur, for
instance, upon default by an issuer of an obligation held in the Fund's
portfolio, the negative amount with respect to each shareholder account would
first be offset from the dividends declared during the month with respect to
each such account. If and to the extent that such negative amount exceeds such
declared dividends at the end of the month, the number of outstanding Fund
Shares would be reduced by treating each shareholder as having contributed to
the capital of the Fund that number of full and fractional Shares in the account
of such shareholder which represents his proportion of the amount of such
excess. Each shareholder will be deemed to have agreed to such contribution in
these circumstances by his investment in the Fund. Thus, the net asset value per
Share is expected to be maintained at a constant $1.00.
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 Class A Shares, Class B Shares, Class C
Shares, Class D and Class Y 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 of the Trust 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. The Trust
may authorize the creation of multiple classes of shares of separate series of
the Trust. Currently, the Fund is divided into five classes of shares.
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Each share of each class of the Fund represents an equal proportionate
interest in the Fund with each other share of that class. Shares have no
preference, pre-emptive, 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.
Each Shareholder Servicing Agent has agreed to transmit all proxies and
voting materials from the Trust to their customers who are beneficial owners of
the Fund and such Shareholder Servicing Agents have agreed to vote as instructed
by such customers. Under the Declaration of Trust, the Trust is not required to
hold annual meetings of Fund shareholders to elect Trustees or for other
purposes. It is not anticipated that the Trust will hold shareholders' meetings
unless required by law or the Declaration of Trust. In this regard, the Trust
will be required to hold a meeting to elect Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Trustees
have been elected by the shareholders of the Trust. In addition, the Declaration
of Trust provides that the holders of not less than two-thirds of the
outstanding shares of the Trust may remove persons serving as Trustee either by
declaration in writing or at a meeting called for such purpose. The Trustees are
required to call a meeting for the purpose of considering the removal of persons
serving as Trustee if requested in writing to do so by the holders of not less
than 10% of the outstanding shares of the Trust. 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. 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 relate 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 Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Shareholders of the Fund have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of the Fund,
shareholders of the Fund would be entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
25
<PAGE>
The Trust's Declaration of Trust provides that, at any meeting of
shareholders of the Fund 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 Subchapter M of the Code. To so qualify, the Fund must distribute
to shareholders at least 90% of its 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) and must meet
certain diversification of assets, source of income, and other requirements of
the Code. By so doing, the Fund will not be subject to federal income tax on
that portion of its net investment income and net realized capital gains (the
excess of any net long-term capital gains over net short-term capital losses),
if any, distributed to shareholders. If the Fund do not meet all of these Code
requirements, it will be taxed as an ordinary corporation.
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
26
<PAGE>
purposes.
The Fund will determine periodically which distributions will be
designated as exempt-interest dividends. If the Fund earns income which is not
eligible to be so designated, the Fund, nonetheless, intends to distribute such
income. Such distributions will be subject to federal, state, and local state
taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by the Fund from
investment in taxable debt securities, or ordinary income realized upon the
disposition of market discount bonds (including tax-exempt market discount
bonds), 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.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. It is not expected that such
distributions will be eligible for the dividends-received deduction for
corporations. Distributions of net capital gains, 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 not 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. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share received equal to the net asset value of a share of the Fund on
the reinvestment date. Shareholders will be notified annually as to the federal
tax status of distributions.
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 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
federal income tax when received by "substantial users" or persons related to
substantial users as defined in the Code. The term "substantial user" includes
any "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of private activity bonds. The Fund may
invest periodically in private activity bonds and, therefore, may not be
appropriate investments for entities that are substantial users of facilities
financed by private activity bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he/she or his/her immediate family (spouse, brothers,
sisters, and lineal descendants) owns indirectly in aggregate more than 50% in
the equity value of the substantial user.
27
<PAGE>
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although the
Fund's advisor attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be federal and (as applicable) state tax-exempt, neither
the advisor nor the Fund's counsel makes any review of proceedings relating to
the issuance of municipal securities or the bases of such opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the 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.
Upon disposition (by redemption, repurchase, sale or exchange) of Fund
shares, a shareholder may realize a taxable gain or loss depending upon his
basis in his shares. Realization of such a gain or loss is considered unlikely
because of the Fund's policy to attempt to maintain a $1.00 per share net asset
value. 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 not more than 18 months. Gain
from the disposition of shares held not ore than one year will be taxed as
short-term capital gain. A loss realized by a shareholder on the disposition of
Fund shares with respect to which long-term capital gain dividends have been
received will, to the extent of such long-term capital gain dividends, be
treated as long-term capital loss if such shares have been held by the
shareholder for six months or less. 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) (whether by reinvestment of distributions or otherwise) 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 the shares have been
held for six months or less at the time of their disposition.
The Trust will be required to report to the Internal Revenue Service
(the "IRS") all distributions by the Fund except in the case of certain exempt
shareholders. All such distributions generally will be subject to withholding of
federal income tax at a rate of 31% ("backup withholding") in the case of
nonexempt shareholders if (1) the shareholder fails to furnish the Fund with and
to certify the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup
28
<PAGE>
withholding. If the withholding provisions are applicable, any such
distributions whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Any amounts withheld may be
credited against the shareholder's federal income tax liability. Investors may
wish to consult their tax advisors about the applicability of the backup
withholding provisions.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the Commonwealth
of Massachusetts as long as each series of the Trust (including the Fund)
qualifies as a regulated investment company for purposes of Massachusetts law.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes, and their treatment under state and
local income tax laws may differ from the federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. and foreign tax
consequences of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
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 California residents from interest on
qualifying California bonds generally are exempt from California State personal
income taxes, but not corporate franchise taxes. Dividends and distributions
derived from taxable income and capital gains are not exempt from California
State taxes. Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible for California State
personal income tax purposes. Gain on the sale of redemption of Fund shares
generally is subject to California State personal income tax.
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<PAGE>
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated April 22, 1987, as a successor to two
previously-existing Massachusetts business trusts, FundTrust Tax-Free Trust
(organized on July 30, 1986) and FundVest (organized on July 17, 1984, and since
renamed FundSource). Prior to October 3, 1994 the name of the Trust was
"FundTrust".
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional series (with different investment objectives
and fundamental policies) and classes of shares within each series at any time
in the future. Establishment and offering of additional classes or series will
not alter the rights of the Fund's shareholders. When issued, shares are fully
paid, nonassessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In liquidation of the Fund, each
shareholder is entitled to receive his pro rata share of the net assets of the
Fund.
INDEPENDENT AUDITORS
The Board of Trustees has appointed KPMG Peat Marwick LLP as
independent auditors of the Trust. KPMG Peat Marwick LLP will audit the Trust's
annual financial statements, prepare the Trust's income tax returns, and assist
in the filings with the Securities and Exchange Commission. KPMG Peat Marwick
LLP's address is 99 High Street, Boston, Massachusetts 02110.
COUNSEL
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006, passes upon
certain legal matters in connection with the shares of the Fund offered by the
Trust, and also acts as counsel to the Trust.
CODE OF ETHICS
HSBC Investor Funds, the Adviser and BISYS each have adopted a code of
ethics, as required by applicable law, which is designed to prevent affiliated
persons of the Fund, the Adviser and BISYS from engaging in deceptive,
manipulative, or fraudulent activities in connection with securities held or to
be acquired by the Fund (which may also be held by persons subject to a code).
There can be no assurance that the codes will be effective in preventing such
activities.
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
30
<PAGE>
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
Financial statements for the Fund are not provided because shares of
the Fund were not offered prior to [ ] ___, 2000.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust, P.O. Box
182845, Columbus, Ohio 43218-2845.
GENERAL AND ACCOUNT INFORMATION: (800) 782-8183 (TOLL FREE).
31
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PART C
ITEM 23. EXHIBITS
<TABLE>
<S> <C>
(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
Fund, Republic Overseas Equity Fund and Republic Opportunity
Fund. 7
(a)(3) Establishment and designation of series for Republic Money
Market Fund. 16
(a)(4) Establishment and designation of series for HSBC Mid-Cap Fund.
16
(a)(5) Establishment and designation of series for HSBC Investor
Limited Maturity Bond Fund, HSBC Investor California Tax-free
Money Market Fund, HSBC Investor Growth and Income Fund, and
HSBC Investor U.S. Treasury Money Market Fund (to be filed by
amendment).
(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 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) Amended and restated Second Master Investment Advisory
Contract, with supplement regarding Republic Money Market
Fund, HSBC Investor California Tax-Free Money Market Fund,
HSBC Investor Growth and Income Fund, and HSBC Investor U.S.
Treasury Money Market Fund (to be filed by amendment)
(d)(4) Subadvisory Agreement between Alliance Capital Management L.P.
and Republic National Bank of New York regarding Republic
Equity Fund. 9
(d)(5) Subadvisory Agreement between Brinson Partners, Inc. and
Republic National Bank of New York regarding Republic Equity
Fund. 9
(d)(6) Subadvisory Agreement between Miller Anderson & Sherrard and
Republic National Bank of New York regarding Republic Bond
Fund. (to be filed by amendment).
(d)(7) Subadvisory Agreement between Capital Guardian Trust Company
and Republic National Bank of New York regarding Republic
Overseas Equity Fund. (to be filed by amendment).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(d)(8) Subadvisory Agreement between MFS Institutional Advisers and
Republic National Bank of New York regarding Republic
Opportunity Fund. (to be filed by amendment).
(e) Amended and Restated Distribution Agreement regarding Republic
U.S. Government Money Market Fund, Republic New York Tax Free
Money Market Fund, Republic New York Tax Free Fund, Republic
Equity Fund, Republic Taxable Fund, Republic Overseas Equity
Fund, Republic Opportunity Fund. Republic Money Market Fund,
HSBC Mid-Cap Fund, HSBC Investor California Tax-Free Money
Market Fund, HSBC Investor Growth and Income Fund, and HSBC
Investor U.S. Treasury Money Market Fund (to be filed by
amendment).
(f) Not applicable.
(g)(1) Form of Custodian Agreement - Republic. 13
(h)(1) Form of Service Agreement. 1
(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 Fund, Republic Equity Fund,
Republic Fund, Republic Overseas Equity Fund and Republic
Opportunity Fund. 9
(h)(3) Amended and Restated Administrative Services Plan. 6
(h)(4) Administration Agreement between Republic Funds and BISYS. 13
(h)(5) Fund Accounting Agreement--BISYS. 13
(h)(6) Form of Transfer Agency and Service Agreement - BISYS. 13
(i)(1) Opinion of Counsel. (to be filed by amendment)
(j) Consent of Independent Auditors. 15
(k) Not applicable.
(1)(1) Initial Investor Representation letter regarding Republic
International Equity Fund and Republic Fixed Income Fund. 3
(1)(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 Fund, Republic Equity Fund, Republic Fund,
Republic, Republic Money Market Fund, HSBC Mid-Cap Fund, HSBC
Investor California Tax-Free Money Market Fund, Overseas
Equity Fund, Republic Opportunity Fund, HSBC Investor Growth
and Income Fund, HSBC
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Investor Limited Maturity Bond Fund, and HSBC Investor U.S.
Treasury Money Market Fund (to be filed by an amendment).
(n) Multiple Class Plan. 5
(p)(1) Code of Ethics for Republic Funds, Republic Advisor Funds
Trust, and Republic Portfolios.16
(p)(2) Code of Ethics for HSBC Asset Management (Americas), Inc. 16
(p)(3) Code of Ethics for Miller Anderson & Sherrard (to be filed by
amendment).
(p)(4) Code of Ethics for Alliance Capital Management L.P. 16
(p)(5) Code of Ethics for Brinson Partners, Inc. 16
(p)(6) Code of Ethics for Capital Guardian Trust Company (to be filed
by amendment).
(p)(7) Code of Ethics for MFS Institutional Advisers, Inc. 16
(p)(8) Code of Ethics for BISYS. 15
(o)(1) Powers of Attorney of Trustees and Officers of Registrant and
Republic Portfolios. 8
(o)(2) Power of Attorney for Nadeem Yousaf. 16
(o)(3) Power of Attorney for Walter B. Grimm. 16
(o)(4) Power of Attorney for Leslie E. Bains. 16
</TABLE>
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.
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.
<PAGE>
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.
13. Incorporated herein by reference from post-effective amendment No.
63 to the Registration Statement as filed with the SEC on March 1, 1999.
14. Incorporated herein by reference from post-effective amendment No.
65 to the Registration Statement as filed with the SEC on March 25, 1999.
15. Incorporated herein by reference from post-effective amendment No.
67 to the Registration Statement filed with the SEC on February 29, 2000.
16. Incorporated herein by reference from post-effective amendment No.
69 to the Registration Statement filed with the SEC on June 30, 2000.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
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.
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
HSBC Bank USA ("HSBC") acts as investment adviser to Republic Funds and
Republic Advisor Funds Trust, and is a subsidiary of HSBC USA, Inc. ("HSBC
USA"), 452 Fifth Avenue, New York, New York 10018, a registered bank holding
company. HSBC'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, the address of all directors and officers is 452 Fifth Avenue,
New York, New York 10018):
NAME -- BUSINESS AND OTHER CONNECTIONS
Directors - HSBC Bank USA
Mr. Sal H. Alfiero
Chairman of the Board
Mark IV Industries, Inc.
501 John James Audubon Parkway
Amherst, New York 14228
Mr. John R.H.
Bond Chairman
HSBC Holdings plc
10 Lower Thames Street - Floor 10
London EC3R 6AE U.K.
Mr. James H. Cleave
9108 Chickadee Way
Blaine, Washington 98230
Dr. Frances D. Fergusson
President
Vassar College
Office of the President
Box 43
Poughkeepsie, New York 12604-0043
Mr. Douglas J. Flint
Group Finance
Director
HSBC Holdings plc
10 Lower Thames Street - Floor 10
London EC3R 6AE U.K.
Mr. Martin J.G. Glynn
President and Chief Executive Officer
HSBC Bank Canada
885 West Georgia Street - Suite 300
Vancouver, BC V6C 3E9
Canada
<PAGE>
Mr. Stephen K. Green
Executive Director
Investment Banking and Markets
HSBC Holdings plc
Thames Exchange
10 Queen Street Place
London EC4R 1BL U.K.
Ambassador Ulric Haynes, Jr.
Executive Dean for International Relations
Office of Admissions
Bernon Hall
Hofstra University
Hempstead, New York 11550
Mr. Richard A. Jalkut
President & Chief Executive Officer
PathNet
1015 31st Street, N.W.
Washington, D.C. 20007
Mr. Bernard J. Kennedy
Chairman of the Board
Chief Executive Officer
National Fuel Gas Company
10 Lafayette Square - Floor 18
Buffalo, New York 14203
Mr. Peter Kimmelman
President
Peter Kimmelman Asset Management Co.
800 Third Avenue -- Suite 3103
New York, New York 10022
Mr. Charles G. Meyer, Jr. President
Cord Meyer Development Company
111-15 Queens Boulevard
Forest Hills, New York 11375
Mr. James L. Morice
30 E. 37th Street -- Apt. 4G
New York, New York 10016
Mr. Youssef A. Nasr
President & Chief Executive Officer
HSBC Bank USA
452 Fifth Avenue -- Floor 10
New York, New York 10018
<PAGE>
Mr. Jonathan Newcomb
Chairman and Chief Executive Officer
Simon & Schuster, Inc.
1230 Avenue of the Americas Floor 17
New York, New York 10020
Mr. Henry J. Nowak
2312 Cypress Bend Road South
Apt. C-106
Pompano Beach, FL 33069
Senior Officers - HSBC Bank USA:
Youssef A. Nasr
President and Chief Executive Officer
Leslie Bains
Senior Executive Vice President
Robert M. Butcher
Senior Executive Vice President
A. A. Flockhart
Senior Executive Vice President
Paul L. Lee
Senior Executive Vice President
Vincent J. Mancuso
Senior Executive Vice President
Robert H. Muth
Senior Executive Vice President
Vito S. Portera
Senior Executive Vice President
Elias Saal
Senior Executive Vice President
lain A. Stewart
Senior Executive Vice President
Philip S. Toohey
Senior Executive Vice President
George T. Wendler
Senior Executive Vice President
<PAGE>
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).
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: HSBC Asset Management
(Americas), 452 Fifth Avenue, New York, New York 10018; BISYS Fund Services,
3435 Stelzer Road, Columbus, Ohio 43219-3035; Investors Bank & Trust Company,
N.A., 89 South Street, Boston, Massachusetts 02110; and Miller Anderson &
Sherrard, One Tower Bridge, West Conshokocken, Pennsylvania, 19428; Alliance
Capital Management L.P., 1345 Avenue of the Americas, New York, New York 10105;
Brinson Partners, Inc., 209 South LaSalle Street, Chicago, IL 60604; Capital
Guardian Trust Company, 333 South Hope Street, Los Angeles, California; and MFS
Institutional Advisers, 500 Boylston Street, Boston, MA 02116.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940. HSBC Investor Funds has duly caused this
registration statement on Form N-lA (File No. 33-7647) (the "Registration
Statement") to be signed on its behalf by the undersigned, thereto duly
authorized on the 5th day of September, 2000.
HSBC INVESTOR FUNDS
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 September 5, 2000.
<PAGE>
Walter B. Grimm**
-----------------------
Walter B. Grimm
President
Nadeem Yousaf**
-----------------------
Nadeem Yousaf
Treasurer
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
Leslie E. Bains*
-----------------------
Leslie E. Bains
Trustee
/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/ Jill Mizer
-----------------------
**Jill Mizer, as attorney-in-fact pursuant to powers of attorney filed as
Exhibit [ ] to post-effective amendment No. [ ].
