<PAGE>
As Filed with the Securities and Exchange Commission on April 29, 1997
Registration Nos. 33-33734
811-6057
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. 18 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. 20 / X /
HSBC MUTUAL FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 634-2536
Steven R. Howard, Secretary
Baker & McKenzie, 805 Third Avenue, 30th Floor
New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check
appropriate box):
X immediately upon filing pursuant to paragraph (b)
---
on (date) pursuant to paragraph (b)
---
75 days after filing pursuant to paragraph (a)
---
on (date) pursuant to paragraph (a) of Rule 485
---
The Registrant has registered an indefinite number of shares of
beneficial interest, par value $0.001 per share, by filing a declaration
pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2
Notice for the fiscal year ended December 31, 1996 was filed with the Commission
on March 3, 1997.
Calculation of Registration Fee
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of
Registered Registered* Offering Price Per Aggregate Offering Registration Fee
Unit Price**
Shares of Beneficial Interest:
$.001 par value of each
Portfolio Indefinite
Growth and Income Fund 17,597 $17.67 $ 0 $ 0.00
New York Tax-Free Bond
Fund 705,748 $11.37 $ 0 $ 0.00
Small Cap Fund 21,104 $14.74 $ 0 $ 0.00
Fixed Income Fund 30,664 $10.14 $ 0 $ 0.00
International Equity Fund 28,273 $11.00 $ 0 $ 0.00
--------- --------------------------------
Total 805,386 $ 0 $ 0.00
</TABLE>
* Registrant continues its election to register an indefinite number of
shares of beneficial interest pursuant to rule 24f-2 under the
Investment Company Act of 1940.
** The calculation of the maximum aggregate offering price is made pursuant
to rule 24e-2(a) under the Investment Company Act of 1940 and is based
on the following: the total amount of securities redeemed or repurchased
of the Registrant's series indicated above during the fiscal year ended
December 31, 1996 was 1,287,720 securities of the Growth and Income
Fund; 983,166 securities of the New York Tax-Free Bond Fund; 296,513
securities of the Small Cap Fund; 2,726,104 securities of the Fixed
Income Fund; 195,359 of the Short-Term U.S. Government Fund; and 355,941
securities of the International Equity Fund; and 1,270,123 shares of the
Growth and Income Fund; 277,418 shares of the New York Tax-Free Bond
Fund; 275,409 shares of the Small Cap Fund; 2,695,439 shares of the
Fixed Income Fund; 195,354 shares of the Short-Term U.S. Government
Fund; and 327,668 shares of the International Equity Fund; were
previously used for reduction pursuant to Rule 24f-2 and 803,386
(representing 17,597 shares of the Growth and Income Fund; 705,748
shares of the New York Tax-Free Bond Fund; 30,665 shares of the Fixed
Income Fund; 21,104 shares of the Small Cap Fund; 0 shares of the Short-
Term U.S. Government Fund; and 28,273 shares of the International Equity
Fund), is being so registered in this Amendment.
*** Unless otherwise indicated, amount represents the maximum offering price
per unit as of April 16, 1996.
<PAGE>
HSBC MUTUAL FUNDS TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
FIXED INCOME FUND
NEW YORK TAX-FREE BOND FUND
SMALL CAP FUND
GROWTH & INCOME FUND
INTERNATIONAL EQUITY FUND
N-1A Item No. Location
Part A Prospectus Caption
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Summary of Annual Fund Operating
Expenses
Item 3. Condensed Financial
Information.............. Yield Information;
Financial Highlights
Item 4. General Description of
Registrant Investment Objective,
Policies and Risk
Factors; Investment
Restrictions
Item 5. Management of the Fund..... Management of the Fund; Transactions
with Affiliates; Purchase of Shares;
Transfer and Dividend Disbursing
Agent and Custodian
Item 5A. Management's Discussion of
Fund Performance......... Not Applicable
Item 6. Capital Stock and Other
Securities............... Dividends, Distributions and Taxes;
Account Services; Shares of
Beneficial Interest
Item 7. Purchase of Securities
Being Offered............ Determination of Net Asset Value;
Purchase of Shares; Exchange
Privilege
Item 8. Redemption or Repurchase... Redemption of Shares; Redemptions
(Part B)
Item 9. Legal Proceedings.......... Not Applicable
<PAGE>
Part B Statement of
Additional Information
Caption
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information and
History................... Not Applicable
Item 13. Investment Objective and
Policies.................. Investment Policies and Risk
Factors; Investment Restrictions
Item 14. Management of the Registrant Management
Item 15. Control Persons and Principal
Holders of Securities..... Management; Shares of Beneficial
Interest
Item l6. Investment Advisory and
Other Services............ Management; Custodian, Transfer
Agent and Dividend Disbursing Agent;
Independent Auditors
Item 17. Brokerage Allocation........ Portfolio Transactions
Item 18. Capital Stock and Other
Securities................ Shares of Beneficial Interest
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............. Purchase of Shares (Part A);
Redemptions; Redemption of Shares
(Part A); Determination of Net Asset
Value; Exchange Privilege
Item 20. Tax Status.................. Dividends, Distributions and Taxes
(Part A); Federal Income Taxes (Part
B);
Item 21. Underwriters................ Management
Item 22. Calculation of Performance
Data ..................... Performance Information
Item 23. Financial Statements........ Financial Statements
<PAGE>
================================================================================
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fixed Income Fund 3435 Stelzer Road, Columbus, Ohio 43219
New York Tax Free Bond Fund
Information: (800) 634-2536
HSBC ASSET MANAGEMENT AMERICAS INC.
--Investment Adviser and Co-Administrator
BISYS FUND SERVICES--Distributor
================================================================================
HSBC Mutual Funds Trust (the "Trust") was organized in Massachusetts on
November 1, 1989 as a Massachusetts business trust and is an open-end,
diversified management investment company with multiple investment portfolios,
including the Fixed Income Fund (the "Fixed Income Fund") and the New York
Tax-Free Bond Fund (the "New York Fund") to which this Prospectus relates
(herein referred to individually as a "Fund" and collectively as the
"Funds").
The investment objective of the Fixed Income Fund is generation of high
current income consistent with appreciation of capital by investing in a variety
of fixed-income securities. The investment objective of the New York Fund is to
provide its investors with as high a level of current income exempt from regular
Federal, New York State and New York City income taxes as is consistent with
relative stability of capital. See "Investment Objectives and Policies" in this
Prospectus. There can be no assurances that the Funds will achieve their
investment objectives.
The Funds' investment adviser is HSBC Asset Management Americas Inc. (the
"Adviser"), the North American investment affiliate of HSBC Holdings plc
(Hongkong and Shanghai Banking Corporation) and Marine Midland Bank. See
"Management of the Funds" in this Prospectus.
Prospective investors should be aware that shares of the Funds are not an
obligation of or guaranteed or endorsed by HSBC Holdings plc or its affiliates.
In addition, such shares are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency and may involve
investment risks, including the possible loss of principal.
Shares of the Funds are offered for sale primarily through its Distributor
as an investment vehicle for institutions, corporations, fiduciaries and
individuals. Certain broker-dealers, banks, financial institutions and
corporations (the "Participating Organizations") have agreed to act as
shareholder servicing agents for investors who maintain accounts at these
Participating Organizations and to perform certain services for the Funds.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Funds. A Statement of Additional Information
(the "SAI"), dated April 29, 1997, containing additional detailed information
about the Funds, has been filed with the Securities and Exchange Commission and
is hereby incorporated by reference into this Prospectus. A copy is available
without charge and can be obtained by writing the Trust at the above address, or
calling the telephone number listed above.
----------
This Prospectus should be read and retained for ready reference to
information about the Fund.
----------
THESE SECURITIES HAVE 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.
April 29, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Summary of Annual Fund Operating
Expenses .......................................................... 2
Financial Highlights ................................................... 4
Investment Objectives, Policies and Risk
Factors ........................................................... 6
Other Investment Policies of the Funds ................................. 15
Investment Restrictions ................................................ 19
Management of the Funds ................................................ 20
Transactions with Affiliates ........................................... 24
Determination of Net Asset Value ....................................... 24
Purchase of Shares ..................................................... 25
Redemption of Shares ................................................... 28
Exchange Privilege ..................................................... 30
Dividends and Distributions ............................................ 31
Federal Income Taxes ................................................... 31
New York Taxes ......................................................... 33
Account Services ....................................................... 33
Transfer Agency and Fund Accounting
Services .......................................................... 34
Custodian .............................................................. 34
Performance Information ................................................ 34
Shares of Beneficial Interest .......................................... 35
</TABLE>
----------
SUMMARY OF ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
The purpose of the following information is to assist an investor in
understanding the costs and expenses that an investor in the Funds would bear
directly or indirectly. The information is based on expenses for the Funds for
the fiscal year ended December 31, 1996, as adjusted for estimated other
operating expenses and voluntary reductions of investment advisory,
administration, co-administration and 12b-1 fees.
Shareholder Transaction Expenses:
<TABLE>
<CAPTION>
New York
Fixed Income Tax-Free
Fund Bond Fund
------------ ---------
<S> <C> <C>
Maximum sales charge imposed on purchases of Fund's shares
(as a percentage of offering price) .................................. 4.75% 4.75%
----- -----
Certain investors will not be subject to the sales charge. See "Purchase of
Shares" in this Prospectus ...........................................
Annual Fund Operating Expenses:
Management Fees (net of fees not imposed)* ................................ 0.55% 0.25%
12b-1 Fees (net of fees not imposed)** .................................... 0.04% 0.24%
Other Expenses (net of fees and expenses not imposed)
Administrative Services Fee*** ....................................... 0.10% 0.10%
Co-Administrative Services Fee**** ................................... 0.00% 0.00%
Other Operating Expenses ............................................. 0.17% 0.30%
----- -----
Total Fund Operating Expenses (net of fees and expenses
not imposed)+ ........................................................ 0.86% 0.89%
===== =====
Total Fund Operating Expenses Before Non-Imposition
of Fees and Expenses++ ............................................... 1.29% 1.32%
===== =====
</TABLE>
Investors should be aware that the above table is not intended to reflect
in precise detail the fees and expenses associated with an individual
shareholder's own investment in the Funds. Rather, the table has been provided
only to assist investors in gaining a more complete understanding of fees,
charges and expenses. For a more detailed discussion of these matters, investors
should refer to the appropriate sections of this Prospectus.
2
<PAGE>
The following example should not be considered a representation of past or
future expenses. The expenses set forth above and example set forth below
reflect the non-imposition of certain fees and expenses. The actual expenses may
be greater or lesser than those shown. The following example assumes a 5% annual
return; however, the Funds' actual return will vary and may be greater or less
than 5%.
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and the reinvestment of all dividends and distributions:+++
Example:
<TABLE>
<CAPTION>
New York
Fixed Income Tax-Free Bond
Fund Fund
------------ -------------
<S> <C> <C>
1 year ................................... $ 56 $ 56
3 years .................................. $ 74 $ 75
5 years .................................. $ 93 $ 94
10 years ................................. $149 $152
</TABLE>
* Reflects advisory fees not imposed as a result of a voluntary waiver by the
Adviser. If these fees had been imposed, the New York Tax-Free Bond Fund
would have paid 0.45%, for advisory fees. See "Management of the
Funds--Investment Adviser."
** The fee under each Fund's Distribution Plan and Agreement is calculated on
the basis of the average daily net assets of each Fund at an annual rate
not to exceed 0.35% with respect to each Fund. See "Management of the
Funds--Distribution Plan and Agreement."
*** Reflects administrative fees not imposed as a voluntary waiver by BISYS
Fund Services of 0.05% for each Fund. See "Management of the
Funds--Administration."
**** Reflects co-administrative fees of 0.03% and shareholder servicing fees of
0.04% voluntarily waived by the Adviser for each Fund. See "Management of
the Funds--Administrator and Shareholder Servicer Assistant."
+ Investors who purchase and redeem shares of a Fund through a customer
account maintained at a Participating Organization may be charged
additional fees by such Participating Organization. The Funds may also pay
fees to Participating Organizations for handling recordkeeping and certain
administrative services for the customers who invest in the Funds through
accounts maintained at the Participating Organization. The payment will not
exceed 0.35% of the average daily net assets maintained by such
Participating Organization (See "Management of the Funds--Servicing
Agreements.")
++ Includes, among other things, Rule 12b-1 fees at the maximum rate of 0.20%.
+++ Includes a maximum sales charge from which certain shareholders may be
exempt. See "Purchase of Shares."
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following supplementary financial information for each of the four
years in the period ended December 31, 1996 for the Fixed Income Fund and for
each of the five years in the period ended December 31, 1996 for the New York
Tax-Free Bond Fund has been audited by Ernst & Young LLP whose report thereon
appears in the Funds' 1996 Annual Report to Shareholders. The supplementary
financial information for each of the years prior to December 31, 1991 also has
been audited by Ernst & Young LLP. This information should be read in
conjunction with the financial statements and notes thereto.
Selected data for a share outstanding throughout each period:
FIXED INCOME FUND
<TABLE>
<CAPTION>
For the Period
Year ended December 31, January 15, 1993(a)
------------------------------------------- to
1996 1995 1994 December 31, 1993
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $10.28 $9.35 $10.13 $10.00
-------- ------- ------- -------
Income From Investment Operations:
Net investment income ............................. 0.59 0.59 0.59 0.63
Net realized and unrealized gain (loss)
on investments ................................. (0.39) 0.93 (0.78) 0.21
-------- ------- ------- -------
Total from investment operations ............... 0.20 $1.52 (0.19) 0.84
-------- ------- ------- -------
Less Distributions from:
Net investment income ............................. (0.59) (0.59) (0.59) (0.63)
Net realized gain ................................. -- -- -- (0.08)
Total distributions ............................ (0.59) (0.59) (0.59) (0.71)
-------- ------- ------- -------
Net asset value, end of period ......................... $9.89 $10.28 $9.35 $10.13
======== ======= ======= =======
Total Return (b) ....................................... 2.11% 16.73% (1.89)% 8.57%(d)
Ratios/Supplemental Data:
Net assets (000), end of period ................... $104,875 $99,942 $84,774 $90,907
Ratio of expenses (without fee waivers)
to average net assets* ......................... 0.98% 0.96% 0.86% 0.87%(c)
Ratio of expenses (with fee waivers) to
average net assets ............................. 0.88% 0.93% 0.77% 0.22%(c)
Ratio of net investment income
(with fee waivers) to average net assets ....... 5.94% 6.03% 6.10% 6.40%(c)
Ratio of net investment income (without
fee waivers) to average net assets* ............ 5.84% 6.00% 6.01% 5.75%(c)
Portfolio turnover rate ........................... 156.05% 41.58% 63.96% 107.34%(d)
</TABLE>
- ----------
* During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
4
<PAGE>
NEW YORK TAX-FREE BOND FUND
<TABLE>
<CAPTION>
For the Period
For the Year ended December 31, March 21, 1989(a)
-------------------------------------------------------------------- to
1996 1995 1994 1993 1992 1991 1990 December 31,1989
---- ---- ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $11.17 $10.20 $11.70 $11.01 $10.66 $10.14 $10.20 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Income From Investment Operations:
Net investment income .................. 0.55 0.54 0.53 0.59 0.66 0.66 0.64 0.50
Net realized and unrealized gain (loss)
from investments ..................... (0.12) 0.97 (1.47) 0.95 0.44 0.57 (0.04) 0.20
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ..... 0.43 1.51 (0.94) 1.54 1.10 1.23 0.60 0.70
------ ------ ------ ------ ------ ------ ------ ------
Less Distributions from:
Net investment income .................. (0.55) (0.54) (0.53) (0.59) (0.66) (0.66) (0.64) (0.50)
Net realized gain ...................... -- -- (0.03) (0.26) (0.09) (0.05) (0.02) --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions .................. (0.55) (0.54) (0.56) (0.85) (0.75) (0.71) (0.66) (0.50)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ............ $11.05 $11.17 $10.20 $11.70 $11.01 $10.66 $10.14 $10.20
------ ------ ------ ------ ------ ------ ------ ------
Total Return(b) ........................... 3.99% 15.17% (8.13)% 14.27% 10.66% 12.59% 6.13% 7.13%(d)
Ratios/Supplemental Data:
Net assets (000), end of period ........ $41,975 $50,677 $50,711 $61,740 $32,407 $14,929 $7,268 $7,150
Ratio of expenses (without fee waivers)
to average net assets* ............... 1.21% 1.20% 1.10% 1.06% 1.17% 1.32% 1.53% 1.58%(c)
Ratio of expenses (with fee waivers)
to average net assets ................ 0.91% 0.99% 0.84% 0.63% 0.38% 0.34% 0.50% 0.50%(c)
Ratio of net investment income (with fee
waivers) to average net assets ....... 5.02% 5.07% 4.93% 4.98% 6.04% 6.36% 6.38% 6.29%(c)
Ratio of net investment income (without
fee waivers) to average net assets* .. 4.72% 4.86% 4.67% 4.55% 5.25% 5.38% 5.35% 5.21%(c)
Portfolio Turnover Rate ................ 87.40% 24.43% 122.43% 70.36% 66.44% 110.27% 8.48% 78.70%(d)
</TABLE>
- ----------
* During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
5
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
Fixed Income Fund
The investment objective of the Fixed Income Fund is generation of high
current income consistent with appreciation of capital. The Fixed Income Fund
invests primarily in notes, bonds, debentures and other fixed-income securities.
Under normal market conditions, at least 65% of the total assets of the Fixed
Income Fund will be invested in fixed-income securities which are rated at least
Baa by Moody's Investors Service ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") or which are comparably rated by another rating agency or,
if unrated, are determined to be of comparable quality by the Adviser pursuant
to guidelines established and regularly reviewed by the Board of Trustees. The
Fixed Income Fund will not purchase debt securities rated below Baa by Moody's
or BBB by S&P and expects to maintain an average quality rating of its
investment portfolio of Aa by Moody's or AA by S&P or, to the extent certain
securities are unrated or rated by other rating agencies, result in comparable
average portfolio quality. While "Baa"/"BBB" and comparable unrated securities
may produce a higher return, they are subject to a greater degree of market
fluctuation and credit risk than the higher quality securities in which the
Fixed Income Fund may invest and may be regarded as having speculative
characteristics as well. The quality restrictions on the Fixed Income Fund's
investments prevent the Fund from utilizing certain more speculative investments
which would otherwise serve to achieve the Fund's investment objective of
providing investors with high current income. Currently, the Fixed Income Fund
has no policy with respect to the Fund's average portfolio maturity. The Fixed
Income Fund may invest up to 35% of its total assets in variable and floating
rate debt securities which meet the issuer and quality standards described
above.
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 this Prospectus and in the
SAI.
The Fixed Income Fund will base its investment selection upon analysis of
prevailing market and economic conditions. Although the Fund has no present
intention of doing so, the Fund may utilize options on securities, interest rate
futures contracts and options thereon to reduce certain risks to its investments
and to attempt to enhance income, but not for speculation. The investment
objective and the investment policies described above are fundamental and may
not be changed by the Board of Trustees without a vote of shareholders of the
Fund. The other investment policies of the Fund are not fundamental, except as
otherwise indicated, including those discussed below under "Investment Policies
of the Fixed Income Fund," and therefore may be changed by the Board of Trustees
without a shareholder vote. There can be no assurance that the Fund's investment
objective will be attained.
6
<PAGE>
New York Tax-Free Bond Fund
The investment objective of the New York Tax-Free Bond Fund (the "New York
Fund") is to provide investors with as high a level of current income exempt
from regular Federal, New York State and New York City income taxes as is
consistent with relative stability of capital. Generally, long-term municipal
obligations provide higher yield and higher price volatility than short-term and
intermediate-term municipal obligations. There can be no assurance that the New
York Fund's investment objective will be attained.
Municipal Obligations and Quality Standards
To attain its investment objective, the New York Fund invests substantially
all of its assets in municipal obligations that are exempt from Federal, New
York State and New York City income tax in the opinion of bond counsel to the
issuer and in participation certificates in such obligations purchased from
banks, insurance companies and other financial institutions ("New York
Obligations") which meet the rating standards described below. As a matter of
fundamental policy, the New York Fund will maintain at least 80% of its net
assets in tax-exempt municipal obligations that are not subject to Federal
income tax and the alternative minimum tax. Generally, during normal market
conditions at least 65% of the value of the New York Fund's total assets will be
invested in bonds of New York issuers and the remainder may be invested in other
New York Obligations or in securities that are not New York Obligations and
therefore are subject to New York State and New York City income taxes. Although
the New York Fund will have no restrictions on the minimum or maximum maturity
of any individual New York Obligations held by it, the New York Fund will have
an average portfolio maturity ranging from three to 30 years. See "Investment
Restrictions" in this Prospectus for additional information.
Municipal Bonds. Municipal bonds may be categorized as "general obligation"
or "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. Revenue bonds
are secured by the revenue derived from a particular facility or group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source, but not by the general taxing power. Investments in municipal
bonds are limited to bonds which are rated at the date of purchase "Baa" or
better by Moody's or "BBB"or better by S&P or comparably rated by other NRSROs,
or, in certain instances, unrated municipal bonds if they are deemed by the
Fund's investment adviser to be comparable to "Baa" or "BBB" rated based upon
the investment adviser's assessment of publicly available information.
Bonds rated "Baa" by Moody's are judged to be "medium-grade obligations,
i.e., they are neither highly protected nor poorly secured." In addition,
"interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well." Under the
S&P classification, bonds rated "BBB" have an "adequate capacity to pay interest
and repay principal" and "whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories."
Municipal Notes. Municipal notes consist of tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes and
project notes. Notes sold as interim financing in anticipation of collection of
taxes, a bond sale or receipt of other revenues are usually general obligations
of the issuer. Project
7
<PAGE>
notes are issued by local housing authorities to finance urban renewal and
public housing projects and are secured by the full faith and credit of the
United States Government.
Investments in municipal notes are limited to notes which are rated at the
date of purchase "MIG-2" or better ("VMIG-2" or better in the case of variable
rate notes) by Moody's or "SP-2" or better by S&P or comparably rated by other
NRSROs, or, if not rated, are in the opinion of the New York Fund's investment
adviser, of comparable investment quality.
Notes rated "MIG-2" by Moody's are judged to be of "high quality, with
margins of protection ample enough although not as large as" in "MIG-1"-rated
issues. Under the S&P classification, notes rated "SP-1" exhibit very strong or
strong capacity to pay principal and interest and notes rated "SP-2" exhibit
satisfactory capacity to pay principal and interest.
Municipal Commercial Paper. Investments in municipal commercial paper are
limited to issues rated "Prime-2" or better by Moody's or "A-2" or better by S&P
or comparably rated by other NRSROs, or, if not rated, are in the opinion of the
Fund's investment adviser of comparable investment quality.
Commercial paper rated "Prime-2" by Moody's is considered to have a "strong
capacity for repayment of short-term promissory obligations". Under the S&P
classification, the "A-2" rating indicates a strong capacity for timely payment
but the relative degree of safety is not as high as for issues designated "A-1".
If not rated, securities purchased by the New York Fund will be of
comparable quality to the above ratings as determined by the Fund's investment
adviser.
After purchase by the New York 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 New York
Fund should continue to hold the security. To the extent the ratings given by a
NRSRO may change as a result of changes in such organizations or their rating
systems, the New York Fund will attempt to conform its rating systems to such
changes as standards for investments in accordance with the investment policies
contained in this Prospectus and in the Statement of Additional Information.
Although an investment in the New York Fund is not insured, certain of the
municipal obligations purchased by the New York Fund may be insured as to
principal and interest by companies that provide insurance for municipal
obligations. These obligations are identified as such in the New York Fund's
financial statements.
Floating Rate Instruments. Certain municipal obligations which the Fund may
purchase have a floating or variable rate of interest. Such obligations bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices, such as a Federal Reserve composite index. Such
obligations may carry a demand or "put" feature which would permit the holder to
tender them back to the issuer (or to a third party) at par value prior to
maturity. The Fund's investment adviser will monitor on an ongoing basis the
earning power, cash flow and other liquidity ratios of the issuers of such
obligations, and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand. The Fund's right to obtain
payment at par on a demand instrument could be affected by events occurring
between the date the Fund elects to demand
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payment and the date payment is due, which may affect the ability of the issuer
of the instrument to make payment when due.
Taxable Securities. The New York Fund may elect to invest up to 20% of the
current value of its total assets in securities subject to the Federal
alternative minimum tax. In addition, the Fund may invest up to 100% of its
total assets in these and other taxable securities to maintain a temporary
"defensive" posture when, in the opinion of the Fund's investment adviser, it is
advisable to do so. During times when the Fund is maintaining a temporary
defensive posture, it may be unable to fully achieve its investment
objective.
The types of taxable securities (in addition to "alternative minimum tax"
securities) in which the Fund may invest are limited to the following money
market instruments which have remaining maturities not exceeding one year: (i)
obligations of the United States Government, its agencies or instrumentalities;
(ii) negotiable certificates of deposit and bankers' acceptances of United
States banks which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation; (iii) domestic commercial paper rated "P-1" by Moody's or
"A-1" or "A-1+" by S&P or comparably rated by another nationally recognized
statistical rating organization; and (iv) repurchase agreements. The Fund also
has the right to hold cash equivalents of up to 100% of its total assets when
the Fund's investment adviser deems it necessary for temporary defensive
purposes.
New York Obligations
The New York Fund's assets will be invested primarily in municipal
obligations that are exempt from Federal, New York State and New York City
income tax in the opinion of bond counsel to the issuer and in participation
certificates in such obligations purchased from banks, insurance companies and
other financial institutions. Dividends paid by the New York Fund which are
attributable to interest income on tax-exempt obligations of the State of New
York and its political subdivisions, and of Puerto Rico, other U.S. territories
or possessions and their political subdivisions will be exempt from Federal, New
York State and New York City personal and corporate income taxes. The New York
Fund may purchase municipal obligations issued by other states, their agencies
and instrumentalities, the interest income on which will be exempt from Federal
income tax but will be subject to New York State and New York City personal and
corporate income taxes. As a matter of fundamental policy, the New York Fund
will invest no less than 80% of its net assets in New York obligations.
Opinions relating to the validity of municipal obligations (including New
York Obligations) and to the exemption of interest thereon from Federal income
tax are rendered by bond counsel to the respective issuers at the time of
issuance. Neither the Trust nor the Adviser will review the proceedings relating
to the issuance of municipal obligations or the basis for such opinions.
Risk Considerations for the New York Fund
Investors should be aware that certain substantial issuers of New York
municipal obligations (including issuers whose obligations may be acquired by
the New York Fund), have experienced serious financial difficulties in recent
years. These difficulties have at times jeopardized the credit standing and
impaired the borrowing abilities of all New York issuers and have generally
contributed to higher interest rates and lower market prices for their debt
obligations. A recurrence of the financial difficulties previously experienced
by such issuers could result in
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defaults or declines in the market values of their existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Obligations.
There are additional risks associated with an investment which
concentrates in issues of one state. Since the New York Fund invests primarily
in obligations of New York issuers, the marketability and market value of these
obligations may be affected by long-term economic problems which face New York
City and New York State. In particular, the ability of the State and the City to
finance independently has been adversely affected in the past by their inability
to achieve or maintain favorable credit ratings. There can also be an effect on
the market price of securities of other New York issuers if the City receives
less favorable credit ratings and if certain of its economic problems continue.
If these problems are not resolved, or if new ones develop, they could adversely
affect the various New York issuers' ability to meet their financial
obligations. Recently, for example, a significant slowdown in the financial
services sector of New York City has adversely affected the City's revenues and
has created budget gaps. There can be no assurance that New York City or the
local entities, or the State, will not face budget gaps in future years. The
ability of the New York Fund to meet its objective is affected by the ability of
issuers to meet their payment obligations. A default by an issuer of an
obligation held by the New York Fund could result in a substantial loss of
principal with respect to that obligation and a potential decline in the New
York Fund's net asset value. In addition, Moody's and S&P have on several
occasions lowered their ratings of New York State and City debt obligations. As
of the date of this Prospectus, New York State General Obligations are rated A
by Moody's and A- by S&P. New York City's General Obligation Bonds are rated
BBB+ by S&P and Baa by Moody's.
Ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings must be obtained from the rating
agency furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the bonds.
The New York Fund is permitted to invest up to 25% of the value of its
total assets in the securities of any one issuer without adhering to the 5%
issuer limitation described under "Investment Restrictions". To the extent that
the New York Fund invests up to 25% of its total assets in the securities of any
one issuer, there may be an increased risk of loss to the New York Fund.
The New York Fund does not intend to concentrate its investments in any
industry. The New York Fund may, however, invest 25% or more of its total assets
in municipal obligations that are related in other ways such that an economic,
business or political development or change affecting one such obligation could
also affect the other obligations; for example, municipal obligations, the
interest on which is paid from revenues of similar types of projects. In
addition, from time to time, the New York Fund may invest 25% or more of its
assets in industrial development bonds, which, although issued by industrial
development authorities, may be backed only by those assets and revenues of
non-governmental users.
The liquidity of the New York Fund may make it difficult in certain
circumstances to dispose of large investments advantageously. Nonetheless, the
Adviser has determined that there is a sufficient market to invest in New York
Obligations.
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In general, tax-exempt municipal obligations are subject to credit risks
such as the loss of credit ratings or possible default. In addition, an issuer
of tax-exempt municipal obligations may lose its tax-exempt status in the event
of a change in the current tax laws. See "Federal Income Taxes" in this
Prospectus.
The net asset value of the New York Fund generally will not be stable and
should fluctuate based upon changes in the value of the New York Fund's
portfolio securities. The prices of such securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations.
Investment Policies of the Fixed Income Fund
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 with respect to 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.
Securities of Foreign Governments and Supranational Organizations. The Fund
may invest in U.S. dollar- denominated debt securities issued by foreign
governments, their political subdivisions, governmental authorities, agencies
and instrumentalities and supranational organizations. A supranational
organization is an entity designated or supported by the national government of
one or more countries to promote economic reconstruction or development.
Examples of supranational organizations include, among others, the International
Bank for Reconstruction and Development (World Bank), the European Economic
Community, the European Coal and Steel Community, the European Investment Bank,
the Inter-American Development Bank, the Asian Development Bank, and the African
Development Bank. The Fund may also invest in "quasi-government securities"
which are debt obligations issued by entities owned by either a national, state
or equivalent government or are obligations of such a government jurisdiction
which are not backed by its full faith and credit and general taxing
powers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
Corporate Debt Obligations. The Fund may invest in U.S. dollar-denominated
obligations issued or guaranteed by U.S. corporations or U.S. commercial banks,
or U.S. dollar-denominated obligations of foreign
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issuers, including but not limited to debt securities issued by foreign banks,
foreign branches of U.S. banks, U.S. branches of foreign banks and foreign
branches of foreign banks. Such debt obligations include, among others, bonds,
notes, debentures, commercial paper and variable rate demand notes. Bank
obligations include, but are not limited to 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 to such issuer's country; and (iii) other considerations the
Adviser deems appropriate.
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.
Mortgage-Related Securities. The Fund may invest in various mortgage-backed
securities or mortgage-related securities. Mortgage loans made by banks, savings
and loan institutions and other lenders are often assembled into pools, the
interests in which may be issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Interests in such pools are called
"mortgage-related securities" or "mortgage-backed securities."
Most mortgage securities are pass-through securities, which means that
investors hold an undivided interest or participation in the mortgage pool. Such
securities provide investors with payments consisting of both principal and
interest as mortgages in the underlying mortgage pool are paid off by the
borrower. Investors receive a pro rata share of both regular interest and
principal payments (less issuer fees and applicable loan servicing fees), as
well as unscheduled early prepayments on the underlying mortgage pool. The
dominant issuers or guarantors of mortgage securities today are the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA guarantees mortgage securities composed of pools of Government-guaranteed
or insured (Federal Housing Authority, Veterans Administration or Farmers Home
Administration) mortgages originated by mortgage banks, commercial banks and
savings and loan associations. FNMA and FHLMC guarantee mortgage-backed
securities composed of pools of conventional and Federally insured or guaranteed
residential mortgages obtained from various entities, including savings and loan
associations, savings banks, commercial banks, credit unions and mortgage
bankers.
The principal and interest on GNMA pass-through securities are guaranteed
by GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, while FHLMC
currently guarantees timely payment and ultimate repayment of interest and
either timely payment of principal or eventual payment of principal, depending
upon the date of issue. Securities issued by FNMA and FHLMC are not backed by
the full faith and credit of the United States; however, their close
relationship with the U.S. Government makes them high quality securities with
minimal credit risks. The yields provided by these mortgage securities have
historically exceeded the yields on other types of U.S. Government securities.
However, like most mortgage-backed securities, the experienced yield is
sensitive to the rate of principal payments (including prepayments). Prepayments
on underlying mortgages result in a loss of anticipated interest, and all or
part of a premium if any has been paid, and the actual yield (or total return)
to the Fund may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease
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with rising interest rates. Like other fixed income securities, when interest
rates rise, the value of a mortgage pass-through security generally will
decline; however, when interest rates are declining, the value of mortgage
pass-through securities with prepayment features may not increase as much as
that of other fixed-income securities. Because the average life of
mortgage-related securities may lengthen with increases in interest rates, the
portfolio weighted average life of the mortgage-related security in which the
Fund is invested 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 weighted average life.
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.
The Fixed Income 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 principal (including 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. See "Investment Policies and Risk Factors" in
the SAI.
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 objective, 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 often 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. The principal returned may be
invested in instruments having a higher or lower yield than the prepaid
instruments. However, because prepayments generally occur more frequently during
periods of declining interest rates, it is more likely that the returned
principal will be invested in instruments with a lower yield. As a result, if
the Fund purchases a security at a premium, a prepayment rate that is faster
than expected will reduce
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yield to maturity, while a prepayment rate that is slower than expected will
have the opposite effect of increasing yield to maturity. Alternatively, if the
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. Because of these factors, the Fund's
share value and yield are not guaranteed and will fluctuate, and there can be no
assurance that the Fund's investment objective will be achieved. 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 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
such as a letter of credit from a bank, excess collateral or a third-party
guarantee.
Municipal Securities. The Fixed Income Fund may, when deemed appropriate by
the Adviser and consistent with the investment objective of the Fund, invest in
obligations of state and local governmental issuers which carry taxable yields
that are comparable to yields of other fixed-income instruments of comparable
quality or, which the Adviser believes possess the possibility of capital
appreciation. Municipal obligations may include bonds which may be categorized
as either "general obligation" or "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are secured by the net
revenue derived from a particular facility or group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source, but
not by the general taxing power.
The Fund may also invest in municipal notes rated at least MIG-1 by Moody's
or SP-1 by S&P. Municipal notes will consist of tax anticipation notes, bond
anticipation notes, revenue anticipation notes and construction loan notes.
Notes sold as interim financing in anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the issuer.
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The Fund may also invest in municipal commercial paper, provided such
commercial paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if
unrated, is of comparable investment quality as determined by the Adviser.
Zero Coupon Securities. The Fixed Income 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 during that year even though the holder receives
no cash payments of interest during the year.
Money Market Securities. Under normal market conditions, the Fund may
invest up to 20% of its total assets in various money market instruments such as
bank obligations, commercial paper, variable rate master demand notes, shares of
money market mutual funds, bills, notes and other obligations issued by a U.S.
company, the U.S. Government, a foreign company or a foreign government, its
agencies or instrumentalities denominated in U.S. dollars. For temporary
defensive purposes, the Fund may invest 100% of its total assets in such money
market instruments subject to certain restrictions. All money market instruments
will be limited to those which carry a rating of MIG-1 or P-1 by Moody's or SP-1
or A-1 by S&P, or which are comparably rated by another rating agency or, if
unrated, are of comparable quality as determined by the Adviser pursuant to
guidelines established and regularly reviewed by the Board of Trustees. During
times when the Fund is maintaining a temporary defensive posture, it may be
unable to achieve fully its investment objective.
OTHER INVESTMENT POLICIES OF THE FUNDS
A number of the investment practices and techniques described below are
subject to certain risks described more fully in the SAI.
Lending of Portfolio Securities. The Funds may lend their securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Fund at least equal at all times to 102% of the
market value of the securities loaned plus interest or dividends. While such
securities are on loan, the borrower will pay the Fund the amount of any income
accruing thereon or, in some cases, a separate fee. The Fund will not lend
securities having a value which exceeds 10% of the current value of its total
net assets. There may be risk 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
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creditworthiness of the broker, dealer or financial institution and whether the
income to be earned from the loan justifies the attendant risks.
Options on Securities. (Fixed Income Fund only.) The Fund may write (sell)
covered put and call options and purchase put and call options on securities in
its portfolio. The principal reason for writing call options is to obtain,
through the receipt of premiums, a greater current return than would be realized
on the underlying securities alone. However, the Fund may receive a greater or
lesser total return from its optioned positions than it would have received from
its underlying securities if they had not been subject to options (See "Risks of
Options and Futures Contracts" below). The Fund may write call options on a
covered basis only.
The Fund may purchase call options, but only to effect a "closing
transaction", i.e., to offset an obligation pursuant to a previously written
call option to prevent an underlying security from being called or to permit the
sale of the underlying security or the writing of a new option on the security
prior to the outstanding option's expiration. The Fund may also purchase
securities with put options, sometimes referred to as stand-by commitments,
which are otherwise eligible for investment in amounts not exceeding 10% of its
total assets, when the Adviser anticipates a decline in the market value of
securities in the Fund's portfolio. The Fund will incur costs, in the form of
premiums, on options it purchases and may incur transaction costs on options
that it exercises. The Fund will ordinarily realize a gain from a put option it
has purchased if the value of the securities subject to the option decreases
sufficiently below the exercise price to cover both the premium and the
transaction costs.
Interest Rate Futures Contracts. (Fixed Income Fund only.) The Fund may, to
a limited extent, enter into interest rate futures contracts i.e., contracts for
the future delivery of securities or index-based futures contracts that are, in
the opinion of the Adviser, sufficiently correlated with the Fund's portfolio.
These investments will be made primarily in an attempt to protect the Fund
against the effects of adverse changes in interest rates (i.e., "hedging"). When
interest rates are increasing and portfolio values are falling, the sale of
futures contracts can offset a decline in the value of the Fund's current
portfolio securities. The SAI describes these investments in greater detail. See
"Risks of Options and Futures Contracts" below for information on certain risks
associated with interest rate futures contracts.
Options on Interest Rate Futures Contracts. (Fixed Income Fund only.) The
Fund may purchase put and call options on interest rate futures contracts, which
give the Fund the right to sell or purchase the underlying futures contract for
a specified price upon exercise of the option at any time during the option
period. The Fund may also write (sell) put and call options on such futures
contracts. For options on interest rate futures that the Fund writes, it will
receive a premium in return for granting to the buyer the right to sell to the
Fund or to buy from the Fund the underlying futures contract for a specified
price at any time during the option period.
Risks of Options and Futures Contracts. (Fixed Income Fund only.) Except as
otherwise provided in this Prospectus, the Fund is permitted to engage in bona
fide hedging transactions (as defined in the rules and regulations of the
Commodity Futures Trading Commission) without any quantitative limitations.
Futures and related option transactions which are not for bona fide hedging
purposes may be used provided the total amount of the initial margin and any
option premiums attributable to such positions does not exceed 5% of the Fund's
liquidating value after taking into account unrealized profits and unrealized
losses, and excluding any in-the-money option premiums paid. The Fund will not
market, and is not marketing, itself as a commodity pool or otherwise as a
vehicle for trading in futures and related options. The Fund will segregate
assets to cover the futures and options.
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Notwithstanding these protective limitations, one risk involved in the
purchase and sale of futures options is that the Fund may not be able to effect
closing transactions at a time when it wishes to do so. Positions in futures
contracts and options on futures contracts may be closed out only on an exchange
or board of trade that provides an active market for them, and there can be no
assurance that a liquid market will exist for the contract or the option at any
particular time. To mitigate this risk, the Fund will ordinarily purchase and
write options only if a secondary market for the options exists on a national
securities exchange or in the over-the-counter market. Another risk is that
during the option period, if the Fund has written a covered call option, it will
have given up the opportunity to profit from a price increase in the underlying
securities above the exercise price in return for the premium on the option
(although, of course, the premium can be used to offset any losses or add to the
Fund's income) but, as long as its obligation as a writer continues, the Fund
will have retained the risk of loss should the price of the underlying security
decline. In addition, the Fund has no control over the time when it may be
required to fulfill its obligation as a writer of the option; once the Fund has
received an exercise notice, it cannot effect a closing transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. More information concerning the risk factors
associated with these option and hedging techniques is contained in the SAI.
Repurchase Agreements. The Funds may enter into repurchase agreements. A
repurchase agreement is a transaction in which a Fund acquires securities and
simultaneously commits to resell the securities to the seller at an agreed upon
price plus an agreed upon market rate of interest. Each 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 risk.
The seller typically is a Federally insured major bank which is a member of the
Federal Reserve System, or a registered securities dealer meeting the
creditworthiness and other quality standards established by the investment
adviser and approved by the Funds' Board of Trustees. In these transactions, the
securities acquired by a Fund are held by the Fund's custodian bank until they
are repurchased. 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. The Funds may enter into repurchase
agreements, if as a result, no more than 15% (10% in the case of the New York
Fund) of the market value of a Fund's net assets would be invested in repurchase
agreements. Repurchase agreements are considered to be loans collateralized by
the underlying securities under the Investment Company Act of 1940, as amended
(the "1940 Act").
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 Funds
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 a Fund does not have the immediate right to liquidate the
underlying securities. If the seller defaults, a Fund might incur a loss if the
value of the underlying securities declines. A 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.
When-Issued and Delayed-Delivery Securities. The Funds 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 New York Fund will only make commitments to purchase
municipal obligations on a when-issued basis with the intention of actually
acquiring the securities but may sell them before the settlement date if it is
deemed advisable. The when-issued securities are subject to market fluctuation
and no
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<PAGE>
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.
Each 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.
Securities with Put Rights. (New York Fund only.) The Fund may enter into
put transactions, sometimes referred to as stand-by commitments, with respect to
municipal obligations held in its portfolio. The amount payable to the Fund by
the buyer upon its exercise of a put will normally be (i) the Fund's acquisition
cost of the securities (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus an amortized
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during the period the securities were owned by the Fund. Absent unusual
circumstances, the Fund values the underlying securities at their market value.
Accordingly, the amount payable by a broker-dealer or bank during the time a put
is exercisable will be substantially the same as the value of the underlying
securities. If necessary and advisable, the Fund may pay for certain puts either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a put (thus reducing the yield to maturity
otherwise available for the same securities).
The Fund's ability to exercise a put will depend on the ability of the
broker-dealer or bank to pay for the underlying securities at the time the put
is exercised. In the event that a broker-dealer or bank should default on its
obligation to repurchase an underlying security, the Fund might be unable to
recover all or a portion of any loss sustained from having to sell the security
elsewhere.
For a more detailed description of put transactions, see "Other Investment
Policies of the Funds--Securities with Put Rights" in the SAI.
Illiquid Securities. Each Fund may invest in illiquid securities if
immediately after such investment no more than 15% (10% in the case of the New
York Fund) of a Fund's net assets (taken at market value) would be invested in
such securities. For this purpose, illiquid securities include (a) securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market, (b) participation interests in loans
that are not subject to puts, and (c) repurchase agreements not terminable
within seven days. Securities that have legal or contractual restrictions on
resale but have a readily available market are not deemed illiquid for purposes
of this limitation. Consequently, investments in restricted securities eligible
for resale pursuant to Rule 144A of the Securities Act of 1933 which have been
determined to be liquid by a Fund's Board of Trustees based upon the trading
markets for such securities, will not be included for purposes of this
limitation.
Portfolio Turnover. The Funds generally will not engage in the trading of
securities for the purpose of realizing short-term profits, but each Fund will
adjust its portfolio as it deems advisable in view of prevailing or anticipated
market conditions or fluctuations in interest rates to accomplish its respective
investment objective. For example, each Fund may sell portfolio securities in
anticipation of an adverse market movement. Other than for
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<PAGE>
tax purposes, frequency of portfolio turnover will not be a limiting factor if a
Fund considers it advantageous to purchase or sell securities. A high rate of
portfolio turnover involves correspondingly greater transaction expenses than a
lower rate, which expenses must be borne by each Fund and its shareholders.
Investment Company Securities. Each Fund may invest up to 10% of its
respective total assets in the securities of other investment companies subject
to the limitations of Section 12(d)(1) of the 1940 Act. 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 fees.
INVESTMENT RESTRICTIONS
The SAI contains more information on each Fund's investment policies, and
also identifies the restrictions on a Fund's investment activities, which
provide among other things:
Each Fund may not:
1. Issue senior securities, borrow money or pledge or mortgage its assets,
except that a Fund may borrow from banks up to 10% of the current value of its
total assets for temporary purposes only in order to meet redemptions, and those
borrowings may be secured by the pledge of not more than 10% of the current
value of its total assets (but investments may not be purchased by a Fund while
such borrowings exist).
2. Invest more than 25% of the value of its total assets in securities of
companies engaged principally in any one industry, provided that there is no
limitation with respect to U.S. Government Securities including repurchase
agreements and loans of securities collateralized by U.S. Government Securities.
With respect to the New York Fund, there is no limitation with respect to
investments in municipal obligations (for purposes of this restriction,
industrial development and pollution control bonds shall not be deemed municipal
obligations if the payment of principal and interest on such bonds are the
ultimate responsibility of nongovernmental users).
3. Lend more than 10% of the value of the total assets of such Fund's
portfolio securities to qualified borrowers, except that the Funds may purchase
or hold a portion of an issue of publicly-distributed bonds, debentures or other
obligations, make deposits with banks and enter into repurchase agreements with
respect to its portfolio securities. All such loans shall require the borrower
to deposit and maintain with the Fund cash collateral equal to 102% of the
market value of the securities loaned. As with any extension of credit, loans by
a Fund may be made to large financial institutions such as broker-dealers and
are subject to the risks of delay in recovery and loss of rights in the
collateral should the borrower of the securities fail financially.
4. Invest an amount equal to 15% (10% in the case of the New York Fund) or
more of the current value of the Fund's net assets in illiquid securities,
including those securities which do not have readily available market quotations
and repurchase agreements having maturities of more than seven days.
5. With respect to 75% of its total assets, purchase a security, if as a
result, (1) more than 5% of its total assets would be invested in the securities
of any one issuer (other than obligations of the United States Government, its
agencies or instrumentalities or securities which are backed by the full faith
and credit of the
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<PAGE>
United States) except as to the remaining 25% of the Fixed Income Fund's total
assets, it will not invest more than 10% of its total assets in any one issuer,
or (2) the Fund would own more than 10% of the voting securities of any one
issuer.
In addition, the New York Fund may not:
6. Invest less than 80% of its net assets in New York Obligations except
when, in the opinion of the Fund's investment adviser, it is advisable for the
Fund to invest temporarily up to 100% of its total assets in taxable securities
to maintain a "defensive" posture because of usual market conditions. For
instance, a "defensive" posture is warranted when the Fund's assets exceed the
available amount of municipal obligations that meet the Fund's investment
objective and policies.
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 Funds, in the securities rating of the investment, or any
other later change.
The investment restrictions referred to above are fundamental and may be
changed only when permitted by law and approved by a majority of the outstanding
voting securities of a Fund. As used in this Prospectus, such approval means
approval of the lesser of (i) the holders of 67% or more of the shares
represented in a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy or (ii) the holders of more than 50% of
the outstanding shares.
MANAGEMENT OF THE FUNDS
The property, affairs and business of the Funds are managed by the Board of
Trustees. The Trustees elect officers who are charged with responsibility for
the day-to-day operations of the Funds and the execution of policies formulated
by the Trustees. Information about the Trustees as well as the Trust's executive
officers, may be found in the SAI under the heading "Management--Trustees and
Officers."
Investment Adviser
The Trust retains HSBC Asset Management Americas Inc. (the "Adviser") to
act as the investment adviser for each of the Funds. The Adviser is the North
American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai
Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York, New York 10177. At December 31, 1996, the Adviser managed over $3.8
billion of assets of individuals, pension plans, corporations and institutions.
Mr. Paul Guidone, Chief Investment Officer of HSBC Asset Management
Americas Inc., oversees the Funds' investments. Mr. Guidone does not manage any
particular portfolio but exercises general supervisory authority over all
portfolio managers. Mr. Guidone has been with the Adviser since 1994.
Mr. James Lark, Director, HSBC Asset Management Inc.'s Taxable Fixed Income
Products, is responsible for the day-to-day management of the Fixed Income
Fund's portfolio. Mr. Lark joined the Adviser in 1986 and is responsible for
managing institutional and retail fixed income portfolios.
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<PAGE>
Mr. Jerry Samet, Municipal Bond Portfolio Manager, Fixed Income Group of
the Adviser, is responsible for the day-to-day management of the New York Fund.
Before joining the Adviser in February 1996, Mr. Samet worked for Bankers Trust
in the Private Clients Group for eight years. He was a portfolio manager/trader
for six years, and before that, he was a trading assistant for two years.
Pursuant to each Advisory Contract, the Adviser furnishes continuous
investment guidance to the Trust consistent with each Fund's investment
objective and policies and provides administrative assistance in connection with
the operation of each Fund. Information regarding the investment performance of
each Fund is contained in each Fund's Annual Report dated December 31, 1996
which may be obtained, without charge, from the Trust.
Banking Laws
Counsel to the Trust and special counsel to the Adviser have advised the
Adviser that the Adviser may perform the services for the Trust contemplated by
the Advisory Contract without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. Such counsel has pointed out, however,
that this question has not been authoritatively determined and that judicial or
administrative decisions or interpretations of present Federal or state statutes
and regulations relating to the permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as future changes in
Federal or state statutes and regulations and judicial or administrative
decisions or interpretations thereof, could prevent the Adviser from continuing
to perform such services for the Trust. 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 Trust's shareholders that they approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant of
the Funds in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but are not specifically required to, include any
or all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of and review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Funds to, and
answer questions from Shareholder Servicers to enhance understanding of the
Funds and their investment objectives; and (iv) generally assist the activities
of the Shareholder Servicers.
The Adviser shall provide all personnel and facilities necessary in order
for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicer Assistant, the Adviser is paid an
annual fee equal to 0.04% of each Fund's average daily net assets.
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<PAGE>
Administrator
The Trust retains BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS") to act as the Administrator of the Funds in accordance with
the terms of the Management and Administration Agreement. Pursuant to the
Management and Administration Agreement, the Administrator, at its expense,
generally supervises the operation of the Trust and the Funds by reviewing the
expenses of the Funds monthly to ensure timing and accuracy of each Fund's
operating expense budget and by providing administrative personnel, office space
and administrative services reasonably necessary for the operation of the Trust
and the Funds, other than those services which are provided by the Adviser
pursuant to the Advisory Contract.
BISYS's annual administration and accounting fee is an asset-based fee of
0.15% of each Fund's first $200 million of average net assets; 0.125% of each
Fund's next $200 million of average net assets; 0.10% of each Fund's next $200
million of average net assets; and 0.08% of each Fund's average net assets in
excess of $600 million. The asset-based administration and accounting fee paid
to BISYS does not include out-of-pocket expenses which shall be borne by the
Trust.
The Trust also retains the Adviser to act as Co-Administrator of the Funds
in accordance with the terms of the Co-Administration Services Contract.
Pursuant to the Co-Administration Services Contract, the Adviser (i) manages
each Fund's relationship with service providers, (ii) assists with negotiation
of contracts with service providers and supervises the activities of those
service providers, (iii) serves as a liaison with Fund trustees, and (iv)
assists with general product management and oversight. For its services as a
Co-Administrator, the Adviser is paid an annual fee equal to 0.03% of each
Fund's average daily net assets.
Distributor
BISYS also serves as the Funds' Distributor and has its principal office at
3435 Stelzer Road, Columbus, Ohio 43219. The Distributor will receive orders
for, sell and distribute shares of the Funds.
Servicing Agreements
The Funds may enter into agreements (the "Servicing Agreement") with
certain banks, financial institutions and corporations (the "Participating
Organizations") so that each Participating Organization handles recordkeeping
and provides certain administrative services for its customers who invest in the
Funds through accounts maintained at that Participating Organization. In such
cases, the Participating Organization or one of its nominees will be the
shareholder of record as nominee for its customers and will maintain subaccounts
for its customers. In addition, the Participating Organization will credit cash
distributions to each customer account, process purchase and redemption
requests, mail statements of all transactions with respect to each customer and,
if required by law, distribute the Trust's shareholder reports and proxy
statements. However, any customer of a Participating Organization may become the
shareholder of record upon written requests to its Participating Organization or
BISYS Fund Services, Inc. as transfer agent. Each Participating Organization
will receive monthly payments which in some cases may be based upon expenses
that the Participating Organization has incurred in the performance of its
services under the Servicing Agreement. The payments will not exceed, on an
annualized basis, an amount equal to 0.35% of the average daily net assets of
Fund shares in the subaccount of which the Participating Organization is record
owner as nominee for its customers. Such payments will be separately negotiated
with each Participating Organization and will vary depending upon such factors
as the services
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<PAGE>
provided and the costs incurred by each Participating Organization. The payments
may be more or less than the fees payable to BISYS for the services it provides
pursuant to the Transfer Agency Agreement for similar services.
The payments will be made by the Funds to the Participating Organizations
pursuant to the Servicing Agreements. BISYS Fund Services, Inc. will not receive
any compensation as transfer or dividend disbursing agent with respect to the
subaccounts maintained by Participating Organizations. The Board of Trustees
will review, at least quarterly, the amounts paid and the purposes for which
such expenditures were made pursuant to the Servicing Agreements.
Under separate agreements, the Adviser (not the Funds) may make
supplementary payments from its own revenues to a Participating Organization
that agrees to perform services such as advising customers about the status of
their subaccounts, the current yield and dividends declared to date and
providing related services a shareholder may request. Such payments will vary
depending upon such factors as the services provided and the costs incurred by
each Participating Organization.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Participating Organization may be charged one or more of
the following types of fees by a Participating Organization, as agreed upon by
the Participating Organization and the investor, with respect to the customer
services provided by the Participating Organization: account fees (a fixed
amount per month or per year); transaction 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.
Distribution Plan and Agreement
The Board of Trustees of the Trust has adopted a Distribution Plan and
related Shareholder Servicing Agreement on behalf of each Fund (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act, as amended, after having concluded that
there is a reasonable likelihood that the Plan will benefit each Fund and its
shareholders. The Plan provides for a monthly payment by the Funds to reimburse
the Distributor in such amounts that the Distributor may request for expenses
such as the printing and distribution of prospectuses sent to prospective
investors, the preparation, printing and distribution of sales literature and
expenses, associated with media advertisements and telephone services and other
direct and indirect distribution-related expenses including the payment of a
monthly fee to broker-dealers for rendering distribution-related asset
introduction and asset retention services. The Funds may also make payments to
other broker-dealers or financial institutions for their assistance in
distributing shares of the Funds and otherwise promoting the sale of shares of
each Fund. The total of each monthly payment is based on each Fund's average
daily net assets during the preceding month and is calculated at an annual rate
not to exceed 0.35% with respect to each Fund.
The Plan provides for the Distributor to prepare and submit to the Board of
Trustees on a quarterly basis written reports of all amounts expended pursuant
to the Plan and the purpose for which such expenditures were made. The Plan may
not be amended to increase materially the amount spent for distribution expenses
on behalf of a Fund without approval by a majority of such Fund's outstanding
shares and approval of a majority of the non-interested Trustees. Distribution
expenses incurred in one year will not be carried forward into and reimbursed in
the next year for actual expenses incurred in the previous year.
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Fees and Expenses
The Fixed Income Fund pays the Adviser, as compensation for its advisory
services, a monthly fee equal to an annual rate of 0.550% of average daily net
assets up to $400 million. The fee is reduced at several breakpoints for average
daily net assets in excess of $400 million up to $2 billion, at which point it
becomes 0.315% of the average daily net assets in excess of $2 billion. The New
York Fund pays the Adviser, as compensation for its advisory services a monthly
fee equal to an annual rate of 0.450% of average daily net assets up to $300
million. The fee is reduced at several break points for average daily net assets
in excess of $300 million up to $2 billion, at which point they become 0.280% of
the average daily net assets in excess of $2 billion.
Each Fund also pays the Adviser, as compensation for its co-administrative
services and shareholder servicer assistance services, a monthly fee equal to an
annual rate of 0.07% of average daily net assets of each Fund. The Adviser
reserves the right to waive in advance a portion of its advisory,
co-administrative services, and shareholder's servicing fees at any time.
TRANSACTIONS WITH AFFILIATES
Broker-dealers which are affiliates of the Adviser may act as brokers for
the Funds. At all times, however, their commissions, fees or other charges must
be reasonable and fair in comparison with those that would be paid to
unaffiliated firms for comparable transactions. Neither Fund will do business
with nor pay commissions to affiliates of the Adviser in any portfolio
transactions where such affiliates act as principal. In placing orders for the
purchase and sale of portfolio securities, the Funds seek the best execution at
the most favorable price, considering all of the circumstances. The Adviser may
consider sales of shares of the Fund and of other HSBC Funds as a factor in
selecting a broker. The Adviser may cause a 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.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share for the purpose of pricing purchase
and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Fund's transfer agent is open for business. The net asset value of the Funds
will not be determined on the following holidays: New Year's Day, Martin Luther
King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net
asset value per share of each Fund is computed by dividing the value of the net
assets of such Fund (i.e., the value of the assets less the liabilities) by the
total number of shares outstanding. All expenses, including the management,
advisory and administrative fees, are accrued daily and taken into account for
the purpose of determining the net asset value.
Portfolio securities are valued at current market value, if available.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the supervision of the
Trust's officers in accordance with guidelines which have been adopted by the
Board of Trustees. Such procedures include the use of independent pricing
services which use prices based on yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to value from dealers; and
general market conditions. Short-term obligations of sixty days or less are
valued at amortized cost, which approximates the market value.
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<PAGE>
PURCHASE OF SHARES
Shares of the Funds 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. Prospectuses and
accompanying sales material can be obtained from the Transfer Agent or
Distributor.
The minimum initial investment requirement for each Fund is $1,000. The
minimum subsequent investment requirement for each Fund is $50. There are no
minimum investment requirements with respect to investments effected through
certain automatic purchase and redemption arrangements on behalf of customer
accounts maintained at Participating Organizations. The minimum investment
requirements may be waived or lowered for investments effected on a group basis
by certain other institutions and their employees, such as pursuant to a payroll
deduction plan. All funds will be invested in full and fractional shares. The
Trust reserves the right to reject any purchase order.
Orders for shares of a Fund will be executed at the net asset value per
share next determined after receipt of an order by the dealer, plus a sales
charge varying with the amount invested in accordance with the following
schedules:
Fixed Income and New York Funds
<TABLE>
<CAPTION>
Reallowance
to Service
Total Sales Load Organizations
------------------------------ -------------
As a % of
As a % of Net Asset As a % of
Amount Invested Offering Price Value Per Offering Price
(including sales charge) Per Share Share Per Share
------------------------ --------- ----- ---------
<S> <C> <C> <C>
Less than $50,000 ......................................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000 ............................ 4.25% 4.44% 3.75%
$100,000 but less than $250,000 ........................... 3.50% 3.63% 3.15%
$250,000 but less than $500,000 ........................... 2.50% 2.56% 2.25%
$500,000 but less than $1 million ......................... 2.00% 2.04% 1.75%
$1 million and above ...................................... 1.00% 1.01% 0.90%
</TABLE>
The sales load does not apply to shareholders of the New York Fund who were
shareholders on May 1, 1990.
The sales charge will be waived on the following purchases: (1) by Trustees
and officers of the Trust and of HSBC 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 and its 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 a Fund with
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the proceeds of their benefits checks (the EBT Plan must currently own shares of
a Fund at the time of the individual's purchase), (8) with respect to the New
York Fund only, 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, (9) with respect to
the Fixed Income Fund only, by customers or prospective customers of Marine
Midland Bank when authorized by an officer of Marine Midland Bank, and (10) by
individuals who, as determined by an officer of the Funds in accordance with
guidelines by the Funds' Board of 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 any of the Funds. 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 will be
made available only to certain dealers whose representatives have sold a
significant number 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 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 a 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 any Fund or its Shareholders.
Stock certificates will not be issued with respect to the shares of each
Fund. The Transfer Agent shall keep accounts upon the books of the Trust for
record holders of such shares.
Right of Accumulation
The Funds offer to all shareholders a right of accumulation under which any
shareholder may purchase shares of a Fund at the offering price applicable to
the total of (a) the dollar amount then being purchased plus (b) an amount equal
to the offering price of the shareholder's combined holdings of the shares of
the Funds. For the right of accumulation to be exercised, the shareholder must
provide at the time of purchase confirmation of the total number of shares of a
Fund owned by such shareholder. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at any
time on sixty days' notice to shareholders. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares held in the name of such nominee or custodian
for other plans to qualify for the right of accumulation.
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<PAGE>
Letter of Intent
By initially investing at least $1,000 and submitting a Letter of Intent to
the transfer agent, a "single purchaser" may purchase shares of a Fund and other
eligible HSBC Funds (other than Money Market Funds) during a 13-month period at
the reduced sales charge rates applying to the aggregate amount of the intended
purchases stated in the Letter of Intent. The Letter of Intent may apply to
purchases made up to 90 days before the date of submission of the Letter.
Dividends and distributions of capital gains paid in shares of the Funds at net
asset value will not apply towards the completion of the Letter of Intent. The
Letter of Intent does not obligate a shareholder to buy the amount indicated in
the Letter of Intent; however, if the intended purchases are not completed
during the Letter of Intent period, the shareholder will be obligated to pay the
Distributor an amount equal to the difference between the regular sales charge
applicable to a single purchase of the number of shares purchased and the sales
charge actually paid. For further details, including escrow provisions, see the
Letter of Intent. The Funds reserve the right to amend, suspend or cease
offering this program at any time.
Prospective investors who wish to obtain additional information concerning
investment procedures should contact the Transfer Agent at: (800) 634-2536.
New Account Purchase By Wire
1. Telephone the Transfer Agent at (800) 634-2536 for instructions. Please
note your bank will normally charge you a fee for handling this transaction.
New Account Purchase By Mail
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and a check for $1,000 or more, payable to
HSBC Family of Funds to the Transfer Agent at:
HSBC Mutual Funds Trust, c/o BISYS, P.O. Box 163850, Columbus, Ohio
43216-3850.
Third-party checks will not be accepted. Checks must be in U.S. dollars.
Please include the Fund name and your account number on all checks.
Additional Purchases By Wire and Mail
Additional purchases of shares may be made by wire by telephoning the
Transfer Agent at 800-634-2536 and then instructing the wiring bank to transmit
the amount ($50 or more) of any additional purchase in Federal funds. Additional
purchases may also be made by mail by making a check ($50 or more) payable to
the HSBC Family of Funds indicating your fund account number on the check and
mailing it to the Transfer Agent at the address set forth above.
27
<PAGE>
Purchase Through Customer Accounts
Purchases of shares also may be made through customer accounts maintained
at Participating Organizations, including qualified Individual Retirement and
Keogh Plan accounts. Purchases will be made through a customer's account only as
directed by or on behalf of the customer on a direction form executed prior to
the customer's first purchase of shares of a Fund. For example, a customer with
an account at a Participating Organization may instruct the Participating
Organization to invest money in excess of a level agreed upon between the
customer and the Participating Organization in shares of a Fund periodically or
give other instructions to the Participating Organization within limits
prescribed by that Participating Organization.
Automatic Investment Plan
Investors may make regular monthly investments of $50 or more in shares
automatically from a checking or savings account if their bank is a member of
automated clearing house (ACH). Upon written authorization, the Transfer Agent
will electronically debit the investor's checking or savings account each month
and use the proceeds to purchase shares for the investor's account.
Approval by the investor's bank is required, so that establishment of a
program may require at least 30 days. The authorized amount and/or bank
information may be changed or the program terminated at any time by writing to
the Transfer Agent. A reasonable period (usually up to 15 days) may be required
after receipt of such instructions to implement them. The purchase application
contains the requirements applicable to this plan. The Trust reserves the right
to amend, suspend or cease offering this program at any time without prior
notice.
REDEMPTION OF SHARES
Upon receipt by the Trust's transfer agent of a redemption request ($50
minimum) in proper form, shares of a Fund will be redeemed at their next
determined net asset value after the order is received by the dealer. See
"Determination of Net Asset Value" in this Prospectus. For the shareholder's
convenience, the Trust has established several different direct redemption
procedures. Redemptions of shares purchased by check will be effected
immediately upon clearance of the purchase check, which may take up to 15 days
after those shares have been credited to the shareholder's account. A redemption
of shares is a taxable transaction on which gain or loss may be recognized for
tax purposes.
The Funds reserve the right to redeem (on 30 days' notice) accounts whose
values shareholders have reduced to $50 or less.
Redemption By Mail
1. Complete a letter of instruction indicating the Fund, the account number
and either the dollar amount or number of shares to be redeemed. Refer to the
shareholder's Fund account number.
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all must sign.
28
<PAGE>
3. If shares to be redeemed have a value of $5,000 or more, the
signature(s) must be guaranteed by a bank, trust company, broker, dealer, credit
union, securities exchange or association, clearing agency or savings
association. Signature guarantees by notaries public are not acceptable. Further
documentation, such as copies of corporate resolutions and instruments of
authority, may be requested from corporations, administrators, executors,
personal representatives, trustees or custodians to evidence the authority of
the person or entity making the redemption request.
4. Mail the letter to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Checks for redemption proceeds will normally be mailed within seven days to
the shareholder's address of record.
Upon request, the proceeds of a redemption amounting to $1,000 or more can
be sent by wire to the shareholder's predesignated bank account. Please note a
wire transfer fee will normally be charged. When proceeds of a redemption are to
be paid to someone other than the shareholder, either by wire or check, the
signature(s) on the letter of instruction must be guaranteed regardless of the
amount of the redemption.
Redemption By Expedited Redemption Service
If shares are held in book credit form and the Expedited Redemption Service
has been elected on the Purchase Application on file with the Transfer Agent,
redemption of shares may be requested on any day the Transfer Agent is open for
business by telephone or letter. A signature guarantee is not required.
1. Telephone the request to the Transfer Agent at: (800) 634-2536; or
2. Mail the request to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Proceeds of Expedited Redemptions of $1,000 or more can be wired to the
shareholder's bank indicated in the Purchase Application. If an Expedited
Redemption request is received by the Trust's transfer agent by 4:00 p.m.
(Eastern time) on a day the transfer agent is open for business, the redemption
proceeds will be transmitted to the shareholder's bank on the next business day.
A check for proceeds of less than $1,000 will be mailed to the shareholder's
address of record.
The Transfer Agent employs reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Transfer Agent fails
to employ such reasonable procedures, the transfer agent may be liable for any
loss, damage or expense arising out of any telephone transactions purporting to
be on a shareholder's behalf. In order to assure the accuracy of instructions
received by telephone, the Transfer Agent requires some form of personal
identification prior to acting upon instructions received by telephone, records
telephone instructions and provides written confirmation to investors of such
transactions.
29
<PAGE>
Systematic Withdrawal Plan
An owner of $10,000 or more of shares of a Fund may elect to have periodic
redemptions from his account to be paid on a monthly basis. The minimum periodic
payment is $50. A sufficient number of shares to make the scheduled redemption
will be redeemed on the first or fifteenth day of the month. Redemptions for the
purpose of making such payments may reduce or even exhaust the account if the
monthly checks paid exceed dividends, interest and capital appreciation, if any,
on your shares. A shareholder may request that these payments be sent to a
predesignated bank or other designated party.
Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a
return on your investment. Payments to you pursuant to the Systematic Withdrawal
Plan are derived from the redemption of shares in your account and are taxable
transactions on which gain or loss may be recognized for Federal, state and city
income tax purposes.
Reinstatement Privilege
A shareholder in a Fund who has redeemed shares may reinvest, without a
sales charge, up to the full amount of such redemption at the net asset value
determined at the time of the reinvestment within 60 days of the original
redemption. This privilege must be effected within 60 days of the redemption.
The shareholder must reinvest in the same Fund and account from which the shares
were redeemed. A redemption is a taxable transaction and gain or loss may be
recognized for Federal income tax purposes even if the reinstatement privilege
is exercised. Any loss realized upon the redemption will not be recognized as to
the number of shares acquired by reinstatement, except through an adjustment in
the tax basis of the shares so acquired.
Redemption through Customer Accounts
Investors who purchase shares through customer accounts maintained at
Participating Organizations may redeem those shares only through the
Participating Organization. In some cases, a customer may instruct the
Participating Organization which maintains the account through which the
customer purchases shares to redeem shares periodically as required to bring the
customer's account balance up to a level agreed upon between the customer and
the Participating Organization. If a redemption request with respect to such an
automatic redemption arrangement is received by the transfer agent by 4:15 p.m.
(Eastern time) on a day the transfer agent is open for business, the redemption
proceeds will be transmitted on the next business day to the investor's customer
account (unless otherwise specified by the Participating Organization).
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange shares of one Fund for shares of any of the other
investment portfolios of the Trust and the HSBC Funds Trust which are available
for sale in their state. A shareholder who has paid a sales load in connection
with the purchase of shares of any of the Funds will be subject only to that
portion of the sales load of the Fund into which the shareholder is exchanging
which exceeds the sales load originally paid by the shareholder. The Transfer
Agent must be advised of the applicability of the sales charge differential when
the exchange order is placed. Shareholders of any of the HSBC Money Market Funds
who exchange shares of any such Money Market Funds for shares of any of the
Funds
30
<PAGE>
of the Trust are charged the sales loads applicable to such Funds as stated in
the Prospectus. Before effecting an exchange, shareholders should review the
prospectuses. Exercise of the exchange privilege is treated as a redemption for
Federal and New York State and City income tax purposes and, depending on the
circumstances, a gain or loss may be recognized. The Funds reserve the right to
change the terms or terminate the Exchange Privilege at any time upon at least
60 days' prior written notice to Shareholders. Exchanges may be made by
telephonic request to the Transfer Agent at (800) 634-2536. For a discussion of
risks associated with unauthorized telephone transactions, see "Redemptions by
Expedited Redemption Service".
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to declare daily dividends from net investment income at
the close of each business day to the shareholders of record at 4:15 p.m.
(Eastern time) on the previous day and pay such amounts monthly. Shares
purchased will begin earning dividends on the day of settlement and shares
redeemed will earn dividends through the date of redemption. Net investment
income for a Saturday, Sunday or holiday will be declared as a dividend on the
previous business day. Each Fund's present intention is to distribute annually
to its shareholders any net capital gains for the year (taking into account any
capital loss carryovers).
Dividends declared in, and attributable to, the preceding month will be
paid within five business days after the end of such month. Dividends declared
by each Fund in October, November or December of any calendar year (as of a
record date in such a month) will be treated for Federal income tax purposes as
having been received by shareholders on December 31 of the year they are
declared, if they are paid during January of the following year. Each Fund's
dividends and capital gains distributions may be reinvested in additional shares
or received in cash.
For all investments effected through customer accounts maintained at
Participating Organizations (see "Purchase of Shares--Purchase through Customer
Accounts" above), dividend payments in cash will be transmitted to the
investor's account through which the shares were purchased or, if a
Participating Organization so specifies, to it for crediting to its customer's
account. Dividend checks will be mailed to all other shareholders who elect to
be paid in cash within five business days after the end of each month.
Investors who redeem shares of a Fund prior to a dividend payment will be
entitled to all dividends declared but will not be credited prior to the
designated dividend payment date.
FEDERAL INCOME TAXES
Each Fund is treated as a separate entity for Federal income tax purposes
notwithstanding that it is one of a multiple series of the Trust. Each Fund has
elected to be treated, and has qualified and intends to continue to qualify to
be treated as a regulated investment company by complying with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code") applicable to
regulated investment companies. Accordingly, the Funds will not be liable for
federal income tax with respect to amounts distributed to shareholders in
accordance with the timing requirements of the Code. Each Fund intends to
distribute substantially all of its net investment income and net realized
capital gains to its shareholders for each taxable year.
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<PAGE>
Dividends derived from each Fund's taxable net investment income (if any)
and the excess of net short-term capital gain over net long-term capital loss
will be taxable to that Fund's shareholders at ordinary income rates, whether
such dividends are invested in additional shares or received in cash.
Distributions of the excess of net long-term capital gain over net
short-term capital loss designated by a Fund as capital gain dividends will be
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held Fund shares, whether invested in additional shares of a
Fund or received in cash. Dividends and distributions from the New York Fund and
long-term capital gain distributions from the Fixed Income Fund do not qualify
for the dividends-received deduction available to corporations.
Each year the Funds will notify shareholders of the character of dividends
and distributions for Federal income tax purposes including, with respect to the
New York Fund, the portion, if any, of exempt-interest dividends paid by the New
York Fund that should be treated as a tax preference item under the Federal
alternative minimum tax. Shareholders should consult their own tax advisers as
to the Federal, state or local tax consequences of ownership of Fund shares in
their particular circumstances. See "Taxation" in the SAI.
The Funds are required to report to the Internal Revenue Service (the
"IRS") all distributions of taxable dividends and of capital gains, as well as
the gross proceeds of share redemptions. The Funds may be required to withhold
Federal income tax at a rate of 31% ("backup withholding") from taxable
dividends (including capital gain dividends) and the proceeds of redemptions of
shares paid to non-corporate shareholders who have not furnished a Fund with a
correct taxpayer identification number and made certain required certifications
or who have been notified by the IRS that they are subject to backup
withholding. In addition, the Funds may be required to withhold Federal income
tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer
identification number is incorrect or that backup withholding applies because of
under reporting of interest or dividend income.
Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect to
such shares.
New York Fund
Provided that the New York Fund complies with applicable requirements of
the Code, dividends derived from interest on New York Obligations will
constitute exempt-interest dividends and, except as discussed below, will not be
subject to Federal income tax. Some portion of the exempt-interest dividends
paid by the New York Fund will be treated as an item of "tax preference" for
purposes of the alternative minimum tax if the New York Fund invests in certain
types of municipal obligations and New York Obligations (see discussion below).
Under the Code, interest on certain types of Municipal Obligations and New
York Obligations is designated as an item of tax preference for purposes of the
alternative minimum tax on individuals and corporations. Therefore, if the Fund
were to invest in such types of obligations, shareholders would be required to
treat as an item of tax preference that part of the distributions by the New
York Fund that is derived from interest income on such obligations.
32
<PAGE>
Exempt-interest dividends received by corporations which hold shares of the
New York Fund may result in or increase liability for the corporate alternative
minimum tax.
Entities or persons who are "substantial users" (or persons related to
"substantial users") as defined in the Code, of facilities financed by Municipal
Obligations and New York Municipal Obligations issued for certain private
activities should consult their tax advisers before purchasing shares of the New
York Fund.
Exempt-interest dividends and other distributions paid by the New York Fund
are includable in the tax base for determining the taxability of social security
or railroad retirement benefits. Interest on debt incurred to purchase or carry
shares in the Fund may not be deductible for Federal income tax purposes.
Depending on the residence of the New York Fund's shareholders for tax
purposes, distributions may also be subject to state and local taxes.
Shareholders are required to report the amount of tax-exempt interest received
each year, including exempt-interest dividends, on their Federal tax returns.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of the New York Fund shares in their
particular circumstances.
NEW YORK TAXES
New York Fund
Exempt-interest dividends paid by the New York Fund will be exempt from New
York State and City personal income taxes to the extent they are derived from
interest on New York Obligations. For New York State and City personal income
tax purposes, whether invested in additional shares of the New York Fund or
received in cash, dividends derived from interest on the New York Fund's other
investments (including interest on Municipal Obligations other than New York
Obligations) and the excess of net short-term capital gain over net long-term
capital loss will be taxed as ordinary income, and dividends treated as
long-term capital gains for Federal tax purposes will be taxed as long-term
capital gains, regardless of how long a shareholder has held his shares.
Dividends paid by the New York Fund, including exempt-interest dividends
derived from interest on New York Obligations, may be subject to the New York
State franchise tax and to the New York City General Corporation Tax if they are
received by a corporation subject to those taxes. Such dividends may also be
subject to state taxes in states other than New York and to local taxes in
cities other than New York City.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in confirmations
for each shareholder and a monthly shareholder statement. In those cases where a
Participating Organization or its nominee is shareholder of record of shares
purchased for its customer, the Trust has been advised that the statement may be
transmitted to the customer in the discretion of the Participating Organization.
Shareholders can write or call the Trust's transfer agent at P.O. Box 163850,
Columbus, OH 43216-3850, or telephone: (800) 634-2536 with any questions
relating to their investments in Fund shares.
33
<PAGE>
Participating Organizations or their nominees may be the shareholders of
record as nominees for their customers, and may maintain subaccounts for those
customers. Any such customer may become the shareholder of record upon written
request to the Participating Organization, or Transfer Agent.
The Transfer Agent will transmit promptly to each of its customers for whom
it processes purchases and redemptions of shares and to each Participating
Organization copies of all reports to shareholders, proxy statements and other
Trust communications. The Trust's arrangements with the transfer agent and the
subtransfer agent arrangements require Participating Organizations to grant
investors who purchase shares through customer accounts the opportunity to vote
their shares by proxy at all shareholder meetings of the Trust. In certain
cases, a customer of a Participating Organization may have given his
Participating Organization the power to vote shares on his behalf. Customers
with accounts at Participating Organizations should consult their Participating
Organization for information concerning their rights to vote shares.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
Pursuant to an Agency Agreement, BISYS Fund Services, Inc. ("Transfer
Agent") acts as each Fund's transfer and dividend disbursing agent and is
responsible for maintaining account records detailing ownership of Fund shares
and for crediting income, capital gains and other changes in share ownership to
investors' accounts. For its services, the Transfer Agent receives from the
Funds an annual base fee of $25 per shareholder account and subaccount plus
additional transaction costs. BISYS Fund Services, Inc. also provides certain
accounting services for the Funds pursuant to the Fund Accounting Agreement.
BISYS' fees for performing accounting services currently are paid under the
Management and Administration Agreement.
CUSTODIAN
The Bank of New York is the Trust's custodian. Pursuant to the Custodian
Agreement, The Bank of New York is responsible for holding each Fund's cash and
portfolio securities. The Bank of New York may enter into such custodian
agreements with certain qualified banks.
PERFORMANCE INFORMATION
Each Fund's total return may be included in advertisements or mailings to
prospective investors. Each Fund may occasionally cite statistical reports
concerning its performance. The Funds may also from time to time compare their
performance to various unmanaged indices. (See the SAI for more details
concerning the various indices which might be used.) Each Fund's "total return"
refers to the average annual compounded rates of return over one, five and ten
year periods or for the life of such Fund (which periods will be stated in the
advertisement) that would equate an initial amount invested at the beginning of
a stated period to the ending redeemable value of the investment, assuming the
deduction of the maximum sales charge and the reinvestment of all dividend and
capital gains distributions. Each Fund calculates its total return by adding the
total dividends paid for the period to the applicable Fund's ending net asset
value per share for that period and dividing that sum by the net asset value per
share of the applicable Fund at the beginning of the period. Each Fund may also
furnish total return calculations based on investments at various sales charge
levels or at net asset value. Any performance data which
34
<PAGE>
is based on a Fund's net asset value per share would be reduced if a sales
charge were taken into account. Each Fund may quote total return on a before tax
or after tax basis. Each Fund may also from time to time include in
advertisements or mailings to prospective investors a current yield quotation
based on a specific thirty day period. Both yield and total return figures are
based on historical earnings and are not intended to indicate future
performance.
Investors who purchase and redeem shares of the Fund through a customer
account maintained at a Participating Organization may be charged by such
Participating Organization certain fees, as agreed upon by the Participating
Organization and the investor with respect to the customer services provided by
the Participating Organization. Such fees will have the effect of reducing the
return and yield for those investors. See "Management of the Funds--Servicing
Agreements" in this Prospectus.
SHARES OF BENEFICIAL INTEREST
The authorized capital of the Trust consists of an unlimited number of
shares of beneficial interest having a par value of $0.001 per share. The
Trust's Board of Trustees has authorized the issuance of multiple series
representing shares in corresponding investment portfolios of the Trust and may,
in the future, authorize the issuance of other series or classes of shares of
beneficial interest representing interest in other investment portfolios. Each
additional portfolio within the Trust is separate for investment and accounting
purposes and is represented by a separate series of shares. Each portfolio will
be treated as a separate entity for Federal income tax purposes.
All shares of the Trust have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law or
where the matter involved affects only one class. All shares of the Trust issued
and outstanding are fully paid and nonassessable. The Trust is not required by
law to hold annual shareholder meetings and does not intend to hold such
meetings. For more details concerning the voting rights of shareholders see the
SAI.
Vacancies on the Board of Trustees are filled by the Board of Trustees if
immediately after filling any such vacancy at least two-thirds of the Trustees
then holding office have been elected to such office by shareholders at an
annual or special meeting. In the event that at any time less than a majority of
Trustees holding office were elected by shareholders, the Board of Trustees will
cause to be held within 60 days a shareholders' meeting for the purpose of
electing Trustees to fill any existing vacancies. Trustees are subject to
removal with cause by two-thirds of the remaining Trustees or by a vote of a
majority of the outstanding shares of the Trust. The Trustees are required to
promptly call a shareholders' meeting for voting on the question of removal of
any Trustee when requested to do so in writing by not less than 10% of the
outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
Under Massachusetts law, it is possible that shareholders of a
Massachusetts business trust might, under certain circumstances, be held
personally liable for acts or obligations of the Trust. The Trust's Declaration
of Trust contains an express disclaimer of shareholder liability for acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust's assets for all loss and expense of any
shareholder held personally liable by reason of being or having been a
shareholder of the Trust. Thus, the risk that a shareholder of a Fund could
incur financial loss on account of shareholder liability is considered remote
since it is limited to circumstances in which the disclaimer is inoperative and
the Fund itself would be unable to meet its obligations.
35
<PAGE>
================================================================================
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HSBC Asset Management
================================================================================
HSBCSM Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
General Information:
(800) 634-2536
Investment Adviser and Co-Administrator
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, New York 10177
Distributor, Administrator, Transfer Agent
and Fund Accounting Agent
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
Custodian
Bank of New York
90 Washington Street
New York, New York 10286
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
Legal Counsel
Baker & McKenzie
805 Third Avenue
New York, New York 10022
No dealer, salesman, or other person has been authorized to give any information
or to make any representations, other than those contained in the Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust, the Distributor or the Investment Adviser. This
Prospectus does not constitute an offering in any state in which such offering
may not lawfully be made.
================================================================================
Prospectus April 29, 1997
- --------------------------------------------------------------------------------
Funds:
Fixed Income Fund
New York Tax-Free Bond Fund
- --------------------------------------------------------------------------------
Managed and Advised by:
HSBC Asset Management Americas Inc.
- --------------------------------------------------------------------------------
Sponsored and Distributed by:
BISYS Fund Services
================================================================================
HSBC2P04
<PAGE>
HSBC MUTUAL FUNDS TRUST
Fixed Income Fund
New York Tax-Free Bond Fund
3435 Stelzer Road
Columbus, Ohio 43219
Information: (800) 634-2536
STATEMENT OF ADDITIONAL INFORMATION
HSBC Mutual Funds Trust (the "Trust") is an open-end, diversified
management investment company with multiple investment portfolios including the
Fixed Income Fund (the "Fixed Income Fund"), and the New York Tax-Free Bond Fund
(the "New York Tax-Free Fund") herein referred to individually as a "Fund" and
collectively as the "Funds".
The investment objective of the Fixed Income Fund is generation of high
-----------------
current income consistent with appreciation of capital by investing in a variety
of fixed-income securities.
The investment objective of the New York Tax-Free Fund is to provide as
high a level of current income exempt from Federal, New York State and New York
City income taxes as is consistent with relative stability of capital. The Fund
will invest primarily in New York Obligations. Although the Fund will have no
restriction on the minimum or maximum maturity of any individual New York
Obligation held by it, the Fund will have an average portfolio maturity ranging
from three to 30 years.
Shares of the Funds are primarily offered for sale by BISYS Funds Services,
---------------------------------------------------------------------------
the Distributor, as an investment vehicle for institutions, corporations,
- -------------------------------------------------------------------------
fiduciaries and individuals. Certain banks, financial institutions and
- -----------------------------------------------------------------------
corporations ("Participating Organizations") have agreed to act as shareholder
- ------------------------------------------------------------------------------
servicing agents for investors who maintain accounts at the Participating
- -------------------------------------------------------------------------
Organizations and to perform certain services for the Funds.
- -----------------------------------------------------------
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Funds'
Prospectus dated April 29, 1997. This Statement of Additional Information
("SAI") contains additional and more detailed information than that set forth in
the Funds' Prospectus and should be read in conjunction with the Funds'
Prospectus, additional copies of which may be obtained without charge from the
Trust.
April 29, 1997
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
INVESTMENT POLICIES AND RISK FACTORS......................................... 1
INVESTMENT RESTRICTIONS..................................................... 20
MANAGEMENT.................................................................. 22
CALCULATION OF YIELDS AND PERFORMANCE INFORMATION........................... 27
DETERMINATION OF NET ASSET VALUE............................................ 30
PORTFOLIO TRANSACTIONS...................................................... 30
PORTFOLIO TURNOVER.......................................................... 31
EXCHANGE PRIVILEGE.......................................................... 31
REDEMPTIONS................................................................. 32
FEDERAL INCOME TAXES........................................................ 33
SHARES OF BENEFICIAL INTEREST............................................... 36
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT............................................... 37
INDEPENDENT AUDITORS........................................................ 38
FINANCIAL STATEMENTS........................................................ 38
</TABLE>
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-i-
<PAGE>
INVESTMENT POLICIES AND RISK FACTORS
The following information supplements the discussion of the investment
objective and policies of the Funds found under "Investment Objective, Policies
and Risk Factors" in the Prospectus.
Mortgage-Related Securities. (Fixed Income Fund Only) The Fund may,
consistent with its investment objective and policies, invest in mortgage-
related securities.
Mortgage-related securities, for purposes of the Fixed Income 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 nongovernmental 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 a 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 a 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.
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 a 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.
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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 securities so purchased are subject to market
fluctuation during this period and no income accrues to a Fund until settlement
takes place. To facilitate such acquisitions, a Fund will maintain with the
custodian a separate account with a segregated portfolio of liquid securities in
an amount at least equal to such commitments. On the delivery dates for such
transactions, a Fund will meet its obligations from maturities or sales of the
securities held in the separate account and/or from cash flow. While a Fund
normally enters into these transactions with the intention of actually receiving
or delivering the securities, it may sell these securities before the settlement
date or enter into new commitments to extend the delivery date into the future,
if the Adviser considers such action advisable as a matter of investment
strategy. Such securities have the effect of leverage on a Fund and may
contribute to volatility of a Fund's net asset value.
Loans of Portfolio Securities. The Fund may, subject to the restrictions
set forth under "Investment Restrictions" in the Prospectus, 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%
for the Short-Term and Fixed Income Funds and 100% for the New York Tax-Free
Fund 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. 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. The Fund will not enter into any portfolio security
lending arrangement having a duration of longer than one year. Any securities
which a 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 a 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 a value which exceeds 10% 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.
The Fund may (as applicable), in the future, engage in the following
investment techniques, although these funds have no present intention of doing
so.
Interest Rate Futures Contracts and Options Thereon. (Fixed Income Fund
Only) The Fund may use interest rate futures contracts ("futures contracts")
principally as a hedge against the effects of interest rate changes. A futures
contract is an agreement to purchase or sell a specified amount of designated
debt securities for a set price at a specified future time. At the time it
enters into a futures transaction, the Fund is required to make a performance
deposit (initial margin) of cash or liquid securities with its custodian in a
segregated account in the name of the futures broker. Subsequent payments of
"variation margin" are then made on a daily basis, depending on the value of the
futures which is continually "marked to market."
The Fund is permitted to engage in bona fide hedging transactions (as
defined in the rules and regulations of the Commodity Futures Trading
Commission) without any quantitative limitations. Futures and related option
transactions which are not for bona fide hedging purposes may be used provided
the total amount of the initial margin and any option premiums attributable to
such positions does not exceed 5% of the Fund's liquidating value after taking
into account unrealized profits and unrealized losses, and excluding any in-the-
money option premiums paid. The Fund will not market, and is not marketing,
itself as a commodity pool or otherwise as a vehicle for trading in futures and
related options. The Fund will segregate assets to cover the futures and
options. If the market moves favorably after the Fund enters into an interest
rate futures contract as a hedge against anticipated adverse market movements,
the
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benefits from such favorable market movements on the value of the securities so
hedged will be offset in whole or in part, by a loss on the futures contract.
The Fund may engage in futures contract sales to maintain the income
advantage from continued holding of a long-term security while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term security prices. If, however, securities prices rise, the
Fund would realize a loss in closing out its futures contract sales that would
offset any increases in prices of the long-term securities it holds.
An option on a futures contract gives the purchaser the right, but not
the obligation, in return for the premium paid, to assume (in the case of a
call) or sell (in the case of a put) a position in a specified underlying
futures contract (which position may be a long or short position) a specified
exercise price at any time during the option exercise period. Sellers of options
on futures contracts, like buyers and sellers of futures contracts, make an
initial performance deposit and are subject to calls for variation margin.
Investment in Bond Options. (Fixed Income Fund Only) The Fund may
purchase put and call options and write covered put and call options on
securities in which the Fund may invest directly and that are traded on
registered domestic securities exchanges or that result from separate, privately
negotiated transactions with primary U.S. Government securities dealers
recognized by the Board of Governors of the Federal Reserve System (i.e., over-
the-counter (OTC) options). The writer of a call option, who receives a
premium, has the obligation, upon exercise, to deliver the underlying security
against payment of the exercise price during the option period. The writer of a
put, who receives a premium, has the obligation to buy the underlying security,
upon exercise, at the exercise price during the option period.
The Fund may write put and call options on bonds only if they are
covered, and such options must remain covered as long as the Fund is obligated
as a writer. A call option is covered if a Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration if the underlying security is held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A put option is covered if a Fund maintains cash, or other liquid
assets with a value equal to the exercise price in a segregated account with its
custodian.
The principal reason for writing put and call options is to attempt to
realize, through the receipt of premiums, a greater current return than would be
realized on the underlying securities alone. In return for the premium received
for a call option, the Fund foregoes the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. In return for the premium received for a put option, the Fund
assumes the risk that the price of the underlying security will decline below
the exercise price, in which case the put would be exercised and the Fund would
suffer a loss. The Fund may purchase put options in an effort to protect the
value of a security it owns against a possible decline in market value.
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. 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 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 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
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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.
Risks Involving Futures Transactions. (Fixed Income Fund only)
Transactions by the Fund in futures contracts and options thereon involve
certain risks. One risk in employing futures contracts and options thereon to
protect against cash market price volatility is the possibility that futures
prices will correlate imperfectly with the behavior of the prices of the
securities in a Fund's portfolio (the portfolio securities will not be identical
to the securities underlying the futures contracts). In addition, commodity
exchanges generally limit the amount of fluctuation permitted in futures
contract and option prices during a single trading day, and the existence of
such limits may prevent the prompt liquidation of futures and option positions
in certain cases. Inability to liquidate positions in a timely manner could
result in the Fund's incurring larger losses than would otherwise be the case.
Illiquid Securities. Each Fund has adopted a fundamental policy with
respect to investments in illiquid 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.
Each 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 recently 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.
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The Adviser will monitor the liquidity of restricted securities in each
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 a Fund does not exceed 10% of the 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.
9.
Municipal Obligations. (New York Tax-Free Fund Only) To attempt to
attain its investment objective, the Fund invests in a broad range of Municipal
Obligations which meet the rating standards described in the Prospectus. The
tax-exempt status of a Municipal Obligation is determined by the issuer's bond
counsel at the time of the issuance of the security. Municipal Obligations,
which pay interest that is excludable from gross income for Federal income tax
purposes and which are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities, include:
Municipal Bonds. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of schools, highways and other
public facilities, for general operating expenses and for making loans to other
public institutions. Industrial development and pollution control bonds are
municipal bonds which are issued by or on behalf of public authorities to
provide funding for the construction, equipment, repair and improvement of
various privately operated facilities.
Municipal bonds may be categorized as "general obligation" or "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith, credit and general taxing power for the payment of principal and
interest. Revenue bonds are secured by the net revenue derived from a
particular facility or group of facilities or, in some cases, the proceeds of a
special excise or other specific revenue source, but not by the general taxing
power. Industrial development and pollution control bonds (now generally
referred to as "private activity bonds") are, in most cases, revenue bonds and
do not generally carry the pledge of the credit of the issuing municipality or
public authority.
Municipal Notes. Municipal notes include, but are not limited to, tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and project notes. Notes sold as interim financing in
anticipation of collection of taxes, a bond sale or receipt of other revenues
are usually general obligations of the issuer. Project notes are issued by local
housing authorities to finance urban renewal and public housing projects and are
secured by the full faith and credit of the United States Government.
Municipal Commercial Paper. Municipal commercial paper is issued to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term debt. It is paid from the general revenues of the
issuer or refinanced with additional issuances of commercial paper or long-term
debt.
For purposes of diversification under the Investment Company Act of 1940,
the identification of the issuer of New York Municipal Obligations depends on
the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision
would be regarded as the sole issuer. Similarly, in the case of an industrial
development bond or pollution control bond, if the bond is backed only by the
assets and revenues of the non-governmental user, the non-governmental user
would be deemed to be the sole issuer. If in either case the creating
government or another entity guarantees an obligation, the guarantee would be
considered a separate security and be treated as an issue of such government or
entity.
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The Fund's assets will be invested primarily in Municipal Obligations
that are exempt from regular Federal, New York State and New York City income
tax in the opinion of bond counsel to the issue.
The value of municipal securities may be affected by uncertainties in the
municipal market related to legislation or litigation involving the taxation of
municipal securities or the rights of municipal securities holders in the event
of a bankruptcy. Municipal bankruptcies are relatively rare, and certain
provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear
and remain untested. Further, the application of state law to municipal issuers
could produce varying results among the states or among municipal securities
issuers within a state. These legal uncertainties could affect the municipal
securities market generally, certain specific segments of the market, or the
relative credit quality of particular securities. Any of these effects could
have a significant impact on the prices of some or all of the municipal
securities held by the Fund.
Taxable Securities. (New York Tax-Free Fund Only) As described in the
Prospectus, the Fund may, with certain limitations, elect to invest in certain
taxable securities and repurchase agreements with respect to those securities.
The Fund will enter into repurchase agreements only with dealers, domestic banks
or recognized financial institutions which, in the opinion of the Fund's
investment adviser, present minimal credit risks. In the event of default by
the seller under a 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.
The Fund's investment 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 agreed upon repurchase price. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940, collateralized
by the underlying securities.
Securities with Put Rights. (New York Tax-Free Fund Only) When the Fund
purchases municipal obligations it may obtain the right to resell them, or "put"
them, to the seller at an agreed upon price within a specific period prior to
their maturity date.
The amount payable to the Fund by the seller upon its exercise of a put
will normally be (i) the Fund's acquisition cost of the securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during the period the
securities were owned by the Fund. Absent unusual circumstances, the Fund
values the underlying securities at their amortized cost. Accordingly, the
amount payable by a broker-dealer or bank during the time a put is exercisable
will be substantially the same as the value of the underlying securities.
The Fund's right to exercise a put is unconditional and unqualified. A
put is not transferable by the Fund, although the Fund may sell the underlying
securities to a third party at any time. The Fund expects that puts will
generally be available without the payment of any direct or indirect
consideration. However, if necessary and advisable, the Fund may pay for
certain puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such a put (thus reducing the yield to
maturity otherwise available for the same securities).
The Fund may enter into put transactions only with broker-dealers and
banks which, in the opinion of the Fund's Adviser, present minimal credit risks.
The Fund's ability to exercise a put will depend on the ability of the broker-
dealer or bank to pay for the underlying securities at the time the put is
exercised. In the event that a broker-dealer or bank should default on its
obligation to repurchase an underlying security, the Fund might be unable to
recover all or a portion of any loss sustained from having to sell the security
elsewhere.
The Fund intends to enter into put transactions solely to maintain
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a put will not affect the valuation of the
underlying security which will continue to be valued in accordance with the
amortized cost method. The actual put will be valued at zero in determining net
asset value. Where the Fund pays directly or indirectly for a put, its cost
will be reflected as an unrealized loss for the period during which the put is
held by the Fund and will be reflected in realized
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gain or loss when the put is exercised or expires. If the value of the
underlying security increases, the potential for unrealized or realized gain is
reduced by the cost of the put.
Risk Factors for the New York Tax-Free Fund
The following information as to certain New York risk factors is given to
investors in view of the New York Tax-Free Fund's policy of concentrating its
investments in New York Municipal Obligation issuers. The factors affecting the
financial conditions of the State of New York (the "State") are complex, and the
following description constitutes only a brief summary; it does not purport to
be a complete description and is based on information from official statements
relating to general obligation bonds issued by the State of New York. The
accuracy and completeness of the information contained in such offering
statements has not been independently verified.
New York State. The economy of the State (the "State") is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a comparatively small share of the
nation's farming and mining activity. The State has a declining portion of its
work force engaged in manufacturing, and an increasing portion engaged in
service industries, reflecting the national trend.
New York has a very high state and local tax burden relative to other
states. The State and its localities have used these taxes to develop and
maintain their transportation networks, public schools and colleges, public
health systems, and social services and recreational facilities. Despite these
benefits, the burden of state and local taxation may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
The national economy began the current expansion in 1991 and has added
over 7 million jobs since early 1992. However, the recession lasted longer in
the State and the State's economic recovery has lagged behind the nation's.
Although the State has added approximately 185,000 jobs since November 1992,
employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense, and banking industries.
The State Budget Process. The requirements of the State budget process
are set forth in Article VII of the State Constitution and the State Finance
law. The process begins with the Governor's submission of the Executive Budget
to the Legislature each January, in preparation for the start of the fiscal year
on April 1. (The submission date is February 1 following a gubernatorial
election.) The budget must contain a complete plan of available receipts and
projected disbursements for the ensuing fiscal year ("State Financial Plan").
That proposed State Financial Plan must be balanced on a cash basis, and must be
accompanied by bills which: (i) set forth all proposed appropriations and
reappropriations, (ii) provide for any new or modified revenue measures, and
(iii) make any other changes to existing law necessary to implement the budget
recommended by the Governor.
In acting on the bills submitted by the Governor, the Legislature has the
power to alter both recommended appropriations and proposed changes to
substantive law. The Legislature may strike out or reduce an item of
appropriation recommended by the Governor. The Legislature may add items of
appropriation provided such additions are stated separately. These additional
items are then subject to line-item veto by the Governor. If the Governor
vetoes an appropriation or a bill related to the budget, these can be
reconsidered in accordance with the rules of each house of the Legislature. If
approved by two-thirds of the members of each house, the measure will become law
notwithstanding the Governor's veto.
Once the appropriation and other bills become law, the State's Division
of the Budget ("DOB") revises the State Financial Plan based on the
Legislatures's action, and begins the process of implementing the budget.
Throughout the fiscal year, DOB monitors actual receipts and disbursements, and
may adjust the estimates in the State Financial Plan. Adjustments may also be
made to the State Financial Plan to reflect changes in the economy, as well as
new actions taken by the Governor or the Legislature.
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The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis State Financial Plan, and an
explanation of any changes from the previous State Financial Plan. As required
by the State Finance law, the Governor updates the State Financial Plan within
30 days of the close of each quarter of the fiscal year, generally issuing
reports by July 30, October 30, and as part of the Executive Budget.
Financial Accounting. New York utilizes the fund method of accounting to
report on its financial position and the results of its operations.
Substantially all State non-pension financial operations are accounted for in
the State's governmental funds group ("Governmental Funds"). The Governmental
Funds include the General Fund, which receives all income not required by law to
be deposited in another fund and which for the State's 1996-1997 fiscal year
("Fiscal Year 1996-97") comprises approximately 50% of total projected
Governmental Funds receipts; the Special Revenue Funds, which receive a
preponderance of money received by the State from the federal government and
other income the use of which is legally restricted to certain purposes and
which comprises approximately 41% of total projected Governmental Funds receipts
in the Fiscal Year 1996-97; the Capital Projects Funds, used to finance the
acquisition and construction of major capital facilities by the State and to aid
in certain of such projects conducted by local governments or public
authorities; and the Debt Service Funds, which are used for the accumulation of
monies for the payment of principal of and interest on long term debt and other
contractual commitments. Receipts in the Capital Projects and Debt Service Funds
comprise an aggregate of approximately 9% of total projected Governmental Funds
receipts in the Fiscal Year 1996-97.
Financial information for the governmental funds during each fiscal year
is maintained on a cash basis of accounting ("Cash Basis"). New York also
prepares financial statements in accordance with generally accepted accounting
principles ("GAAP"). The GAAP statements differ in format from the Cash Basis
statements in that, among other things, they are prepared on an accrual basis,
include a combined balance sheet, and report on the activities of all funds. The
Cash Basis financial information is adjusted at fiscal year end by an
independent public accounting firm to reflect financial reporting in conformity
with GAAP. The State maintains a March 31st fiscal year end.
Revenues and Expenditures. New York's Governmental Funds receive over
50% of their revenues from taxes levied by the State. Investment income, fees
and assessments, abandoned property collections, and other varied sources supply
the balance of the receipts for these funds. Revenues not required to be
deposited in another fund are deposited in the General Fund. The major tax
sources for the General Fund are the personal income tax (52% of General Fund
tax receipts in Fiscal Year 1995-96, and 52% of the Fiscal Year 1996-97 budgeted
figure), the 4% user taxes and fees (20% in Fiscal Year 1995-96, 25% of the
Fiscal Year 1996-97 budget), business taxes (14% of the fiscal 1995 budget and
14% of the Fiscal 1996 budget), and other taxes. The majority of Special
Revenue Funds receipts come from federal grants (75% of receipts in Fiscal Year
1995-96, 76% of the Fiscal Year 1996-97 budget). Generally, approximately 87% of
the federal funds received by the Special Revenue Funds are on account of
Medicaid, income maintenance and associated social services, education and
health programs.
New York's major expenditures are grants to local governments, which are
projected to account for 70% of all Governmental Funds expenditures in Fiscal
Year 1996-97. These grants include disbursements for elementary, secondary and
higher education, social services, drug abuse control, and mass transportation
programs.
Fiscal 1995-96 Financial Results (Cash Basis). The State ended its 1995-
96 fiscal year on March 31, 1996 with a General Fund cash surplus. The Division
of the Budget ("DOB") reported that revenues exceeded projections by $270
million, while spending for social service programs was lower than forecast by
$120 million and all other spending was lower by $55 million. From the resulting
benefit of $445 million, a $65 million voluntary deposit was made into the Tax
Stabilization Revenue Fund ("TSRF"), and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the Contingency Reserve
Fund ("CRF"), and a $9 million deposit
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to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State Finance Law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which $521 million was
necessary to complete the restructuring of the State's cash flow under the LGAC
program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together with decreased social services spending, this
management review account for the bulk of the decline in spending.
1996-97 State Financial Plan (Cash Basis). The State's budget for the
1996-97 fiscal year was enacted by the Legislature on July 13, 1996, more than
three months after the start of the fiscal year. Prior to adoption of the
budget, the Legislature enacted appropriations for disbursements considered to
be necessary for State operations and other purposes, including necessary
appropriations for all State-supported debt service. The State Financial Plan
for the 1996-97 fiscal year was formulated on July 25, 1996 and is based on the
State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current fiscal
year.
After adjustment for comparability between fiscal years, the adopted
1996-97 budget projects a year-over-year increase in General Fund disbursements
of 0.2 percent. Adjusted State Funds (excluding federal grants) disbursements
all projected to increase by 1.6 percent from the prior fiscal year. All
Governmental Funds projected disbursements increase by 4.1 percent over the
prior fiscal year.
The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised on March 20,
1996, the State's adopted budget for 1996-97 increases General Fund spending by
$842 million, primarily from increases for education, special education and
higher education ($563 million). The balance represents funding increases to a
variety of other programs, including community projects and increased assistance
to fiscally distressed cities. Resources used to fund these additional
expenditures include $540 million in increased revenues projected for 1996-97
based on higher-than projected tax collections during the first half of calendar
1996, $110 million in projected receipts from a new State tax amnesty program,
and other resources including certain non-recurring resources. The total amount
of non-recurring resources included in the 1996-97 State budget is projected by
DOB to be $1.3 billion, or 3.9 percent of total General Fund receipts.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the State Financial Plan is
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from its estimates set forth
herein and those estimates may be changed materially and adversely from time to
time. There are also risks and uncertainties concerning the future-year impact
of actions taken in the 1996-97 budget.
Financial Plan Updates. The State issued its first update to the cash-
basis 1996-97 State Financial Plan (the "Mid-Year Update") on October 25,1996.
Revisions were made to estimates of both receipts and disbursements based on:
(1) updated economic forecasts for both the nation and the State, (2) an
analysis of actual receipts and disbursements
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through the first six months of the fiscal year, and (3) an assessment of
changing program requirements. The Mid-Year Update reflected a balanced 1996-97
State Financial Plan, and a projected reserve in the General Fund of $300
million.
The State economic forecast was changed slightly from the one formulated
with the July 1996-97 State Financial Plan. Moderate growth was projected to
continue through the second half of 1996, with employment, wages and incomes
continuing their modest rise.
Actual receipts through the first two quarters of the 1996-97 State
fiscal year reflected stronger-than-expected growth in most taxes, with actual
receipts exceeding expectations by $250 million. Based on the revised economic
outlook and actual receipts for the first six months of 1996-97, projected
General Fund receipts for the 1996-97 State fiscal year were increased by $420
million. Most of this projected increase was in the yield of the personal income
tax ($241 million), with additional increases expected in business taxes ($124
million) and other tax receipts ($49 million). Projected collections from user
taxes and fees were revised downward slightly ($5 million). Revisions were also
made to both miscellaneous receipts and in transfers from other funds (an $11
million combined projected increase).
Disbursements through the first six months of the fiscal year were $415
million less than projected, primarily because of delays in processing payments
following delayed enactment of the State budget. As a result, no savings were
included in the Mid-Year Update from this slower-than-expected spending.
Projections of 1996-97 General Fund disbursements were increased by $ 120
million, since increased General Fund disbursements for education were required
to replace a projected decrease in lottery receipts. This modification was shown
in the form of an increased transfer of General Fund monies to the Lottery Fund
in the Special Revenue fund type.
The projected closing fund balance in the General Fund of $337 million
reflected a balance of $252 million in the TSRF following a payment of $15
million during the current fiscal year, and a deposit of $85 million to the
CRF.
The State revised the cash-basis 1996-97 State Financial Plan again on
January 14, 1997, in conjunction with the release of the Executive Budget for
the 1997-98 fiscal year.
The 1996-97 General Fund Financial Plan continues to be balanced. The DOB
projects that, prior to taking the actions described below, the General Fund
Financial Plan would have shown an operating surplus of approximately $1.3
billion. These actions include implementing reduced personal income tax
withholding to reflect the impact of tax reduction actions which took effect on
January 1, 1997. This has the effect of raising taxpayer's current take-home pay
rather than requiring taxpayers to wait until the spring of 1998 for larger
refunds. The Financial Plan assumes the use of $250 million for this purpose. In
addition, $943 million is projected to be used to pay tax refunds during the
1996-97 fiscal year or reserved to pay refunds during the 1997-98 fiscal year,
which produces a benefit for the 1997-98 Financial Plan (see below). Finally,
$65 million is projected to be deposited into the TSRF (in addition to the
required deposit of $15 million), increasing the cash balance in that fund to
$317 million by the end of 1996-97.
The projected surplus results primarily from growth in the underlying
forecast for projected receipts. As compared to the enacted budget, revenues are
expected to increase by more than $1 billion, while disbursements are expected
to fall by $228 million. These changes from original Financial Plan projections
reflect actual results through December 1996 as well as modified economic and
social services caseload projections for the balance of the fiscal year.
As compared to the Mid-Year Update, underlying estimates of General Fund
receipts have been revised upward $566 million, primarily in personal income
taxes and business taxes. However, two transactions offset these projected
increases, producing a projected decline in available General Fund receipts as
compared to the Mid-Year Update:
* first, in order to make the projected 1996-97 cash surplus available to
help finance 1997-98 spending requirements, $943 million in personal
income tax refund payments (or reserves for such payments) are proposed
to be accelerated into 1996-97. This action has the effect of decreasing
reported personal income tax receipts in 1996-97, while increasing
available personal income tax receipts in 1997-98, as these refunds will
no longer be a charge against current revenues in 1997-98.
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* second, January 1997 implementation of personal income tax withholding
table changes to reflect tax reductions effective January 1,1997,
originally scheduled for April of this year, also depresses personal
income tax receipts by an estimated $250 million this year. The change
lowers withholding rather than having these monies paid to taxpayers
through larger refunds in the spring of 1998.
As a result of these transactions, projections of available receipts in 1996-97
have been reduced by $627 million from the time of the Mid-Year Update, despite
the increases in the underlying forecast.
Projected General Fund disbursements are reduced by a total of $348
million from the Mid-Year Update, with changes made in most categories of the
Financial Plan. Most of this savings is attributable to reductions in local
assistance spending, primarily due to significant reestimates in social services
spending to reflect lower caseload growth, yielding savings of $226 million.
General State Charges are reduced $76 million to reflect lower pension and
fringe benefit costs. The General State Charges estimate includes savings
achieved from the refinancing of certain pension liabilities through the
issuance of long-term debt, as planned, and the repayment of that liability to
the State Retirement System. Transfers to the Capital Projects Fund have been
reduced $31 million to reflect slower-than-expected capital disbursements for
the balance of the fiscal year. Reductions in debt service costs of $21 million
reflect savings from refundings undertaken in the current fiscal year, as well
as savings from improved interest rates in the financial markets.
The Mid-Year Update had reserved $300 million in the General Fund for
certain contingencies, including litigation which could have produced an adverse
impact on the State's finances, either by itself or the precedential nature of
the court's decision. Since subsequent events make it unlikely that these risks
will materialize before the end of the 1996-97 fiscal year, the Third Quarter
Update no longer includes this reserve. Other reserves are contained in the
Financial Plan, as discussed below.
The General Fund closing balance is expected to be $358 million at the
end of 1996-97. Of this amount, $317 million would be on deposit in the TSRF,
while another $41 million would remain on deposit in the CRF as a reserve for
litigation or other unbudgeted costs to the Financial Plan. The TSRF had an
opening balance of $237 million, to be supplemented by a required payment of $15
million and an extraordinary deposit of $65 million from surplus 1996-97 monies.
The $9 million on deposit in the Revenue Accumulation Fund will be drawn down as
planned. A planned deposit of $85 million to the CRF, projected to be received
from contractual efforts to maximize federal revenue, is no longer expected to
be deposited this year.
1997-98 State Financial Plan. The Governor presented his 1997-98
Executive Budget to the Legislature on January 14, 1997. The Executive Budget
also contains financial projections for the State's 1998-99 and 1999-2000 fiscal
years, detailed estimates of receipts and an updated Capital Plan. It is
expected that the Governor will prepare amendments to his Executive Budget as
permitted under law and that these amendments will be reflected in a revised
Financial Plan. There can be no assurance that the Legislature will enact the
Executive Budget as proposed by the Governor into law, or that the State's
adopted budget projections will not differ materially and adversely from its
estimates set forth herein.
The 1997-98 Financial Plan projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $32.84 billion, a decrease of $56 million from spending totals
projected for the current fiscal year. As compared to the 1996-97 State
Financial Plan, the Executive Budget proposes a year-to-year decline in General
Fund spending of 0.2 percent. State funds spending (i.e., General Fund plus
other dedicated funds, with the exception of federal aid) is projected to grow
by 1.2 percent. Spending from all Governmental Funds (excluding transfers) is
proposed to increase by 2.2 percent from the prior fiscal year.
The Executive Budget proposes $2.3 billion in actions to balance the
1997-98 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1997-98 were projected
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to grow by approximately 4 percent. This increase would have resulted from
growth in Medicaid, higher fixed costs such as pensions and debt service,
collective bargaining agreements, inflation, and the loss of non-recurring
resources that offset spending in 1996-97. General Fund receipts were projected
to fall by roughly 3 percent. This reduction would have been attributable to
modest growth in the State's economy and underlying tax base, the loss of non-
recurring revenues available in 1996-97 and implementation of previously enacted
tax reduction programs.
The Executive Budget proposes to close this gap primarily through a
series of spending reductions and Medicaid cost containment measures, the use of
a portion of the 1996-97 projected budget surplus, and other actions. The 1997-
98 Financial Plan projects receipts of $32.88 billion and spending of $32.84
billion, allowing for a deposit of $24 million into the CRF and a year-ending
CRF reserve of $65 million, and a required repayment of $15 million to the
TCRF.
State Debt. Under the State Constitution, the State may not, with limited
exceptions for emergencies, undertake long term borrowing (i.e., borrowing for
more than one year) unless the borrowing is authorized in a specific amount for
a single work or purpose by the Legislature and approved by the voters. There
is no limitation on the amount of long term debt that may be so authorized and
subsequently incurred by the State. With the exception of housing bonds (which
must be paid in equal annual installments, within 50 years after issuance,
commencing no more than three years after issuance), general obligation bonds
must be paid in equal annual installments, within 40 years after issuance,
beginning not more than one year after issuance of such bonds.
The State may undertake short term borrowings without voter approval (i)
in the anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes. Tax and revenue anticipation notes must mature within one
year from their dates of issuance and may not be refunded or refinanced beyond
such period. The State may issue bond anticipation notes only for the purposes
and within the amounts for which bonds may be issued. Such notes must be paid
from the proceeds of the sale of bonds in anticipation of which they were issued
or from other sources within two years of the date of issuance or, in the case
of notes for housing purposes, within five years from the date of issuance.
Pursuant to specific constitutional authorization, the State may also
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. The
constitutional provisions allowing a State guarantee of certain Port Authority
of New York and New Jersey debt stipulates that no such guaranteed debt may be
outstanding after December 31, 1996. State-guaranteed bonds issued by the
Thruway Authority were fully retired on July 1, 1995.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
In 1990, as part of a State fiscal reform program,, legislation was
enacted creating LGAC,, a public benefit corporation empowered to issue long-
term obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after
the
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limit was first exceeded. This provision capping the seasonal borrowing was
included as a covenant with LGAC's bondholders in the resolution authorizing
such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds
of $4.7 billion, completing the program. The impact of LGAC's borrowing is that
the State has been able to meet its cash flow needs throughout the fiscal year
without relying on short-term seasonal borrowings. The 1996-97 State Financial
Plan includes no seasonal borrowing; this reflects the success of the LGAC
program in permitting the State to accelerate local aid payments from the first
quarter of the current fiscal year to the fourth quarter of the previous fiscal
year.
1996-97 Borrowing Plan. The State anticipates that its capital programs
will be financed, in part, through borrowings by the State and public
authorities in the 1996-97 fiscal year. The State expects to issue $411 million
in general obligation bonds (including $153.6 million for purposes of redeeming
outstanding BANs)) and $154 million in general obligation commercial paper. The
Legislature has also authorized the issuance of up to $101 million in COPs
during the State's 1996-97 fiscal year for equipment purchases. The projection
of the State regarding its borrowings for the 1996-97 fiscal year may change if
circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1996-97
capital projects. Included therein are borrowings by (i) DASNY for SUNY, The
City University of New York ("CUNY"), health facilities, and mental health
facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iii) UDC (doing business as
the Empire State Development Corporation) for prison and youth facilities; (iv)
the Housing Finance Agency ("HFA") for housing programs; and (v) borrowings by
the Environmental Facilities Corporation ("EFC") and other authorities. In
addition, the Legislature has authorized DASNY to refinance a $787 million
pension obligation of the State.
In the 1996 legislative session, the legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. lf the Clean Water, Clean Air Bond Act is approved by the
voters, the amount of general obligation bonds issued during the 1996-97 fiscal
year may increase above the $411 million currently included in the 1996-97
Borrowing Plan to finance a portion of this new program.
Debt Ratings. Due primarily to the deteriorating economy and recurring
deficits, Moody's lowered its ratings on New York State general obligations in
1990 from A1 to A. In January 1992, Moody's lowered the ratings on a substantial
number of the State's appropriation-backed debt from A to Baal, and stated that
it had put the State's general obligations under review for possible downgrade
in the future. S&P lowered its rating on the State's general obligations in
March 1990 from AA- to A, and in January 1992, S&P further lowered the rating to
A-. In January 1992, S&P also downgraded to A- various agency debt, State moral
obligations, contractual obligations, lease purchase obligations, guarantees and
school district debt. New York State general obligation bonds currently are
rated "A" by Moody's and "A-" by S&P.
Ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings must be obtained from the rating
agency furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the Bonds.
Litigation. The legal proceedings noted below involve State finances,
State programs and miscellaneous tort, real property and contract claims in
which the State is a defendant and the monetary damages sought are substantial.
These proceedings could affect adversely the financial condition of the State in
the 1996-97 fiscal year or thereafter.
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Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced 1996-97
State Financial Plan. The State believes that the 1996-97 State Financial Plan
includes sufficient reserves for the payment of judgments that may be required
during the 1996-97 fiscal year. There can be no assurance, however, that an
adverse decision in any of these proceedings would not exceed the amount of the
1996-97 State Financial Plan reserves for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced 1996-97
State Financial Plan. In its General Purpose Financial Statements, the State
reports its estimated liability in subsequent fiscal years for awarded and
anticipated unfavorable judgments.
Although other litigation is pending against the State, except as
described below, no current litigation involves the State's authority, as a
matter of law, to contract indebtedness, issue its obligation, or pay such
indebtedness when its matures, or affects the State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
In addition to the proceedings noted below, the State is party to other
claims and litigation which its legal counsel has advised are not probable of
adverse court decisions. Although the amounts of potential losses, if any, are
not presently determinable, it is the State's opinion that its ultimate
liability in these cases is not expected to have a material adverse effect on
the State's financial position in the 1996-97 fiscal year or thereafter.
Insurance Law. In Trustees of and The Pension, Hospitalization Benefit
-------------
Plan of the Electrical Industry, et al. v. Cuomo, et al., commenced November 25,
1992 in the United States District Court for the Eastern District of New York,
plaintiff employee welfare benefit plans seek a declaratory judgment nullifying
on the ground of Federal preemption provisions of Section 2807-c of the Public
Health Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans.
Tax Law. Aspects of petroleum business taxes are the subject of
-------
administrative claims and litigation (e.g., Tug Buster Bouchard, et al. v.
Wetzler, Supreme Court, Albany County, commenced November 13, 1992). In Tug
Buster Bouchard, petitioner corporations, which purchase fuel out of State and
consume such fuel within State, contend that the assessment of the petroleum
business tax pursuant to Tax Law (S)301 to such fuel violates the Commerce
Clause of the United States Constitution. Petitioners contend that the
application of Section 301 to the interstate transaction but not to purchasers
who purchase and consume fuel within the State discriminates against interstate
commerce.
State Programs. Several cases challenge provisions of Chapter 81 of the
--------------
Laws of 1995 which alter the nursing home Medicaid reimbursement methodology on
and after April 1, 1995. Included are New York State Health Facilities
Association, et al. v. DeBuono, et al., St. Luke's Nursing Center, et al. v.
DeBuono, et al., New York Association of Homes and Services for the Aging v.
DeBuono et al. (three cases), Healthcare Association of New York State v.
DeBuono and Bayberry Nursing Home et al. v. Pataki, et al. Plaintiffs allege
that the changes in methodology have been adopted in violation of procedural and
substantive requirements of State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services ("DSS") in June 1992 of a home assessment resource
review instrument ("HARRI"), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
Office of Mental Health Patient-Care Costs. Two actions, Balzi, et al.
------------------------------------------
v. Surles, et al., commenced in November 1985 in the United States District
Court for the Southern District of New York, and Brogan, et al. v. Sullivan, et
al., commenced in May 1990 in the United States District Court for the Western
District of New York, now consolidated, challenge the practice of using
patients' Social Security benefits for the costs of care of patients of State
Office of Mental Health facilities.
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Shelter Allowance. In an action commenced in March 1987 against State
-----------------
and New York City officials (Jiggetts, et al. v. Bane, et al.), plaintiffs
allege that the shelter allowance granted to recipients of public assistance is
not adequate for proper housing.
Education Law. In New York State Association of Counties v. Pataki, et
-------------
al., commenced May 29, 1996 (Supreme Court, Albany County),), plaintiff seeks
reimbursement from the State for certain costs arising out of the provision of
preschool services and programs for children with handicapping conditions,
pursuant to Sections 4410 (10) and (11) of the Education Law.
Racial Segregation. In an action commenced in 1985 (United States, et
------------------
al, v. Yonkers Board of Education, et al.), the United States District Court for
the Southern District of New York found that Yonkers and its public schools were
intentionally segregated. Yonkers enacted an "education improvement plan. which
was adopted in 1986. Plaintiffs allege that defendants have not fulfilled their
responsibility to alleviate the segregation. On January 19, 1989 the State, the
State Education Department and the New York State Urban Development Corporation
were added as defendants.
Real Property Claims. On March 4, 1985 in Oneida Indian Nation of New
--------------------
York, et al. v. County of Oneida, the United States Supreme Court affirmed a
judgment of the United States Court of Appeals for the Second Circuit holding
that the Oneida Indians have a common-law right of action against Madison and
Oneida Counties for wrongful possession of 872 acres of land illegally sold to
the State in 1795. At the same time, however, the Court reversed the Second
Circuit by holding that a third-party claim by the counties against the State
for indemnification was not properly before the federal courts. The case was
remanded to the District Court for an assessment of damages, which action is
still pending. The counties may still seek indemnification in the State
courts.
Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York,
et al., both in the United States District Court for the Northern District of
New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.
Contract and Tort Claims. In Inter-Power of New York, Inc. v. State of
------------------------
New York, commenced November 16, 1994 in the Court of Claims, plaintiff alleges
that by reason of the failure of the State's Department of Environmental
Conservation to provide in a timely manner accurate and complete data, plaintiff
was unable to complete by the projected completion date a cogeneration facility,
and thereby suffered damages.
New York City. The fiscal health of the State is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The City,
with a population of approximately 7.3 million, is an international center of
business and culture. Its non-manufacturing economy is broadly based, with the
banking and securities, life insurance, communications, publishing, fashion
design, retailing and construction industries accounting for a significant
portion of the City's total employment earnings. Additionally, the City is the
nation's leading tourist destination. Manufacturing activity in the City is
conducted primarily in apparel and printing.
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and real Gross City
Product ("GCP") fell in those two years. Beginning in calendar year 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. However, after noticeable improvements in the City's economy
during calendar year 1994, economic growth slowed in calendar year 1995, and the
City's current four-year financial plan assumes that economic growth will
continue to slow in calendar year 2000.
For each of the 1981 through 1996 fiscal years, the City achieved
balanced operating results as reported in accordance with then applicable
generally accepted accounting principles ("GAAP"). The City was required to
close
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substantial budget gaps in recent years in order to maintain balanced operating
results. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional tax or other revenue
increases or additional reductions in City services or entitlement programs,
which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
current four-year financial plan projects substantial budget gaps for each of
the 1998 through 2000 fiscal years, before implementation of the proposed gap-
closing program contained in the current financial plan. The City is required
to submit its financial plans to review bodies, including the New York State
Financial Control Board ("Control Board").
The City depends on State aid both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that State budgets in future fiscal years will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal
budget negotiation process could result in a reduction in or a delay in the
receipt of Federal grants in the City's 1996 fiscal year which could have
additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's four-year financial
plan, including the City's current financial plan for the 1997 through 2000
fiscal years (the "1997-2000 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the condition of the
regional and local economies, the impact on real estate tax revenues of the real
estate market, wage increases for City employees consistent with those assumed
in the Financial Plan, employment growth, the ability to implement proposed
reductions in City personnel and other cost reduction initiatives, which may
require in certain cases the cooperation of the City's municipal unions, the
ability of the New York City Health and Hospitals Corporation ("HHC") and the
Board of Education ("BOE") to take actions to offset reduced revenues, the
ability to complete revenue generating transactions, provision of State and
Federal aid and mandate relief and the impact on City revenues or expenditures
of proposals for Federal and State welfare reform and any future legislation
affecting Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the City's
ability to market its securities successfully. The City's financing program for
fiscal years 1997 through 2000 contemplates the issuance of $9.0 billion of
general obligation bonds and $3.8 billion of bonds to be issued by the proposed
New York City Finance Authority (the "Finance Authority") to finance City
capital projects. The creation of the Finance Authority, which is subject to the
enactment of State legislation, is being proposed as part of the City's effort
to assist in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. Indebtedness subject to the constitutional debt limit includes liability
on capital contracts that are expected to be funded with general obligation
bonds, as well as general obligation bonds. The City's projections of total debt
subject to the general debt limit that would be required to be issued to fund
the Updated Ten-Year Capital Strategy published in April 1995 indicates that
projected contracts for capital projects and debt issuance may exceed the
general debt limit by the end of fiscal year 1997 and would exceed the general
debt limit by a substantial amount thereafter, unless legislation is enacted
creating the Finance Authority or other legislative initiatives are identified
and implemented. Depending on a number of factors, including whether the
Legislature is expected to enact legislation creating the Finance Authority or
to take other action that would provide relief under the general debt limit, the
City may find it necessary to curtail its currently defined capital program
before the end of fiscal year 1997 to ensure that there is ongoing capacity to
enter into capital contracts necessary to preserve projects designed to
safeguard health and safety in the City. Without the Finance Authority or other
legislative relief, the City's general obligation financed capital program with
respect to new projects would be virtually brought to a halt during the
Financial Plan period. General obligation borrowing would continue to reimburse
the City's general fund for ongoing costs of existing contractual commitments.
In addition, the
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<PAGE>
City issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City bonds and
notes and Finance Authority bonds will be subject to prevailing market
conditions, and no assurance can be given that such sales will be completed. If
the City were unable to sell its general obligation bonds and notes or the
proposed Finance Authority were unable to sell its bonds, the City would be
prevented from meeting its planned capital and operating expenditures. Future
developments concerning the City and public discussion of such developments, as
well as prevailing market conditions, may affect the market for outstanding City
general obligation bonds and notes.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
On November 14, 1996, the City submitted to the Control Board the
Financial Plan for the 1997 through 2000 fiscal years, which relates to the
City, BOE and the City University of New York ("CUNY"). The Financial Plan is a
modification to the financial plan submitted to the Control Board on June 21,
1996 (the "June Financial Plan").
1997 Fiscal Year. The June Financial Plan identified actions to close a
previously projected gap of approximately $2.6 billion for the 1997 fiscal year.
The proposed actions in the June Financial Plan for the 1997 fiscal year
included (i) agency actions totaling $1.2 billion; (ii) a revised tax reduction
program which would increase projected tax revenues by $369 million due to the
four year extension of the 12.5% personal income tax surcharge and other
actions; (iii) savings resulting from cost containment in entitlement programs
to reduce City expenditures and additional proposed State aid of $75 million;
(iv) the assumed receipt of revenues relating to rent payments for the City's
airports, which are currently the subject of a dispute with the Port Authority
of New York and New Jersey (the "Port Authority"); (v) the sale of the City's
television station for $207 million; and (vi) pension cost savings totaling $134
million resulting from a proposed increase in the earnings assumption for
pension assets from 8.5% to 8.75%.
1997-2000 Fiscal Years. The 1997-2000 Financial Plan published on
November 14, 1996 reflects actual receipts and expenditures and changes in
forecast revenues and expenditures since the June Financial Plan. The 1997-2000
Financial Plan projects revenues and expenditures for 1997 fiscal year balanced
in accordance with GAAP, and projects gaps of $1.2 billion, $2.1 billion and
$3.0 billion for the 1998, 1999 and 2000 fiscal years, respectively. Changes
since the June Financial Plan include (i) an increase in projected tax revenues
of $450 million, $120 million, $50 million and $45 million in fiscal years 1997
through 2000, respectively; (ii) a delay in the assumed receipt of $304 million
relating to projected rent payments for the City airports from the 1997 fiscal
year to the 1998 and 1999 fiscal years, and a $34 million reduction in assumed
State and Federal aid for the 1997 fiscal year; (iii) an approximately $200
million increase in projected overtime and other expenditures in each of the
fiscal years 1997 through 2000; (iv) a $70 million increase in expenditures for
BOE in the 1997 fiscal year for school text books; (v) a reduction in projected
pension costs of $34 million, $50 million, $49 million and $47 million in fiscal
years 1997 through 2000, respectively; and (vi) additional agency actions
totaling $179 million, $386 million, $473 million and $589 million in fiscal
years 1997 through 2000, including personnel reductions through attrition and
early retirement.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 12.5% personal income tax surcharge, which
expired on December 31, 1996 and is projected to provide revenue of $170
million, $463 million, $492 million, and $521 million, in the 1997 through 2000
fiscal years, respectively; (ii) collection of the projected rent payments for
the City's airports, totaling $270 million and $180 million in the 1998 and 1999
fiscal years, respectively, which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases thereto through pending legal actions; (iii) the
ability of HHC and BOE to identify actions to offset substantial City and State
revenue reductions and the receipt by BOE of additional State aid; (iv) State
approval of the cost containment initiatives and State aid proposed by the City;
and (v) a reduction in City funding for labor settlements for certain public
authorities or corporations. Legislation extending the 12.5% personal income tax
surcharge beyond December 31, 1996, was not enacted in the special legislative
session held in December 1996. Such legislation may be enacted in the 1997 State
legislative session. The Financial Plan does not
-17-
<PAGE>
reflect any increased costs which the City might incur as a result of welfare
legislation recently enacted by Congress or legislation proposed by the
Governor, which would, if enacted, implement such Federal welfare legislation.
In addition, the economic and financial condition of the City may be affected by
various financial, social, economic and political factors which could have a
material effect on the City.
The Governor released the 1997-1998 Executive Budget on January 14, 1997,
which will be considered for adoption by the State Legislature. Based on a
preliminary evaluation of currently available information, the City's Office of
Management and Budget ("("OMB")") believes that the reductions in Medicaid
reimbursement rates and other entitlement and welfare initiatives proposed in
the 1997-1998 Executive Budget, if approved by the State Legislature without
change, would provide the City with a portion of the $650 million of additional
aid and reductions in entitlement costs assumed in the City's gap-closing
program for the 1998 fiscal year. The nature and extent of the impact on the
City of the State budget, when adopted, is uncertain, and no assurance can be
given that the State actions included in the State adopted budget may not have a
significant adverse impact on the City's budget and its Financial Plan.
The City's financial plans have been the subject of extensive public
comment and criticism. On February 28, 1996, Fitch Investors Service, L.P.
("Fitch") placed the City's general obligation bonds on FitchAlert with negative
implications. On November 5, 1996, Fitch removed the City's general obligation
bonds from FitchAlert, although Fitch stated that the outlook remains
negative.
The projections for the 1997 through 2000 fiscal years reflect the costs
of the settlements with the United Federation of Teachers ("UFT") and a
coalition of unions headed by District Council 37 of the American Federation of
State, County and Municipal Employees ("District Council 37"), which together
represent approximately two-thirds of the City's workforce, and assume that the
City will reach agreement with its remaining municipal unions under terms which
are generally consistent with such settlements. The settlement provides for a
wage freeze in the first two years, followed by a cumulative effective wage
increase of 11% by the end of the five year period covered by the proposed
agreements, ending in fiscal years 2000 and 2001. Additional benefit increases
would raise the total cumulative effective increase to 13% above present costs.
Costs associated with similar settlements for all City-funded employees would
total $49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999
fiscal years, respectively, and exceed $2 billion in each fiscal year after the
1999 fiscal year. There can be no assurance that the City will reach an
agreement with the unions that have not yet reached a settlement with the City
on the terms contained in the Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective bargaining with the
UFT, which may be subject to non-binding arbitration. On January 23, 1996, the
City requested the Office of Collective Bargaining to declare an impasse against
the Patrolmen's Benevolent Association ("PBA") and the Uniformed Firefighters
Association ("UFA").
In addition, Moody's and S&P have on several occasions lowered their
ratings of New York State and City debt obligations. On July 10, 1995, S&P
revised its rating of the City's General Obligation Bonds downward softness in
the City's economy, highlighted by weak job growth and a growing dependence on
the historically volatile financial services sector." Other factors identified
by S&P in lowering its rating on City bonds included a trend of using one-time
measures, including debt refinancing, to close projected budget gaps, dependence
on unratified labor savings to help balance the Financial Plan, optimistic
projections on additional Federal and State aid or mandate relief, a history of
cash flow difficulties caused by State budget delays and continued high debt
levels. S&P's ratings on the New York City Bonds currently are BBB+. Moody's
ratings on New York City's bonds currently are Baa1.
Ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings must be obtained from the rating
agency furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdraw entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the Bonds.
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<PAGE>
INVESTMENT RESTRICTIONS
The Funds observe the following fundamental investment restrictions
which can be changed only when permitted by law and approved by a majority of a
Fund's outstanding 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.
Each Fund may not:
(1) purchase securities on margin (but Fixed Income Fund may make
margin payments in connection with financial futures contracts and
related options) or purchase real estate or interests therein,
commodities or commodity contracts (except Fixed Income Fund may purchase
financial futures contracts and related options), or make loans, except
loans of portfolio securities and except that each Fund may purchase or
hold short-term debt securities and enter into repurchase agreements with
respect to its portfolio securities described in each Prospectus. For
this purpose, repurchase agreements are considered loans;
(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 for the Fixed
Income Fund only), 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. The Fixed Income Fund will
not invest more than 10% of its total assets in the securities of any one
issuer (with respect to the remaining 25% of total assets);
(3) engage in the underwriting of securities of other issuers,
except to the extent that each 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; or participate on a
joint or joint-and-several basis in any securities trading account. The
"bunching" of orders with other accounts under the management of the
Adviser to save commissions or to average prices among them is not deemed
to result in a securities trading account;
(4) effect a short sale of any security (other than index options
or hedging strategies in the case of Fixed Income Fund only), 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 each Fund may borrow from banks as a
temporary measure for emergency purposes where such borrowings would not
exceed 10% 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 10% of each Fund's
total assets taken at market value. The Funds have no present intention
of engaging in transactions under this paragraph;
(6) purchase securities of any company with a record of less than
three years' continuous operation if such purchase would cause each
Fund's investments in all such companies taken at cost to exceed 5% of
such Fund's total assets taken at market value;
(7) invest for the purpose of exercising control over management
of any company;
(8) invest more than 10% of its total assets in the securities of
other investment companies;
(9) 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
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<PAGE>
marketable, if as a result more than 15% (10% in the case of the New York
Tax-Free Fund) of the market value of the Fund's total assets would be so
invested;
(10) 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 Funds; however, this policy will not prohibit
the acquisition of securities of companies engaged in the production or
transmission of oil, gas, other minerals or companies which purchase or
sell real estate or real estate mortgage loans;
(11) purchase or retain securities of any company if, to the
knowledge of the Funds, officers and Trustees of the Trust and officers
and directors of the Adviser who individually own more than 1/2 of 1% of
the securities of that company together own beneficially more than 5% of
such securities;
(12) have dealings on behalf of the Funds with Officers and
Trustees of the Funds, 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 Funds;
(13) purchase equity securities or other securities convertible
into equity securities; or
(14) 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 each Fund's investments in that
industry would exceed 25% of the current value of a Fund's total assets,
provided that there is no limitation with respect to investments in
obligations of the United States Government, its agencies or
instrumentalities (and, in the case of the New York Tax-Free Fund,
investments in Municipal Obligations (for the purpose of this
restriction, industrial development and pollution control bonds shall not
be deemed Municipal Obligations if the payment of principal and interest
on such bonds is the ultimate responsibility of nongovernmental users)).
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 Funds, in the securities rating of the investment, or any
other later change.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
The principal occupations of the Trustees and executive officers of the
Funds for the past five years are listed below. The address of each, unless
otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. Trustees deemed
to be "interested persons" of the Funds for purposes of the Investment Company
Act of 1940, as amended, are indicated by an asterisk.
WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville, Virginia
-------
22901. Trustee, Excelsior Funds, Inc. Excelsior Tax-Exempt Funds, Inc.
and Excelsior Institutional Funds, Inc. (mutual funds); Director,
Deutsche Bank Financial, Inc.; Director, the Harbus Corporation; Trustee,
HSBC Funds Trust.
WILLIAM L. KUFTA, Chairman and Trustee - 97 Main Street, Chatham, New
--------------------
Jersey 07928. Chief Investment Officer, Beacon Trust Company; Senior Vice
President, Pitcairn Financial Management Group from 1987 to 1991;
Trustee, HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut
-------
06840. Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee,
U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc.
(mutual funds); Trustee, HSBC Funds Trust.
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<PAGE>
HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017.
-------
Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten
and Company since 1991; Advisory Managing Director, Lepercq de Neuflize &
Co. Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to
1993; Trustee, HSBC Funds Trust.
JOHN P. PFANN, Trustee - 43 Captains Walk, Marina Cove, Palm Coast,
-------
Florida 32137. Chairman and President, JPP Equities, Inc. 1982 to 1995;
Trustee, HSBC Funds Trust.
MICHAEL J. KANE, President - Director, New Business Development, BISYS
---------
Fund Services, Inc. 1991 to present; Sales Manager, Business
Development at Fairfield Group 1988 to 1991. Vice President at SEI
Corporation from 1980 to 1988.
ERIC F. ALMQUIST, Senior Vice President - Senior Marketing Strategist,
---------------------
Fund Services Division, BISYS Fund Services, Inc., August, 1996 to
present; Director of Process Management, Coopers & Lybrand L.L.P. from
1994 to 1996; Vice President, The Dreyfus Service Corporation from 1988
to 1994.
KAREN DOYLE, Vice President - Director, Client Services, Fund Services
--------------
Division of BISYS Fund Services, Inc. from October 1994 to present. The
Bank of New York, 1979 to 1994.
KEVIN L. MARTIN, Treasurer - Vice President, Fund Accounting Services,
---------
BISYS Fund Services, Inc., February 1996 to present; Senior Audit
Manager, Ernst & Young LLP (1984 to February 1996).
STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York 10022.
---------
Partner, Baker & McKenzie since April 1991; Partner, Gaston & Snow from
1988 to 1991; Secretary, HSBC Funds Trust since 1987.
ALAINA V. METZ, Assistant Secretary - Chief Administrator, Administration
-------------------
and Regulatory Services of BISYS Fund Services, Inc., June 1995 to
Present; Supervisor of Mutual Fund Legal Department, Alliance Capital
Management, May 1989 to June 1995.
CURTIS W. BARNES, Assistant Secretary - Compliance Officer, BISYS Fund
-------------------
Services June 1995 to present; Senior Legal Analyst for John Hancock
Funds from February, 1984 to June, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation from Benefits Accrued as Benefits Upon from the Fund
the Funds Part of Fund Expenses Retirement Complex*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee $ 4,427 0 N/A $ 20,000
William L. Kufta, Trustee $ 3,984 0 N/A $ 18,000
Harald Paumgarten, Trustee $ 3,542 0 N/A $ 18,000
John P. Pfann, Trustee $ 4,427 0 N/A $ 20,000
Robert A. Robinson, Trustee $ 3,984 0 N/A $ 20,000
</TABLE>
- --------------------
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<PAGE>
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1996 (and with respect to the Funds,
estimated to be paid during a full calendar year).
Trustees of the Funds receive from the Funds an annual fee and a fee for
attending each meeting of the Trustees and each committee meeting and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
As of the date of this Statement of Additional Information the Trustees
and officers of the Funds as a group owned less than 1% of the outstanding
shares of the Trust.
Investment Adviser. The Funds retain HSBC Asset Management Americas Inc.
("Adviser") to act as the adviser for each Fund. The Adviser is the North
American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai
Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York, New York 10177.
The Advisory Contracts for the Funds provide that the Adviser will manage
the portfolio of each Fund and will furnish to each Fund investment guidance and
policy direction in connection therewith. The Adviser has agreed to provide to
the Trust, among other things, information relating to money market portfolio
composition, credit conditions and average maturity of the portfolio of each
Fund. Pursuant to the Advisory Contract, the Adviser also furnishes to the
Trust's Board of Trustees periodic reports on the investment performance of each
Fund. The Adviser has also agreed in the Advisory Contract to provide
administrative assistance in connection with the operation of each 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 Funds, (ii) compiling
statistical and research data required for the preparation of reports and
statements which are periodically distributed to the Funds' 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 Funds' filings
with the Securities and Exchange Commission.
The Adviser acts as Co-Administrator to the Funds pursuant to a Co-
Administration Services Contract between the Funds and the Adviser. The Adviser
(i) manages the Fund's relationship with BISYS Fund Services, the Administrator
to the Funds, (ii) assists with negotiation of contracts with service providers
and supervises the activities of those service providers, (iii) serves as
liaison with the Board of Trustees, and (iv) assists with general product
management and oversight. HSBC is paid an annual fee equal to 0.03% of each
Fund's average daily net assets pursuant to the Co-Administration Services
Contract.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant of
the Funds in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but is not specifically required to, include any or
all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of an review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Funds to, and
answer questions from Shareholder Servicers to enhance understanding of the
Funds and its investment objectives; and (iv) generally assist the activities of
the Shareholder Servicers.
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<PAGE>
The Adviser shall provide all personnel and facilities necessary in order
for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicing Agent, the Adviser is paid an
annual fee equal to 0.04% of the Funds' daily average net assets.
For the year ended December 31, 1996, the Adviser earned $14,639 (net of
fee waivers of $59,021) and $7,303 (net of fee waivers of $25,128) as
compensation for its Co-Administration and Shareholder Services to the Fixed
Income Fund and New York Tax-Free Bond Fund, respectively.
Distributor. Shares of the Funds are offered on a continuous basis
through BISYS Fund Services, the Distributor, pursuant to the Distribution
Contract. The Distributor is not obligated to sell any specific amount of
shares.
Administrator. BISYS Fund Services, Limited Partnership d/b/a/ BISYS Fund
Services serves as Administrator of the Funds pursuant to the terms of a
Management and Administration Agreement (the "Administrative Services
Agreement"). Pursuant to the Administrative Services Agreement, BISYS Fund
Services: (i) provides administrative services reasonably necessary for the
operation of the Funds, (other than those services which are provided by the
Adviser pursuant to the Advisory Contract); (ii) provides the Funds with office
space and office facilities reasonably necessary for the operation of the Funds;
and (iii) employs or associates with itself such persons as it believes
appropriate to assist it in performing its obligations under the Administrative
Services Agreement.
As compensation for its administrative services under the Administrative
Services Agreement, BISYS Fund Services is paid a monthly fee at the following
annual rates: 0.15% of a Fund's first $200 million of average daily net assets;
.125% of a Fund's second $200 million of average daily net assets; 0.10% of a
Fund's third $200 million of average daily net assets; and 0.08% of a Fund's
average daily net assets in excess of $600 million.
For the period from March 1, 1996 to December 31, 1996, BISYS Fund
Services earned $88,619 (net of fee waivers of $48,426) and $38,260 (net of fee
waivers of $21,167) in administration fees from the Fixed Income Fund and New
York Tax-Free Fund, respectively. For the two months ended February 29, 1996.
PFPC, the previous Administrator, earned $15,598 (net of fee waivers of $821)
and $7,660 (net of fee waivers of $403) for the Fixed Income Fund and New York
Tax Free Fund, respectively.
For the year ended December 31, 1995, the Fixed Income and New York Tax-
Free Funds paid $78,200 (net of fee waivers of $6,300), and $47,800 (net of fee
waivers of $3,800), respectively, to PFPC Inc. in administration fees under the
Administrative Services Agreement.
For the period of July 1, 1994 to December 31, 1994, the Fixed Income
Fund paid $39,779 (net of fee waivers of $4,420) to PFPC Inc. in administration
fees under the Administrative Services Agreement. The Adviser, the predecessor
to PFPC Inc., earned $771 (net of fee waivers of $6,309) and $25,868 (net of fee
waivers of $5,472) from the Fixed Income Fund in administration fees for the six
month period ended June 30, 1994. For the period of June 22, 1994 to December
31, 1994, the New York Tax-Free Fund paid $25,177 (net of fee waivers of $2,797)
to PFPC Inc. in administration fees under the Administrative Services Agreement.
The Adviser, the predecessor to PFPC Inc., waived its entire administration fee
of $21,174 for the period January 1, 1994 to June 30, 1994.
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<PAGE>
Fees and Expenses
As compensation for its advisory and management services, the Adviser is
paid a monthly fee by each Fund at the following annual rates:
<TABLE>
<CAPTION>
Portion of Average Daily Value of Net Assets of
the Fixed Income Fund Advisory
--------------------------------------------------- ------------
<S> <C>
Not exceeding $400 million........................ 0.550%
In excess of $400 million but
not exceeding $800 million.................... 0.505
In excess of $800 million but
not exceeding $1.2 billion.................... 0.460
In excess of $1.2 billion but
not exceeding $1.6 billion.................... 0.415
In excess of $1.6 billion but
not exceeding $2 billion...................... 0.370
In excess of $2 billion........................... 0.315
<CAPTION>
Portion of Average Daily Value of Net Assets of
the New York Tax-Free Fund Advisory
--------------------------------------------------- ------------
<S> <C>
Not exceeding $300 million........................ 0.450%
In excess of $300 million but
not exceeding $600 million.................... 0.420
In excess of $600 million but
not exceeding $1 billion...................... 0.385
In excess of $1 billion but
not exceeding $1.5 billion.................... 0.350
In excess of $1.5 billion but
not exceeding $2 billion...................... 0.315
In excess of $2 billion........................... 0.280
</TABLE>
With respect to the Fixed Income Fund, for the years ended December 31,
1996, 1995 and 1994, the Adviser was paid $562,307 (net of fee waivers of $0),
$464,400 (net of fee waivers of $0) and $446,346 (net of fee waivers of
$42,992), respectively, in advisory fees.
With respect to the New York Tax-Free Fund, for the years ended December
31, 1996, 1995 and 1994, the Adviser was paid $112,830 (net of fee waivers of
$89,511), $128,900 (net of fee waivers of $103,200) and $144,878 (net of fee
waivers of $117,129), respectively, for advisory fees.
-24-
<PAGE>
Except for the expenses paid by the Adviser under the Advisory Contract and
Co-Administration Services Contract and by BISYS Fund Services, Inc. under the
Management and Administration Agreement, the Funds bear all costs of their
operations. Expenses attributable to a 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 a Fund from year to year provided
such continuance is approved annually (i) 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 a 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). The Board of Trustees of the Trust, including the non-
interested Trustees, approved the continuance of each Fund's Advisory Contract,
the Distribution Contract and the Co- Administration Agreement at a meeting of
the Board of Trustees on February 4, 1997.
Distribution Plans and Expenses
Each Fund has adopted a Distribution Plan and related Shareholder Servicing
Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of
1940, after having concluded that there is a reasonable likelihood that the Plan
will benefit each Fund and its shareholders. The Plan provides for a monthly
payment by each Fund to BISYS Fund Services for expenses incurred not to exceed
an annual rate of 0.35%.
BISYS Fund Services will use all amounts received under each Plan for
payments to broker-dealers or financial institutions for their assistance in
distributing shares of each Fund and otherwise promoting the sale of the Funds'
shares. BISYS Fund Services may also use all or any portions of such fee to pay
expenses such as the printing and distribution of prospectuses sent to
prospective investors, the preparation, printing and distribution of sales
literature and expenses associated with media advertisements and telephone
services.
The Plans provide for BISYS Fund Services to prepare and submit to the
Board of Trustees on a quarterly basis written reports of all amounts expended
pursuant to the Plan and the purpose for which such expenditures were made. The
Plans may not be amended to increase materially the amount spent for
distribution expenses without approval by a majority of each Fund's outstanding
shares and approval of a majority of the non-interested Trustees.
The Plan will continue in effect with respect to each Fund from year to
year provided such continuance is approved annually by a vote of the Board of
Trustees of the Trust and of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan, cast in person at a meeting
called for the purpose of voting on such Plan ("12b-1 non-interested Trustees").
The Board of Trustees of the Trust, including the 12b-1 non-interested Trustees,
approved the continuance of the Plan at a meeting of the Board of Trustees on
February 4, 1997.
For the fiscal year ended December 31, 1996, the Funds incurred the
following amounts in distribution-related fees under the Rule 12b-1 Distribution
Plan:
-25-
<PAGE>
<TABLE>
<CAPTION>
Printing of
Compensation to Prospectuses and Retail Postage and
Broker- Shareholder Marketing Miscellaneous
Fund Dealers Advertising Reports Program Expenses Total
---- --------------- ----------- ---------------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed Income $ 3,902 $0 $0 $0 $0 $ 3,902
Fund
New York $88,567 $0 $0 $0 $0 $88,567
Tax-Free Fund
</TABLE>
CALCULATION OF YIELDS AND
PERFORMANCE INFORMATION
From time to time, the Funds quote current yield based on a specific thirty
day period. Such thirty day yield, which may be used in advertisements and
marketing material, is calculated by using a method known as "semi-annual
compounding." Yield is calculated by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
Where: yield = 2[(a-b + 1)/6/ -1]
---
cd
a = dividends and interest earned during the period, including
the amortization of market premium or accretion of market
discount.
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.
d = the maximum offering price per share on the last day of the
period.
The public offering price (net asset value of $9.89, and $11.05 plus
maximum sales charge of 4.75% of the offering price for the Fixed Income Fund
and New York Tax Free Fund, respectively) per share at December 31, 1996 was
$10.38 and $11.60 for the Fixed Income Fund and New York Tax-Free Fund,
respectively.
The current yields for the Fixed Income and New York Tax-Free Funds as of
December 31, 1996, were 5.85% and 4.81%, respectively (excluding the maximum
sales of 4.75% for each Fund). The current yields as of the same date including
the maximum sales charge were 5.57% and 4.58%, respectively, for the Fixed
Income and New York Tax-Free Funds.
The Funds from time to time may advertise total return and cumulative total
return figures. Total return is the average annual compound rate of return for
the periods of one year and the life of each Fund, where applicable, each ended
on the last day of a recent calendar quarter. Total return quotations reflect
the change in the price of each Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
-26-
<PAGE>
shares of each Fund. Total return is calculated by finding the average annual
compound rates of return of a hypothetical investment over such periods, that
would compare the initial amount to the ending redeemable value of such
investment according to the following formula (total return is then expressed as
a percentage):
Where: P(1+T)/n/ = ERV
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
The average annual total return information for the Funds for the periods
indicated below is as follows:
Fixed Income Fund
Sales Charge * NAV
-------------- ---
One Year Ended December 31, 1996 -2.71 2.11
Inception (January 15, 1993)
to December 31, 1996 4.91 6.21
New York Tax-Free Bond Fund
Sales Charge * NAV
-------------- ---
One Year Ended December 31, 1996 -0.97 3.99
Five Years Ended December 31, 1996 5.79 6.82
Inception (March 21, 1989)
to December 31, 1996 7.02 7.69
* Includes maximum sales charge. Past Performance is not predictive of future
performance.
Cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Cumulative total return is calculated by finding the rate
of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
C = Cumulative Total Return
-27-
<PAGE>
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
All Funds
From time to time, in marketing pieces and other Fund literature, each
Fund's or the Funds' total performance may be compared to the performance of
broad groups of comparable funds or unmanaged indices of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Funds. Sources for Fund performance information
may include, but are not limited to, the following:
* Barron's, a Dow Jones and Company, Inc. business and financial weekly that
--------
periodically reviews mutual fund performance data.
* Business Week, a national business weekly that periodically reports the
-------------
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
--------------------------------------
publication that periodically features the performance of a variety of
securities.
Financial Times, Europe's business newspaper, which features from time to
---------------
time articles on international or country-specific funds.
* Forbes, a national business publication that from time to time reports the
------
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
-------
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
---------------
performance of U.S. mutual funds investing internationally.
* Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
-------------------------------------------------------------------
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
-----
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
--------------
financial news.
Personal Investor, a monthly investment advisory publication that includes
-----------------
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on personal
--------------------------------
money management that periodically rates and ranks mutual funds by
performance.
-28-
<PAGE>
* Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
-------------------
regularly covers financial news.
* Wiesenberger Investment Companies Services, an annual compendium of
------------------------------------------
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
__________________
* Sources of Fund performance information actually used by the Funds in the
past.
DETERMINATION OF NET ASSET VALUE
The Funds' net asset value per share is determined by dividing the total
current market value of the assets of a Fund, less its liabilities, by the total
number of shares outstanding at the time of determination. All expenses,
including the advisory and administrative fees, are accrued daily and taken into
account for the purpose of determining the net asset value.
Portfolio securities are valued at current market value, if available.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the supervision of the
Trust's officers in accordance with guidelines which have been adopted by the
Board of Trustees. Such procedures include the use of independent pricing
services which use prices based on yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to value from dealers; and
general market conditions. Short-term obligations of sixty days or less are
valued at amortized cost, which approximates market value.
The Funds will compute their net asset value once daily as of 4:15 p.m.
(Eastern time), on each day on which the Funds' transfer agent is open for
business. The net asset value of the Funds will not be determined on the
following national, regional or local holidays: New Year's Day, Martin Luther
King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas.
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 Funds 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 Funds will not necessarily be paying the lowest spread or commission
available.
Purchases and sales of securities will often be principal transactions in
the case of debt securities and, for the Fixed Income Fund, equity securities
traded otherwise than on an exchange. The purchase or sale of equity securities
will frequently involve the payment of a commission to a broker-dealer who
effects the transaction on behalf of the Fund. Debt securities normally will be
purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price. Generally, money market securities
are traded on a net basis and do not involve brokerage commissions. Under the
Investment Company Act of 1940 ("ICA of 1940"), persons affiliated with Marine
Midland, the Adviser, the Funds or BISYS Fund Services are prohibited from
dealing with the Funds as a principal in the purchase and sale of securities
except in accordance with regulations adopted by the Securities and Exchange
-29-
<PAGE>
Commission. The Funds 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 ICA of
1940. Under the ICA of 1940, persons affiliated with the Adviser, the Funds or
BISYS Fund Services may act as a broker for the Funds. In order for such
persons to effect any portfolio transactions for the Funds, 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 Funds to affiliated brokers.
The Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate measures the frequency with which a Fund's
portfolio of securities is traded. The Funds will attempt to purchase securities
with intent of holding them for investment but may purchase and sell portfolio
securities whenever the Adviser believes it to be warranted (e.g., the Fund may
sell portfolio securities in anticipation of an adverse market movement). The
purchase and sale of portfolio securities may involve dealer mark-ups,
underwriting commissions or other transaction costs. Generally, the higher the
portfolio turnover rate, the higher the transaction costs to the Fund, which
will generally increase the Fund's total operating expenses. In order to qualify
as a regulated investment company, less than 30% of a Fund's gross income must
be derived from the sale or other disposition of stock, securities or certain
other investments held for less than 3 months. Although increased portfolio
turnover may increase the likelihood of additional capital gains for each Fund,
a Fund expects to satisfy the 30% income test. The Fixed Income Fund's
portfolio turnover rate for the years ended December 31, 1996 and 1995 was 156%
and 41.6%, respectively (the increase in 1996 turnover was due to market
volatility). The New York Tax-Free Fund's portfolio turnover rate for the years
ended December 31, 1996 and 1995 was 87.4% and 24.4%, respectively.
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange those shares for shares of the other portfolios of
the Trust and the HSBC Funds Trust which are available for sale in their state.
A shareholder who has paid a sales load in connection with the purchase of
shares of any of the Funds will not be subject to any additional sales loads in
the event such shareholder exchanges shares of one Fund for shares of another
Fund. Shareholders of any of the HSBC Money Market Funds who exchange shares of
any of such Money Market Funds for shares of any of the Funds are charged the
sales loads applicable to the Funds as stated in the Prospectus.
Before effecting an exchange, shareholders should review the prospectuses.
Exercise of the exchange privilege is treated as a redemption for Federal and
New York State and City income tax purposes and, depending on the circumstances,
a gain or loss may be recognized. See the Prospectus discussion of the Federal
tax treatment of load reductions or eliminations in an exchange.
-30-
<PAGE>
The exchange privilege may be modified or terminated upon sixty (60) days'
notice to shareholders. Although initially there will be no limit on the number
of times a shareholder may exercise the exchange privilege, the Funds reserve
the right to impose such a limitation. Call or write the Funds for further
details.
REDEMPTIONS
The proceeds of a redemption may be more or less than the amount invested
and, therefore, a redemption may result in a gain or loss for Federal and New
York State and City income tax purposes. Any loss realized on the redemption of
Fund shares held, or treated as held, for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gain dividends
received on the redeemed shares.
A shareholder's account with a Fund remains open for at least one year
following complete redemption and all costs during the period will be borne by
the Fund. This permits an investor to resume investments in such Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive shareholder expense burdens,
each Fund reserves the right to adopt a policy pursuant to which it may redeem,
upon not less than 30 days' notice, shares of the Fund in an account which has a
value below a designated amount. However, any shareholder affected by the
exercise of this right will be allowed to make additional investments prior to
the date fixed for redemption to avoid liquidation of the account.
The Funds may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is closed,
other than customary weekend and holiday closings, (ii) the Securities and
Exchange Commission has by order permitted such suspension or (iii) an emergency
exists making disposal of portfolio securities or determination of the value of
the net assets of the Funds not reasonably practicable.
Although it would not normally do so, the Trust has the right to pay the
redemption price in whole or in part in securities of a Fund's portfolio as
prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act
of 1940, as amended. Under that rule, the Trust must redeem its shares for cash
except to the extent that the redemption payments to any shareholder during any
90-day period would exceed the lesser of $250,000 or 1% of a Fund's net asset
value at the beginning of such period.
FEDERAL INCOME TAXES
The Funds have elected to be treated and intend to continue to be treated
and so qualified in 1996, as regulated investment companies for each taxable
year by complying with the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") applicable to regulated investment companies so that they
will not be liable for Federal income tax with respect to amounts distributed to
shareholders in accordance with the timing requirements of the Code.
In order to qualify as a regulated investment company for a taxable year,
each Fund must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to loans of stock or securities
and gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities or other income
(including gains from options, futures or forward contracts) derived with
respect to the business of investing in stock, securities or currency; (b)
derive less than 30% of its gross income from the sale or other disposition of
stock or securities or certain other investments held less than three months
(excluding some amounts included in income as a result of certain hedging
transactions); and (c) diversify its holdings so that, at the end of each
-31-
<PAGE>
quarter of its taxable year, (i) at least 50% of the market value of a Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other stocks and
securities limited, in the case of other stocks or securities for purposes of
this calculation, in respect of any one issuer, to an amount not greater than 5%
of its assets or 10% of the voting stocks or securities of the issuer, and (ii)
not more than 25% of the value of its assets is invested in the stocks or
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
Federal income tax on taxable income (including realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code. Compliance with the "30% test" described in clause (b) above may, in
particular, limit a Fund's ability to engage in some transactions involving
options, short-term trading and stock index futures.
The amount of capital gains, if any, realized in any given year will result
from sales of securities made with a view to the maintenance of a portfolio
believed by each Fund's management to be most likely to attain such Fund's
investment objective. Such sales and any resulting gains or losses, may
therefore vary considerably from year to year. Since at the time of an
investor's purchase of shares, a portion of the per share net asset value by
which the purchase price is determined may be represented by realized or
unrealized appreciation in each Fund's portfolio or undistributed income of such
Fund, subsequent distributions (or portions thereof) on such shares may be
taxable to such investor even if the net asset value of his shares is, as a
result of the distributions, reduced below his cost for such shares and the
distributions (or portions thereof) represent a return of a portion of his
investment.
Each Fund is required to report to the Internal Revenue Service (the "IRS")
all distributions of taxable dividends and of capital gains, as well as the
gross proceeds of share redemptions. Each Fund may be required to withhold
Federal income tax at a rate of 31% ("backup withholding") from taxable
dividends (including capital gain dividends) and the proceeds of redemptions of
shares paid to non-corporate shareholders who have not furnished such Fund with
a correct taxpayer identification number and made certain required
certifications or who have been notified by the IRS that they are subject to
backup withholding. In addition, a Fund may be required to withhold Federal
income tax at a rate of 31% if it is notified by the IRS or a broker that the
taxpayer identification number is incorrect or that backup withholding applies
because of underreporting of interest or dividend income.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described in the Prospectus whether made in shares or
in cash. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions will also be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
Any loss realized upon the redemption of shares held (or treated as held)
for six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gain dividend received on the redeemed shares. Any
loss realized upon the redemption of shares within six months after receipt of
an exempt-interest dividend will be disallowed. All or a portion of a loss
realized upon the redemption of shares may be disallowed to the extent shares
are purchased (including shares acquired by means of reinvested dividends)
within 30 days before or after such redemption. Exchanges are treated as
redemptions for Federal tax purposes.
Different tax treatment is accorded to accounts maintained as IRAs,
including a penalty on early distributions. Shareholders should consult their
tax advisers for more information.
Each portfolio within the Trust will be separate for investment and
accounting purposes and will be treated as a separate taxable entity for Federal
income tax purposes. Provided that each Fund qualifies as a regulated
investment company under the Code, it will not be required to pay Massachusetts
income or excise taxes.
-32-
<PAGE>
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.
The "straddle" rules of Section 1092 of the Code may require the Funds
which are permitted to engage in such transactions to defer the recognition of
certain losses incurred on its transactions involving certain stock or
securities, futures contracts or options. Section 1092 defines a "straddle" to
include "offsetting positions" with respect to publicly traded stock or
securities. A "position" is defined to include a futures contract and an
option. In general, the Funds will be considered to hold offsetting positions
if there is a substantial diminution of its risk of loss from holding one
position by reason of its holding one or more other positions. Section 1092
generally provides that in the case of a straddle, any loss from the disposition
of a position (the "loss position") in the straddle shall be recognized for any
taxable year only to the extent that the amount of such loss exceeds the
unrealized gains on any offsetting straddle position (the "gain position") and
the unrealized gain on any successor position (which is a position that is
itself offsetting to the gain position and is acquired during a period
commencing 30 days prior to, and ending 30 days after, the disposition of the
loss position).
These special tax rules applicable to options and futures transactions
could affect the amount, timing and character of capital gain distributions to
shareholders by causing holding period adjustments, converting short-term
capital losses into long-term capital losses, and accelerating a Fund's income
or deferring its losses.
Corporate shareholders should also note that their basis in shares of the
Fund may be reduced by the untaxed portion (i.e., the portion qualifying for the
----
dividends-received deduction) of an "extraordinary dividend" if the shares have
not been held for at least two years prior to declaration of the dividend.
Extraordinary dividends are dividends paid during a prescribed period which
equal or exceed 10% of a corporate shareholder's basis in its Fund shares or
which satisfy an alternative test based on the fair market value of the shares.
To the extent dividend payments received by corporate shareholders of the Fund
constitute extraordinary dividends, such shareholders' basis in their Fund
shares will be reduced and any gain realized upon a subsequent disposition of
such shares will therefore be increased. The untaxed portion of dividends
received by such shareholders is also included in adjusted alternative minimum
taxable income in determining shareholders' liability under the alternative
minimum tax.
Each Fund is subject to a 4% nondeductible excise tax to the extent that it
fails to distribute to its shareholders during each calendar year an amount
equal to at least the sum of (a) 98% of its taxable ordinary investment income
(excluding long-term and short-term capital gain income) for the calendar year;
plus (b) 98% of its capital gain net income for the one year period ending on
October 31 of such calendar year; plus (c) any ordinary investment income or
capital gain net income from the preceding calendar year which was neither
distributed to shareholders nor taxed to a Fund during such year. Each Fund
intends to distribute to shareholders each year an amount sufficient to avoid
the imposition of such excise tax.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
Shareholders should consult their own tax advisers with respect to the tax
status of distributions from each Fund, and redemptions of shares of each Fund,
in their own states and localities. Shareholders who are not United States
persons should also consult their tax advisers as to the potential application
of foreign and U.S. taxes, including a 30% U.S. withholding tax (or lower treaty
rate) on dividends representing ordinary income to them.
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<PAGE>
Special Tax Considerations for the New York Tax-Fee Fund. The New York
Tax-Free Fund also intends to qualify to pay "exempt-interest dividends" within
the meaning of the Code by holding at the end of each quarter of its taxable
year at least 50% of the value of its total assets in the form of Municipal
Obligations. Dividends derived from interest on Municipal Obligations that
constitute exempt-interest dividends will not be includable in gross income for
Federal income tax purposes and exempt-interest dividends derived from interest
on New York Municipal Obligations will not be includable in gross income for
Federal income tax purposes or subject to New York State or City personal income
tax.
The Tax Reform Act of 1986 (the "Tax Act") and subsequent restrictive
legislation may significantly affect the supply and yields of Municipal
Obligations and New York Obligations. The Tax Act imposed new restrictions on
the issuance of Municipal Obligations and New York Obligations. As described in
the Prospectus, pursuant to the Tax Act, if the Fund invested in Municipal
Obligations and New York Municipal Obligations that are private activity bonds,
some portion of exempt-interest dividends paid by the Fund would be treated as
an item of tax preference for purposes of the Federal alternative minimum tax on
individuals and corporations. In addition, a portion of original issue discount
relating to stripped Municipal Obligations and their coupons may be treated as
taxable income under certain circumstances, as will income from repurchase
agreements and securities loans.
Exempt-interest dividends received by corporations which hold shares of the
Fund will be part of the "adjusted current earnings" of such corporations, and
will increase the "alternative minimum taxable income" of such corporations for
purposes of the alternative minimum tax on corporations.
Property and casualty insurance companies will be required to reduce their
deductions for "losses incurred" by a portion of the exempt-interest dividends
they receive for shares of the Fund. The portion of the income from the Fund
derived from bonds with respect to which a holder is a "substantial user" will
not be tax-exempt in the hands of such user.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund may not be deductible in whole or in part for
Federal or New York State or City income tax purposes. Pursuant to Treasury
Regulations, the Internal Revenue Service may deem indebtedness to have been
incurred for the purpose of purchasing or carrying shares, even though the
borrowed funds may not be directly traceable to the purchase of shares.
The Fund will determine the portion of any distribution that will qualify
as an exempt-interest dividend based on the proportion of its gross income
derived from interest on Municipal Obligations over the course of the Fund's
taxable year. Therefore, the percentage of any particular distribution
designated as an exempt-interest dividend may be substantially different from
the percentage of the Fund's gross income derived from interest on Municipal
Obligations for the period covered by the distribution.
Opinions relating to the validity of Municipal Obligations (including New
York Municipal Obligations) and to the exclusion of interest thereon from
Federal, New York State and New York City gross income are rendered by bond
counsel for each issue at the time of issuance. Neither the Trust nor its
investment adviser will review the proceedings relating to the issuance of
Municipal Obligations or the basis for such opinions.
The Fund may obtain put rights with respect to certain of its Municipal
Obligations. The Internal Revenue Service has issued published and private
rulings concerning the treatment of such put transactions for Federal income tax
purposes. Since these rulings are ambiguous in certain respects, there can be
no assurance that the Fund will be treated as the owner of the Municipal
Obligations subject to the puts or that the interest on such obligations
received by the Fund will be exempt from Federal income tax (and New York State
and City personal income tax in the case of New York Municipal Obligations). If
the Fund is not treated as the owner of the Municipal Obligations subject to the
puts, distributions of income derived from such obligations will be taxed as
ordinary income. The Fund anticipates that,
-34-
<PAGE>
in any event, it will remain qualified to pay exempt-interest dividends with
respect to interest derived from other obligations in its portfolio.
SHARES OF BENEFICIAL INTEREST
The authorized capital of the Trust consists of an unlimited number of
shares of beneficial interest having a par value of $0.001 per share. The
Declaration of Trust authorizes the Trustees to classify or reclassify any
unissued shares of beneficial interest. Pursuant to that authority, the Board
of Trustees has authorized the issuance of shares in multiple investment
portfolios.
All shares have equal voting rights and will be voted in the aggregate, and
not by portfolio, except where voting by portfolio is required by law or where
the matter involved affects only one portfolio. As used in the Prospectus and
in this Statement of Additional Information, the term "majority," when referring
to the approvals to be obtained from shareholders in connection with general
matters affecting all of the Funds (e.g., election of Trustees and ratification
- -
of independent auditors), means the vote of a majority of each Fund's
outstanding shares represented at a meeting. The term "majority", when
referring to the approvals to be obtained from shareholders in connection with
approval of the Advisory Contract or changing the fundamental policies of a
Fund, means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Vacancies on the Board of Trustees are filled by the Board of Trustees if
immediately after filling any such vacancy at least two-thirds of the Trustees
then holding office have been elected to such office by shareholders at an
annual or special meeting. In the event that at any time less than a majority
of Trustees holding office were elected by shareholders, the Board of Trustees
will cause to be held within 60 days a shareholders' meeting for the purpose of
electing trustees to fill any existing vacancies. Trustees are subject to
removal with cause by two-thirds of the remaining Trustees or by a vote of a
majority of the outstanding shares of the Trust. The Trustees are required to
promptly call a shareholders' meeting for voting on the question of removal of
any Trustee when requested to do so in writing by not less than 10% of the
outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
Each share of a Fund represents an equal proportionate interest in the Fund
with each other share of such Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Trustees. In the event of liquidation or
dissolution, shares of a Fund are entitled to receive the assets belonging to
the Fund which are available for distribution, and of any general assets not
belonging to such Fund which are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Funds.
At April 3, 1997 no person owned of record or, to the knowledge of
management beneficially owned more than 5% of the outstanding shares of any Fund
except as set forth below:
-35-
<PAGE>
Shares Held & Percent of Class
<TABLE>
<CAPTION>
Name and Address of Fixed Income Fund New York Tax-Free Fund
Holder of Record
------------------------------------------------------------------------
<S> <C> <C>
Marine Midland Bank 6,465,032 676,670
Buffalo, NY 14240 97.07% 18.62%
Total Shares Outstanding 6,660,103 3,632,812
</TABLE>
Marine Midland Bank has informed the Trust that it was not the beneficial
owner of any of the shares it held of record.
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
The Bank of New York has been retained, pursuant to a Custodian Agreement, to
act as custodian for each Fund. The Bank of New York's address is 90 Washington
Street, New York, New York 10286. Under the Custodian Agreement, the Custodian
maintains a custody account or accounts in the name of each Fund; receives and
delivers all assets for each such Fund upon purchase and upon sale or maturity;
collects and receives all income and other payments and distributions on account
of the assets of each such Fund; pays all expenses of each such Fund; receives
and pays out cash for purchases and redemptions of shares of each such Fund and
pays out cash if requested for dividends on shares of each such Fund; calculates
the daily value of the assets of the Fixed Income Fund; determines the daily net
asset value per share, net investment income and dividend rate for the Short-
Term and Fixed Income Funds; and maintains records for the foregoing services.
Under the Custodian Agreement, each such Fund has agreed to pay the Custodian
for furnishing custodian services a fee for certain administration and
transaction charges and out-of-pocket expenses.
For the period from January 1, 1995 to September 25, 1995, the New York Tax-
Free Fund paid $6,400 in custody fees to Marine Midland Bank. The New York Tax-
Free Fund paid $8,726 for custody services to Marine Midland for the year ended
December 31, 1994.
The Board of Trustees has authorized The Bank of New York in its capacity as
custodian of each such Fund to enter into Subcustodian Agreements with banks
that qualify under the Investment Company Act of 1940 to act as subcustodians
with respect to certain variable rate short-term tax-exempt obligations in each
Fund's portfolio.
BISYS Fund Services, Inc. (the"Transfer Agent") has been retained by the Trust
to act as transfer agent and dividend disbursing agent for the Funds. Under the
Agency Agreement, BISYS Fund Services, Inc. performs general transfer agency and
dividend disbursing services. It maintains an account in the name of each
shareholder of record in each Fund reflecting purchases, redemptions, daily
dividend accruals and monthly dividend disbursements, processes purchase and
redemption requests, issues and redeems shares of each Fund, addresses and mails
all communications by each Fund to its shareholders, including financial
reports, other reports to shareholders, dividend and distribution notices, tax
notices and proxy material for its shareholder meetings, and maintains records
for the foregoing services. Under the Agency Agreement, each Fund has agreed to
pay BISYS Fund Services, Inc. $25.00 per account and
-36-
<PAGE>
subaccount (whether maintained by the Adviser or a correspondent bank) per
annum. In addition, the Funds have agreed to pay BISYS Fund Services, Inc.
certain transaction charges, wire charges and out-of-pocket expenses incurred by
BISYS Fund Services, Inc.
The Fixed Income Fund paid $7,669 and $17,288, respectively, to PFPC Inc.
(BISYS' predecessor) and BISYS for transfer agency services for the year ended
December 31, 1996. The Fixed Income Fund paid $36,235 to PFPC Inc. for transfer
agency services for the year ending December 31, 1995. The Fixed Income Fund
paid $20,493, to PFPC Inc. and its predecessor, the Adviser, for transfer agency
services for the year ending December 31, 1994.
The New York Tax-Free Fund paid $11,814 and $36,768, respectively to PFPC Inc.
and BISYS for transfer agency services for the year ended December 31, 1996.
The New York Tax-Free Fund paid $63,295 and $54,827, respectively, to PFPC Inc.,
for transfer agency services for the years ending December 31, 1995 and 1994.
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to the Funds pursuant to a Fund Accounting Agreement. Under such
agreement, BISYS Fund Services, Inc. maintains the accounting books and records
for each Fund, maintains a monthly trial balance of all ledger accounts;
performs certain accounting services for the Fund, including calculation of the
net asset value per share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity. BISYS' fees for providing such services to the
Funds currently are paid under the Management and Administration Agreement.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as the independent auditors for the Funds. Ernst &
Young LLP provides audit services, tax return preparation and assistance and
consultation in connection with Securities and Exchange Commission filings.
Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York 10019.
FINANCIAL STATEMENTS
The financial statements appearing in the most current fiscal year Annual
Report to shareholders and the report thereon of the independent auditors
appearing therein, namely Ernst & Young LLP, are incorporated by reference in
this Statement of Additional Information and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
The Annual Reports to shareholders which contains the referenced statements, are
available upon request and without charge.
-37-
<PAGE>
================================================================================
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Growth and Income Fund 3435 Stelzer Road, Columbus, Ohio 43219
Small Cap Fund
Information: (800) 634-2536
HSBC ASSET MANAGEMENT AMERICAS INC.
--Investment Adviser and Co-Administrator
INVESTMENT CONCEPTS, INC.
--Sub-Adviser to the Small Cap Fund
BISYS FUND SERVICES
--Distributor
- --------------------------------------------------------------------------------
HSBC Mutual Funds Trust (the "Trust") was organized in Massachusetts on
November 1, 1989 as a Massachusetts business trust and is an open-end,
diversified management investment company with multiple investment portfolios,
including the Growth and Income Fund and the Small Cap Fund (herein referred to
individually as a "Fund" and collectively as the "Funds").
The Growth and Income Fund seeks as its investment objective to provide
investors with long-term growth of capital and current income by investing,
under ordinary market conditions, at least 65% of its total assets in common
stocks, preferred stocks and securities convertible into or with rights to
purchase common stocks. The Small Cap Fund seeks as its investment objective to
provide investors with long-term capital appreciation and, secondarily, income
by investing, under ordinary market conditions, at least 70% of its total assets
in a diversified portfolio of common stocks and securities convertible into
common stocks of small to medium-size companies. The balance of each Fund's
assets may be invested in various types of fixed income securities (and
preferred stocks with respect to the Small Cap Fund) and in money market
instruments. See "Investment Objectives, Policies and Risk Factors." The Funds
may also utilize certain other investment practices to seek to enhance return or
to hedge against fluctuations in the value of portfolio securities. See
"Investment Objectives, Policies and Risk Factors-Other Investment Practices".
The Funds' investment adviser is HSBC Asset Management Americas Inc. (the
"Adviser"), the North American investment affiliate of HSBC Holdings plc
(Hongkong and Shanghai Banking Corporation) and Marine Midland Bank. Investment
Concepts, Inc. serves as sub-adviser to the Small Cap Fund. See "Management of
the Funds" in this Prospectus.
Prospective investors should be aware that shares of the Funds are not an
obligation of or guaranteed or endorsed by HSBC Holdings plc or its affiliates.
In addition, such shares are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency and may involve
investment risks, including the possible loss of principal.
Shares of the Funds are offered for sale primarily through its Distributor
as an investment vehicle for institutions, corporations, fiduciaries and
individuals. Certain broker-dealers, banks, financial institutions and
corporations (the "Participating Organizations") have agreed to act as
shareholder servicing agents for investors who maintain accounts at these
Participating Organizations and to perform certain services for the Funds.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Funds. A Statement of Additional Information
(the "SAI"), dated April 29, 1997, containing additional detailed information
about the Funds, has been filed with the Securities and Exchange Commission and
is hereby incorporated by reference into this Prospectus. A copy is available
without charge and can be obtained by writing the Trust at the above address, or
calling the telephone number listed above.
--------------------------
This Prospectus should be read and retained for ready reference to
information about the Funds.
--------------------------
THESE SECURITIES HAVE 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.
April 29, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Summary of Annual Fund Operating
Expenses ............................................................. 2
Financial Highlights ...................................................... 4
Investment Objectives, Policies and Risk
Factors .............................................................. 6
Investment Restrictions ................................................... 17
Management of the Funds ................................................... 18
Transactions with Affiliates .............................................. 23
Determination of Net Asset Value .......................................... 23
Purchase of Shares ........................................................ 23
Redemption of Shares ...................................................... 27
Exchange Privilege ........................................................ 29
Dividends, Distributions and Taxes ........................................ 29
Account Services .......................................................... 30
Transfer Agency and Fund Accounting
Services ............................................................. 31
Custodian ................................................................. 31
Performance Information ................................................... 31
Shares of Beneficial Interest ............................................. 32
</TABLE>
----------
SUMMARY OF ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
The purpose of the following information is to assist an investor in
understanding the costs and expenses that an investor in the Funds would bear
directly or indirectly. The information is based on expenses for each Fund for
the fiscal year ended December 31, 1996 as adjusted for estimated other
operating expenses and voluntary reductions of investment advisory,
administration, co-administration and 12b-1 fees.
<TABLE>
<CAPTION>
Growth and
Shareholder Transaction Expenses: Income Small Cap
---------- ---------
<S> <C> <C>
Maximum sales charge imposed on purchases of shares of the Funds
(as a percentage of offering price)............................................. 5.00% 5.00%
Certain investors will not be subject to the sales charge.
See "Purchase of Shares" in this Prospectus
Annual Fund Operating Expenses:
Management Fees.................................................................... 0.55% 0.70%
12b-1 Fees (net of fees not imposed)*.............................................. 0.03% 0.03%
Other Expenses (net of fees and expenses not imposed)
Administrative Services Fee**................................................... 0.10% 0.10%
Co-Administrative Services Fee***............................................... 0.00% 0.00%
Other Operating Expenses........................................................ 0.16% 0.20%
---- ----
Total Fund Operating Expenses (net of fees and expenses not imposed)****........... 0.84% 1.03%
---- ----
Total Fund Operating Expenses Before
Non-Imposition of Fees and Expenses .......................................... 1.43% 1.47%
==== ====
</TABLE>
Investors should be aware that the above table is not intended to reflect
in precise detail the fees and expenses associated with an individual
shareholder's own investment in the Funds. Rather, the table has been provided
only to assist investors in gaining a more complete understanding of fees,
charges and expenses. For a more detailed discussion of these matters, investors
should refer to the appropriate sections of this Prospectus.
2
<PAGE>
The following example should not be considered a representation of past or
future expenses. The expenses set forth above and example below reflect the
non-imposition of certain fees and expenses. The actual expenses may be greater
or less than those shown. The following example assumes a 5% annual return;
however the Funds' actual return will vary and may be greater or less than 5%.
Example:
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and the reinvestment of all dividends and distributions:++
<TABLE>
<CAPTION>
Growth
and
Income Small Cap
------ ---------
<S> <C> <C>
1 year........................................ $ 58 $ 60
3 years....................................... $ 75 $ 81
5 years....................................... $ 94 $104
10 years...................................... $150 $170
</TABLE>
- ----------
* The fee under each Fund's Distribution Plan and Agreement is calculated on
the basis of the average daily net assets at an annual rate not to exceed
0.50% and 0.35% for the Growth and Income Fund and Small Cap Fund,
respectively. See "Management of the Funds--Distribution Plan and
Agreement."
** Reflects administrative fees not imposed due to a voluntary waiver by BISYS
Fund Services of 0.05% for each Fund. See "Management of the
Funds--Administration."
*** Reflects co-administrative fees of 0.03% and shareholder servicer
assistance fees of 0.04% voluntarily waived by the Adviser for each Fund.
"See Management of the Fund--Administrator and Shareholder Servicer
Assistant" in this Prospectus.
**** Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Participating Organization may be charged
additional fees by such Participating Organization. The Funds may also pay
fees to Participating Organizations for handling recordkeeping and certain
administrative services for the customers who invest in the Funds through
accounts maintained at the Participating Organization. The payment will not
exceed 0.35% of the average daly net assets maintained by such
Participating Organization. See "Management of the Funds--Servicing
Agreements."
+ Includes, among other things, Rule 12b-1 fees at the maximum rate of 0.20%.
++ Includes a maximum sales charge from which certain shareholders may be
exempt. See "Purchase of Shares."
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following supplementary financial information for each of the five
years in the period ended December 31, 1996 with respect to the Growth and
Income Fund and for each of the four years in the period ended December 31,
1996, with respect to the Small Cap Fund has been audited by Ernst & Young LLP
whose report thereon appears in the 1996 Annual Report to Shareholders. The
supplementary financial information for each of the three years in the period
ended December 31, 1991 also has been audited by Ernst & Young LLP whose report
thereon was unqualified. The supplementary financial information for the year
ended December 31, 1988 and prior has been audited by other auditors whose
report also was unqualified. This information should be read in conjunction with
the financial statements and notes thereto.
Selected data for a share of each Fund outstanding throughout each period:
Growth and Income Fund
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ........................ $14.77 $11.93 $12.87 $12.02 $13.12 $10.77 $11.59 $10.38 $9.56 $10.32
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Income From Investment Operations:
- ----------------------------------
Net investment income ............ 0.18 0.30 0.29 0.33 0.15 0.21 0.32 0.41 0.38 0.31
Net realized and unrealized
gain/(loss) on investments ..... 2.46 3.64 (0.67) 1.00 0.80 3.21 (0.82) 2.21 1.09 (0.27)
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Total from investment operations 2.64 3.94 (0.38) 1.33 0.95 3.42 (0.50) 2.62 1.47 (0.04)
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Less Distributions from:
- ------------------------
Net investment income ............ (0.18) (0.30) (0.29) (0.33) (0.15) (0.21) (0.32) (0.38) (0.45) (0.55)
Net realized gains ............... (0.95) (0.80) (0.15) (0.15) (1.90) (0.86) (0.00) (1.03) (0.20) (0.25)
Excess of current year net
realized gain on investments ... -- -- (0.12) -- -- -- -- -- -- --
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Total distributions ............ (1.13) (1.10) (0.56) (0.48) (2.05) (1.07) (0.32) (1.41) (0.65) (0.80)
-------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Net asset value, end of period ...... $16.28 $14.77 $11.93 $12.87 $12.02 $13.12 $10.77 $11.59 $10.38 $9.56
======== ======= ======= ======= ====== ====== ====== ====== ====== ======
Total Return (a) .................... 17.90% 33.11% (2.97%) 11.23% 7.74% 31.92% (4.41% 25.56% 15.52% (0.17%)
Ratios/Supplemental Data:
- -------------------------
Net assets (000), end of period .. $140,688 $66,062 $64,985 $77,718 $3,609 $4,798 $4,041 $4,334 $3,863 $5,517
Ratio of expenses
(without fee waivers) to
average net assets* ............ 0.96% 0.97% 0.86% 0.88% 2.29% 2.18% 2.86% 2.36% 0.29% 0.19%
Ratio of expenses
(with fee waivers) to
average net assets ............. 0.85% 0.94% 0.78% 0.23% 1.68% 1.40% 1.19% 0.47% 0.29% 0.19%
Ratio of net investment income
(without fee waivers) to
average net assets* ............ 1.32% 2.03% 2.17% 2.30% 0.51% 0.91% 1.23% 1.61% 3.17% 2.65%
Ratio of net investment income
(with fee waivers) to
average net assets ............. 1.43% 2.06% 2.25% 2.95% 1.12% 1.69% 2.90% 3.50% 3.17% 2.65%
Portfolio turnover rate .......... 61.68% 52.77% 23.31% 14.25% 54.99% 77.11% 45.21% 50.47% 49.11% 163.56%
Average Commission Rate Paid(b) .. $0.0572 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ----------
* During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Excludes sales charge.
(b) Represents the total dollar amount of commissions paid on portfolio
transactions for the twelve months ended December 31, 1996, divided by
total number of portfolio shares purchased and sold for which commissions
were charged. Disclosure is not required for periods prior to December 31,
1996.
4
<PAGE>
Small Cap Fund
<TABLE>
<CAPTION>
For the Period
For the Year Ended December 31, January 4,
--------------------------------------- 1993(a) to
1996 1995 1994 December 1993
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 14.46 $ 11.90 $ 12.29 $ 10.00
------- ------- ------- -------
Income From Investment Operations:
- ----------------------------------
Net investment loss ......................................... (0.04) (0.12) (0.07) (0.05)
Net realized and unrealized
gain/(loss) on investments ................................ 2.25 3.24 (0.32) 2.42
------- ------- ------- -------
Total from investment operations ........................ 2.21 3.12 (0.39) 2.37
------- ------- ------- -------
Less Distribution from:
- -----------------------
Net realized capital gains .................................. (0.09) (0.56) -- (0.08)
------- ------- ------- -------
Net asset value, end of period ................................ $ 16.58 $ 14.46 $ 11.90 $ 12.29
======= ======= ======= =======
Total Return (b) .............................................. 15.29% 26.20% (3.17)% 23.74%(d)
Ratios/Supplemental Data:
- -------------------------
Net assets (000), end of period ............................. $76.668 $26,036 $24,308 $17,659
Ratio of expenses (without fee waivers)
to average net assets* .................................... 1.15% 1.35% 1.28% 1.58%(c)
Ratio of expenses (with fee waivers)
to average net assets ..................................... 1.04% 1.33% 1.23% 1.12%(c)
Ratio of net investment loss (without fee waivers)
to average net assets* .................................... (0.46)% (0.87)% (0.73)% (0.97)%(c)
Ratio of net investment loss (with fee waivers)
to average net assets ..................................... (0.35)% (0.85)% (0.68)% (0.51)%(c)
Portfolio turnover rate ..................................... 35.73% 29.86% 20.17% 5.96%
Average Commission Rate Paid (e) .............................. $0.0635 N/A N/A N/A
</TABLE>
- ----------
* During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Commencement of operations.
(b) Excludes sale charge.
(c) Annualized.
(d) Not annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions for the twelve months ended December 31, 1996, divided by
total number of portfolio shares purchased and sold for which commissions
were charged. Disclosure is not required for periods prior to December 31,
1996.
5
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
Growth and Income Fund
Investment Objective
The investment objective of the Growth and Income Fund is to provide
investors with long-term growth of capital and current income by investing
primarily in common stocks, preferred stocks and securities convertible into or
with rights to purchase common stocks ("equity securities"). There is no
assurance that this objective will be attained.
The Growth and Income Fund's investment objective is fundamental and cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities as defined in the SAI. The other investment
policies and practices of the Growth and Income Fund, unless otherwise noted,
are not fundamental and may therefore be changed by a vote of the Board of
Trustees without shareholder approval.
Investment Policies and Risk Factors
In selecting securities for the portfolio of the Growth and Income Fund,
the Adviser looks for securities that appear to be undervalued, some of which
will be income-producing. To meet the Growth and Income Fund's investment
objective of growth of capital, the Adviser will 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 been reflected yet in the price of the securities. In
order to increase the income generated by the Growth and Income Fund's
portfolio, the Adviser looks for securities that provide current dividends or,
in the opinion of the Adviser, have a potential for dividend growth in the
future. In addition, the Growth and Income 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 Growth and Income Fund may use stock index futures, related options
and options on stock indices for the sole purpose of hedging the portfolio. See
"Other Investment Practices of the Funds" for more information.
The Growth and Income Fund will place greater emphasis on capital
appreciation as compared to income, although changes in market conditions and
interest rates will cause the Growth and Income Fund to vary the emphasis of
these two elements of its investment program in order to meet its investment
objective. For example, in a period of rising interest rates, the Adviser may
decide to emphasize the investment objective of current income by investing in
money market investments.
During ordinary market conditions, at least 65% of the Growth and Income
Fund's total assets will be invested in equity securities, and it is expected
that the percentage will ordinarily be much higher. Most of the Growth and
Income 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 Growth and Income 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. Criteria for
selecting particular securities are expected to include the issuer's managerial
strength, competitive position, profit and earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value.
6
<PAGE>
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.
The Growth and Income 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
Growth and Income Fund may also invest up to 5% of its total assets in the debt
obligations of foreign issuers (see "Other Investment Practices of the Funds" in
this Prospectus for more information). Investment grade bonds, for example, are
those rated "Baa" or better by Moody's Investors Service, Inc. ("Moody's") or
"BBB" or better by Standard & Poor's Corporation ("S&P") or of a comparable
rating by another nationally recognized statistical rating organization or, if
unrated, determined by the Adviser to be of comparable investment quality. While
"Baa"/"BBB" securities and comparable unrated securities may produce a higher
return, they are subject to a greater degree of market fluctuation and credit
risks than the higher quality securities in which the Fund may invest and may be
regarded as having speculative characteristics as well. For a complete
description of the ratings of Moody's and S&P, see the Appendix to the SAI.
The types of debt obligations in which the Growth and Income 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. See "Other
Investment Practices of the Funds" in this Prospectus for further information
concerning these investments.
As a result of investments in fixed income securities, the net asset value
of the Growth and Income Fund may be adversely affected in response to
fluctuations in prevailing interest rates and resulting changes in the value of
its fixed income portfolio securities. When interest rates decline, the value of
fixed income securities already held in the Growth and Income Fund's portfolio
can generally be expected to rise. Conversely, when interest rates rise, the
value of existing fixed income portfolio security holdings can generally be
expected to decline. The risk of these fluctuations increases in the case of
fixed income securities with longer maturities. Consequently, the Growth and
Income Fund will not invest in any fixed income security with a remaining
maturity in excess of five years.
The Growth and Income 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 Growth and Income 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 of the Adviser. During times when the Growth and Income Fund is
maintaining a temporary defensive posture, it may be unable to achieve fully its
investment objective.
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The foregoing investment policies and those additional policies described
under "Other Investment Practices of the Funds" in this Prospectus with respect
to the Growth and Income Fund, unless otherwise noted, are not fundamental and
may be changed by a vote of the Board of Trustees of the Trust without
shareholder approval.
Small Cap Fund
Investment Objective
The investment objective of the Small Cap Fund is to seek long-term capital
appreciation and, secondarily, income by investing primarily in a diversified
portfolio of common stocks and securities convertible into common stocks of
small to medium-size companies with an initial market capitalization of $500
million or less at the time of purchase by the Fund. The universe of small to
medium-size companies includes those companies with market capitalizations of up
to $5 billion. The inherent risks of small to medium-size companies are
two-fold: business risk and market risk. Business risk refers to the possibility
that a company may do poorly due to competitive or financial factors. Market
risk refers mainly to the relatively small number of shares publicly owned as
compared to larger companies.
The Small Cap Fund's investment objective is fundamental and cannot be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities as defined in the SAI. The other investment
policies and practices of the Small Cap Fund, unless otherwise noted, are not
fundamental and may therefore be changed by a vote of the Board of Trustees
without shareholder approval.
Investment Policies and Risk Factors
The Small Cap Fund will tend to utilize a "bottom-up" approach to
securities selection. In this analysis, emphasis is placed upon the prospects of
each individual company rather than on its sector prospects. Particular
attention will be focused upon the prospects of above market earnings growth.
Other characteristics will include return on equity, product profile, condition
of the balance sheet and company management. The Small Cap Fund primarily seeks
long-term return from capital appreciation. The Fund will be managed in a manner
that seeks to provide the same level of income as a growth fund. Also, the Small
Cap Fund will attempt to achieve growth over a period of years that is greater
than that of an income fund. Depending upon the performance of the Small Cap
Fund's investments, the net asset value per share of such Fund may increase or
decrease.
Under normal market conditions, the Small Cap Fund will invest at least 70%
of the value of its total assets in common stocks and securities convertible
into common stocks of companies believed by the Adviser to be characterized by
sound management and the ability to finance expected growth.
The Small Cap Fund may also invest up to 30% of the value of its total
assets in preferred stocks, corporate bonds, notes, warrants, debentures, zero
coupon securities, asset-backed and mortgage-related securities, and cash
equivalents. Such securities will be rated at least "A" by Moody's or S&P, or,
if not rated, deemed to be of comparable quality by the Adviser.
In addition to the general risks inherent in investing in common stock, the
Fund's investments in fixed-income investments, if any, may adversely affect the
net asset value of the Small Cap Fund due to fluctuations in prevailing interest
rates and resulting changes in the value of such investments. When interest
rates decline, the value of fixed
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securities investments already held in the Small Cap Fund's portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of existing fixed income portfolio security holdings can generally be expected
to decline. The risk of these fluctuations increases in the case of fixed income
securities with longer maturities. Consequently, the Small Cap Fund will not
invest in any fixed income security with a remaining maturity in excess of five
years.
"Cash equivalents" are short-term, interest-bearing instruments or
deposits. The purpose of cash equivalents is to provide liquidity and income at
money market rates while minimizing the risk of decline in value to the maximum
extent possible. The instruments may include, but are not limited to, commercial
paper, domestic and Eurodollar certificates of deposit, repurchase agreements,
bankers' acceptances, United States Treasury Bills, variable and floating rate
demand and master demand notes, agency discount notes, bank money market deposit
accounts and money market mutual funds. The Small Cap Fund will only purchase
commercial paper rated at the time of purchase A-1 or better by S&P, Prime-1 or
better by Moody's or F-1 or better by Fitch Investors Service ("Fitch") or, if
not rated, deemed to be of comparable quality by the Adviser. See the Appendix
to the SAI for an explanation of these ratings. During temporary defensive
periods as determined by the Adviser, the Small Cap Fund may hold up to 100% of
its total assets in cash equivalents.
The foregoing investment policies and those additional policies described
under "Other Investment Practices of the Funds" in this Prospectus with respect
to the Small Cap Fund, unless otherwise noted, are not fundamental and may be
changed by a vote of the Board of Trustees of the Trust without shareholder
approval.
Other Investment Practices of the Funds
Lending of Portfolio Securities. Each Fund may lend its securities if such
loans are secured continuously by cash or equivalent collateral or by a letter
of credit in favor of such Fund at least equal at all times to 102% of the
market value of the securities loaned plus interest or dividends. While such
securities are on loan, the borrower will pay the Fund the amount of any income
accruing thereon, or, in some cases, a separate fee. Each Fund will not lend
securities having a value which exceeds 10% of the current value of its total
assets. 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.
Investment Company Securities. Each Fund may invest up to 10% of its total
assets in securities issued by other investment companies. Such securities will
be acquired by the Funds within the limits prescribed by the Investment Company
Act of 1940, as amended (the "1940 Act"), which include a prohibition against a
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 fees.
U.S. Government Securities. Each 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
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(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, each 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.
Corporate Debt Obligations. Each Fund may invest in U.S. dollar-denominated
obligations issued or guaranteed by U.S. corporations or U.S. commercial banks,
U.S. dollar denominated obligations of foreign issuers, including those
described below under "Foreign Securities and American Depository Receipts."
Such debt obligations include, among others, bonds, notes, debentures,
commercial paper and variable rate demand notes. Bank obligations include, but
are not limited to certificates of deposit, bankers' acceptances, and fixed time
deposits. The Adviser, in choosing corporate debt securities on behalf of each
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 to
such issuer's country; and (iii) other considerations the Adviser deems
appropriate. Investment in obligations of foreign issuers may present a greater
degree of risk than investment in domestic securities (see "Foreign Securities
and American Depository Receipts" below for more details).
Mortgage-Related Securities. Each Fund may invest in various
mortgage-related securities. Mortgage loans made by banks, savings and loan
institutions and other lenders are often assembled into pools, the interests in
which may be issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (but not the market value of the mortgage-related securities
themselves). Interests in such pools are called "mortgage-related securities" or
"mortgage-backed securities."
Most mortgage securities are pass-through securities, which means that they
provide investors with payments consisting of both principal and interest on
mortgages in the underlying mortgage pool. Investors receive a pro rata share of
both regular interest and principal payments (less issuer fees and applicable
loan servicing fees), as well as unscheduled early prepayments on the underlying
mortgage pool. The dominant issuers or guarantors of mortgage securities today
are the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). GNMA guarantees mortgage-backed securities composed of U.S.
Government guaranteed or insured (Federal Housing Authority, Veterans
Administration or Farmers Home Administration) mortgages originated by mortgage
bankers, commercial banks and savings and loan associations. FNMA and FHLMC
guarantee mortgage securities are composed of pools of conventional and
Federally insured or guaranteed residential mortgages obtained from various
entities, including savings and loan associations, savings banks, commercial
banks, credit unions and mortgage bankers.
The principal and interest on GNMA pass-through securities are guaranteed
by GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal,
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while FHLMC currently guarantees timely payment and ultimate payment of interest
and either timely payment of principal or eventual payment of principal
depending upon the date of issue. Securities issued by FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, their close
relationship with the U.S. Government makes them high quality securities with
minimal credit risks. The yields provided by these mortgage securities have
historically exceeded the yields on other types of U.S. Government securities.
However, like most mortgage-backed securities, the experienced yield is
sensitive to the rate of principal payments (including prepayments). Prepayments
on underlying mortgages result in a loss of anticipated interest, and all or
part of a premium if any has been paid, and the actual yield (or total return)
to the Fund may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise, the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities. 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 a Fund is invested 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
weighted average life.
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, each 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, a 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. Each
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.
Each 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 Funds' ability to invest in such CMOs or REMICs will
be limited. Neither Fund will invest in the residual interests of REMICs. See
"Investment Policies and Risk Factors" in the SAI.
The Adviser expects that new types of mortgage-related securities may be
developed and offered to investors. The Adviser will, consistent with each
Fund's investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
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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 a 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
a 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. Because of these factors, each Fund's
share value and yield are not guaranteed and will fluctuate, and there can be no
assurance that each Fund's investment objective will be achieved. The magnitude
of these fluctuations generally will be greater when the average maturity of a
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 Funds' investment objectives, policies and quality
standards, each Fund may invest 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 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. Each 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.
Each 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.
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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. Each 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. A 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 that Fund's net assets.
Each Fund may also buy variable rate master demand notes. The terms of the
obligations permit a 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. A 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.
Because the notes are direct lending arrangements between a Fund and 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,
a 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 by the Growth and Income Fund in money market
instruments and investment by the Small Cap Fund in cash equivalents, as
described above.
Repurchase Agreements. Each Fund may invest in securities pursuant to
repurchase agreements, whereby the seller agrees to repurchase such securities
at a 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, each 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, each Fund's repurchase agreements will provide that the
value of the collateral underlying the repurchase agreement will always be at
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, each
Fund will seek to liquidate such collateral. However, the exercise of a 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, each
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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 each Fund not
to enter into repurchase agreements exceeding in the aggregate 10% of the market
value of each Fund's total assets.
Reverse Repurchase Agreements. The Small Cap Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
the Small Cap Fund would sell portfolio securities to financial institutions
such as banks and broker-dealers, and agree to repurchase them at a mutually
agreed upon date and price. The Small Cap Fund intends to enter into reverse
repurchase agreements only to avoid selling securities during market conditions
deemed unfavorable by the Adviser to meet redemptions. At the time the Small Cap
Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as cash or liquid securities, consistent with the
Fund's investment objective having a value not less the 100% of the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Small Cap
Fund may decline below the price at which such Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings by
an investment company under the 1940 Act.
When-Issued and Delayed-Delivery Securities. Each 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 securities so purchased are subject to market
fluctuation during this period and no income accrues to a Fund until settlement
takes place. To facilitate such acquisitions, a Fund will maintain with the
custodian a separate account with a segregated portfolio of liquid securities in
an amount at least equal to such commitments. On the delivery dates for such
transactions, each Fund will meet its obligations from maturities or sales of
the securities held in the separate account and/or from cash flow. It is the
current policy of each 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.
Writing Covered Calls. Each Fund may seek to earn premiums by writing
covered call options against some of the securities in its portfolio. A call
option is "covered" if a 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. Until an option lapses or is cancelled by a closing transaction, the
maximum sales price a Fund can realize on the underlying security is limited to
the strike price. The Fund continues to bear the risk of a decline in the market
price of the security during the option period, although the decline in value
would be mitigated by the amount of the premium received for the call. The
aggregate value of the securities subject to options written by each Fund may
not exceed 25% of the value of such Fund's net assets.
Futures, Related Options and Options on Stock Indices. Each Fund may
attempt to reduce the risk of investment in equity securities by hedging a
portion of its portfolio through the use of certain futures transactions,
options on futures traded on a board of trade and options on stock indices
traded on national securities exchanges. In addition, each Fund may hedge a
portion of its portfolio by purchasing such instruments during a market advance
or when the Adviser anticipates an advance. In attempting to hedge a portfolio,
a Fund may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts, and engage in related
closing transactions.
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A stock index assigns relative weightings to the common stocks in the
index, and the index generally fluctuates with changes in the market values of
these stocks. 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. Each 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.
In the case of options on stock index futures, the holder of the option
pays a premium and receives the right, upon exercise of the option at a
specified price during the option period, to assume the option writer's position
in a stock index futures contract. If the option is exercised by the holder
before the last trading day during the option period, the option writer delivers
the futures position, as well as any balance in the writer's futures margin
account. If it is exercised on the last trading day, the option writer delivers
to the option holder cash in an amount equal to the difference between the
option exercise price and the closing level of the relevant index on the date
the option expires. In the case of options on stock indices, the holder of the
option pays a premium and receives the right, upon exercise of the option at a
specified price during the option period, to receive cash equal to the dollar
amount of the difference between the closing price of the relevant index and the
option exercise price times a specified multiple, called the "multiplier."
During a market decline or when the Adviser anticipates a decline, each
Fund may hedge a portion of its portfolio by selling futures contracts or
purchasing puts on such contracts or on a stock index in order to limit exposure
to the decline. This provides an alternative to liquidation of securities
positions and the corresponding costs of such liquidation. Conversely, during a
market advance or when the Adviser anticipates an advance, each Fund may hedge a
portion of its portfolio by purchasing futures, options on these futures or
options on stock indices. This affords a hedge against a Fund not participating
in a market advance at a time when it is not fully invested and serves as a
temporary substitute for the purchase of individual securities which may later
be purchased in a more advantageous manner.
The Funds' 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 Funds' portfolios diverge from the composition of the relevant index. Such
imperfect correlation may prevent the Funds from achieving the intended hedge or
may expose the Funds to risk of loss. In addition, if the Funds purchase futures
to hedge against market advances before they can invest in common stock in an
advantageous manner and the market declines, the Funds might create a loss on
the futures contract. Particularly in the case of options on stock index futures
and on stock indices, the Funds' ability to establish and maintain positions
will depend on market liquidity. The successful utilization of hedging and risk
management transactions requires skills different from those needed in the
selection of the Funds' portfolio securities. The Funds believe
15
<PAGE>
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 Funds' ability to effectively hedge their securities. The
Funds will enter into an option or futures position only if there appears to be
a liquid secondary market for such options or futures.
Except as otherwise provided in this Prospectus, the Funds are permitted to
engage in bona fide hedging transactions (as defined in the rules and
regulations of the Commodity Futures Trading Commission) without any
quantitative limitations. Futures and related option transactions which are not
for bona fide hedging purposes may be used provided the total amount of the
initial margin and any option premiums attributable to such positions does not
exceed 5% of each Fund's liquidating value after taking into account unrealized
profits and unrealized losses, and excluding any in-the-money option premiums
paid. The Funds will not market, and are not marketing, themselves as commodity
pools or otherwise as vehicles for trading in futures and related options. The
Funds will segregate assets to cover the futures and options.
Portfolio Turnover. The Funds generally will not engage in the trading of
securities for the purpose of realizing short-term profits, but will adjust
their portfolios as they deem advisable in view of prevailing or anticipated
market conditions to accomplish their investment objective. For example, a Fund
may sell portfolio securities in anticipation of an adverse market movement.
Other than for tax purposes, frequency of portfolio turnover will not be a
limiting factor if a Fund considers it advantageous to purchase or sell
securities. The Small Cap Fund and the Growth and Income Fund do not anticipate
that their annual portfolio turnover rates will exceed 100%.
Foreign Securities and American Depository Receipts ("ADRs"). Each Fund may
invest in foreign securities through the purchase of ADRs and may also invest
directly in certain debt securities of foreign issuers. The foreign debt
securities in which the Small Cap Fund may invest include securities issued by
foreign branches of U.S. banks and foreign banks, Canadian commercial paper and
Europaper (U.S. dollar denominated commercial paper of a foreign issuer). The
foreign debt securities in which the Growth and Income Fund may invest include
debt obligations of foreign banks, corporations and governmental entities, and
supranational organizations, such as the International Bank for Reconstruction
and Development, the European Economic Community and the Inter-American
Development Bank, among others. Each Fund's investment in foreign debt
securities is limited to 5% of the total assets of each Fund.
Investment in foreign securities is subject to special risks, such as
future adverse political and economic developments, possible seizure,
nationalization, or expropriation of foreign investments, less stringent
disclosure requirements, the possible establishment of exchange controls or
taxation at the source, or the adoption of other foreign governmental
restrictions. Investors should note that there is no uniformity among foreign
accounting standards.
As noted above, each Fund may also invest in securities represented by
ADRs. ADRs are dollar-denominated receipts generally issued by domestic banks,
which represent the deposit with the bank of a security of a foreign issuer, and
which are publicly traded on exchanges or over-the-counter in the United States.
The Funds may invest
16
<PAGE>
in both sponsored and unsponsored ADR programs. There are certain risks
associated with investments in unsponsored ADR programs. Because the non-U.S.
company does not actively participate in the creation of the ADR program, the
underlying agreement for service and payment will be between the depository and
the shareholder. The company issuing the stock underlying the ADRs pays nothing
to establish the unsponsored facility, as fees for ADR issuance and cancellation
are paid by brokers. Investors directly bear the expenses associated with
certificate transfer, custody and dividend payment.
In an unsponsored ADR program, there also may be several depositories with
no defined legal obligations to the non-U.S. company. The duplicate depositories
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 ADRs
there is always the risk of loss due to currency fluctuations. The Funds will
not invest more than 20% of their total assets in ADRs.
Illiquid Securities. The Small Cap Fund will not invest in illiquid
securities if immediately after such investment more than 15% of the Fund's net
assets (taken at market value) would be invested in such securities. For this
purpose, illiquid securities include (a) securities that are illiquid by virtue
of legal or contractual restrictions on resale or the absence of a readily
available market, (b) participation interests in loans that are not subject to
puts and (c) repurchase agreements not terminable within seven days. See
"Repurchase Agreements" above. Securities that have legal or contractual
restrictions on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. Consequently, investments in
restricted securities eligible for resale pursuant to Rule 144A of the
Securities Act of 1933 which have been determined to be liquid by the Fund's
Board of Trustees based upon the trading markets for the securities will not be
included for purposes of this limitation.
The Growth and Income Fund will not 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 10% of the market value of the
Fund's net assets would be so invested. The Funds will not invest more than 10%
of their net assets in Rule 144A securities.
INVESTMENT RESTRICTIONS
The Statement of Additional Information contains more information on the
Funds' Investment Policies, and also identifies the restrictions on the Funds'
investment activities, which provide among other things:
Growth and Income Fund
The Growth and Income Fund shall not invest more than 5% of its total
assets taken at market value in the securities (including securities subject to
repurchase agreements) of any one issuer other than securities issued or
guaranteed by the United States Government, its agencies or instrumentalities.
The Growth and Income Fund shall not 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
investments of the Growth and Income Fund in that industry would exceed 25% of
the current value of the total assets of the Fund, except that there is no
limitation with respect to investments in obligations of the United States
Government, its agencies or instrumentalities which are backed by the full faith
and credit of the United States.
17
<PAGE>
The Growth and Income Fund shall not borrow money, except that it may
borrow from banks as a temporary measure for emergency purposes where such
borrowing would not exceed 5% of the total assets (including amount borrowed)
taken at market value. The Growth and Income Fund shall not purchase securities
while its borrowings exceed 5% of its total assets.
Small Cap Fund
The Small Cap Fund shall not purchase a security if, as a result, with
respect to 75% of its portfolio, (i) more than 5% of the value of its total
assets would be invested in any one issuer, or (ii) it would hold more than 10%
of any class of securities of such issuer or more than 10% of the outstanding
voting securities of the issuer. There is no limit on the percentage of assets
that may be invested in U.S. Treasury bills, notes, or other obligations issued
or guaranteed by the U.S. Government or its agencies and instrumentalities.
The Small Cap Fund shall not purchase a security if, as a result, more than
25% of the value of its total assets would be invested in securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) this limitation shall not apply to obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities; (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.
The Small Cap Fund shall not borrow money or issue senior securities,
except that it may borrow from banks or enter into reverse repurchase agreements
for temporary purposes in amounts up to 10% of the value of its total assets at
the time of such borrowing; or mortgage, pledge, or hypothecate any assets,
except in connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of its total assets at
the time of its borrowing. The Small Cap Fund shall not purchase securities
while its borrowings (including reverse repurchase agreements) exceed 5% of its
total assets.
The investment restrictions referred to above are fundamental and may be
changed only when permitted by law and approved by a majority of the outstanding
voting securities of the Funds. As used in this Prospectus, such approval means
approval of the lesser of (i) the holders of 67% or more of the shares
represented in a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy or (ii) the holders of more than 50% of
the outstanding shares.
MANAGEMENT OF THE FUNDS
The property, affairs and business of the Funds are managed by the Board of
Trustees. The Trustees elect officers who are charged with the responsibility
for the day-to-day operations of the Funds and the execution of policies
formulated by the Trustees. Information about the Trustees as well as the
Trust's executive officers, may be found in the SAI under the heading
"Management -- Trustees and Officers".
Investment Adviser
The Trust retains HSBC Asset Management Americas Inc. (the "Adviser") to
act as the investment adviser for each of its Funds. The Adviser is the North
American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai
Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York,
18
<PAGE>
New York 10177. At December 31, 1996, the Adviser managed over $3.8 billion of
assets of individuals, pension plans, corporations and institutions.
The HSBC Asset Management Equity Team, under the direct supervision of Mr.
Paul Guidone, Chief Investment Officer of the Adviser, is responsible for the
day-to-day management of the Growth and Income Fund's portfolio. Mr. Guidone has
been with the Adviser since 1994.
Pursuant to the Advisory Contract, the Adviser furnishes continuous
investment guidance to the Trust consistent with each Fund's investment
objective and policies and provides administrative assistance in connection with
the operation of each Fund. Information regarding the investment performance of
each Fund is contained in each Fund's Annual Report dated December 31, 1996
which may be obtained, without charge, from the Trust.
Sub-Adviser to the Small Cap Fund
The Adviser retains Investment Concepts, Inc. ("ICI") to serve as
sub-adviser to the Small Cap Fund. ICI is a subsidiary of BancOklahoma Trust
Company ("BOTC"), the largest trust company in the State of Oklahoma. BOTC is a
subsidiary of Bank of Oklahoma, N.A. ("BOK") which in turn is a subsidiary of
Bank of Oklahoma Corporation ("BOK Financial"). BOK Financial is controlled by
its principal shareholder, George B. Kaiser. Through its subsidiaries, BOK
Financial provides a full array of trust, commercial banking and retail banking
services. Its non-bank subsidiaries engage in various bank-related services,
including mortgage banking and providing credit life, accident, and health
insurance on certain loans originated by its subsidiaries.
ICI maintains an office in Tulsa, Oklahoma, and offers a variety of
services for both corporate and individual customers. BOTC also serves as
transfer agent and registrar for corporate securities, paying agent for
dividends and interest, and indenture trustee of bond issues. At December 31,
1996, BOTC was responsible for approximately $7.5 billion in assets including
approximately $3.3 billion in assets under management and possessed total
capital, surplus and undivided profits of $9.9 million.
Mr. Joe P. Sing, Jr. is responsible for the day-to-day management of the
Small Cap Fund. Mr. Sing has been a portfolio manager with ICI since 1984.
Under its Sub-Advisory Contract with the Adviser, ICI will undertake at its
own expense to furnish the Small Cap Fund and the Adviser with micro- and
macroeconomic research, advice and recommendations, and economic and statistical
data, with respect to the Fund's investments, subject to the overall review by
the Adviser and the Board of Trustees.
Banking Laws
Counsel to the Trust and special counsel to the Advisers, have advised the
Adviser that the Adviser may perform the services for the Funds contemplated by
the Advisory Contract without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. Counsel to ICI has given similar advice
to ICI with respect to its performance of services under the Sub-Advisory
Contract. Such counsel has pointed out, however, that this question has not been
authoritatively determined and that judicial or administrative decisions or
interpretations of present Federal or state statutes and regulations relating to
the permissible activities of banks or trust companies
19
<PAGE>
and their subsidiaries or affiliates, as well as future changes in Federal or
state statutes and regulations and judicial or administrative decisions or
interpretations thereof, could prevent the Adviser and ICI from continuing to
perform such services for the Funds.
If the Adviser and ICI were prohibited from performing any of their
services for the Trust, it is expected that the Board of Trustees would
recommend to the Funds' shareholders that they approve new agreements with
another entity or entities qualified to perform such services and selected by
the Board.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant of
the Funds in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but are not specifically required to, include any
or all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of and review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Funds to, and
answer questions from Shareholder Servicers to enhance understanding of the
Funds and their investment objectives; and (iv) generally assist the activities
of the Shareholder Servicers.
The Adviser shall provide all personnel and facilities necessary in order
for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicer Assistant, the Adviser is paid an
annual fee equal to 0.04% of each Fund's average daily net assets.
Administrator
The Trust retains BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS") to act as the Administrator of the Funds in accordance with
the terms of a Management and Administration Agreement. BISYS has its principal
office at 3435 Stelzer Road, Columbus, Ohio 43219. Pursuant to the Management
and Administration Agreement, the Administrator, at its expense, generally will
supervise the operation of the Trust and the Funds by reviewing the expenses of
the Funds monthly to ensure the Funds are within their respective budgets and by
providing personnel, office space and administrative and fund accounting
services reasonably necessary for the operation of the Trust and the Funds other
than those provided by the Adviser pursuant to the Advisory Contract.
BISYS's annual administration and accounting fee is an asset-based fee of
0.15% of each Fund's first $200 million of average net assets; 0.125% of each
Fund's next $200 million of average net assets; 0.10% of each Fund's next $200
million of average net assets; and 0.08% of each Fund's average net assets in
excess of $600 million; exclusive of out-of-pocket expenses.
The Trust also retains the Adviser to act as Co-Administrator in accordance
with the terms of the Co-Administration Services Contract. Pursuant to the
Co-Administration Services Contract, the Adviser (i) manages the Funds'
relationship with service providers, (ii) assists with negotiation of contracts
with service providers and
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<PAGE>
supervises the activities of those service providers, (iii) serves as a liaison
with Fund trustees, and (iv) assists with general product management and
oversight. For its services as Co-Administrator, the Adviser is paid an annual
fee equal to 0.03% of each Fund's daily average net assets.
Distributor
BISYS also serves as the Funds' Distributor and has its principal office at
3435 Stelzer Road, Columbus, Ohio 43219. The Distributor will receive orders
for, sell, and distribute shares of the Funds.
Servicing Agreements
The Fund may enter into agreements (the "Servicing Agreement") with certain
banks, financial institutions and corporations (the "Participating
Organizations") so that each Participating Organization handles recordkeeping
and provides certain administrative services for its customers who invest in the
Funds through accounts maintained at that Participating Organization. In such
cases, the Participating Organization or one of its nominees will be the
shareholder of record as nominee for its customers and will maintain subaccounts
for its customers. In addition, the Participating Organization will credit cash
distributions to each customer account, process purchase and redemption
requests, mail statements of all transactions with respect to each customer and,
if required by law, distribute the Trust's shareholder reports and proxy
statements. However, any customer of a Participating Organization may become the
shareholder of record upon written requests to its Participating Organization or
the Fund. Each Participating Organization will receive monthly payments which in
some cases may be based upon expenses that the Participating Organization has
incurred in the performance of its services under the Servicing Agreement. The
payments will not exceed, on an annualized basis, an amount equal to 0.35% of
the average daily net assets during the month of Fund shares in the subaccount
of which the Participating Organization is record owner as nominee for its
customers. Such payments will be separately negotiated with each Participating
Organization and will vary depending upon such factors as the services provided
and the costs incurred by each Participating Organization. The payments may be
more or less than the fees payable to BISYS Fund Services, Inc. for the services
it provides pursuant to the Transfer Agency Agreement for similar services.
The payments will be made by the Fund to the Participating Organizations
pursuant to the Servicing Agreements. BISYS Fund Services, Inc. will not receive
any compensation as transfer or dividend disbursing agent with respect to the
subaccounts maintained by Participating Organizations. The Board of Trustees
will review, at least quarterly, the amounts paid and the purposes for which
such expenditures were made pursuant to the Servicing Agreements.
Under separate agreements, the Adviser (not the Funds) may make
supplementary payments from its own revenues to a Participating Organization
that agrees to perform services such as advising customers about the status of
their subaccounts, the current yield and dividends declared to date and
providing related services a shareholder may request. Such payments will vary
depending upon such factors as the services provided and the costs incurred by
each Participating Organization.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Participating Organization may be charged one or more of
the following types of fees by a Participating Organization, as agreed upon by
the Participating Organization and the investor, with respect to the customer
services provided by the Participating Organization: account fees (a fixed
amount per month or per year);
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<PAGE>
transaction 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).
Distribution Plan and Agreement
The Board of Trustees of the Trust has adopted a Distribution Plan and
related Shareholder Servicing Agreement (the "Plan") pursuant to Rule 12b-1 of
the 1940 Act, after having concluded that there is a reasonable likelihood that
the Plan will benefit each Fund and its shareholders. The Plan provides for a
monthly payment by each Fund to reimburse the Distributor in such amounts that
the Distributor may request for expenses such as the printing and distribution
of prospectuses sent to prospective investors, the preparation, printing and
distribution of sales literature and expenses associated with media
advertisements and telephone services and other direct and indirect
distribution-related expenses, including the payment of a monthly fee to
broker-dealers for rendering distribution-related asset introduction and asset
retention services. The Funds may also make payments to other broker-dealers or
financial institutions for their assistance in distributing shares of the Funds
and otherwise promoting the sale of each Fund's shares. The total of each
monthly payment is based on each Fund's average daily net assets during the
preceding month and is calculated at an annual rate not to exceed 0.35% and
0.50% with respect to the Small Cap Fund and Growth and Income Fund,
respectively.
The Plan provides for the Distributor to prepare and submit to the Board of
Trustees on a quarterly basis written reports of all amounts expended pursuant
to the Plan and the purpose for which such expenditures were made. The Plan may
not be amended to increase materially the amount spent for distribution expenses
without approval by a majority of each Fund's outstanding shares and approval of
a majority of the non-interested Trustees. Distribution expenses incurred in one
year will not be carried forward into and reimbursed in the next year for actual
expenses incurred in the previous year.
Fees and Expenses
The Growth and Income Fund pays the Adviser, as compensation for its
advisory services a monthly fee equal to an annual rate of 0.55% of average
daily net assets up to $400 million. The fee is reduced at several breakpoints
for average daily net assets in excess of $400 million up to $2 billion, at
which point it becomes 0.315% of the average daily net assets in excess of $2
billion. The Small Cap Fund pays the Adviser, as compensation for its advisory
services a monthly fee equal to an annual rate of 0.70% of average daily net
assets up to $400 million. The fee is reduced at several breakpoints for average
daily net assets in excess of $400 million up to $2 billion, at which point it
becomes 0.415% of the average daily net assets in excess of $2 billion.
As compensation for its services, ICI receives a monthly fee from the
Adviser at an annual rate not to exceed 0.50% of the Small Cap Fund's average
daily net assets up to $400 million. The fee is reduced at several breakpoints
for average daily net assets in excess of $400 million up to $2 billion, at
which point it becomes 0.29% of the average daily net assets in excess of $2
billion.
As compensation for its co-administrative services and shareholder servicer
assistance services, the Adviser receives from each Fund a monthly fee equal to
an annual rate of 0.07% of the average daily net assets of each Fund.
The Adviser and ICI reserve the right to waive in advance a portion of
their fees at any time.
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TRANSACTIONS WITH AFFILIATES
Broker-dealers which are affiliates of the Adviser or ICI may act as
brokers for the Funds. At all times, however, their commissions, fees or other
charges must be reasonable and fair in comparison with those that would be paid
to unaffiliated firms for comparable transactions. The Funds will not do
business with or pay commissions to affiliates of the Adviser or ICI in any
portfolio transactions where they act as principal. In placing orders for the
purchase and sale of portfolio securities, the Funds seek the best execution at
the most favorable price, considering all of the circumstances. The Adviser may
consider sales of shares of the Fund and of other HSBC Funds as a factor in
selecting a broker. The Adviser may cause a 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.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share for the purpose of pricing purchase
and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Funds' transfer agent is open for business. The net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King, Jr.'s
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per
share of each Fund is computed by dividing the value of the net assets of a Fund
(i.e. the value of the assets less the liabilities) by the total number of
shares outstanding. All expenses, including the management, advisory,
sub-advisory and administrative fees, are accrued daily and taken into account
for the purpose of determining the net asset value.
Portfolio securities are valued at the last quoted sales price as of the
close of business on the day the valuation is made, or lacking any sales, at the
mean between closing bid and asked prices. Price information on listed
securities is taken from the exchange where the security is primarily traded.
The value for each unlisted security is based on the last trade price for that
security on a day in which the security is traded. The value for each unlisted
security on a day such security is not traded shall be based on the mean of the
bid and ask quotations for that day. The value of each security for which
readily available market quotations exist will be based on a decision as to the
broadest and most representative market for such security. Options on stock
indices traded on national securities exchanges are valued at the close of
options trading on such exchanges (which is currently 4:10 p.m., Eastern time).
Stock index futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such exchanges
(which is currently 4:15 p.m., Eastern time). Other assets and securities for
which no quotations are readily available are valued at fair value as determined
in good faith by the Trustees. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. Short-term investments are valued at amortized
cost, which approximates market value. The Board of Trustees has determined in
good faith that amortized cost equals fair market value.
PURCHASE OF SHARES
Shares of each 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. Prospectuses and
accompanying sales material can be obtained from the Transfer Agent or
Distributor.
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The minimum initial investment requirement for each Fund is $1,000. The
minimum subsequent investment requirement for each Fund is $50. There are no
minimum investment requirements with respect to investments effected through
certain automatic purchase and redemption arrangements on behalf of customer
accounts maintained at Participating Organizations. The minimum investment
requirements may be waived or lowered for investments effected on a group basis
by certain other institutions and their employees, such as pursuant to a payroll
deduction plan. All funds will be invested in full and fractional shares. The
Trust reserves the right to reject any purchase order.
Orders for shares of the Funds will be executed at the net asset value per
share next determined after receipt of an order by the dealer, plus a sales
charge varying with the amount invested in accordance with the following
schedule:
<TABLE>
<CAPTION>
Reallowance
to
Service
Total Sales Load Organizations
------------------------------ ---------------
As a % of
As a % of Net Asset As a % of
Amount Invested Offering Price Value Per Offering Price
(including sales charge) Per Share Share Per Share
- ------------------------ -------------- --------- -------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.00% 5.26% 4.50%
$50,000 but less than $100,000........................ 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.40%
$250,000 but less than $500,000....................... 2.50% 2.56% 2.25%
$500,000 but less than $1 million..................... 2.00% 2.04% 1.75%
$1 million and above.................................. 1.00% 1.01% 0.90%
</TABLE>
The sales charge will be waived on the following purchases: (1) by Trustees
and officers of the Trust and of HSBC 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 Funds with the
proceeds of their benefits checks (the EBT Plan must currently own shares of a
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 Funds in accordance with guidelines established by the Funds' Board of
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
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<PAGE>
Distributor, at its expense, may also provide additional compensation to dealers
in connection with sales of Shares of any of the Funds. 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 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 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 a 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 any Fund or its Shareholders.
Stock certificates will not be issued with respect to shares of each Fund.
The Transfer Agent shall keep accounts upon the books of the Trust for record
holders of such shares.
Right of Accumulation
The Funds offer to all shareholders a right of accumulation under which any
shareholder may purchase shares of a Fund at the offering price applicable to
the total of (a) the dollar amount then being purchased plus (b) an amount equal
to the offering price of the shareholder's combined holdings of the shares of
such Fund. For the right of accumulation to be exercised, a shareholder must
provide at the time of purchase confirmation of the total number of shares of
such Fund owned by such shareholder. Acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time on sixty days' notice to shareholders. Shares held in the name of a
nominee or custodian under pension, profit-sharing, or other employee benefit
plans may not be combined with other shares held in the name of such nominee or
custodian for other plans to qualify for the right of accumulation.
Letter of Intent
By initially investing at least $1,000 and submitting a Letter of Intent to
the Transfer Agent, a "single purchaser" may purchase shares of the Funds and
other eligible HSBC Funds (other than Money Market Funds) during a 13-month
period at the reduced sales charge rates applying to the aggregate amount of the
intended purchases stated in the Letter of Intent. The Letter of Intent may
apply to purchases made up to 90 days before the date of submission of the
Letter of Intent. Dividends and distributions of capital gains paid in shares of
the Funds at net asset value will not apply towards the completion of the Letter
of Intent. The Letter of Intent does not obligate a shareholder to buy the
amount indicated in the Letter of Intent; however, if the intended purchases are
not completed during the Letter of Intent period, the shareholder will be
obligated to pay the Distributor an amount equal to the difference between the
regular sales charge applicable to a single purchase of the number of shares
purchased and the sales charge actually paid. For further details, including
escrow provisions, see the Letter of Intent. The Funds reserve the right to
amend, suspend or cease offering this program at any time.
25
<PAGE>
Prospective investors who wish to obtain additional information concerning
investment procedures should contact the Transfer Agent at: (800) 634-2536.
New Account Purchase By Wire
1. Telephone the Transfer Agent at (800) 634-2536 for instructions. Please
note your bank will normally charge a fee for handling this transaction.
New Account Purchase By Mail
1. Complete a Purchase Application.
2. Mail the Purchase Application and a check for $1,000 or more, to HSBC
Family of Funds to the Transfer Agent at:
HSBC Mutual Funds Trust c/o BISYS, P.O. Box 163850, Columbus, Ohio
43216-3850.
Third party checks will not be accepted. Check payments must be in U.S.
dollars. Please include the Fund Name and your account number on all checks.
Additional Purchases By Wire and Mail
Additional purchases of shares may be made by wire by telephoning the
Transfer Agent and then instructing the wiring bank to transmit the amount ($50
or more) of any additional purchase in Federal funds. Additional purchases may
also be made by mail by making a check ($50 or more) payable to the HSBC Family
of Funds indicating your fund account number on the check and mailing it to the
Transfer Agent at the address set forth above.
Purchase through Customer Accounts
Purchases of shares also may be made through customer accounts maintained
at Participating Organizations, including qualified Individual Retirement and
Keogh Plan accounts. Purchases will be made through a customer's account only as
directed by or on behalf of the customer on a direction form executed prior to
the customer's first purchase of shares of any Fund. For example, a customer
with an account at a Participating Organization may instruct the Participating
Organization to invest money in excess of a level agreed upon between the
customer and the Participating Organization in shares of one of the Funds
periodically or give other instructions to the Participating Organization within
limits prescribed by that Participating Organization.
Automatic Investment Plan
Investors may make regular monthly investments of $50 or more in shares
automatically from a checking or savings account if their bank is a member of
automated clearing house (ACH). Upon written authorization, the Transfer Agent
will electronically debit the investor's checking or savings account each month
and use the proceeds to purchase shares for the investor's account.
Approval by the investor's bank is required, so that establishment of a
program may require at least 30 days. The authorized amount and/or bank
information may be changed or the program terminated at any time by writing
26
<PAGE>
to the Transfer Agent. A reasonable period (usually up to 15 days) may be
required after receipt of such instructions to implement them. The purchase
application contains the requirements applicable to this plan. The Trust
reserves the right to amend, suspend or cease offering this program at any time
without prior notice.
REDEMPTION OF SHARES
Upon receipt by the Trust's transfer agent of a redemption request in
proper form ($50 minimum), shares of the Funds will be redeemed at their next
determined net asset value. See "Determination of Net Asset Value" in this
Prospectus. For the shareholder's convenience, the Trust has established several
different direct redemption procedures. Redemptions of shares purchased by check
will be effected immediately upon clearance of the purchase check, which may
take up to 15 days after those shares have been credited to the shareholder's
account. A redemption of shares is a taxable transaction on which gain or loss
may be recognized for tax purposes.
The Funds reserve the right to redeem (on 30 days' notice) accounts whose
values shareholders have reduced to $500 or less.
Redemption by Mail
1. Complete a letter of instruction indicating the Fund, the account number
and either the dollar amount or number of shares to be redeemed.
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all must sign.
3. If shares to be redeemed have a value of $5,000 or more, the
signature(s) must be guaranteed by a bank, trust company, broker, dealer, credit
union, securities exchange or association, clearing agency or savings
association. Signature guarantees by notaries public are not acceptable. Further
documentation, such as copies of corporate resolutions and instruments of
authority, may be requested from corporations, administrators, executors,
personal representatives, trustees or custodians to evidence the authority of
the person or entity making the redemption request.
4. Mail the letter to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Checks for redemption proceeds will normally be mailed within seven days to
the shareholder's address of record. Upon request, the proceeds of a redemption
amounting to $1,000 or more can be sent by wire to the shareholder's
predesignated bank account. Please note a wire transfer fee will normally be
charged. When proceeds of a redemption are to be paid to someone other than the
shareholder, either by wire or check, the signature(s) on the letter of
instruction must be guaranteed regardless of the amount of the redemption.
Redemption by Expedited Redemption Service
If shares are held in book credit form and the Expedited Redemption Service
has been elected on the Purchase Application on file with the Transfer Agent,
redemption of shares may be requested on any day the Transfer Agent is open for
business by telephone or letter. A signature guarantee is not required.
27
<PAGE>
1. Telephone the request to the Transfer Agent toll free: (800) 634-2536;
or
2. Mail the request to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Proceeds of Expedited Redemptions of $1,000 or more can be wired to the
shareholder's bank indicated in the Purchase Application. If an Expedited
Redemption request is received by the Transfer Agent by 4:00 p.m. (Eastern time)
on a day the Transfer Agent is open for business, the redemption proceeds will
be transmitted to the shareholder's bank on the next business day. A check for
proceeds of less than $1,000 will be mailed to the shareholder's address of
record.
The Transfer Agent employs reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Transfer Agent fails
to employ such reasonable procedures, the Transfer Agent may be liable for any
loss, damage or expense arising out of any telephone transactions purporting to
be on a shareholder's behalf. In order to ensure the accuracy of instructions
received by telephone, the Transfer Agent requires some form of personal
identification prior to acting upon instructions received by telephone, records
telephone instructions and provides written confirmation to investors of such
transactions.
Systematic Withdrawal Plan
An owner of $10,000 or more of shares of a Fund may elect to have periodic
redemptions from his account to be paid on a monthly basis. The minimum periodic
payment is $50. A sufficient number of shares to make the scheduled redemption
will be redeemed on the first or fifteenth day of the month. Redemptions for the
purpose of making such payments may reduce or even exhaust the account if the
monthly checks exceed the dividends, interest and capital appreciation, if any,
on your shares. A shareholder may request that these payments be sent to a
predesignated bank or other designated party.
Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a
return on your investment. Payments to you pursuant to the Systematic Withdrawal
Plan are derived from the redemption of shares in your account and are taxable
transactions on which gain or loss may be recognized for Federal, state and
local income tax purposes.
Reinstatement Privilege
A shareholder in a Fund who has redeemed shares may reinvest, without a
sales charge, up to the full amount of such redemption at the net asset value
determined at the time of the reinvestment within 60 days of the original
redemption. This privilege must be effected within 60 days of the redemption and
the investor at the time of purchase must provide the number of shares redeemed
within the 60 day period. The shareholder must reinvest in the same Fund and
account from which the shares were redeemed. A redemption is a taxable
transaction and gain or loss may be recognized for Federal income tax purposes
even if the reinstatement privilege is exercised. Any loss realized upon the
redemption will not be recognized as to the number of shares acquired by
reinstatement, except through an adjustment in the tax basis of the shares so
acquired.
28
<PAGE>
Redemption through Customer Accounts
Investors who purchase shares through customer accounts maintained at
Participating Organizations may redeem those shares only through the
Participating Organization. In some cases, a customer may instruct the
Participating Organization which maintains the account through which the
customer purchases shares to redeem shares periodically as required to bring the
customer's account balance up to a level agreed upon between the customer and
the Participating Organization. If a redemption request with respect to such an
automatic redemption arrangement is received by the Transfer Agent by 4:00 p.m.
(Eastern time) on a day the Transfer Agent is open for business, the redemption
proceeds will be transmitted on the next business day to the investor's customer
account (unless otherwise specified by the Participating Organization).
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange shares of one Fund for shares of any of the other
investment portfolios of the Trust and HSBC Funds Trust which are available for
sale in their state. A shareholder who has paid a sales load in connection with
the purchase of shares of any of the Funds will be subject only to that portion
of the sales load of the Fund into which the shareholder is exchanging which
exceeds the sales load originally paid by the shareholder. The Transfer Agent
must be advised of the applicability of the sales charge differential when the
exchange order is placed. Shareholders of any of the HSBC Money Market Funds who
exchange shares of any such Money Market Funds for shares of any of the Funds of
the Trust are charged the sales load applicable to such Funds as stated in the
Prospectus. Before effecting an exchange, shareholders should review the
prospectuses. Exercise of the exchange privilege is treated as a redemption for
Federal and New York State and City income tax purposes and, depending on the
circumstances, a gain or loss may be recognized. The Funds reserve the right to
change the terms of or terminate the Exchange Privilege at any time upon at
least 60 days' prior written notice to shareholders. Exchanges may be made by
telephonic request to the Transfer Agent at (800) 634-2536. For a discussion of
risks associated with unauthorized telephone transactions, see "Redemption by
Expedited Redemption Service."
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to distribute annually substantially all of its net
investment income in the form of dividends. The Funds pay semi-annual dividends.
Net capital gains, if any, are distributed at least once annually.
Each Fund's dividend and capital gains distributions may be reinvested in
additional shares or received in cash.
In order to satisfy certain annual distribution requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), the Funds may declare
special dividend and capital gains distributions during October, November or
December as of a record date in such a month. Such distributions, if paid to
shareholders in the following January, are deemed for Federal income tax
purposes to have been paid by the Funds and received by shareholders on December
31 of the prior year.
Each Fund will be treated as a separate entity for Federal income tax
purposes, notwithstanding that it is one of a multiple series of the Trust. Each
Fund has elected to be treated and has qualified as a registered investment
29
<PAGE>
company and intends to continue to qualify to be treated as a regulated
investment company for each taxable year by complying with the provisions of the
Code applicable to regulated investment companies so that it will not be liable
for Federal income tax with respect to its net investment income and net
realized capital gains distributed to shareholders in accordance with the timing
requirements of the Code. Each Fund intends to distribute substantially all of
its net investment income and net realized capital gains to its shareholders for
each taxable year.
Dividends derived from each Fund's taxable net investment income (if any)
and the excess of net short-term capital gain over net long-term capital loss
will be taxable to that Fund's shareholders as ordinary income, whether such
dividends are invested in additional shares or received in cash. A portion of
each Fund's dividends will normally qualify for the dividends-received deduction
for corporations. In general, the amount so qualifying will depend primarily on
the portion of a Fund's gross income that is represented by dividends received
by such Fund from stock in domestic corporations held by such Fund subject to
the requisite holding period under the Code and not treated as debt financed
under the Code. The dividends-received deduction will be reduced to the extent
shares of such Fund are treated as debt-financed and will be eliminated if such
shares are held for less than 46 days.
Distributions of the excess of net long-term capital gain over net
short-term capital loss designated by the Funds as capital gain dividends will
be taxable as long-term capital gains, regardless of how long a shareholder has
held his Fund shares, whether they are invested in additional shares or received
in cash. Long-term capital gain distributions will generally not qualify for the
dividends-received deduction for corporations.
Each year the Funds will notify shareholders of the character of dividends
and distributions for Federal income tax purposes. Depending on the residence of
the shareholder for tax purposes, such dividends and distributions may also be
subject to state, local or foreign taxes. Shareholders should consult their own
tax advisers as to the Federal, state, local or foreign tax consequences of
ownership of Fund shares in their particular circumstances.
Shareholders who are not U.S. persons under the Code should also consult
their tax advisers as to the possible application of U.S. taxes, including a 30%
U.S. withholding tax (or lower treaty rate) on dividends.
Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in a Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect to
such shares.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in confirmations
for each shareholder and a monthly shareholder statement. In those cases where a
Participating Organization or its nominee is shareholder of record of shares
purchased for its customer, the Trust has been advised that the statement may be
transmitted to the customer in the discretion of the Participating Organization.
Shareholders can write or call the Transfer Agent at P.O. Box 163850, Columbus,
OH 43216-3850, telephone (800) 634-2536 with any questions relating to their
investments in Fund shares.
30
<PAGE>
Participating Organizations or their nominees may be the shareholders of
record as nominees for their customers, and may maintain subaccounts for those
customers. Any such customer may become the shareholder of record upon written
request to the Participating Organization or transfer agent.
The transfer agent will transmit promptly to each of its customers for whom
it processes purchases and redemptions of shares and to each Participating
Organization copies of all reports to shareholders, proxy statements and other
Trust communications. The Trust's arrangements with the transfer agent and the
subtransfer agent arrangements require Participating Organizations to grant
investors who purchase shares through customer accounts the opportunity to vote
their shares by proxy at all shareholder meetings of the Trust. In certain
cases, a customer of a Participating Organization may have given his
Participating Organization the power to vote shares on his behalf. Customers
with accounts at Participating Organizations should consult their Participating
Organization for information concerning their rights to vote shares.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
Pursuant to an Agency Agreement, BISYS Fund Services, Inc. ("Transfer
Agent") acts as the Funds' transfer and dividend disbursing agent and is
responsible for maintaining account records detailing ownership of Fund shares
and for crediting income, capital gains and other changes in share ownership to
investors' accounts. For its services, the Transfer Agent receives from the
Funds an annual base fee of $25 per shareholder account plus additional
transaction costs. BISYS Fund Services, Inc. also provides certain accounting
services for the Funds pursuant to the Fund Accounting Agreement. BISYS' fees
for performing accounting services currently are paid under the Management and
Administration Agreement.
CUSTODIAN
The Bank of New York is the Funds' custodian. Pursuant to the Custodian
Agreement, The Bank of New York is responsible for holding the Funds' cash and
portfolio securities. The Bank of New York may enter into sub-custodian
agreements with certain qualified banks.
PERFORMANCE INFORMATION
Each Fund's total return may be included in advertisements or mailings to
prospective investors. Each Fund may occasionally cite statistical reports
concerning its performance. Each Fund may also from time to time compare its
performance to various unmanaged indices, such as the Standard & Poor's 500
Composite Stock Price Index. (See the Statement of Additional Information for
more details concerning the various indices which might be used.) A Fund's
"total return" refers to the average annual compounded rates of return over one,
five and ten year periods or for the life of the Fund (which periods will be
stated in the advertisement) that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable value of the investment,
assuming the deduction of the maximum sales charge and the reinvestment of all
dividend and capital gains distributions. Each Fund may quote total return on a
before tax or after tax basis. Each Fund calculates its total return by adding
the total dividends paid for the period to the Fund's ending net asset value per
share for that period and dividing that sum by the net asset value per share of
the Fund at the beginning of the period. Each Fund may also furnish total return
calculations based on investments at various sales charge levels or at net asset
value. Any performance data which is based on a Fund's net asset value per share
would be reduced if a sales charge
31
<PAGE>
were taken into account. Total return figures are based on historical earnings
and are not intended to indicate future performance.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Participating Organization may be charged by such
Participating Organization certain fees, as agreed upon by the Participating
Organization and the investor, with respect to the customer services provided by
the Participating Organization. Such fees will have the effect of reducing the
return for those investors. See "Management of the Funds -- Servicing
Agreements" in this Prospectus.
SHARES OF BENEFICIAL INTEREST
The authorized capital stock of the Trust consists of an unlimited number
of shares of beneficial interest having a par value of $0.001 per share. The
Trust's Board of Trustees has authorized the issuance of multiple series
representing shares in corresponding investment portfolios of the Trust. All
shares of the Trust have equal voting rights and will be voted in the aggregate,
and not by class, except where voting by class is required by law or where the
matter involved affects only one class. All shares of the Trust issued and
outstanding are fully paid and nonassessable. The Trust is not required by law
to hold annual shareholder meetings and does not intend to hold such meetings;
however, the Trustees are required to call a meeting for the purpose of
considering the removal of persons serving as Trustee if requested to do so in
writing by the holders of not less than 10% of the outstanding shares of the
Trust. Each Fund will be treated as a separate entity for Federal income tax
purposes. For more details concerning the voting rights of shareholders, see the
SAI.
Vacancies on the Board of Trustees are filled by the Board of Trustees if
immediately after filling any such vacancy at least two-thirds of the Trustees
then holding office have been elected to such office by shareholders at an
annual or special meeting. In the event that at any time less than a majority of
Trustees holding office were elected by shareholders, the Board of Trustees will
cause to be held within 60 days a shareholders' meeting for the purpose of
electing Trustees to fill any existing vacancies. Trustees are subject to
removal with cause by two-thirds of the remaining Trustees or by a vote of a
majority of the outstanding shares of the Trust. The Trustees are required to
promptly call a shareholders' meeting for voting on the question of removal of
any Trustee when requested to do so in writing by not less than 10% of the
outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
Under Massachusetts law, it is possible that shareholders of a
Massachusetts business trust might, under certain circumstances, be held
personally liable for acts or obligations of the Trust. The Trust's Declaration
of Trust contains an express disclaimer of shareholder liability for acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust's assets for all loss and expense of any
shareholder held personally liable by reason of being or having been a
shareholder of the Trust. Thus, the risk that a shareholder of a Fund could
incur financial loss on account of shareholder liability is considered remote
since it is limited to circumstances in which the disclaimer is inoperative and
the Fund itself would be unable to meet its obligations.
32
<PAGE>
================================================================================
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HSBC Asset Management
================================================================================
HSBC(SM) Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
Information:
(800) 634-2536
Investment Adviser and Co-Administrator
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, New York 10177
Sub-Adviser to Small Cap Fund
Investment Concepts, Inc.
One Williams Center
P.O. Box 2300
Tulsa, Oklahoma 74192
Distributor, Administrator, Transfer Agent
and Fund Accounting Agent
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
Legal Counsel
Baker & McKenzie
805 Third Avenue
New York, New York 10022
No dealer, salesman, or other person has been authorized to give any information
or to make any representations, other than those contained in the Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust, the Distributor or the Investment Adviser. This
Prospectus does not constitute an offering in any state in which such offering
may not lawfully be made.
================================================================================
Prospectus April 29, 1997
- --------------------------------------------------------------------------------
Funds:
Growth and Income Fund
Small Cap Fund
- --------------------------------------------------------------------------------
Managed and Advised by:
HSBC Asset Management Americas Inc.
- --------------------------------------------------------------------------------
Managed by:
Investment Concepts, Inc.
(with respect to the Small Cap Fund only)
- --------------------------------------------------------------------------------
Distributed by:
BISYS Fund Services
================================================================================
HSBC3P0497
<PAGE>
HSBC MUTUAL FUNDS TRUST
Growth and Income Fund
Small Cap Fund
3435 Stelzer Road
Columbus, Ohio 43219
Information: (800) 634-2536
STATEMENT OF ADDITIONAL INFORMATION
HSBC Mutual Funds Trust (the "Trust") is an open-end, diversified
management investment company with multiple portfolios, including the Growth and
Income Fund (the "Growth and Income Fund") and the Small Cap Fund (the "Small
Cap Fund") (together herein referred to as the "Funds").
The investment objective of the Growth and Income Fund is to provide
----------------------
investors with long-term growth of capital and current income by investing
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 investment objective of the Small Cap Fund is to provide investors with
--------------
long-term capital appreciation and, secondarily, income by investing primarily
in a diversified portfolio of common stocks and securities convertible into
common stocks of small to medium-size companies with an initial market
capitalization of $500 million or less at the time of purchase by the Fund. The
universe of small to medium-size companies includes those companies with market
capitalization of up to $5 billion ("small cap equity securities"). As a matter
of fundamental policy, during normal market conditions, at least 70% of the
value of the Fund's total assets will be invested in small cap equity
securities.
Shares of the Funds are primarily offered for sale by BISYS Fund Services,
--------------------------------------------------------------------------
the Sponsor and Distributor, as an investment vehicle for institutions,
- -----------------------------------------------------------------------
corporations, fiduciaries and individuals. Certain banks, financial
- --------------------------------------------------------------------
institutions and corporations ("Participating Organizations") have agreed to act
- --------------------------------------------------------------------------------
as shareholder servicing agents for investors who maintain accounts at the
- --------------------------------------------------------------------------
Participating Organizations and to perform certain services for the Funds.
- --------------------------------------------------------------------------
This Statement of Additional Information ("SAI") is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Funds'
Prospectus dated April 29, 1997. This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus, additional copies of which may be obtained
without charge from the Trust.
April 29, 1997
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES AND RISK FACTORS ...................................... 1
INVESTMENT RESTRICTIONS ................................................... 6
MANAGEMENT ................................................................ 8
PERFORMANCE INFORMATION ................................................... 15
DETERMINATION OF NET ASSET VALUE .......................................... 17
PORTFOLIO TRANSACTIONS .................................................... 17
PORTFOLIO TURNOVER ........................................................ 18
EXCHANGE PRIVILEGE ........................................................ 18
REDEMPTIONS ............................................................... 19
FEDERAL INCOME TAXES ...................................................... 20
SHARES OF BENEFICIAL INTEREST ............................................. 23
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT ................... 23
INDEPENDENT AUDITORS ...................................................... 25
FINANCIAL STATEMENTS ...................................................... 25
</TABLE>
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-i-
<PAGE>
INVESTMENT POLICIES AND RISK FACTORS
The following information supplements the discussion of the investment
objective and policies of the Funds found under "Investment Objective, Policies
and Risk Factors" in the Prospectus.
The following investment policies apply to each of the Funds.
Short-Term Trading. Although the Funds will not make a practice of
short-term trading, purchases and sales of securities will be made whenever
necessary in the management's view to achieve the investment objectives of a
Fund. Management does not expect that in pursuing each Fund's investment
objective unusual portfolio turnover will be required and intends to keep
turnover to a minimum consistent with such investment objective. Management
believes unsettled market economic conditions during certain periods require
greater portfolio turnover in pursuing each Fund's investment objective than
would otherwise be the case. A higher incidence of portfolio turnover will
result in greater transaction costs to a Fund. During periods of relatively
stable market and economic conditions, the management expects that the portfolio
turnover of each Fund will not exceed 100% annually, so that normally no more
than 100% of the securities held by a Fund would be replaced in any one year.
Loans of Portfolio Securities. The Funds may 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 100% 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. 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. Neither Fund will enter into any portfolio security lending
arrangement having a duration of longer than one year. Any securities which a
lending 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.
Neither Fund will loan securities having a value which exceeds 10% of
the current value of such Fund's total assets. Loans of securities will be
subject to termination at the lender's or the borrower's option. Each 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 Funds, its
investment adviser or subadviser.
Writing Covered Calls. The Funds may engage in the writing of covered
call options (options on securities which a Fund owns) provided the options are
listed on a national securities exchange. Each 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. Each 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.
American Depository Receipts. The Funds may invest in American
Depository Receipts ("ADRs"). Generally these are receipts issued by a bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation and that are designed for use in the domestic securities
market. The Funds intend to invest less than 20% of each Fund's total net
assets in ADRs.
<PAGE>
There are certain risks associated with investments in unsponsored ADR
programs. Because the non-U.S. company does not actively participate in the
creation of the ADR program, the underlying agreement for service and payment
will be between the depository and the shareholder. The company issuing the
stock underlying the ADRs pays nothing to establish the unsponsored facility, as
fees for ADR issuance and cancellation are paid by brokers. Investors directly
bear the expenses associated with certificate transfer, custody and dividend
payment.
In an unsponsored ADR program, there also may be several depositories
with no defined legal obligations to the non-U.S. company. The duplicate
depositories 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 ADRs, there is always the risk of
loss due to currency fluctuations.
To the extent permitted in the Funds' Prospectus, each Fund may engage
in transactions for the purchase and sale of stock index options, stock index
futures contracts and options on stock index futures as described below.
Stock Index Options. Each Fund may purchase and write put and call
options on stock indexes listed on national securities exchanges in order to
realize its investment objectives or for the purpose of hedging its 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 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. Each Fund may enter into stock index
futures contracts in order to protect the value of its 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.
-2-
<PAGE>
Each Fund intends to utilize stock index futures contracts 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 a Fund against
an increase in prices of stocks which the Fund intends to purchase. If a 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 a 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 purchased. A Fund also may buy
or sell stock index futures contracts to close out existing futures positions.
Options on Stock Index Futures. Each 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.
If a 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 a 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 a Fund for the option.
If a 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 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. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
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, as amended (the "Securities Act"), there is no assurance that the Funds
will succeed in negotiating a closing out of a particular OTC option at any
particular time. If a Fund, as covered call option writer, is unable to effect
a closing purchase transaction in the 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.
-3-
<PAGE>
The staff of the 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 Funds will treat such options and, except to the extent permitted
through the procedure described in the preceding sentence, assets as subject to
each such Fund's limitation on investments in securities that are not readily
marketable.
Risks Involving Futures Transactions. Transactions by the Funds in
futures contracts and options thereon involve certain risks. One risk in
employing futures contracts and options thereon to protect against cash market
price volatility is the possibility that futures prices will correlate
imperfectly with the behavior of the prices of the securities in a Fund's
portfolio (the portfolio securities will not be identical to the securities
underlying the futures contracts). In addition, commodity exchanges generally
limit the amount of fluctuation permitted in futures contract and option prices
during a single trading day, and the existence of such limits may prevent the
prompt liquidation of futures and option positions in certain cases. Inability
to liquidate positions in a timely manner could result in the Fund's incurring
larger losses than would otherwise be the case.
Mortgage-Related Securities. The Funds, may, consistent with their
respective investment objective and policies, invest in mortgage-related
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Mortgage-related securities, for purposes of the Funds' 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 nongovernmental 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
securities return to the Fund. Similarly, because the average life of a
mortgage-related security may lengthen with increases in interest rates, the
portfolio weighted average life of the mortgage-related securities in which a
Fund is invested 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 weighted average life.
Regular payments received in respect of mortgage-related securities
include both interest and principal. No assurance can be given as to the return
a 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
-4-
<PAGE>
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 stock-holders. 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 on account of 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.
Option Premiums. In order to comply with certain state securities
regulations, each 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.
Illiquid Securities. Each Fund has adopted a fundamental policy with
respect to investments in illiquid 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,
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.
Each 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.
Rule 144A of the Securities Act provides for 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 new regulation and the development of automated
systems for the
-5-
<PAGE>
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 market place
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 a Fund does not exceed 10% of the 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 RESTRICTIONS
The Funds observe the following fundamental investment restrictions
which can be changed only when permitted by law and approved by a majority of a
Fund's outstanding 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 proxy or (ii) more than 50% of the outstanding shares.
Except as otherwise noted each Fund may not:
(1) purchase securities on margin (but may make margin
payments in connection with financial futures contracts and related
options) or purchase real estate or interests therein, commodities or
commodity contracts (except financial futures contracts and related
options), or make loans, except loans of portfolio securities and
except that each Fund may purchase or hold short-term debt securities
and enter into repurchase agreements with respect to its portfolio
securities described in each Prospectus. For this purpose, repurchase
agreements are considered loans;
(2) engage in the underwriting of securities of other
issuers, except to the extent that each 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;
or participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders with other accounts under
the management of the Adviser to save commissions or to average prices
among them is not deemed to result in a securities trading account;
(3) effect a short sale of any security (other than index
options or hedging strategies), or issue senior securities except as
permitted in paragraph (4). 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;
(4) borrow money, except that each Fund may borrow from banks
(and the Small Cap Fund may enter into reverse repurchase agreements)
as a temporary measure for emergency
-6-
<PAGE>
purposes where such borrowings would not exceed 5% (or 10% with
respect to the Small Cap Fund) 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 5% (or 10% with respect to the Small Cap
Fund) of each Fund's total assets taken at market value. The Funds
have no present intention of engaging in transactions under this
paragraph;
(5) purchase securities of any company with a record of less
than three years' continuous operation if such purchase would cause
each Fund's investments in all such companies taken at cost to exceed
5% of such Fund's total assets taken at market value;
(6) invest for the purpose of exercising control over or
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% (10% with respect to
the Growth and Income Fund) of the market value of the Fund's net
assets would be so invested;
(9) purchase interests in oil, gas, or other mineral
exploration programs or real estate and real estate mortgage loans
except as provided in the Prospectus of the Funds, or invest in oil,
gas or other mineral leases, or in real estate limited partnership
interests; however, this policy will not prohibit the acquisition of
securities of companies 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) purchase or retain securities of any company if, to the
knowledge of the Funds, officers and Trustees of the Trust and
officers and directors of the Adviser who individually own more than
1/2 of 1% of the securities of that company together own beneficially
more than 5% of such securities;
(11) have dealings on behalf of the Funds with Officers and
Trustees of the Funds, 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 Funds; or
(12) invest in excess of 5% of net assets in warrants;
provided that warrants that are listed on the New York or American
Stock Exchange may not exceed 2% of net assets.
In addition, the Growth and Income Fund may not:
(1) Invest more than 5% of its total assets taken at market
value in the securities (including securities subject to repurchase
agreements) of any one issuer other than securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities; or
(2) (i) purchase more than 10% of the outstanding voting
securities of any one issuer or (ii) 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 investments of the Growth and Income Fund in that
industry would exceed 25% of the current value of the total assets of
the Fund, except that there is no limitation with respect to
investments
-7-
<PAGE>
in obligations of the United States Government, its agencies or
instrumentalities which are backed by the full faith and credit of the
United States.
In addition, the Small Cap Fund may not:
(1) purchase a security if, as a result, with respect to 75%
of its portfolio, (i) more than 5% of the value of its total assets
would be invested in any one issuer, or (ii) it would hold more than
10% of any class of securities of such issuer or more than 10% of the
outstanding voting securities of the issuer. There is no limit on the
percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities; or
(2) purchase a security if, as a result, more than 25% of the
value of its total assets would be invested in securities of one or
more issuers conducting their principal business activities in the
same industry, provided that (a) this limitation shall not apply to
obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities; (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.
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 Funds, in the securities rating of the investment, or any
other later change.
MANAGEMENT
Trustees and Officers
The principal occupations for the past five of the Trustees and
executive officers of the Funds are listed below. The address of each, unless
otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. The Trustees
deemed to be "interested persons" of the Funds for purposes of the Investment
Company Act of 1940 are indicated by an asterisk.
WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville, Virginia
-------
22901. Trustee, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc. and
Excelsior Institutional Funds, Inc. (mutual funds); Director, Deutsche Bank
Financial, Inc.; Director, The Harbus Corporation; Trustee, HSBC Funds
Trust.
WILLIAM L. KUFTA, Chairman and Trustee - 97 Main Street, Chatham, New Jersey
--------------------
07928. Chief Investment Officer, Beacon Trust Company; Senior Vice
President, Pitcairn Financial Management Group from 1987 to 1991; Trustee,
HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut
-------
06840. Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee,
U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc. (mutual
funds); Trustee, HSBC Funds Trust.
HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017.
-------
Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten and
Company since 1991; Advisory Managing Director, Lepercq de Neuflize & Co.
Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to 1993;
Trustee, HSBC Funds Trust.
-8-
<PAGE>
JOHN P. PFANN, Trustee - 43 Captains Walk, Marina Cove, Palm Coast, Florida
-------
32137. Chairman and President, JPP Equities, Inc., 1982 to 1995; Trustee,
HSBC Funds Trust.
MICHAEL J. KANE, President - Director, New Business Development, BISYS Fund
Services, Inc. 1991 to present; Sales Manager, Business Development at
Fairfield Group 1988 to 1991. Vice President at SEI Corporation from 1980 to
1988.
ERIC F. ALMQUIST, Senior Vice President - Senior Marketing Strategist, Fund
---------------------
Services Division of BISYS Fund Services, Inc., August, 1996 to present.
Director of Process Management, Coopers & Lybrand L.L.P. from 1994 to 1996;
Vice President, The Dreyfus Service Corporation, from 1988 to 1994.
KAREN DOYLE, Vice President - Director, Client Services, Fund Services
--------------
Division of BISYS Fund Services, Inc., 1994 to present. The Bank of New
York, 1979 to 1994.
KEVIN MARTIN, Treasurer - Vice President, Fund Accounting, BISYS Fund
---------
Services, Inc., February 1996 to Present; Senior Audit Manager, Ernst &
Young LLP 1984 to February, 1996.
STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York 10022.
---------
Partner, Baker & McKenzie since April 1991; Partner, Gaston & Snow from 1988
to 1991; Secretary, HSBC Funds Trust.
ROBERT L. TUCH, Assistant Secretary - Senior Counsel of BISYS Fund Services,
-------------------
Inc., June 1991 to Present; Vice President and Associate General Counsel
with Nation Securities Research Corp., July 1990 to June 1991.
ALAINA V. METZ, Assistant Secretary - Chief Administrator, Administrator and
-------------------
Regulatory Services of BISYS Fund Services, Inc., June 1995 to Present;
Supervisor of Mutual Fund Legal Department, Alliance Capital Management, May
1989 to June 1995.
CURTIS BARNES, Assistant Secretary - Compliance Officer, BISYS Fund
-------------------
Services, Inc., June 1995 to Present; Senior Legal Analyst for John Hancock
Funds from February, 1984 to June, 1995.
Trustees of the Funds receive from the Funds an annual fee and a fee
for attending each meeting of the Trustees and each committee meeting and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
-9-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Estimated Annual Compensation
Compensation as Part of Fund Benefits Upon from the Fund
from the Fund Expenses Retirement complex*
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee $ 3,069 0 N/A $ 20,000
William L. Kufta, Trustee $ 2,762 0 N/A $ 18,000
Harald Paumgarten, Trustee $ 2,277 0 N/A $ 18,000
John P. Pfann, Trustee $ 3,069 0 N/A $ 20,000
Robert A. Robinson, Trustee $ 2,762 0 N/A $ 20,000
- ---------------------
</TABLE>
* Represents the total compensation paid to such persons during the calendar
year ending December 31, 1996 (and with respect to the Funds estimated to
be paid during a full calendar year).
As of the date of the Statement of Additional Information the Trustees
and officers of the Funds as a group owned less than 1% of the outstanding
shares of the Funds.
Investment Adviser. The Funds retain HSBC Asset Management Americas
Inc.( the "Adviser") to act as the adviser for each Fund. The Adviser is the
North American investment affiliate of HSBC Holdings pc (Hong Kong and Shanghai
Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York, New York 10177.
The Advisory Contracts for the Funds provide that the Adviser will
manage the portfolio of each Fund and will furnish to each Fund investment
guidance and policy direction in connection therewith. The Adviser has agreed
to provide to the Funds, among other things, information relating to portfolio
composition. Pursuant to the Advisory Contract, the Adviser also furnishes to
the Trust's Board of Trustees periodic reports on the investment performance of
each Fund.
The Adviser has also agreed in the Advisory Contract to provide
administrative assistance in connection with the operation of the Funds.
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 Funds, (ii) compiling
statistical and research data required for the preparation of reports and
statements which are periodically distributed to the Funds' officers and
Trustees, (iii) handling general shareholder relations with Fund investors, such
as advice as to the status of their accounts, the dividends declared to date and
assistance with other questions related to their accounts, and (iv) compiling
information required in connection with the Funds' filings with the SEC.
Pursuant to the Co-Administration Services Contract between the Funds
and the Adviser, the Adviser (i) manages the Fund's relationship with BISYS Fund
Services, the Administrator to the Fund, (ii) assists with negotiation of
contracts with service providers and supervises the activities of those service
providers, (iii) serves as liaison with the Board of Trustees, and (iv) assists
with general product management and oversight.
-10-
<PAGE>
HSBC is paid an annual fee equal to 0.03% of the Fund's average daily net assets
pursuant to the Co-Administration Services Contract.
Sub-Adviser to the Small Cap Fund. The Adviser retains Investment
Concepts, Inc. ("ICI") to serve as sub-adviser to the Small Cap Fund. ICI is a
subsidiary of BancOklahoma Trust Company ("BOTC"), the largest trust company in
the State of Oklahoma. BOTC is a subsidiary of Bank of Oklahoma, N.A. ("BOK")
which in turn is a subsidiary of Bank of Oklahoma Corporation ("BOK Financial").
BOK Financial is controlled by its principal shareholder, George B. Kaiser.
Through its subsidiaries, BOK Financial provides a full array of trust,
commercial banking and retail banking services. Its non-bank subsidiaries
engage in various bank-related services, including mortgage banking and
providing credit, life, accident, and health insurance on certain loans
originated by its subsidiaries.
ICI maintains an office in Tulsa, Oklahoma and offers a variety of
services for both corporate and individual customers. ICI also serves as
transfer agent and registrar for corporate securities, paying agent for
dividends and interest, and indenture trustee of bond issues. At December 31,
1996, BOTC was responsible for approximately $7.5 billion in assets including
approximately $3.3 billion in assets under management and possessed total
capital, surplus and undivided profits of $9.9 million.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant
of the Funds in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but is not specifically required to, include any or
all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of an review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Funds to, and
answer questions from Shareholder Servicers to enhance understanding of the
Funds and its investment objectives; and (iv) generally assist the activities of
the Shareholder Servicers.
The Adviser shall provide all personnel and facilities necessary in
order for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicer Assistant, the Adviser is
paid an annual fee equal to 0.04% of the Funds' daily average net assets.
Distributor. Shares of the Funds are offered on a continuous
basis through BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services,
the Distributor, pursuant to the Distribution Contract. The Distributor is not
obligated to sell any specific amount of shares.
Administrator. Pursuant to the Management and Administration
Agreement, BISYS Fund Services: (i) provides administrative services reasonably
necessary for the operation of the Funds (other than those services which are
provided by the Adviser pursuant to the Advisory Contract); (ii) provides the
Funds with office space and office facilities reasonably necessary for the
operation of the Funds; and (iii) employs or associates with itself such persons
as it believes appropriate to assist it in performing its obligations under the
Management and Administration Agreement.
As compensation for its administrative services under the Management
and Administration Agreement, BISYS Fund Services is paid a monthly fee at the
following annual rates: 0.15% of the Fund's first $200 million of average daily
net assets; 0.125% of the Fund's second $200 million of average daily net
assets; 0.10% of the Fund's third $200 million of average daily net assets; and
0.08% of the Fund's average daily net assets in excess of $600 million.
-11-
<PAGE>
For the period March 1, 1996 to December 31, 1996, BISYS Fund Services
earned $48,208 from the Small Cap Fund and $99,227 from the Growth & Income Fund
in administrative services fees, (net of fee waivers of $25,136 and $52,606,
respectively). For the two months ended February 29, 1996, PFPC earned $4,039
from the Small Cap Fund and $10,725 from the Growth & Income Fund in
administrative fees, net of fee waivers of $213 and $564, respectively.
For the year ended December 31, 1995, the Funds paid $61,800 (net of
fee waivers of $5,000) and $23,700 (net of fee waivers of $1,900), respectively,
to PFPC, Inc., BISYS Fund Services' predecessor, in administration fees under
the Administrative Services Agreement for the Growth and Income Fund and Small
Cap Fund, respectively. For the period July 1, 1994 to December 31, 1994, the
Growth and Income and Small Cap Funds paid $33,295 (net of fee waivers of
$3,699) and $10,459 (net of fee waivers of $1,162), respectively, to PFPC, Inc.
in administration fees. The Adviser, the predecessor to PFPC, Inc., earned
$22,091 (net of fee waivers of $4,687) and $6,110 (net of fee waivers of $1,060)
for the six months ended June 30, 1994 for the Growth and Income Fund and Small
Cap Fund, respectively.
For the year ended December 31, 1996, the Growth and Income and Small
Cap Funds paid $9,956 and $3,890, respectively, to the Adviser in co-
administration fees under the Co-Administration Agreement. For the year ended
December 31, 1995, the Growth and Income and Small Cap Funds paid $20,014 and
$7,671, respectively to the Adviser in co-administration fees.
Fees and Expenses
The Growth and Income Fund. As compensation for its advisory
--------------------------
and management services, the Adviser is paid a monthly fee with respect to the
Total Return Fund at the following annual rates:
<TABLE>
<CAPTION>
Portion of average daily value
of net assets of the Fund Advisory
--------------------------- --------
<S> <C>
Not exceeding $400 million...........0.550%
In excess of $400 million but
not exceeding $800 million.........0.505%
In excess of $800 million but
not exceeding $1.2 billion.........0.460%
In excess of $1.2 billion but
not exceeding $1.6 billion.........0.415%
In excess of $1.6 billion but
not exceeding $2 billion...........0.370%
In excess of $2 billion..............0.315%
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, the
Adviser earned $597,497, $367,300 and $377,042, respectively, in advisory fees
(net of fee waivers of $88, $0 and $36,828, respectively).
The Small Cap Fund. As compensation for its advisory and
------------------
management services, the Adviser is paid a monthly fee with respect to the Small
Cap Fund at the following annual rates:
-12-
<PAGE>
<TABLE>
<CAPTION>
Portion of average daily value
of net assets of the Fund Advisory
------------------------- --------
<S> <C>
Not exceeding $400 million.............0.700%
In excess of $400 million but
not exceeding $800 million............0.645%
In excess of $800 million but
not exceeding $1.2 billion............0.590%
In excess of $1.2 billion but
not exceeding $1.6 billion............0.535%
In excess of $1.6 billion but
not exceeding $2 billion..............0.480%
In excess of $2 billion................0.415%
</TABLE>
As compensation for its management services with respect to the Small
Cap Fund, ICI is paid by the Adviser a monthly fee at an annual rate not to
exceed 0.50% of average daily net assets up to $400 million. The fee is reduced
at several breakpoints for average daily net assets in excess of $400 million up
to $2 billion, at which point it becomes 0.290% of the average daily net assets
in excess of $2 billion.
For the years ended December 31, 1996, 1995 and 1994, the Adviser
earned $362,401, $179,300 and $150,019, respectively, in advisory fees (net of
fee waivers of $0, $0 and $3,027, respectively), of which [$128,100] and
[$109,319], respectively, was paid to ICI in 1995 and 1994.
Except for the expenses paid by the Adviser under the Advisory
Contract and Co-Administration Services Agreement, and by BISYS Fund Services
under the Management and Administration Agreement and by ICI under the Sub-
Advisory Contract with respect to the Small Cap Fund, the Funds bear all costs
of their operations Expenses attributable to a Fund are charged against the
assets of the Fund.
The Advisory Contract, Distribution Contract, Administration Agreement
and Sub-Advisory Contract will continue in effect with respect to a Fund from
year to year provided such continuance is approved annually (i) by the holders
of a majority of the outstanding voting securities of the Fund or by the Trust's
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. Each contract may be terminated with respect to a 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. The Advisory Contract,
Management and Administration Agreement, the Distribution Contract and Sub-
Advisory Contract shall terminate automatically in the event of their assignment
(as defined in the Investment Company Act of 1940).
The Board of Trustees of the Trust approved the continuance of each of
the Fund's Advisory Contract (including Sub-Advisory Contract with respect to
the Small Cap Fund), the Distribution Contract and the Co-Administration
Agreement at a meeting of the Board of Trustees on February 4, 1997.
Distribution Plans and Expenses
- -------------------------------
The Funds have adopted a Distribution Plan and related Shareholder
Servicing Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment
Company Act of 1940, after having concluded that there is a reasonable
likelihood that the Plan will benefit each Fund and its shareholders. The Plan
provides for a monthly payment by each Fund to BISYS Fund Services for expenses
incurred not to exceed an annual rate of the respective Funds total assets as
follows:
The Growth and Income Fund 0.50 of 1%
The Small Cap Fund 0.35 of 1%
-13-
<PAGE>
BISYS Fund Services will use all amounts received under the Plan for
payments to broker-dealers or financial institutions for their assistance in
distributing shares of each Fund and otherwise promoting the sale of Fund
shares. BISYS Fund Services may also use all or any portions of such fee to pay
expenses such as the printing and distribution of prospectuses sent to
prospective investors, the preparation, printing and distribution of sales
literature and expenses associated with media advertisements and telephone
services.
The Plans provide for BISYS Fund Services to prepare and submit to the
Board of Trustees on a quarterly basis written reports of all amounts expended
pursuant to the Plan and the purpose for which such expenditures were made. The
Plans may not be amended to increase materially the amount spent for
distribution expenses without approval by a majority of each Fund's outstanding
shares and approval of the Board of Trustees of the Trust and of the Trustees
who are not interested persons of the Trust and have no direct or indirect
financial interest in the operation of the Plans or in any agreements related to
the Plans ("non-interested Trustees") cast in person at a meeting called for the
purpose of voting on such Plans.
The Plans will continue in effect with respect to the Funds from year
to year provided such continuance is approved annually by a vote of the Board of
Trustees of the Trust and of the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on such Plans. The Board of Trustees of
the Trust approved the continuance of the Plans at a meeting of the Board of
Trustees on February 4, 1997.
For the year ended December 31, 1996, the Funds incurred the following
amounts in distribution-related fees under the Rule 12b-1 Distribution
Plan:
<TABLE>
<CAPTION>
Compensation Printing of
to Prospectuses and Retail Postage and
Broker- Shareholder Marketing Miscellaneous
Fund Dealers Advertising Reports Program Expenses Total
---- ------------ ----------- ---------------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Growth and $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Income Fund
Small Cap $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Fund
</TABLE>
PERFORMANCE INFORMATION
The Funds from time to time may advertise total return and cumulative
total return figures. Total return is the average annual compound rate of
return for the periods of one year and the life of each Fund, each ended on the
last day of a recent calendar quarter. Total return quotations reflect the
change in the price of each Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
shares of each Fund. Total return is calculated by finding the average annual
compound rates of return of a hypothetical investment over such periods, that
would compare the initial amount to the ending redeemable value of such
investment according to the following formula (total return is then expressed as
a percentage):
Where: P(1+T)/n/= ERV
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
-14-
<PAGE>
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative total return is the rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect the change in the price of each Fund's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in shares of each Fund. Cumulative total return is calculated by finding the
rate of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
The average annual total return information for the shares of the Funds
are as follows:
<TABLE>
<CAPTION>
Sales
Growth and Income Fund Charge* NAV
---------------------- ------ ---
<S> <C> <C>
One Year Ended December 31, 1996 12.03% 17.90%
Five Years Ended December 31, 1996 11.67% 12.78%
Ten Years Ended to December 31, 1996 12.27% 12.79%
<CAPTION>
Sales
Small Cap Fund Charge* NAV
-------------- ------ ---
<S> <C> <C>
One Year Ended December 31, 1996 9.53% 15.29%
Inception (January 4, 1993) to December 31, 1996 13.45% 14.93%
</TABLE>
* Includes maximum sales charge of 5.00%. Past performance is not predictive of
future performance.
From time to time, in marketing pieces and other Fund literature, each
Fund's or the Funds' total performance may be compared to the performance of
broad groups of comparable funds or unmanaged indices of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Funds. Sources for Fund performance information
may include, but are not limited to, the following:
Barron's, a Dow Jones and Company, Inc. business and financial weekly
--------
that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports
-------------
the performance rankings and ratings of a variety of mutual funds
investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
--------------------------------------
publication that periodically features the performance of a variety of
securities.
-15-
<PAGE>
Financial Times, Europe's business newspaper, which features from time
---------------
to time articles on international or country-specific funds.
Forbes, a national business publication that from time to time reports
------
the performance of specific investment companies in the mutual fund
industry.
Fortune, a national business publication that periodically rates the
-------
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
---------------
performance of U.S. mutual funds investing internationally.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
-------------------------------------------------------------------
weekly publication of industry-wide mutual fund averages by type of
fund.
Money, a monthly magazine that from time to time features both
-----
specific funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly
--------------
covers financial news.
Personal Investor, a monthly investment advisory publication that
-----------------
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on
--------------------------------
personal money management that periodically rates and ranks mutual
funds by performance.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
-------------------
regularly covers financial news.
*Wiesenberger Investment Companies Services, an annual compendium of
------------------------------------------
information about mutual funds and other investment companies,
including comparative data on funds' backgrounds, management policies,
salient features, management results, income and dividend records, and
price ranges.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share for the purpose of pricing and
redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Funds' transfer agent is open for business. The net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King, Jr.'s
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value
per share of each Fund is computed by dividing the value of the net assets of a
Fund (i.e. the value of the assets less the liabilities) by the total number of
shares outstanding. All expenses, including the advisory and administrative
fees, are accrued daily and taken into account for the purpose of determining
the net asset value. The public offering price (net asset value of $16.23 and
$16.58 for the Growth and Income Fund and Small Cap Fund, respectively, plus
maximum sales charge of 5.00% of the offering price) per
- ----------------------------------
*Sources of Fund performance information actually used by the Funds in the
past.
-16-
<PAGE>
share at December 31, 1996 was $17.14 and $17.45 for the Growth and Income Fund
and Small Cap Fund, respectively.
Portfolio securities are valued at the last quoted sales price as of
the close of business on the day the valuation is made, or lacking any sales, at
the mean between closing bid and asked prices. Price information on listed
securities is taken from the exchange where the security is primarily traded.
The value for each unlisted security is based on the last trade price for that
security on a day in which the security is traded. The value for each unlisted
security on a day such security is not traded shall be based on the mean of the
bid and ask quotations for that day. The value of each security for which
readily available market quotations exist will be based on a decision as to the
broadest and most representative market for such security. Options on stock
indices traded on national securities exchanges are valued at the close of
options trading on such exchanges (which is currently 4:10 p.m., Eastern time).
Stock index futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such exchanges
(which is currently 4:15 p.m., Eastern time). Other assets and securities for
which no quotations are readily available are valued at fair value as determined
in good faith by the Trustees. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. Short-term investments are valued at amortized
cost, which approximates market value. The Board of Trustees has determined in
good faith that amortized cost approximates fair market value.
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 Funds 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 Funds will not necessarily be paying the lowest spread or commission
available.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to
issuers directly or to dealers serving as market makers for the securities at a
net price. Generally, money market securities are traded on a net basis and do
not involve brokerage commissions. Under the Investment Company Act of 1940,
persons affiliated with Marine Midland, the Adviser, the Funds or BISYS Fund
Services are prohibited from dealing with the Funds as a principal in the
purchase and sale of securities except in accordance with regulations adopted by
the SEC. The Funds 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
Investment Company Act of 1940. Under the Investment Company Act of 1940,
persons affiliated with the Adviser, the Funds or BISYS Fund Services may act as
a broker for the Funds. In order for such persons to effect any portfolio
transactions for the Funds, 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 Funds to affiliated
brokers.
-17-
<PAGE>
The Adviser may, in circumstances in which two or more dealers are in
a position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms.
For the years ended December 31, 1996, 1995, and 1994 the Growth and
Income Fund paid an aggregate of $113,241, $117,652, $50,365, respectively, in
brokerage commissions.
For the years ended December 31, 1996, 1995, and 1994, the Small Cap
Fund paid an aggregate of $54,986, $12,091 and $7,006, respectively, in
brokerage commissions.
PORTFOLIO TURNOVER
The portfolio turnover rate measures the frequency with which a Fund's
portfolio of securities is traded. Each of the Funds will attempt to purchase
securities with intent of holding them for investment but may purchase and sell
portfolio securities whenever the adviser believes it to be warranted (e.g., the
Fund may sell portfolio securities in anticipation of an adverse market
movement). The purchase and sale of portfolio securities may involve dealer
mark-ups, underwriting commissions or other transaction costs. Generally, the
higher the portfolio turnover rate, the higher the transaction costs to the
Fund, which will generally increase the Fund's total operating expenses. In
order to qualify as a regulated investment company, less than 30% of the Fund's
gross income must be derived from the sale or other disposition of stock,
securities or certain other investments held for less than 3 months. Although
increased portfolio turnover may increase the likelihood of additional capital
gains for the Funds, each Fund expects to satisfy the 30% income test. The
Growth and Income Fund's portfolio turnover rate for the years ending December
31, 1996 and 1995 was 61.7% and 52.8% respectively. The Small Cap Fund
portfolio turnover rate for the years ended December 31, 1996 and 1995 was 35.7%
and 29.9%, respectively.
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for
at least seven days may exchange those shares for shares of the other portfolios
of the Trust and the HSBC Funds Trust which are available for sale in their
state. A shareholder who has paid a sales load in connection with the purchase
of shares of any of the Funds will not be subject to any additional sales loads
in the event such shareholder exchanges shares of one Fund for shares of another
Fund. Shareholders of any of the HSBC Money Market Funds who exchange shares of
any of such Money Market Funds for shares of any of such Funds of the Trust are
charged the sales loads applicable to the Funds as stated in the Prospectus.
Before effecting an exchange, shareholders should review the
prospectuses. Exercise of the exchange privilege is treated as a redemption for
Federal, state and local income tax purposes and, depending on the
circumstances, a gain or loss may be recognized. See the Prospectus discussion
of the federal tax treatment of load reductions or eliminations in an exchange.
The exchange privilege may be modified or terminated upon sixty (60)
days' written notice to shareholders. Although initially there will be no limit
on the number of times a shareholder may exercise the exchange privilege, the
Funds reserve the right to impose such a limitation. Call or write the Funds
for further details.
-18-
<PAGE>
REDEMPTIONS
The proceeds of a redemption may be more or less than the amount
invested and, therefore, a redemption may result in a gain or loss for Federal,
state and local income tax purposes. Any loss realized on the redemption of
Fund shares held, or treated as held, for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gain dividends
received on the redeemed shares.
A shareholder's account with a Fund remains open for at least one year
following complete redemption and all costs during the period will be borne by
the Fund. This permits an investor to resume investments in such Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive shareholder expense
burdens, each Fund reserves the right to adopt a policy pursuant to which it may
redeem, upon not less than 30 days' notice, shares of the Fund in an account
which has a value below a designated amount. However, any shareholder affected
by the exercise of this right will be allowed to make additional investments
prior to the date fixed for redemption to avoid liquidation of the account.
The Funds may suspend the right of redemption during any period when
(i) trading on the New York Stock Exchange is restricted or that Exchange is
closed, other than customary weekend and holiday closings, (ii) the Securities
and Exchange Commission has by order permitted such suspension or (iii) an
emergency exists making disposal of portfolio securities or determination of the
value of the net assets of the Funds not reasonably practicable.
Although it would not normally do so, the Trust has the right to pay
the redemption price in whole or in part in securities of a Fund's portfolio as
prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act
of 1940, as amended. Under that rule, the Trust must redeem its shares for cash
except to the extent that the redemption payments to any shareholder during any
90-day period would exceed the lesser of $250,000 or 1% of a Fund's net asset
value at the beginning of such period.
FEDERAL INCOME TAXES
Each of the Funds has elected to be treated as a regulated investment
company and qualified as such in 1996. Each Fund intends to continue to so
qualify by complying with the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") applicable to regulated investment companies so that it
will not be liable for Federal income tax with respect to amounts distributed to
shareholders in accordance with the timing requirements of the Code.
In order to qualify as a regulated investment company for a taxable
year, each Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock or
securities and gains from the sale or other disposition of stock or securities
or foreign currency gains related to investments in stock or securities or other
income (including gains from options, futures or forward contracts) derived with
respect to the business of investing in stock, securities or currency; (b)
derive less than 30% of its gross income from the sale or other disposition of
certain investments held less than three months (including stocks and securities
and excluding some amounts included in income as a result of certain hedging
transactions); and (c) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of each Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other stock and
securities limited, in the case of other securities for purposes of this
calculation, in respect of any one issuer, to an amount not greater than 5% of
each Fund's total assets or 10% of the voting stocks or securities of the
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 or
stocks or securities of other regulated
-19-
<PAGE>
investment companies). As such, and by complying with the applicable provisions
of the Code, a Fund will not be subject to Federal income tax on taxable income
(including realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code. Compliance with the "30%
test" described in clause (b) above may, in particular, limit a Fund's ability
to engage in some transactions involving options, short-term trading and stock
index futures.
The amount of capital gains, if any, realized in any given year will
result from sales of securities made with a view to the maintenance of a
portfolio believed by each Fund's management to be most likely to attain such
Fund's investment objective. Such sales and any resulting gains or losses, may
therefore vary considerably from year to year. Since at the time of an
investor's purchase of shares, a portion of the per share net asset value by
which the purchase price is determined may be represented by realized or
unrealized appreciation in each Fund's portfolio or undistributed income of such
Fund, subsequent distributions (or portions thereof) on such shares may be
taxable to such investor even if the net asset value of his shares is, as a
result of the distributions, reduced below his cost for such shares and the
distributions (or portions thereof) represent a return of a portion of his
investment.
Each Fund is required to report to the Internal Revenue Service (the
"IRS") all distributions of taxable dividends and of capital gains, as well as
the gross proceeds of share redemptions. Each Fund may be required to withhold
Federal income tax at a rate of 31% ("backup withholding") from taxable
dividends (including capital gain dividends) and the proceeds of redemptions of
shares paid to non-corporate shareholders who have not furnished such Fund with
a correct taxpayer identification number and made certain required
certifications or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. In addition, a Fund may be required to
withhold Federal income tax at a rate of 31% if it is notified by the IRS or a
broker that the taxpayer identification number is incorrect or that backup
withholding applies because of under reporting of interest or dividend income.
Distributions of taxable net investment income and net realized
capital gains will be taxable as described in the Prospectus whether made in
shares or in cash. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions will also be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
Any loss realized upon the redemption of shares held (or treated as
held) for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gain dividend received on the redeemed shares.
Any loss realized upon the redemption of shares within six months after receipt
of an exempt-interest dividend will be disallowed. All or a portion of a loss
realized upon the redemption of shares may be disallowed to the extent shares
are purchased (including shares acquired by means of reinvested dividends)
within 30 days before or after such redemption. Exchanges are treated as
redemptions for Federal tax purposes.
Different tax treatment is accorded to accounts maintained as IRAs,
including a penalty on early distributions. Shareholders should consult their
tax advisers for more information.
Each portfolio within the Trust will be separate for investment and
accounting purposes and will be treated as a separate taxable entity for Federal
income tax purposes. Provided that each Fund qualifies as a regulated
investment company under the Code, it will not be required to pay Massachusetts
income or excise taxes.
Gains or losses on sales of stock or securities by each Fund will
ordinarily be long-term capital gains or losses if the stock or securities have
been held by it for more than one year. However, if an Equity Fund writes a
covered call option which has an exercise price below the price of the
underlying stock or security at the time the call is written, or if it acquires
a put option with respect to stock or securities which have been held for less
than the applicable capital gain holding period, the holding period of such
stock or securities will be terminated or
-20-
<PAGE>
suspended for purposes of determining long-term capital gains treatment and will
start again only when such Fund enters into a closing transaction with respect
to such option or when such option expires.
Each Fund will be required to treat stock index futures, options on
such futures and options on the stock indices held at the end of each taxable
year as having been sold at market value on the last business day of the year.
For purposes of computing gain or loss, 60% of any gain or loss recognized on
these deemed sales, on actual sales or on termination by closing transactions,
delivery, exercise, lapse or otherwise will be treated as long-term capital gain
or loss, and the remaining 40% will be treated as short-term capital gain or
loss. However, under certain circumstances a Fund may be able to make an
election under which these provisions would not apply to such futures and
options.
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.
The "straddle" rules of Section 1092 of the Code may require the Funds
which are permitted to engage in such transactions to defer the recognition of
certain losses incurred on its transactions involving certain stock or
securities, futures contracts or options. Section 1092 defines a "straddle" to
include "offsetting positions" with respect to publicly traded stock or
securities. A "position" is defined to include a futures contract and an
option. In general, the Funds will be considered to hold offsetting positions
if there is a substantial diminution of its risk of loss from holding one
position by reason of its holding one or more other positions. Section 1092
generally provides that in the case of a straddle, any loss from the disposition
of a position (the "loss position") in the straddle shall be recognized for any
taxable year only to the extent that the amount of such loss exceeds the
unrealized gains on any offsetting straddle position (the "gain position") and
the unrealized gain on any successor position (which is a position that is
itself offsetting to the gain position and is acquired during a period
commencing 30 days prior to, and ending 30 days after, the disposition of the
loss position).
These special tax rules applicable to options and futures transactions
could affect the amount, timing and character of capital gain distributions to
shareholders by causing holding period adjustments, converting short-term
capital losses into long-term capital losses, and accelerating a Fund's income
or deferring its losses.
For purposes of the dividends-received deduction available to
corporations, dividends received by the Funds from taxable domestic corporations
in respect of any share of stock treated as debt-financed under the Code or held
by each Fund for 45 days or less (90 days or less in the case of certain
preferred stock) will not be treated as qualifying dividends. To the extent
applicable, for purposes of the dividends-received deduction, the holding period
of any share of stock will not include any period during which a Fund has an
option or a contractual obligation to sell, or has granted certain call options
with respect to, substantially identical stock or securities or, under Treasury
regulations to be promulgated, the Funds may diminish their risk of loss by
holding one or more other positions with respect to substantially similar or
related property. It is anticipated that these rules will operate so as to
reduce the portion of distributions paid by the Funds that will be eligible for
the dividends-received deduction available to corporate shareholders of such
Fund. The dividends-received deduction is reduced to the extent the shares of
the Funds with respect to which the dividends are received are treated as debt-
financed under the Code and is eliminated if the shares are deemed to have been
held for less than 46 days.
Corporate shareholders should also note that their basis in shares of
a Fund may be reduced by the untaxed portion (i.e., the portion qualifying for
- -
the dividends-received deduction) of an "extraordinary dividend" if the shares
have not been held for at least two years prior to declaration of the dividend.
Extraordinary dividends are dividends paid during a prescribed period which
equal or exceed 10% of a corporate shareholder's basis in its Fund shares or
which satisfy an alternative test based on the fair market value of the shares.
To the extent dividend payments received by corporate shareholders of a Fund
constitute extraordinary dividends, such shareholders' basis in their Fund
shares will be reduced and any gain realized upon a subsequent disposition of
such shares will therefore be increased.
-21-
<PAGE>
The untaxed portion of dividends received by such shareholders is
also included in adjusted alternative minimum taxable income in determining
shareholders' liability under the alternative minimum tax.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
Each Fund is subject to a 4% nondeductible excise tax to the extent
that it fails to distribute to its shareholders during each calendar year an
amount equal to at least the sum of (a) 98% of its taxable ordinary investment
income (excluding long-term and short-term capital gain income) for the calendar
year; plus (b) 98% of its capital gain net income for the one year period ending
on October 31 of such calendar year; plus (c) any ordinary investment income or
capital gain net income from the preceding calendar year which was neither
distributed to shareholders nor taxed to a Fund during such year. Each Fund
intends to distribute to shareholders each year an amount sufficient to avoid
the imposition of such excise tax.
Shareholders should consult their own tax advisers with respect to the
tax status of distributions from each Fund, and redemptions of shares of each
Fund, in their own states and localities. Shareholders who are not United
States persons should also consult their tax advisers as to the potential
application of foreign and U.S. taxes, including a 30% U.S. withholding tax (or
lower treaty rate) on dividends representing ordinary income to them.
SHARES OF BENEFICIAL INTEREST
The authorized capitalization of the Trust consists of an unlimited
number of shares of beneficial interest having a par value of $0.001 per share.
The Declaration of Trust authorizes the Trustees to classify or reclassify any
unissued shares of beneficial interest. Pursuant to that authority, the Board
of Trustees has authorized the issuance of shares in seven investment
portfolios.
All shares have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law or
where the matter involved affects only one class. As used in the Prospectus and
in this Statement of Additional Information, the term "majority", when referring
to the approvals to be obtained from shareholders in connection with general
matters affecting all of the Funds (e.g., election of Trustees and ratification
- -
of independent auditors), means the vote of a majority of each Fund's
outstanding shares represented at a meeting. The term "majority", when
referring to the approvals to be obtained from shareholders in connection with
approval of the Advisory Contract or changing the fundamental policies of a
Fund, means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held, and fractional votes for fractional shares held.
Vacancies on the Board of Trustees are filled by the Board of Trustees
if immediately after filling any such vacancy at least two-thirds of the
Trustees then holding office have been elected to such office by shareholders at
an annual or special meeting. In the event that at any time less than a
majority of Trustees holding office were elected by shareholders, the Board of
Trustees will cause to be held within 60 days a shareholders' meeting for the
purpose of electing Trustees to fill any existing vacancies. Trustees are
subject to removal with cause by two-thirds of the remaining Trustees or by a
vote of a majority of the outstanding shares of the Trust. The Trustees are
required to promptly call a shareholders' meeting for voting on the question of
removal of any Trustee when requested to do so in writing by not less than 10%
of the outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
-22-
<PAGE>
Each share of a Fund represents an equal proportionate interest in the
Fund with each other share of such Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund as
are declared in the discretion of the Trustees. In the event of liquidation or
dissolution, shares of each Fund are entitled to receive the assets belonging to
that Fund which are available for distribution, and of any general assets not
belonging to such Fund which are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by each Fund.
At April 3, 1997, no person owned of record or, to the knowledge of
management, beneficially owned more than 5% of the outstanding shares of any
Fund except as set forth below:
SHARES HELD & PERCENT OF CLASS
<TABLE>
<CAPTION>
NAME AND ADDRESS OF GROWTH AND SMALL
HOLDER OF RECORD INCOME FUND CAP FUND
<S> <C> <C>
Marine Midland Bank, N.A. 8,785,077 4,058,040
Buffalo, NY 14240 96.33% 97.72%
TOTAL SHARES OUTSTANDING 9,199,055 4,152,539
</TABLE>
Marine Midland has informed the Trust that it was not the beneficial
owner of any of the shares it held of record.
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
The Bank of New York has been retained, pursuant to a Custodian
Agreement, to act as custodian for each Fund. The Bank of New York's address is
90 Washington Street, New York, New York 10286. Under the Custodian Agreement,
the Custodian maintains a custody account or accounts in the name of each Fund;
receives and delivers all assets for each such Fund upon purchase and upon sale
or maturity; collects and receives all income and other payments and
distributions on account of the assets of each such Fund; pays all expenses of
each such Fund; receives and pays out cash for purchases and redemptions of
shares of each such Fund and pays out cash if requested for dividends on shares
of each such Fund, and maintains records for the foregoing services. Under the
Custodian Agreement, each such Fund has agreed to pay the Custodian for
furnishing custodian services a fee for certain transaction charges and out-of-
pocket expenses.
For the period January 1, 1995 to September 25, 1995 and the year ended
December 31, 1994, Marine Midland received $8,200 and $8,070, respectively, (all
of which was paid by the Adviser) from the Growth and Income Fund for custody
services. For the period from January 1, 1995 to September 25, 1995 and for the
year ended December 31, 1994, the Adviser paid Marine Midland $5,535 and $3,744,
respectively, for custody services with respect to the Small Cap Fund.
The Board of Trustees has authorized the Custodian in its capacity as
custodian of each such Fund to enter into Subcustodian Agreements with banks
that qualify under the Investment Company Act of 1940 to act as subcustodians
with respect to certain securities in each Fund's portfolio.
-23-
<PAGE>
BISYS Fund Services, Inc. has been retained by the Trust to act as
transfer agent and dividend disbursing agent for the Funds. Under the Agency
Agreement, BISYS Fund Services, Inc. performs general transfer agency and
dividend disbursing services. It maintains an account in the name of each
shareholder of record in each Fund reflecting purchases, redemptions, daily
dividend accruals and monthly dividend disbursements, processes purchase and
redemption requests, issues and redeems shares of each Fund, addresses and mails
all communications by each Fund to its shareholders, including financial
reports, other reports to shareholders, dividend and distribution notices, tax
notices and proxy material for its shareholder meetings, and maintains records
for the foregoing services. Under the Agency Agreement, each Fund has agreed to
pay BISYS Fund Services, Inc. $25.00 per account and subaccount per annum. In
addition, the Funds have agreed to pay BISYS Fund Services, Inc. certain
transaction charges, wire charges and out-of-pocket expenses incurred by BISYS
Fund Services, Inc.
The Growth and Income Fund paid $6,966 and $22,167, respectively to
PFPC Inc. (BISYS' predecessor) and BISYS for transfer agency services for the
year ended December 31, 1996. PFPC Inc. was paid $35,052 from the Growth and
Income Fund for transfer agency services for the fiscal year ending December 31,
1995. PFPC Inc. and its predecessor, the Adviser, were paid $22,291 in the
aggregate from the Growth and Income Fund for transfer agency services for the
fiscal year ended December 31, 1994.
The Small Cap Fund paid $2,881 and $13,336, respectively to PFPC In. and
BISYS for transfer agency services for the year ended December 31, 1996. For the
year ended December 31, 1995, PFPC Inc.'s predecessor, the Adviser, was paid
$14,619 in the aggregate by the Small Cap Fund for transfer agency services.
PFPC Inc.'s predecessor, the Adviser, was paid $12,045 in the aggregate from the
Small Cap Fund for transfer agency services for the year ended December 31,
1994.
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to the Funds pursuant to a Fund Accounting Agreement. Under such
Agreement, BISYS Fund Services, Inc. maintains the accounting books and records
for each Fund, maintains a monthly trial balance of all ledger accounts;
performs certain accounting services for the Fund, including calculation of the
net asset value per share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity. BISYS' fees for performing such services for the
Funds currently are paid under the Management and Administration Agreement.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as the independent auditors for the Funds.
Ernst & Young LLP provides audit services, tax return preparation and assistance
and consultation in connection with review of Securities and Exchange Commission
filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York
10019.
FINANCIAL STATEMENTS
The financial statements appearing in the most current fiscal year
Annual Report to shareholders and the report thereon of the independent auditors
appearing therein, namely Ernst & Young LLP, are incorporated by reference in
this Statement of Additional Information and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
The Annual Reports to shareholders which contains the referenced statements, are
available upon request and without charge.
-24-
<PAGE>
HSBC Mutual Funds Trust
International Equity Fund 3435 Stelzer Road, Columbus, Ohio 43219
Information: (800) 634-2536
HSBC ASSET MANAGEMENT AMERICAS INC.
-Investment Adviser and Co-Administrator
BISYS funds services-Distributor
HSBC Mutual Funds Trust (the "Trust") was organized in Massachusetts on
November 1, 1989 as a Massachusetts business trust and is an open-end,
management investment company with multiple investment portfolios, including
the diversified International Equity Fund (the "Fund").
The Fund's investment objective is to seek to provide investors with
long-term capital appreciation by investing at least 80% of its total assets in
equity securities (including American and European Depositary Receipts) issued
by companies based outside of the United States. The balance of the Fund's
assets will be invested in equity and debt securities of companies based in the
United States and outside of the United States including bonds and money market
instruments. Dividend income is expected to be incidental to the Fund's
investment objective. The Fund may also use other investment practices to
enhance return or to hedge against fluctuations in the value of portfolio
securities. See "Investment Objectives, Policies and Risk Factors - Other
Investment Practices" in this Prospectus.
The Fund's investment adviser is HSBC Asset Management Americas Inc.
(the "Adviser"), the North American investment affiliate of HSBC Holdings plc
(Hongkong and Shanghai Banking Corporation) and Marine Midland Bank. See
"Management of the Fund" in this Prospectus.
Prospective investors should be aware that shares of the Fund are not an
obligation of or guaranteed or endorsed by the HSBC Holdings plc or its
affiliates. In addition, such shares are not insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency and may
involve investment risks, including the possible loss of principal.
Shares of the Fund are offered for sale primarily through its
distributor as an investment vehicle for institutions, corporations, fiduciaries
and individuals. Certain banks, broker-dealers, financial institutions and
corporations (the "Participating Organizations") have agreed to act as
shareholder servicing agents for investors who maintain accounts at these
Participating Organizations and to perform certain services for the Fund.
The International Equity Fund offers and the Prospectus relates to two
classes of shares - the Institutional Class and Service Class. The
Institutional Class of shares are available to customers of 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. The Service Class of shares are available to all other
investors. The Institutional Class shares and Service Class shares are
identical in all respects, with the exception that Institutional Class shares
are not subject to a sales load and do not impose any shareholder servicing or
Rule 12b-1 fees.
This Prospectus sets forth concisely the information a prospective
investor should know before investing in the Fund. A Statement of Additional
Information (the "SAI"), dated April 29, 1997, containing additional detailed
information about the Fund, has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A copy
is available without charge and can be obtained by writing the Trust at the
above address, or calling the telephone number listed above.
------------
This Prospectus should be read and retained for ready reference to
information about the Fund.
------------
THESE SECURITIES HAVE 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.
April 29, 1997
<PAGE>
TABLE OF CONTENTS
Summary of Annual Fund Operating
Expenses.................... 2
Financial Highlights................ 4
Investment Objective, Policies
and Risk Factors ........... 5
Investment Restrictions............. 11
Management of the Fund.............. 12
Transactions with Affiliates........ 16
Determination of Net Asset Value.... 17
Purchase of Shares.................. 17
Redemption of Shares................ 21
Exchange Privilege.................. 23
Dividends, Distributions and Taxes.. 23
Account Services.................... 25
Transfer Agency and Fund Accounting
Services.................... 26
Custodian........................... 26
Performance Information............. 26
Shares of Beneficial Interest....... 27
----------------------
SUMMARY OF ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
The purpose of the following information is to assist an investor in
understanding the costs and expenses that an investor in the Fund would bear
directly or indirectly in connection with the purchase of Service Class and
Institutional Class shares. The information provided is based on expenses for
the Fund for the fiscal year ended December 31, 1996, as adjusted for estimated
operating expenses and voluntary reductions of investment advisory,
administration, co-administration and 12b-1 fees.
<TABLE>
<CAPTION>
Service Institutional
Shareholder Transaction Expenses: Shares Shares
------- -------------
<S> <C> <C>
Maximum sales charge imposed on purchases of shares of the Fund
(as a percentage of offering price)....................................... 5.00% 0.00%
----- -----
Certain investors will not be subject to the sales charge.
(See "Purchase of Shares" in this Prospectus.)
Annual Fund Operating Expenses:
Management Fees (net of fees not imposed)*........................................ 0.50% 0.50%
12b-1 Fees (net of fees not imposed)**............................................ 0.05% 0.00%
Other Expenses
Administrative Services Fee***............................................ 0.10% 0.10%
Co-Administrative/Shareholder Services Fee****............................ 0.00% 0.00%
Other Operating Expenses.................................................. 1.80% 1.80%
----- -----
Total Fund Operating Expenses (net of fees and expenses not imposed)*****......... 2.45% 2.40%
===== =====
Total Fund Operating Expenses Before Non-Imposition of Fees and Expenses.......... 3.27% 2.88%
===== =====
</TABLE>
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual
shareholder's own investment in the Fund. Rather, the table has been provided
only to assist investors in gaining a more complete understanding of fees,
charges and expenses. For a more detailed discussion of these matters,
investors should refer to the appropriate sections of this Prospectus.
2
<PAGE>
The following example should not be considered a representation of
past or future expenses. The expenses set forth above and example set forth
below reflect the non-imposition of certain fees and expenses. The actual
expenses may be greater or less than those shown. The following example assumes
a 5% annual return; however, the Fund's actual return will vary and may be
greater or less than 5%.
Example:
You would pay the following expenses on a $1,000 investment assuming a
5% annual return and the reinvestment of all dividends and distributions:++
<TABLE>
<CAPTION>
Service Institutional
Shares Shares
------- -------------
<S> <C> <C>
1 year......................... $ 74 $ 24
3 years........................ $123 $ 75
5 years........................ $174 $128
10 years....................... $315 $274
</TABLE>
- ----------------
* Reflects advisory fees not imposed as a result of a voluntary
waiver by the Adviser. If these fees had been imposed the Service Class and
Institutional Class shares would have paid 0.90% for advisory fees.
** The fee under the Fund's Distribution Plan and Agreement is
calculated on the basis of the average daily net assets of the Fund's Service
Shares at an annual rate not to exceed 0.35%. See "Management of the Fund -
Distribution Plan and Agreement."
*** Reflects administrative fees not imposed as a voluntarily
waiver by BISYS Fund Services of 0.05% for both share classes. See "Management
of the Fund - Administrator and Shareholder Servicing Agent."
**** Reflects co-administrative fees of 0.03% for both share classes
and shareholder servicer assistance fees of 0.04% for Service Shares voluntarily
waived by the Adviser. See "Management of the Fund - Shareholder Servicing
Agent, and Administrator."
***** Investors who purchase and redeem shares of the Fund through a
customer account maintained at a Participating Organization may be charged
additional fees by such Participating Organization related to services it
provides for such Investors. The Fund may also pay fees to Participating
Organizations for handling recordkeeping and certain administrative services
for the customers who invest in the Fund through accounts maintained at the
Participating Organization. The payment will not exceed 0.35% of the average
daily net assets maintained by such Participating Organization. See "Management
of the Fund - Servicing Agreements" for additional information.
+ Includes, among other things, Rule 12b-1 fees at the maximum
rate of 0.20%.
++ Includes a maximum sales charge for the Service Class Shares
from which certain shareholders may be exempt. See "Purchase
of Shares" in this Prospectus.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following supplementary financial information has been audited by Ernst
& Young LLP, whose report thereon appears in the Funds' 1996 Annual Report to
Shareholders. This information should be read in conjunction with the financial
statements and notes thereto.
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
Service Class Shares Institutional Class Shares
---------------------------------------------------------- -----------------------------------
For the For the For the Period For the For the Period
Year ended Year ended April 25, 1994(a) to Year ended March 1, 1995(a) to
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1996 December 31, 1995
----------------- ----------------- -------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $ 9.97 $ 9.55 $10.00 $ 9.98 $ 8.81
------ ------ ------ ------ ------
Investment Operations:
Net investment loss**.......... (0.02) (0.07) - (0.01) (0.03)
Net realized and unrealized
gain (loss) from investments.. 0.65 0.49 (0.43) 0.64 1.20
------ ------ ------ ------ ------
Total from investment
operations..................... 0.63 0.42 (0.43) 0.63 1.17
Distributions
- -------------
From excess of net realized
losses on investments......... - - (0.02) - -
------ ------ ------ ------ ------
Total distributions............. - - (0.02) - -
------ ------ ------ ------ ------
Net asset value, end of period.. $10.60 $ 9.97 $ 9.55 $10.61 $ 9.98
====== ====== ====== ====== ======
Total return(b)................. 6.32% 4.40% (4.30)%(d) 6.31% 13.28%(d)
Ratios/Supplemental Data:
- ------------------------
Net assets at end of period
(000)......................... $409 $ 658 $16,819 $21,100 $15,253
Ratio of expenses to average
net assets (with fee waivers). 2.10% 1.98% 2.16%(c) 2.04% 2.62%(c)
Ratio of net investment loss
to average net assets (with
fee waivers).................. (0.19)% (1.01)% (0.04)%(c) (0.10)% (0.34)%(c)
Ratio of expenses (without fee
waivers) to average net
assets*....................... 2.94% 3.66% 2.50%(c) 2.89% 3.12%(c)
Ratio of net investment loss
(without fee waivers) to
average net assets*........... (1.03)% (2.69)% (0.39)%(c) (0.95)% (0.84)%(c)
Portfolio turnover rate........ 77.91% 90.31% 29.37%(d) 77.91% 90.31%(d)
Average commission rate
paid(e)....................... $0.0006 N/A N/A $0.0006 N/A
</TABLE>
- ---------------
* During the period certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
** Based on average shares outstanding.
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions for the year ended December 31, 1996, divided by total number
of portfolio shares purchased and sold for which commissions were charged.
Disclosure is not required for periods prior to December 31, 1996.
4
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
Investment Objective
The investment objective of the Fund is to seek to provide investors
with long-term capital appreciation by investing at least 80% of its total
assets in equity securities (including American and European Depositary
Receipts) issued by companies based outside of the United States. The balance of
the Fund's assets will be invested in equity and debt securities of companies
based in the United States and outside of the United States including bonds and
money market instruments. Dividend income is expected to be incidental to the
Fund's investment objective. There is no assurance that the Fund's objective
will be achieved.
The International Equity Fund's investment objective is fundamental and
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the SAI. The other
investment policies and practices of the Fund, unless otherwise noted, are not
fundamental and may therefore be changed by a vote of the Board of Trustees
without shareholder approval.
Investment Policies
The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of equity investments in a variety of non-U.S. markets
with a focus on equity investments that have the potential for favorable price
appreciation and currency movements. The Fund invests primarily in appreciation
oriented equity securities of seasoned companies located outside the United
States. The Fund will invest its assets in securities traded on as many as
sixty foreign stock markets, including but not limited to Japan, the United
Kingdom, Germany, France, Switzerland, the Netherlands, Sweden, Australia, Hong
Kong and Singapore. Up to 20% of the Fund's total assets may be invested in
"emerging markets," including but not limited to Mexico, Hong Kong, Indonesia,
Malaysia, Thailand, South Africa and Peru. The Adviser believes that both the
selection of individual stocks and the allocation of the Fund's assets across
foreign stock markets are important in managing an international equity
portfolio. Within each country, criteria for selecting particular securities
are expected to include among other things, as determined by the Adviser, the
issuer's managerial strength, competitive market position, prospects for
profits and earnings growth, underlying asset value and relative valuation.
Risk Factors
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 domestic issuers. The Fund, in connection with its
purchases and sales of foreign securities, other than securities denominated in
United States Dollars, is
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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 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.
Other Investment Practices
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.
Long-Term and Short-Term Corporate Debt Obligations. The Fund may
invest up to 20% of its total assets 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 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.
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.
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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 the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer and any
call provisions.
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). 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. 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. The Fund may invest in ADRs, EDRs and CDRs 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 the holders of such receipts in respect of
the deposited securities.
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
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 not to enter into repurchase agreements exceeding in the aggregate 10% of
the market value of the Fund's total assets.
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 securities so purchased are subject to market
fluctuation during this period and no income is credited to the Fund until
settlement takes place. To facilitate such acquisitions, the Fund will maintain
with the custodian a separate account with a segregated portfolio of liquid
securities in an amount at least
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equal to such commitments. On the delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the securities held in the
separate account and/or from cash flow. It is the current policy of the 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.
Forward Currency Contracts. The Fund may conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market or through entering into forward
currency contracts to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. Dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. A forward contract involves an obligation to purchase or sell a
specific currency amount at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. Under normal circumstances, consideration of the
prospect for changes in currency exchange rates will be incorporated into the
Fund's long-term investment strategies. However, the Adviser believes that it
is important to have the flexibility to enter into forward currency contracts
when it determines that the best interests of the Fund will be served. The Fund
will convert currency on a spot basis from time to time, and investors should
be aware of the transaction costs of currency conversion.
When the Adviser believes that the currency of a particular country may
suffer a significant decline against the U.S. Dollar or against another
currency, the Fund may enter into a currency contract to sell, for a fixed
amount of U.S. Dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency.
At the maturity of a forward contract, the Fund may either sell a
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
Generally, the Fund will enter into forward currency contracts only as a
hedge against foreign currency exposure affecting the Fund. If the Fund enters
into forward currency contracts to cover activities which are essentially
speculative, the Fund will segregate cash or liquid securities with its
custodian, or a designated sub-custodian, in an amount at all times equal to or
exceeding the Fund's commitment with respect to such contracts.
Options on Currencies. The Fund will purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Fund's exposure to changes in dollar
exchange rates. Call options on foreign currency written by the Fund will be
"covered," which means that the Fund will own an equal amount of the underlying
foreign currency. With respect to put options on foreign currency written by
the Fund, the Fund will establish a segregated account with its custodian bank
consisting of cash or liquid securities in an amount equal to the amount the
Fund would be required to pay upon exercise of the put.
Options on Securities. The Fund may write (sell) covered put and call
options and purchase put and call options with a value of up to 25% of its
total assets. The Fund will engage in options trading principally for hedging
purposes. The Fund may write call options on a covered basis only, and will not
engage in option writing strategies for speculative purposes.
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The Fund may purchase call options, but only to effect a "closing
transaction" - i.e., to offset an obligation pursuant to a previously written
call option to prevent an underlying security from being called, or to permit
the sale of the underlying security or the writing of a new option on the
security prior to the outstanding option's expiration. The Fund may also
purchase securities with put options, sometimes referred to as stand-by
commitments, which are otherwise eligible for investment in amounts not
exceeding 10% of its total assets, when the Fund anticipates a decline in the
market value of securities in the Fund's portfolio. The Fund will incur costs,
in the form of premiums, on options it purchases and may incur transaction
costs on options that it exercises. The Fund will ordinarily realize a gain
from a put option it has purchased if the value of the securities subject to
the option decreases sufficiently below the exercise price to cover both the
premium and the transaction costs.
Interest Rate Futures Contracts. The Fund may, to a limited extent,
enter into interest rate futures contracts i.e., contracts for the future
delivery of securities or index-based futures contracts that are, in the opinion
of the Fund, sufficiently correlated with the Fund's portfolio. These
investments will be made primarily in an attempt to protect the Fund against the
effects of adverse changes in interest rates (i.e., "hedging"). When interest
rates are increasing and portfolio values are falling, the sale of futures
contracts can offset a decline in the value of the Fund's current portfolio
securities. The Fund will engage in such transactions solely for bona fide
hedging purposes and not for the purpose of engaging in speculative trading
practices. The SAI describes these investments in greater detail.
Options on Interest Rate Futures Contracts. The Fund may purchase put
and call options on interest rate futures contracts, which give the Fund the
right to sell or purchase the underlying futures contract for a specified price
upon exercise of the option at any time during the option period. The Fund may
also write (sell) put and call options on such futures contracts. For options on
interest rate futures that the Fund writes, the Fund will receive a premium in
return for granting to the buyer the right to sell to the Fund or to buy from
the Fund the underlying futures contract for a specified price at any time
during the option period. As with futures contracts, the Fund will purchase or
sell options on interest rate futures contracts solely for bona fide hedging
purposes and not as a means of speculative trading.
Futures, Related Options and Options on Stock Indices. The Fund may
attempt to reduce the risk of investment in equity securities by hedging a
portion of its portfolio through the use of certain futures transactions,
options on futures traded on a board of trade and options on stock indices
traded on national securities exchanges. In addition, the Fund may hedge a
portion of its portfolio by purchasing such instruments during a market advance
or when the Adviser anticipates an advance. In attempting to hedge its
portfolio, the Fund may enter into contracts for the future delivery of
securities and futures contracts based on a specific security, class of
securities or an index, purchase or sell options on any such futures contracts,
and engage in related closing transactions. The Fund will not engage in
transactions in futures contracts or options for speculation. The Fund will use
these instruments only as a hedge against changes resulting from market
conditions in the values of securities held in its portfolio or which it intends
to purchase.
A stock index assigns relative weightings to the common stocks in the
index, and the index generally fluctuates with changes in the market values of
these stocks. 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. 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.
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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.
In the case of options on stock index futures, the holder of the option
pays a premium and receives the right, upon exercise of the option at a
specified price during the option period, to assume the option writer's
position in a stock index futures contract. If the option is exercised by the
holder before the last trading day during the option period, the option writer
delivers the futures position, as well as any balance in the writer's futures
margin account. If it is exercised on the last trading day, the option writer
delivers to the option holder cash in an amount equal to the difference between
the option exercise price and the closing level of the relevant index on the
date the option expires. In the case of options on stock indexes, the holder of
the option pays a premium and receives the right, upon exercise of the option
at a specified price during the option period, to receive cash equal to the
dollar amount of the difference between the closing price of the relevant index
and the option exercise price times a specified multiple, call the "multiplier."
During a market decline or when the Adviser anticipates a decline, the
Fund may hedge a portion of its portfolio by selling futures contracts or
purchasing puts on such contracts or on a stock index in order to limit exposure
to the decline. This provides an alternative to liquidation of securities
positions and the corresponding costs of such liquidation. Conversely, during a
market advance or when the Adviser anticipates an advance, the Fund may hedge a
portion of its portfolio by purchasing futures, options on these futures or
options on stock indices. This affords a hedge against the Fund not
participating in a market advance at a time when it is not fully invested and
serves as a temporary substitute for the purchase of individual securities which
may later be purchased in a more advantageous manner. The Fund will sell options
on futures and on stock indices only to close out existing hedge positions.
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 from 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.
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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 Fund's total assets
after taking into account unrealized profits and unrealized losses on any such
contract; (iii) the Fund will not market, and is not marketing, itself as a
commodity pool or otherwise as a vehicle for trading in commodity futures and
related options; and (iv) the Fund will segregate assets to cover the futures
and options.
Portfolio Turnover. The Fund generally will not engage in the trading of
securities for the purpose of realizing short-term profits, but will adjust its
portfolio as it deems advisable in view of prevailing or anticipated market
conditions to accomplish its investment objective. For example, the Fund may
sell portfolio securities in anticipation of an adverse market movement. Other
than for tax purposes, frequency of portfolio turnover will not be a limiting
factor if the Fund considers it advantageous to purchase or sell securities.
The Fund does not anticipate that its annual portfolio turnover rate will
exceed 200%.
Illiquid Securities. The Fund will not invest in illiquid securities if
immediately after such investment more than 15% of the Fund's net assets (taken
at market value) would be invested in such securities. For this purpose,
illiquid securities include (a) securities that are illiquid by virtue of legal
or contractual restrictions on resale or the absence of a readily available
market; and (b) repurchase agreements not terminable within seven days. See
"Repurchase Agreements" above. Securities that have legal or contractual
restrictions on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. The Fund will not invest more than
10% of its net assets in Rule 144A securities.
INVESTMENT RESTRICTIONS
The SAI contains more information on the Fund's Investment Policies, and
also identifies the restrictions on the Fund's investment activities, which
provide among other things that the Fund may not:
(1) with respect to 75% of its total assets, invest more than 5% of its
total assets taken at market value in the securities of any one
issuer (excluding U.S. Government securities but including
securities subject to repurchase agreements) or purchase more than
10% of the outstanding voting securities of any single issuer.
(2) purchase the securities of issuers conducting their principal
business activity in the same industry immediately after the
purchase and as a result thereof, the value of the investments of
the Fund in that industry would exceed 25% of the current value of
the total assets of the Fund, except that there is no limitation
with respect to investments in obligations of the United States
Government, its agencies or instrumentalities which are backed by
the full faith and credit of the United States.
(3) borrow money, except that it may borrow from banks as a temporary
measure for emergency purposes where such borrowing would not exceed
5% of the total assets (including amount borrowed) taken at market
value. The Fund shall not purchase securities while such borrowings
are outstanding.
* * * * *
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The investment restrictions referred to above are fundamental and may be
changed only when permitted by law and approved by a majority of the
outstanding voting securities of the Fund. As used in this Prospectus, such
approval means approval by the lesser of (i) the holders of 67% or more of the
shares represented in a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (ii) the holders of
more than 50% of the outstanding shares.
MANAGEMENT OF THE FUND
The property, affairs and business of the Fund are managed by the Board
of Trustees. The Trustees elect officers who are charged with the responsibility
for the day-to-day operations of the Fund and the execution of policies
formulated by the Trustees. Information about the Trustees as well as the
Trust's executive officers may be found in the SAI under the heading
"Management - Trustees and Officers."
Investment Adviser
The Trust retains HSBC Asset Management Americas Inc. to act as the
investment adviser for the Fund. HSBC Asset Management Americas Inc. is the
North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai
Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York, New York 10177. At December 31, 1996, the Adviser managed over $3.8
billion of assets of individuals, pension plans, corporations and institutions.
Mr. Paul Guidone, Chief Investment Officer of HSBC Asset Management
Americas Inc. oversees the Fund's investments. Mr. Guidone does not manage the
portfolio but exercises general supervisory authority over all portfolio
managers. Mr. Guidone has been with the Adviser since 1994.
Mr. James B. McHugh, Director-Client Investment Services at the
Adviser, is responsible for the day-to-day management of the Fund's portfolio.
Mr. McHugh is also responsible for setting the asset allocation for domestic
balanced portfolios and several international equity portfolios. He chairs the
Americas Asset Allocation Committee and is also a member of HSBC's Global
Investment Strategy Group. Before joining the firm in late 1994, Mr. McHugh was
Director of Portfolio Management at Prudential Diversified Investment Strategies
("PDI"). At PDI, Mr. McHugh was responsible for asset allocation on over $8
billion of institutional assets, including three mutual funds.
Pursuant to the Advisory Contract, the Adviser furnishes continuous
investment guidance to the Trust consistent with the Fund's investment
objective and policies and provides administrative assistance in connection
with the operation of the Fund. Information regarding the investment
performance of the Fund is contained in the Fund's Annual Report dated December
31, 1996 and may be obtained, without charge, from the Trust.
Sub-Advisers
The Adviser retains HSBC Asset Management Europe Ltd., HSBC Asset Management
Hong Kong Ltd., HSBC Asset Management (Japan) KK, HSBC Asset Management
Singapore and HSBC Asset Management Australia Limited to act as sub-advisers
(the "Sub-Advisers") to the Fund. HSBC Asset Management Europe Ltd., HSBC Asset
Management Hong Kong Ltd., HSBC Asset Management (Japan) KK, HSBC Asset
Management Singapore and HSBC Asset Management
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Australia Limited along with the Adviser are all investment advisory affiliates
of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation).
HSBC Asset Management Europe Ltd. is the European investment arm of HSBC
Asset Management and manages equity and balanced portfolios with an emphasis on
the markets of the United Kingdom and other major European securities markets.
HSBC Asset Management Europe Ltd. also manages global fixed income portfolios.
HSBC Asset Management Europe Ltd. manages separate accounts for pension plans,
corporations, bank trust divisions, endowments and foundations and provides
continuous supervision for the entire James Capel family of Unit Investment
Trusts. Total assets managed by HSBC Asset Europe Ltd. amount to approximately
U.S.$22.8 billion. Its principal offices are located at 6 Bevies Marks, London,
EC3A 7QP, England.
HSBC Asset Management Hong Kong Ltd. is the Asia Pacific investment
arm of HSBC Asset Management. HSBC Asset Management Hong Kong Ltd. manages
approximately U.S.$12.9 billion of equity portfolios dedicated to the Pacific
Rim, Pacific Basin and the emerging markets of Southeast Asia. HSBC Asset
Management Hong Kong Ltd. was founded in 1973 and has its principal business
address at 10/F Citibank Tower, 3 Garden Road, Hong Kong. It is one of the
largest investment managers in the Asia Pacific region, managing accounts for
corporations, pension plans and the full-line of Wardley Unit Investment Trusts.
HSBC Asset Management (Japan) KK provides a full range of investment
services to clients investing in Japanese securities and Japanese investors
investing domestically or internationally. HSBC Asset Management (Japan) KK
manages approximately U.S.$470 million in assets. HSBC Asset Management (Japan)
KK has its principal office at 6/F No. 2 Tomoecho Annex. 3-8-27 Toranomon
Minato-ku, Tokyo, Japan.
HSBC Asset Management Singapore is one of the largest fund managers in
Singapore providing a full range of investment discretionary and advisory
services to government and government related bodies, corporations, trusts,
charities, insurance companies, and high-net-worth individuals. HSBC Asset
Management Singapore's investment management activities began in Singapore in
1982 and has its principal business address at 21 Collyer Quay, #20-02,
Hongkong Bank Building, Singapore 049320.
HSBC Asset Management Australia Limited is one of the largest fund
managers in Australia offering a full range of investment services to
superannuation funds, public bodies, corporations, trusts, charities, high-net-
worth individuals and unit trusts for smaller investors. HSBC Asset Management
Australia Limited manages U.S.$4.3 billion in assets. HSBC Asset Management
Australia Limited has its principal address at P.O. Box 291, Market Street,
Melbourne, Victoria 3000, Australia.
Under its Sub-Advisory Contract with the Adviser, each Sub-Adviser will
undertake at its own expense to furnish the Fund and the Adviser with micro-
and macro-economic research, advice and recommendations, and economic and
statistical data, with respect to the Fund's investments, subject to the
overall review by the Adviser and the Board of Trustees.
Banking Laws
Counsel to the Trust and special counsel to the Adviser, have advised
the Adviser that the Adviser may perform the services for the Fund contemplated
by the Advisory Contract without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. Such counsel has pointed out, however,
that this question has not
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been authoritatively determined and that judicial or administrative decisions or
interpretations of present Federal or state statutes and regulations relating to
the permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as future changes in Federal or state statutes and
regulations and judicial or administrative decisions or interpretations thereof,
could prevent the Adviser from continuing to perform such services for the Fund.
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.
Distributor
BISYS Fund Services, the Distributor (the "Distributor"), has its
principal office at 3435 Stelzer Road, Columbus, Ohio 43219. The Distributor
will receive orders for, sell, and distribute shares of the Fund.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant
of the Fund in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but is not specifically required to, include any or
all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of and review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Fund to, and
answer questions from Shareholder Servicers to enhance understanding of the Fund
and its investment objectives; and (iv) generally assist the activities of the
Shareholder Servicers.
The Adviser shall provide all personnel and facilities necessary in
order for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicer Assistant, the Adviser is
paid an annual fee equal to 0.04% of average daily Service Class net assets.
Administrator
The Trust retains BISYS Fund Services Limited Partnership d/b/a BISYS
Fund Services to act as the Administrator of the Fund in accordance with the
terms of the Management and Administration Agreement. Pursuant to the Management
and Administration Agreement, the Administrator, at its expense, generally
supervises the operation of the Trust and the Fund by reviewing the expenses of
the Fund monthly to ensure timing and accuracy of the Fund's operating expense
budget and by providing administrative personnel, office space and
administrative services reasonably necessary for the operation of the Trust and
the Fund, other than those services which are provided by the Adviser pursuant
to the Advisory Contract.
The Trust also retains the Adviser as Co-Administrator. Pursuant to the
Co-Administration Services Contract, the Adviser (i) manages the Funds'
relationship with the Fund's Service Providers, (ii) assists with negotiation
of
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<PAGE>
contracts with service providers and supervises the activities of those service
providers, (iii) serves as a liaison with Fund trustees, and (iv) assists with
general product management and oversight. For its services as Co-Administrator,
the Adviser is paid an annual fee equal to 0.03% of the Fund's average daily net
assets.
Servicing Agreements
The Fund may enter into agreements (the "Servicing Agreement") with
certain banks, financial institutions and corporations (the "Participating
Organizations") so that each Participating Organization handles recordkeeping
and provides certain administrative services for its customers who invest in the
Funds through accounts maintained at that Participating Organization. In such
cases the Participating Organization or one of its nominees will be the
shareholder of record as nominee for its customers and will maintain subaccounts
for its customers. In addition, the Participating Organization will credit cash
distributions to each customer account, process purchase and redemption
requests, mail statements of all transactions with respect to each customer and,
if required by law, distribute the Trust's shareholder reports and proxy
statements. However, any customer of a Participating Organization may become the
shareholder of record upon written request to its Participating Organization or
the Fund's Transfer Agent. Each Participating Organization will receive monthly
payments which in some cases may be based upon expenses that the Participating
Organization has incurred in the performance of its services under the Servicing
Agreement. The payments will not exceed, on an annualized basis, an amount equal
to 0.35% of the average daily value during the month of Fund shares in the
subaccount of which the Participating Organization is record owner as nominee
for its customers. Such payments will be separately negotiated with each
Participating Organization and will vary depending upon such factors as the
services provided and the costs incurred by each Participating Organization. The
payments may be more or less than the fees payable to BISYS Fund Services, Inc.
for the services it provides pursuant to the Transfer Agency Agreement for
similar services.
The payments will be made by the Fund to the Participating Organizations
pursuant to receive any compensation as transfer or dividend disbursing agent
with respect to the subaccounts maintained by Participating Organizations. The
Board of Trustees will review, which such expenditures were made pursuant to the
Servicing Agreements.
Under separate agreements, the Adviser (not the funds) may make
supplementary payments from its own revenues to a Participating Organization
that agrees to perform services such as advising customers about the status of
their subaccounts, the current yield and dividends declared to date and
providing related services a shareholder may request. Such payments will vary
depending upon such factors as the services provided and the cost incurred by
each Participating Organization.
Distribution Plan and Agreement
The Board of Trustees of the Trust has adopted a Distribution Plan and
related Shareholder Servicing Agreement (the "Plan") for the Service Class
shares pursuant to Rule 12b-1 of the 1940 Act, after having concluded that
there is a reasonable likelihood that the Plan will benefit the Fund and the
Service Class shareholders. The Plan provides with respect to the Service Class
shares only for a monthly payment by the Fund to reimburse the Distributor in
such amounts that they may request for expenses such as the printing and
distribution of prospectuses sent to prospective investors, the preparation,
printing and distribution of sales literature and expenses associated with
media advertisements and telephone services and other direct and indirect
15
<PAGE>
distribution-related expenses, including the payment of a monthly fee to
broker-dealers for rendering distribution-related asset introduction and asset
retention services. The Fund may also make payments to other broker-dealers or
financial institutions for their assistance in distributing shares of the Fund
and otherwise promoting the sale of the Fund's shares. The total monthly
payment is based on the Fund's Service Class shares average daily net assets
value during the preceding month and is calculated at an annual rate not to
exceed 0.35%.
The Plan provides for the Distributor to prepare and submit to the
Board of Trustees on a quarterly basis written reports of all amounts expended
pursuant to the Plan and the purpose for which such expenditures were made. The
Plan may not be amended to increase materially the amount spent for distribution
expenses without approval by a majority of the Fund's outstanding shares subject
to the Plan and approval of a majority of the non-interested Trustees.
Distribution expenses incurred in one year will not be carried forward into and
reimbursed in the next year for actual expenses incurred in the previous year.
Fees and Expenses
The Fund pays the Adviser as compensation for its advisory services a
monthly fee equal to an annual rate of 0.90% of the Fund's average daily net
assets. As compensation for its administrative services, BISYS receives from the
Fund a monthly fee equal to an annual rate of 0.15% of the Fund's average daily
net assets. The Distributor is not paid a fee by the Fund, but is reimbursed for
certain distribution expenses described above under "Distribution Plan and
Agreement" in this Prospectus. As compensation for their services, the Sub-
Advisers collectively receive fees from the Adviser at an annual rate not to
exceed 0.45% of the Fund's average daily net assets. The Adviser and the Sub-
Advisers may agree in advance not to impose a portion of their fees in the
future.
Investors who purchase and redeem shares of the Fund through a customer
account maintained at a Participating Organization may be charged one or more
of the following types of fees by Participating Organizations, as agreed upon
by the Participating Organization and the investor, with respect to the
customer services provided by the Participating Organization: account fees (a
fixed amount per month or per year); transaction 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).
TRANSACTIONS WITH AFFILIATES
Broker-dealers which are affiliates of the Adviser may act as brokers
for the Fund. At all times, however, their commissions, fees or other charges
must be reasonable and fair in comparison with those that would be paid to
unaffiliated firms for comparable transactions. The Fund will not do business
with nor pay commissions to affiliates of the Adviser in any portfolio
transactions where they act as principal. In placing orders for the purchase and
sale of portfolio securities, the Fund seeks the best execution at the most
favorable price, considering all of the circumstances. The Adviser may consider
sales of shares of the Fund and of other HSBC Funds as a factor in selecting a
broker. The Adviser may cause a 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.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share for the purpose of pricing purchase
and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Fund's transfer agent is open for business. The net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value
per share of each class is computed by dividing the value of the net assets of
each class (i.e., the value of the assets less the liabilities) by the total
number of shares outstanding of each class. All expenses, including the
management, advisory, sub-advisory and administrative fees, are accrued daily
and taken into account for the purpose of determining the net asset value.
Portfolio securities are valued at the last quoted sales price as of the
close of business on the day the valuation is made, or lacking any sales, at
the mean between closing bid and asked prices. Price information on listed
securities is taken from the exchange where the security is primarily traded.
The value for each unlisted security is based on the last trade price for that
security on a day in which the security is traded. The value of each security
for which readily available market quotations exist will be based on a decision
as to the broadest and most representative market for such security. Options on
stock indices traded on national securities exchanges are valued at the close
of options trading on such exchanges (which is currently 4:10 p.m., Eastern
time). Stock index futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
exchanges (which is currently 4:15 p.m., Eastern time). Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees. Securities may be valued on
the basis of prices provided by a pricing service when such prices are believed
to reflect the fair market value of such securities. Short-term investments are
valued at amortized cost, which approximates market value. The Board of
Trustees has determined in good faith that amortized cost equals fair market
value. All assets and liabilities initially expressed in foreign currencies
will be translated into U.S. Dollars at the bid price of such currencies
against U.S. Dollars last quoted by a major bank or broker. If such quotations
are not available as of the close of the New York Stock Exchange, the rate of
exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
PURCHASE OF SHARES
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. Prospectuses and
accompanying sales material can be obtained from the Transfer Agent or
Distributor.
The minimum initial investment requirement for the Fund is $1,000. The
minimum subsequent investment requirement is $50. There are no minimum
investment requirements with respect to investments effected through certain
automatic purchase and redemption arrangements on behalf of customer accounts
maintained at Participating Organizations. The minimum investment requirements
may be waived or lowered for investments effected on a group basis by certain
other institutions and their employees, such as pursuant to a payroll deduction
plan. All funds will be invested in full and fractional shares. The Trust
reserves the right to reject any purchase order. Compensation to salespersons
may vary depending upon whether Service Class or Institutional Class shares are
sold.
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<PAGE>
Orders for shares of the Fund will be executed at the net asset value
per share next determined after receipt of an order by the dealer, plus a sales
charge (Service Class shares only) varying with the amount invested in
accordance with the following schedule:
<TABLE>
<CAPTIONE>
Reallowance
to
Service
Total Sales Load Organizations
--------------------------- ----------------
As a % of
As a % of Net Asset As a % of
Offering Price Value Per Offering Price
Per Share Share Per Share
-------------- --------- ---------------
<S> <C> <C> <C>
Less than $50,000...................... 5.00% 5.26% 4.50%
$50,000 but less than $100,000......... 4.50% 4.71% 4.00%
$100,000 but less than $250,000........ 3.75% 3.90% 3.40%
$250,000 but less than $500,000........ 2.50% 2.56% 2.25%
$500,000 but less than $1 million...... 2.00% 2.04% 1.75%
$1 million and above................... 1.00% 1.01% 0.90%
</TABLE>
The sales charge applicable to the purchase of Service Class shares
will be waived on the following purchases: (1) by Trustees and officers of the
Trust and of HSBC 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
18
<PAGE>
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 a 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 any 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.
Right of Accumulation
The Fund offers to all shareholders a right of accumulation under
which any shareholder may purchase shares of the Fund at the offering price
applicable to the total of (a) the dollar amount then being purchased plus (b)
an amount equal to the offering price of the shareholder's combined holdings of
the shares of the Fund. For the right of accumulation to be exercised, a
shareholder must provide at the time of purchase confirmation of the total
number of shares of the Fund owned by such shareholder. Acceptance of the
purchase order is subject to such confirmation. The right of accumulation may be
amended or terminated at any time on sixty days notice to shareholders. Shares
held in the name of a nominee or custodian under pension, profit-sharing, or
other employee benefit plans may not be combined with other shares held in the
name of such nominee or custodian for other plans to qualify for the right of
accumulation.
Letter of Intent
By initially investing at least $1,000 and submitting a Letter of Intent to
the transfer agent, a "single purchaser" may purchase shares of the Fund and
other eligible HSBC Funds (other than Money Market Funds) during a 13-month
period at the reduced sales charge rates applying to the aggregate amount of
the intended purchases stated in the Letter of Intent. The Letter of Intent may
apply to purchases made up to 90 days before the date of submission of the
Letter. Dividends and distributions of capital gains paid in shares of the Fund
at net asset value will not apply towards the completion of the Letter of
Intent. The Letter of Intent does not obligate a shareholder to buy the amount
indicated in the Letter of Intent; however, if the intended purchases are not
completed during the Letter of Intent period, the shareholder will be obligated
to pay the Distributor an amount equal to the difference between the regular
sales charge applicable to a single purchase of the number of shares purchased
and the sales charge actually paid. For further details, including escrow
provisions, see the Letter of Intent. The Fund reserves the right to amend,
suspend or cease offering this program at any time.
Prospective investors who wish to obtain additional information
concerning investment procedures should contact the Transfer Agent at:
(800) 634-2536.
New Account Purchase By Wire
1. Telephone the Transfer Agent at (800) 634-2536 for instructions.
Please note your bank will normally charge a fee for handling this transaction.
19
<PAGE>
New Account Purchase By Mail
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and a check for $1,000 or more,
payable to HSBC Family of Funds to the Transfer Agent at:
HSBC Mutual Funds Trust, c/o BISYS, P.O. Box 163850, Columbus OH 43216-
3850
Third-party checks will not be accepted. Checks must be in U.S. dollars.
Please include the Fund name and your account number on all checks.
Additional Purchases By Wire and Mail
Additional purchases of shares may be made by wire by telephoning the
Transfer Agent at (800) 634-2536 and then instructing the wiring bank to
transmit the amount ($50 or more) of any additional purchase in Federal funds.
Additional purchases may also be made by mail by making a check ($50 or more)
payable to the HSBC Family of Funds indicating your fund account number on the
check and mailing it to the Transfer Agent at the address set forth above.
Purchase through Customer Accounts
Purchases of shares also may be made through customer accounts
maintained at Participating Organizations, including qualified Individual
Retirement and Keogh Plan accounts. Purchases will be made through a customer's
account only as directed by or on behalf of the customer on a direction form
executed prior to the customer's first purchase of shares of the Fund. For
example, a customer with an account at a Participating Organization may instruct
the Participating Organization to invest money in excess of a level agreed upon
between the customer and the Participating Organization in shares of the Fund
periodically or give other instructions to the Participating Organization within
limits prescribed by that Participating Organization.
Automatic Investment Plan
Investors may make regular monthly investments of $50 or more in shares
automatically from a checking or savings account if their bank is a member of
automated clearing house (ACH). Upon written authorization, the Transfer Agent
will electronically debit the investor's checking or savings account each month
and use the proceeds to purchase shares for the investor's account.
Approval by the investor's bank is required, so that establishment of a
program may require at least 30 days. The authorized amount and/or bank
information may be changed or the program terminated at any time by writing to
the Transfer Agent. A reasonable period (usually up to 15 days) may be required
after receipt of such instructions to implement them. The purchase application
contains the requirements applicable to this plan. The Trust reserves the right
to amend, suspend or cease offering this program at any time without prior
notice.
20
<PAGE>
REDEMPTION OF SHARES
Upon receipt by the Transfer Agent of a redemption request in proper form
($50 minimum), shares of the Fund will be redeemed at their next determined net
asset value. See "Determination of Net Asset Value" in this Prospectus. For the
shareholder's convenience, the Trust has established several different direct
redemption procedures. Redemptions of shares purchased by check will be
effected immediately upon clearance of the purchase check, which may take up to
15 days after those shares have been credited to the shareholder's account. A
redemption of shares is a taxable transaction on which gain or loss may be
recognized for tax purposes.
The Fund reserves the right to redeem (on 30 days' notice) accounts whose
values shareholders have reduced to $500 or less.
Redemption By Mail
1. Complete a letter of instruction indicating the Fund, the account
number and either the dollar amount or number of shares to be redeemed.
2. Sign the letter of instruction in exactly the same way the account is
registered. If there is more than one owner of the shares, all must sign.
3. If shares to be redeemed have a value of $5,000 or more, the
signature(s) must be guaranteed by a bank, trust company, broker, dealer,
credit union, securities exchange or association, clearing agency or savings
association. Signature guarantees by notaries public are not acceptable.
Further documentation, such as copies of corporate resolution and instruments
of authority, may be requested from corporations, administrators, executors,
personal representatives, trustees or custodians to evidence the authority of
the person or entity making the redemption request.
4. If shares to be redeemed are held in certificate form, enclose the
certificates with the letter. Do not sign the certificates and for your
protection use registered mail.
5. Mail the letter to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Checks for redemption proceeds will normally be mailed within seven days to
the shareholder's address of record.
Upon request, the proceeds of a redemption amounting to $1,000 or more will
be sent by wire to the shareholder's predesignated bank account. Please note a
wire transfer fee will normally be charged. When proceeds of a redemption are
to be paid to someone other than the shareholder, either by wire or check, the
signature(s) on the letter of instruction must be guaranteed regardless of the
amount of the redemption.
21
<PAGE>
Redemption By Expedited Redemption Service
If shares are held in book credit form and the Expedited Redemption Service
has been elected on the Purchase Application on file with the Trust's Transfer
Agent, redemption of shares may be requested on any day the Transfer Agent is
open for business by telephone or letter. A signature guarantee is not
required.
1. Telephone the request to the Transfer Agent at (800) 634-2536; or
2. Mail the request to the Transfer Agent at the address set forth under
"Purchase of Shares" in this Prospectus.
Proceeds of Expedited Redemptions of $1,000 or more will be wired to the
shareholder's bank indicated in the Purchase Application. If an Expedited
Redemption request is received by the Trust's transfer agent by 4:00 p.m.
(Eastern time) on a day the transfer agent is open for business, the redemption
proceeds will be transmitted to the shareholder's bank on the next business
day. A check for proceeds of less than $1,000 will be mailed to the
shareholder's address of record.
The Fund's Transfer Agent employs reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Transfer Agent fails
to employ such reasonable procedures, the Transfer Agent may be liable for any
loss, damage or expense arising out of any telephone transactions purporting to
be on a shareholder's behalf. In order to assure the accuracy of instructions
received by telephone, the transfer agent requires some form of personal
identification prior to acting upon instructions received by telephone, records
telephone instructions and provides written confirmation to investors of such
transactions.
Systematic Withdrawal Plan
An owner of $10,000 or more of shares of the Fund may elect to have
periodic redemptions from his account to be paid on a monthly basis. The minimum
periodic payment is $50. A sufficient number of shares to make the scheduled
redemption will be redeemed on the first or the fifteenth day of the month.
Redemptions for the purpose of making such payments may reduce or even exhaust
the account if your monthly checks exceed the dividend, interest and capital
appreciation, if any, on your shares. A shareholder may request that these
payments be sent to a predesignated bank or other designated party. Shareholders
holding share certificates are not eligible to establish a Systematic Withdrawal
Plan because share certificates must accompany all withdrawal requests.
Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a
return on your investment. Payments to you pursuant to the Systematic
Withdrawal Plan are derived from the redemption of shares in your account and
is a taxable transaction on which gain or loss may be recognized for Federal,
state and local income tax purposes.
Reinstatement Privilege
A shareholder in the Fund who has redeemed shares may reinvest, without a
sales charge, up to the full amount of such redemption at the net asset value
determined at the time of the reinvestment within 60 days of the original
redemption. This privilege must be effected within 60 days of the redemption
and the investor at the time of purchase must provide the number of shares
redeemed within the 60 day period. The shareholder must reinvest
22
<PAGE>
in the same Fund and account from which the shares were redeemed. A redemption
is a taxable transaction and gain or loss may be recognized for Federal income
tax purposes even if the reinstatement privilege is exercised. Any loss realized
upon the redemption will not be recognized as to the number of shares acquired
by reinstatement, except through an adjustment in the tax basis of the shares so
acquired.
Redemption through Customer Accounts
Investors who purchase shares through customer accounts maintained at
Participating Organizations may redeem those shares only through the
Participating Organization. In some cases, a customer may instruct the
Participating Organization which maintains the account through which the
customer purchases shares to redeem shares periodically as required to bring
the customer's account balance up to a level agreed upon between the customer
and the Participating Organization. If a redemption request with respect to
such an automatic redemption arrangement is received by the transfer agent by
4:00 p.m. (Eastern time) on a day the Transfer Agent is open for business, the
redemption proceeds will be transmitted on the next business day to the
investor's customer account (unless otherwise specified by the Participating
Organization).
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange shares of one Fund for shares of any of the other
portfolios of the Trust and the HSBC Funds Trust which are available for sale
in their state. A shareholder who has paid a sales load in connection with the
purchase of shares of any of the Funds will be subject only to that portion of
the sales load of the Fund into which the shareholder is exchanging which
exceeds the sales load originally paid by the shareholder. The Transfer Agent
must be advised of the applicability of the sales charge differential when the
exchange order is placed. Shareholders of any of the HSBC Money Market Funds
who exchange shares of any such Money Market Funds for shares of any of the
Funds of HSBC Mutual Funds Trust are charged the sales load applicable to such
Funds as stated in the Prospectus. Before effecting an exchange, shareholders
should review the prospectuses. Exercise of the exchange privilege is treated
as a redemption for Federal and New York State and City income tax purposes
and, depending on the circumstances, a gain or loss may be recognized. The
Trust reserves the right to change the terms or terminate the Exchange
Privilege at any time upon at least 60 days prior written notice to
shareholders. Exchanges may be made by telephonic request to the Transfer Agent
at (800) 634-2536. For a discussion of risks associated with unauthorized
telephone transactions, see "Redemption by Expedited Redemption Service".
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to distribute annually substantially all of its net
investment income in the form of dividends. The Fund pays dividends and
distributes net capital gains, if any, at least once annually. The Fund's
dividend and capital gains distributions may be reinvested in additional shares
or received in cash.
In order to satisfy certain annual distribution requirements of the
Internal Revenue Code of 1986 (the "Code"), the Fund may declare special
dividend and capital gains distributions during October, November or December as
of a record date in such a month. Such distributions, if paid to shareholders in
the following January, are deemed for Federal income tax purposes to have been
paid by the Fund and received by shareholders on December 31 of the prior year.
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<PAGE>
The Fund will be treated as a separate entity for Federal income tax
purposes, notwithstanding that it is one of multiple series of the Trust. The
Fund has elected to be treated, and has qualified and intends to continue to
qualify to be treated as a regulated investment company for each taxable year
by complying with the provisions of the Code applicable to regulated investment
companies so that it will not be liable for Federal income tax with respect to
its net investment income and net realized capital gains distributed to
shareholders in accordance with the timing requirements of the Code. The Fund
intends to distribute substantially all of its net investment income and net
realized capital gains to its shareholders for each taxable year.
Dividends derived from the Fund's taxable net investment income (if any)
and the excess of net short-term capital gain over net long-term capital loss
will be taxable to the Fund's shareholders as ordinary income, whether such
dividends are invested in additional shares or received in cash.
Distributions of the excess of net long-term capital gain over net
short-term capital loss designated by the Fund as capital gain dividends will
be taxable as long-term capital gains, regardless of how long a shareholder has
held his Fund shares, whether they are invested in additional shares or
received in cash. Dividends and distributions will generally not qualify for
the dividends-received deduction for corporations.
Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect
to such shares.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency denominated debt securities or
payables or receivables denominated in a foreign currency are subject to
Section 988 of the Code which causes such gains and losses to be treated as
ordinary income and losses rather than capital gains and losses and may affect
the amount, timing and character of distributions to shareholders.
If the Fund invests in certain "passive foreign investment companies"
("PFICs") which do not distribute their income on a regular basis, it could be
subject to Federal income tax (and possibly additional interest charges) on a
portion of any "excess distribution" or gain from the disposition of such
shares even if it distributes such income to its shareholders. If the Fund
elects to treat the PFIC as a "qualified electing fund" ("QEF") and the PFIC
furnishes the Fund certain financial information in the required form, the Fund
would instead be required to include in income each year a portion of the
ordinary earnings and net capital gains of the QEF, regardless of whether
received, and such amounts would be subject to the various distribution
requirements described above.
It is expected that dividends and interest from non-U.S. sources received
by the Fund will be subject to non-U.S. withholding taxes. Such withholding
taxes may be reduced or eliminated under the terms of applicable United States
income tax treaties, and the Fund intends to undertake any procedural steps
required to claim the benefits of such treaties. With respect to any non-U.S.
taxes (including withholding taxes) actually paid by the Fund, if more than 50%
in value of the Fund's total assets at the close of any taxable year consists of
stocks or securities of any non-U.S. corporations, the Fund may elect to treat
any non-U.S. taxes paid by it as paid by its shareholders. If the Fund does not
make the election permitted under Section 853, any foreign taxes paid or accrued
will
24
<PAGE>
represent an expense to the Fund which will reduce its investment company
taxable income. Absent this election, shareholders will not be able to claim
either a credit or a deduction for their pro rata portion of such taxes paid by
the Fund, nor will shareholders be required to treat as part of the amounts
distributed to them their pro rata portion of such taxes paid.
In the event the Fund makes the election described above to pass through
non-U.S. taxes to shareholders, shareholders will be required to include in
income (in addition to any distributions received) their proportionate portion
of the amount of non-U.S. taxes paid by the Fund and will be entitled to claim
either a credit or deduction for their portion of such taxes in computing their
U.S. Federal income tax liability. Availability of such a credit or deduction
is subject to certain limitations. Shareholders will be informed each year in
which the Fund makes the election regarding the amount and nature of foreign
taxes to be included in their income for U.S. Federal income tax purposes.
Each year the Fund will notify shareholders of the character of its
dividends and distributions for federal income tax purposes. Depending on the
residence of the shareholder for tax purposes, such dividends and distributions
may also be subject to state, local or foreign tax consequences of ownership of
Fund shares in their particular circumstances.
Shareholders who are not U.S. persons under the Code should also consult
their tax advisers as to the possible application of U.S. taxes, including a
30% U.S. withholding tax (or lower treaty rate) on dividends.
ACCOUNT SERVICES
All transactions in shares of the Fund will be reflected in confirmations
for each shareholder and a quarterly shareholder statement. In those cases
where a Participating Organization or its nominee is shareholder of record of
shares purchased for its customer, the Trust has been advised that the
statement may be transmitted to the customer in the discretion of the
Participating Organization. Shareholders can write or call the Trust's transfer
agent at P.O. Box 163850, Columbus, OH 43216-3850, or telephone: (800) 634-2536
with any questions relating to their investments in Fund shares.
Participating Organizations or their nominees may be the shareholders of
record as nominees for their customers, and may maintain subaccounts for those
customers. Any such customer may become the shareholder of record upon written
request to the Participating Organization, or Transfer Agent.
As transfer agent, BISYS Fund Services, Inc. will transmit promptly to each
of its customers for whom it processes purchases and redemptions of shares and
to each Participating Organization copies of all reports to shareholders, proxy
statements and other Trust communications. The Trust's arrangements with the
transfer agent and the subtransfer agent arrangements require Participating
Organizations to grant investors who purchase shares through customer accounts
the opportunity to vote their shares by proxy at all shareholder meetings of
the Trust. In certain cases, a customer of a Participating Organization may
have given his Participating Organization the power to vote shares on his
behalf. Customers with accounts at Participating Organizations should consult
their Participating Organization for information concerning their rights to
vote shares.
25
<PAGE>
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
Pursuant to an Agency Agreement, BISYS Fund Services, Inc. (the "Transfer
Agent") acts as the Fund's transfer and dividend disbursing agent and is
responsible for maintaining account records detailing ownership of Fund shares
and for crediting income, capital gains and other changes in share ownership to
investors' accounts. For its services the Transfer Agent receives from the Fund
an annual base fee of $25 per shareholder account plus additional transaction
costs. Effective on or about June 15, 1997, BISYS Fund Services, Inc. will also
provide certain accounting services for the Fund pursuant to the Fund
Accounting Agreement. BISYS' fee for performing accounting services will be
paid under the Management and Administration Agreement. As of the date of this
Prospectus, State Street Bank and Trust Company is responsible for these
services.
CUSTODIAN
As of the date of this Prospectus, State Street is the Fund's custodian.
Effective on or about June 15, 1997, The Bank of New York will act as the
Fund's Custodian. Pursuant to the Custodian Agreement, the Custodian is
responsible for holding the Fund's cash and portfolio securities. The Custodian
may enter into sub-custodian agreements with certain qualified banks.
PERFORMANCE INFORMATION
The Fund's total return may be included in advertisements or mailings to
prospective investors. The Fund may occasionally cite statistical reports
concerning its performance. The Fund may also from time to time compare its
performance to various unmanaged indices, such as the Morgan Stanley Capital
International Index (EAFE). (See the SAI for more details concerning the
various indices which might be used.) The Fund's "total return" refers to the
average annual compounded rates of return over one, five and ten year periods
or for the life of the Fund (which periods will be stated in the advertisement)
that would equate an initial amount invested at the beginning of a stated
period to the ending redeemable value of the investment, assuming the deduction
of the maximum sales charge and the reinvestment of all dividend and capital
gains distributions. The Fund calculates its total return by adding the total
dividends paid for the period to the Fund's ending net asset value per share
for that period and dividing that sum by the net asset value per share of the
Fund at the beginning of the period. The Fund may also furnish total return
calculations based on investments at various sales charge levels or at net
asset value. Any performance data which is based on the Fund's net asset value
per share would be reduced if a sales charge were taken into account. Total
return figures are based on historical earnings and are not intended to
indicate future performance. Shareholders of the Service Class of shares will
experience a lower net return on their investment than shareholders of the
Institutional Class of shares because of the sales load, Rule 12b-1 fee and
shareholder servicer assistance fee to which Service Class shareholders will be
subject.
Investors who purchase and redeem shares of the Fund through a customer
account maintained at a Participating Organization may be charged by such
Participating Organization certain fees, as agreed upon by the Participating
Organization and the investor, with respect to the customer services provided
by the Participating Organization. Such fees will have the effect of reducing
the return for those investors. See "Management of the Funds - Servicing
Agreements" in the Prospectus.
26
<PAGE>
SHARES OF BENEFICIAL INTEREST
The authorized capital stock of the Trust consists of an unlimited number
of shares of beneficial interest having a par value of $0.001 per share. The
Trust's Board of Trustees has authorized the issuance of multiple series
representing shares in corresponding investment portfolios of the Trust. All
shares of the Trust have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law or
where the matter involved affects only one class. The International Equity Fund
offers and the Prospectus relates to two classes of shares - the Institutional
Class and Service Class. The Institutional Class of shares are available to
customers of 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. The Service Class of shares
are available to all other investors. The Institutional Class shares and
Service Class shares are identical in all respects, with the exception that
Institutional Class shares are not subject to a sales load and do not impose
any shareholder servicing or Rule 12b-1 fees. All shares of the Trust issued
and outstanding are fully paid and nonassessable. The Trust is not required by
law to hold annual shareholder meetings and does not intend to hold such
meetings; however, the Trustees are required to call a meeting for the purpose
of considering the removal of persons serving as Trustee if requested to do so
in writing by the holders of not less than 10% of the outstanding shares of the
Trust. The Fund will be treated as a separate entity for Federal income tax
purposes. For more details concerning the voting rights of shareholders, see
the SAI.
Vacancies on the Board of Trustees are filled by the Board of Trustees if
immediately after filling any such vacancy at least two-thirds of the Trustees
then holding office have been elected to such office by shareholders at an
annual or special meeting. In the event that at any time of Trustees holding
office were elected by shareholders, the Board of Trustees will cause to be held
within 60 days a shareholders' meeting for the purpose of electing Trustees to
fill any existing vacancies. Trustees are subject to removal with cause by two-
thirds of the remaining Trustees or by a vote of a majority of the outstanding
shares of the Trust. The Trustees are required to promptly call a shareholders'
meeting for voting on the question of removal of any Trustee when requested to
do so in writing by not less than 10% of the outstanding shares of the Trust. In
connection with the calling of such shareholders' meetings, shareholders will be
provided with communication assistance.
Under Massachusetts law, it is possible that shareholders of a
Massachusetts business trust might, under certain circumstances, be held
personally liable for acts or obligations of the Trust. The Trust's Declaration
of Trust contains an express disclaimer of shareholder liability for acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust's assets for all loss and expense of any
shareholder held personally liable by reason of being or having been a
shareholder of the Trust. Thus, the risk that a shareholder of the Fund could
incur financial loss on account of shareholder liability is considered remote
since it is limited to circumstances in which the disclaimer is inoperative and
the Fund itself would be unable to meet its obligations.
27
<PAGE>
HSBC Mutual Funds Trust
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
HSBC Asset Management
HSBC /SM/ Mutual Funds Trust
3435 Stelzer Road
Columbus OH 43219
Information:
(800) 634-2536
Investment Adviser and Co-Administrator
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, New York 10177
Distributor, Administrator, Transfer Agent and
Fund Accounting Agent
BISYS Fund Services
3435 Stelzer Road
Columbus OH 43219
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
Legal Counsel
Baker & McKenzie
805 Third Avenue
New York, New York 10022
No dealer, salesman, or other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus, in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied
upon as having been authorized by the Trust, the Distributor or the Investment
Adviser. This Prospectus does not constitute an offering in any state in which
such offering may not lawfully be made.
<PAGE>
HSBC Mutual Funds Trust
INTERNATIONAL EQUITY FUND
3435 Stelzer Road
Columbus, Ohio 43219
Information: (800) 634-2536
STATEMENT OF ADDITIONAL INFORMATION
HSBC Mutual Funds Trust (the "Trust"), is an open-end, management
investment company with multiple portfolios, including the diversified
International Equity Fund (the "Fund").
The investment objective of the Fund is to seek to provide investors with
long-term capital appreciation by investing at least 80% of its total assets in
equity securities (including American and European Depositary Receipts) issued
by companies based outside of the United States. The balance of the Fund's
assets will be invested in equity and debt securities of companies based in the
United States and outside of the United States including bonds and money market
instruments. Dividend income is expected to be incidental to the Fund's
investment objective.
The Fund offers two classes of shares - the Institutional Class and Service
Class shares. The Institutional Class shares are available to customers of
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. The Service Class shares are available to
all other investors. The Institutional Class and Service Class shares are
identical in all respects, with the exception that Institutional Class shares
are not subject to a sales load and do not impose any shareholder servicing or
Rule 12b-1 fees. See "Shares of Beneficial Interest" herein.
There is no assurance that the Fund's investment objective will be
achieved.
Shares of the Fund are primarily offered for sale by BISYS Fund Services,
the Sponsor and Distributor, as an investment vehicle for institutions,
corporations, fiduciaries and individuals. Certain banks, broker-dealers,
financial institutions and corporations ("Participating Organizations") have
agreed to act as shareholder servicing agents for investors who maintain
accounts at the Participating Organizations and to perform certain services for
the Fund.
This Statement of Additional Information (the "SAI") is not a prospectus
and is only authorized for distribution when preceded or accompanied by the Fund
Prospectus dated April 29, 1997. This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus, additional copies of which may be obtained
without charge from the Trust.
April 29, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT POLICIES AND RISK FACTORS........................................ 1
INVESTMENT RESTRICTIONS..................................................... 6
MANAGEMENT.................................................................. 8
SERVICE ORGANIZATIONS....................................................... 12
PERFORMANCE INFORMATION..................................................... 13
DETERMINATION OF NET ASSET VALUE............................................ 15
PORTFOLIO TRANSACTIONS...................................................... 16
PORTFOLIO TURNOVER.......................................................... 17
EXCHANGE PRIVILEGE.......................................................... 17
REDEMPTIONS................................................................. 17
FEDERAL INCOME TAXES........................................................ 18
SHARES OF BENEFICIAL INTEREST............................................... 21
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................... 22
INDEPENDENT AUDITORS........................................................ 23
FINANCIAL STATEMENTS........................................................ 23
</TABLE>
-ii-
<PAGE>
INVESTMENT POLICIES AND RISK FACTORS
The following information supplements the discussion of the investment
objective and policies of the Fund found under "Investment Objective, Policies
and Risk Factors" in the Prospectus.
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
in the management's view to achieve the investment objective of the Fund. The
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 objective than would
otherwise be the case. A higher incidence of portfolio turnover will result in
greater transaction costs to the Fund. During periods of relatively stable
market and economic conditions, management expects that the portfolio turnover
of the Fund will not exceed 200% annually.
Loans of Portfolio Securities. The Fund may 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 Fund in a segregated account. 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. 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 a value which exceeds 10% of the
current value of such 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, or the
Adviser.
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depository Receipts ("EDRs") and other depositary receipts. 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. 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. The Fund may invest in ADRs,
EDRs and CDRs 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 the holders of such receipts in
respect of the deposited securities.
There are certain risks associated with investments in unsponsored ADR and
EDR programs. Because the non-U.S. company does not actively participate in the
creation of the ADR or EDR program, the underlying agreement for service and
payment will be between the depositary and the shareholder. The company issuing
the stock underlying the ADRs or EDRs pays nothing to establish the unsponsored
facility, as fees for ADR or EDR issuance and cancellation
<PAGE>
are paid by brokers. Investors directly bear the expenses associated with
certificate transfer, custody and dividend payment.
In an unsponsored ADR or EDR 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 ADRs and EDRs, there is always the risk of
loss due to currency fluctuations.
Writing Covered Calls. The Fund may engage in the writing of covered call
options (options on securities which the Fund owns) provided the options are
listed on a national securities exchange. 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.
To the extent permitted in the Prospectus, 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 its 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 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 its 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.
-2-
<PAGE>
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 purchased. 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 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.
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
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.
-3-
<PAGE>
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.
Forward Foreign Exchange Contracts. The Fund may enter into forward
foreign exchange contracts. A forward foreign exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and its customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract, the Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Fund may enter into forward foreign exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund anticipates
the receipt in a foreign currency of dividend or interest payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, a Fund will attempt to protect
itself against an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Fund will not enter into forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency. The
Fund's custodian will place cash or readily marketable securities into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign exchange contracts
requiring the Fund to purchase foreign currencies or forward contracts entered
into for non-hedging purposes. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts.
-4-
<PAGE>
The Fund generally will not enter into forward contracts with a term of
greater than one year. Using forward contracts to protect the value of the
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which the Fund can achieve at some future
point in time.
While the Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks
and, while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving a complete hedge or
may expose the Fund to risk of foreign exchange loss.
Risks Involving Futures Transactions. Transactions by the Fund in futures
contracts and options thereon involve certain risks. One risk in employing
futures contracts and options thereon to protect against cash market price
volatility is the possibility that futures prices will correlate imperfectly
with the behavior of the prices of the securities in the Fund's portfolio (the
portfolio securities will not be identical to the securities underlying the
futures contracts). In addition, commodity exchanges generally limit the amount
of fluctuation permitted in futures contract and option prices during a single
trading day, and the existence of such limits may prevent the prompt liquidation
of futures and option positions in certain cases. Inability to liquidate
positions in a timely manner could result in the Fund incurring larger losses
than would otherwise be the case.
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.
Illiquid Securities. The Fund has adopted a fundamental policy with
respect to investments in illiquid 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.
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.
-5-
<PAGE>
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 new 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 Investment 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 Investment
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 Investment 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 a Fund does not exceed 10% of the 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 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 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 proxy or (ii) more than 50% of the outstanding shares.
Except as otherwise noted, the Fund may not:
(1) purchase securities on margin (but may make margin payments in
connection with financial futures contracts and related options) or
purchase real estate or interests therein, commodities or commodity
contracts (except financial futures contracts and related options), or
make loans, except loans of portfolio securities and except that the
Fund may purchase or hold short-term debt securities and enter into
repurchase agreements with respect to its portfolio securities described
in the Prospectus. For this purpose, repurchase agreements are
considered loans;
(2) 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; or participate on a
joint or joint-and-several basis in any securities trading account. The
"bunching" of orders with other accounts under the management of the
Adviser to save commissions or to average prices among them is not
deemed to result in a securities trading account;
(3) effect a short sale of any security (other than index options
or hedging strategies), or issue senior securities except as permitted
in paragraph (4). For purposes of this restriction, the
-6-
<PAGE>
purchase and sale of financial futures contracts and related options
does not constitute the issuance of a senior security;
(4) borrow money, except that the Fund may borrow from banks as a
temporary measure for emergency purposes where such borrowings would not
exceed 5% 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 5% of the Fund's
total assets taken at market value. The Fund has no present intention of
engaging in transactions under this paragraph;
(5) purchase securities of any company with a record of less than
three years' continuous operation if such purchase would cause the
Fund's investments in all such companies taken at cost to exceed 5% of
such Fund's total assets taken at market value;
(6) invest for the purpose of exercising control over or 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 of
the Fund's assets would be so invested;
(9) purchase interests in oil, gas, or other mineral exploration
programs or real estate and real estate mortgage loans, or oil, gas or
other mineral leases, or in real estate limited partnership interests;
however, this policy will not prohibit the acquisition of securities of
companies 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) purchase or retain securities of any company if, to the
knowledge of the Fund, officers and trustees of the Trust and officers
and directors of the Adviser who individually own more than 1/2 of 1% of
the securities of that company together own beneficially more than 5% of
such securities;
(11) 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, trustees or
employees of the Fund;
(12) with respect to 75% of its total assets, purchase a security
if, as a result, more than 5% of its total assets taken at market value
would be invested in the securities of any one issuer or it would own
more than 10% of the outstanding voting securities of such issuer. There
is no limit on the percentage of assets that may be invested in U.S.
Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities;
(13) purchase a security if, as a result, more than 25% of the
value of its total assets would be invested in securities of one or more
issuers conducting their principal business activities in the same
industry, provided that (a) this limitation shall not apply to
obligations issued or guaranteed by the U.S. Government or its agencies
and instrumentalities; (b) wholly-owned finance companies will be
considered to be in the industries of their parents; and (c) utilities
will be divided
-7-
<PAGE>
according to their services. For example, gas, gas transmission,
electric and gas, electric, and telephone will each be considered a
separate industry;
(14) invest in warrants in excess of 5% of net assets, provided
that within that amount, investments in warrants which are listed on the
New York or American Stock Exchanges shall not exceed 2% of net assets.
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.
MANAGEMENT
Trustees and Officers
The principal occupations for the past five years of the Trustees and
executive officers of the Trust are listed below. The address of each, unless
otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. Trustees
deemed to be "interested persons" of the Fund for purposes of the Investment
Company Act of 1940, as amended, are indicated by an asterisk.
WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville,
-------
Virginia 22901. Trustee, Excelsior Funds, Inc. , Excelsior Tax-Exempt
Funds, Inc. and Excelsior Institutional Funds, Inc., (mutual funds);
Trustee, IP Capital Fund II (Deutsche Bank Capital Corp.); Director,
Deutsche Bank Financial, Inc.; Director, The Harbus Corporation;
Trustee, HSBC Funds Trust.
WILLIAM L. KUFTA, Chairman and Trustee - 97 Main Street, Chatham, New
--------------------
Jersey 07928. Chief Investment Officer, Beacon Trust Company; Senior
Vice President, Pitcairn Financial Management Group from 1987 to 1991;
Trustee, HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut
-------
Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee,
U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc.
(mutual funds); Trustee, HSBC Funds Trust.
HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017.
-------
Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten
and Company since 1991; Advisory Managing Director, Lepercq de Neuflize
& Co. Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to
1993; Trustee, HSBC Funds Trust.
JOHN P. PFANN, Trustee - 43 Captains Walk, Marina Cove, Palm Coast,
-------
Florida 32137. Chairman and President, JPP Equities, Inc., 1982 to 1995;
Trustee, HSBC Funds Trust.
MICHAEL J. KANE, President - Director, New Business Development, BISYS
---------
Fund Services, Inc. 1991 to present; Sales Manager, Business Development
at Fairfield Group 1988 to 1991. Vice President at SEI Corporation from
1980 to 1988.
ERIC F. ALMQUIST, Senior Vice President - Senior Marketing Strategist,
---------------------
Fund Services Division, BISYS Fund Services, Inc., August, 1996 to
present; Director of Process Management, Coopers & Lybrand L.L.P. 1994
to 1996; Vice President, The Dreyfus Service Corporation, from 1988 to
1994.
-8-
<PAGE>
KAREN DOYLE, Vice President - Director, Client Services, Fund Services
--------------
Division, BISYS Fund Services, Inc., October, 1994 to present. The Bank
of New York, 1979 to 1994.
KEVIN MARTIN, Treasurer - Vice President, Fund Accounting Services,
---------
Services, Inc., February 1996 to present; Senior Audit Manager, Ernst &
Young LLP (1984 to February 1996).
STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York
---------
10022. Partner, Baker & McKenzie since April 1991; Partner, Gaston &
Snow from 1988 to 1991; Secretary, HSBC Funds Trust.
CURTIS BARNES, Assistant Secretary - Compliance Officer, BISYS Fund
-------------------
Services June 1995 to present; Senior Legal Analyst for John Hancock
Funds from February, 1984 to June, 1995.
ALAINA V. METZ, Assistant Secretary - Chief Administrator,
-------------------
Administration and Regulatory Services of BISYS Fund Services, Inc.,
June 1995 to Present; Supervisor of Mutual Fund Legal Department,
Alliance Capital Management, May 1989 to June 1995.
Trustees of the Fund receive from the Fund an annual fee and a fee for
attending each meeting of the Trustees and each committee meeting and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation Benefits Accrued as Part Benefits Upon from the Fund
from the Fund of Fund Expenses Retirement complex*
--------------- --------------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee $503 0 N/A $20,000
William L. Kufta, Trustee $453 0 N/A $18,000
Harald Paumgarten, Trustee $403 0 N/A $18,000
John P. Pfann, Trustee $503 0 N/A $20,000
Robert A. Robinson, Trustee $453 0 N/A $20,000
</TABLE>
- ---------------------
* Represents the total compensation paid to such persons during the calendar
year ending December 31, 1996 (and with respect to the Fund, estimated to
be paid during a full calendar year).
As of the date of this SAI the Trustees and officers of the Fund as a group
owned less than 1% of the outstanding shares of the Fund.
Investment Adviser. The Fund retains HSBC Asset Management Americas, Inc.
(the "Adviser") to act as the adviser for the Fund. the Adviser is the North
American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai
Banking corporation) and Marine Midland Bank and is located at 250 Park Avenue,
New York, New York 10177.
-9-
<PAGE>
The Advisory Contract for the Fund provides that the Adviser will manage
the portfolio of the Fund and will furnish the Fund with investment guidance and
policy direction in connection therewith. The Adviser has agreed to provide to
the Fund, among other things, information relating to portfolio composition.
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 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 SEC.
Sub-Advisers. The Adviser retains HSBC Asset Management Europe Ltd., HSBC
Asset Management Hong Kong Ltd., HSBC Asset Management (Japan) KK, HSBC Asset
Management Australia Limited and HSBC Asset Management Singapore Ltd. to act as
sub-advisers (the "Sub-Advisers") to the Fund. HSBC Asset Management Europe
Ltd., HSBC Asset Management Hong Kong, Ltd., HSBC Asset Management (Japan) KK,
HSBC Asset Management Singapore Ltd. and HSBC Asset Management Australia Limited
along with the Adviser are all parts of HSBC Holdings plc (Hongkong and Shanghai
Banking Corporation).
HSBC Asset Management Europe Ltd. is the European investment arm of HSBC
Asset Management and manages equity and balanced portfolios with an emphasis on
the markets of the United Kingdom and other major European securities markets,
the Middle East and Africa. HSBC Asset Management Europe Ltd. also manages
global fixed income portfolios, HSBC Asset Management Europe Ltd. manages
separate accounts for pension plans, corporations, bank trust divisions,
endowments and foundations and provides continuous supervision for the entire
James Capel family of Unit Investment Trusts. Total assets managed by HSBC
Asset Management EuropeLtd. amount to approximately U.S. $22.8 billion. Its
principal offices are located at 6 Beview Marks, London, EC3A, 7QP, England.
HSBC Asset Management Hong Kong, Ltd. is the Asian Pacific investment arm
of HSBC Asset Management. HSBC Asset Management Hong Kong, Ltd. manages
approximately U.S. $12.9 billion of equity portfolios dedicated to the Pacific
Rim, Pacific Basin and the emerging markets of Southeast Asia. HSBC Asset
Management Hong Kong, Ltd. was founded in 1973 and has its principal business
address at GPO Box 8983 Hong Kong, 12/F, Bank of America Tower, 12 Harcourt
Road, Hong Kong. It is one of the largest investment managers in the Asia
Pacific region, managing accounts for corporations, pension plans and the full-
line of Wardley Unit Investment Trusts.
HSBC Asset Management ( Japan) KK provides a full range of investment
services to clients investing in Japanese securities and Japanese investors
investing domestically or internationally. HSBC Asset Management (Japan) KK
manages approximately $470 million in assets. HSBC Asset Management (Japan) KK
has its principal office at 6/F No. 2 Tomoecho Annex. 3-8-27 Toranomon Minato-
ku, Tokyo, Japan.
HSBC Asset Management Singapore Ltd. is one of the largest fund managers in
Singapore, providing a full range of investment discretionary and advisory
services to government and government related bodies, corporations, trusts,
charities, insurance companies, and high-net-worth individuals. HSBC Asset
Management Singapore Ltd.'s investment management activities began in Singapore
in 1982 and has its principal business address at 21 Collyer Quay, #20-02,
Hongkong Bank Building, Singapore 049320.
HSBC Asset Management Australia Limited is one of the largest fund managers
in Australia offering a full range of investment services to superannuation
funds, public bodies, corporations, trusts, charities, high-net-worth
individuals and unit trusts for smaller investors. HSBC Asset Management
Australia Limited manages approximately $4.3 billion in assets. HSBC Asset
Management Australia Limited has its principal address at P.O. Box 291, Market
Street, Melbourne, Victoria 3000, Australia.
-10-
<PAGE>
Pursuant to the terms of their sub-advisory contracts, HSBC Asset
Management Europe Ltd. and HSBC Asset Management Hong Kong Ltd. commenced their
sub-advisory services from the commencement of Fund operations. HSBC Asset
Management (Japan) KK and HSBC Asset Management Australia Limited commenced
their sub-advisory services on July 1, 1994. HSBC Asset Management Singapore
commenced their sub-advisory services on April 30, 1996.
Under its Sub-Advisory Contract with the Adviser, each Sub-Adviser will
undertake at its own expense to furnish the Fund and the Adviser with micro- and
macroeconomic research, advice and recommendations, and economic and statistical
data, with respect to the Fund's investments, subject to the overall review by
the Adviser and the Board of Trustees.
Shareholder Servicer Assistant
The Trust retains the Adviser to act as Shareholder Servicer Assistant of
the Fund in accordance with the terms of the Shareholder Servicer Assistance
Agreement. Pursuant to the Shareholder Servicer Assistance Agreement, the
Adviser shall be responsible for performing Shareholder Servicer administrative
support services, which may, but is not specifically required to, include any or
all of the following: (i) assist personnel who (a) hand out prospectuses and
Fund applications, (b) assist customers with filling out Fund applications and
(c) effect purchases and redemptions; (ii) assist with preparation of an review
Fund written communications, including marketing material, semi-annual and
Annual Reports and prospectus updates; (iii) educate, describe the Fund to, and
answer questions from Shareholder Servicers to enhance understanding of the Fund
and its investment objectives; and (iv) generally assist the activities of the
Shareholder Servicers.
The Adviser shall provide all personnel and facilities necessary in order
for it to perform its functions under the Shareholder Servicer Assistance
Agreement.
For its services as Shareholder Servicing Agent, the Adviser is paid an
annual fee equal to 0.04% of the Fund's daily average net assets.
Distributor. Shares of the Fund are offered on a continuous basis through
BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services ("BISYS"),
the Distributor, pursuant to the Distribution Contract. The Distributor is not
obligated to sell any specific amount of shares.
Administrator. Pursuant to the Management and Administration Agreement,
BISYS: (i) provides administrative services reasonably necessary for the
operation of the Fund, (other than those services which are provided by it
pursuant to the Advisory Contract); (ii) provides the Fund with office space and
office facilities reasonably necessary for the operation of the Fund; and (iii)
employs or associates with itself such persons as it believes appropriate to
assist it in performing its obligations under the Management and Administration
Agreement.
Pursuant to the Co-Administration Services Contract between the Fund and
the Adviser, the Adviser (i) manages the Fund's relationship with BISYS, the
Administrator to the Fund, (ii) assists with negotiation of contracts with
service providers and supervises the activities of those service providers,
(iii) serves as liaison with the Board of Trustees, and (iv) assists with
general product management and oversight. HSBC is paid an annual fee equal to
0.03% of the Fund's average daily net assets pursuant to the Co-Administration
Services Contract.
Fees and Expenses. The Fund pays the Adviser as compensation for its
advisory services a monthly fee equal to an annual rate of 0.90% of average
daily net assets. As compensation for its administrative services, BISYS
receives from the Fund a monthly fee equal to an annual rate of 0.15% of the
average daily net assets. As compensation for their services, the Sub-Advisers
receive fees from the Adviser at an annual rate not to exceed 0.45% of the
average net assets of the Fund. The Adviser and the Sub-Adviser may agree in
advance not to impose a portion of their fees in the future.
-11-
<PAGE>
For the year ended December 31, 1996, as Adviser and Co-Administrator, the
Adviser received payments of $20,367 (net of fee waivers of $140,552) and $1,720
(net of fee waivers of $5,414), respectively.
For the year ended December 31, 1995, as Adviser and Administrator, the
Adviser recevied payments of $149,012 (net of fee waivers of $66,081) and
$24,797, respectively. For the period of April 25, 1994 (commencement of
operations) to December 31, 1994, as Adviser and Administrator, the Adviser
received payments of $85,631 and $14,569, respectively.
For the year ended December 31, 1996, as Administrator, BISYS received
payment of $18,016 (net of fee waivers of $6,109). For the two months ended
February 29, 1996, BISYS' predecessor Administrator, PFPC Inc. earned $2,548
(net of fee waivers of $134).
Except for the expenses paid by the Adviser and Administrator under the
Advisory and Management and Administraton Services Agreements, 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 ending September
1, 1999) will continue in effect with respect to the Fund from year to year
provided such continuance is approved annually (i) by the holders of a majority
of the outstanding voting securities of the Fund or by the Trust's 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 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 Services Agreement which requires
written notice of non-renewal given at least 90 days prior to expiration of the
then current term. The Advisory Contract, Management and Administration
Services Agreement and the Distribution Contract shall terminate automatically
in the event of their assignment (as defined in the Investment Company Act of
1940). The Board of Trustees approved the continuance of the Funds' Advisory
Contract (including the Sub-Advisory Contracts), Distribution Contract and Co-
Administration Contract at a meeting of the Board of Trustees on February 4,
1997.
Distribution Plans and Expenses. The Service Class shares of the Fund has
adopted a Distribution Plan and related Shareholder Servicing Agreement (the
"Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940, after
having concluded that there is a reasonable likelihood that the Plan will
benefit the Fund and its Service Class shareholders. The Plan provides for a
monthly payment by the Service Class Shares of the Fund to BISYS Fund Services
for expenses incurred not to exceed an annual rate of 0.35 of 1%.
BISYS will use all amounts received under the Plan for payments to broker-
dealers or financial institutions for their assistance in distributing shares of
the Fund and otherwise promoting the sale of Fund shares. BISYS may also use
all or any portion of such fee to pay expenses such as the printing and
distribution of prospectuses sent to prospective investors, the preparation,
printing and distribution of sales literature and expenses associated with media
advertisements and telephone services.
The Plan provides for BISYS to prepare and submit to the Board of Trustees
on a quarterly basis written reports of all amounts expended pursuant to the
Plan and the purpose for which such expenditures were made. The Plan may not be
amended to increase materially the amount spent for distribution expenses
without approval by a majority of the Fund's outstanding Service Class shares
and approval of a majority of the non-interested Trustees.
The Plan will continue in effect with respect to the Fund from year to year
provided such continuance is approved annually by a vote of the Board of
Trustees of the Trust and of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to
-12-
<PAGE>
the Plan, cast in person at a meeting called for the purpose of voting on such
Plan. The Board of Trustees of the Trust approved the continuance of the Plan at
a meeting of the Board of Trustees on February 4, 1997.
The Service Class shares of the Fund made payments of $67 (net of fee
waivers of $180) for the year ended December 31, 1996 all of which was for
compensation to broker-dealers.
SERVICE ORGANIZATIONS
The Trust also contracts with banks (including Marine Midland Bank), trust
companies, broker-dealers or other financial organizations ("Service
Organizations") on behalf of the Fund to provide certain administrative services
for the Fund at a fee of up to an annual rate of 0.35%. Services provided by
Service Organizations may include among other things: providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records; assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving funds in
connection with shareholders orders to purchase or redeem shares; verifying and
guaranteeing client signatures in connection with redemption orders, transfers
among and changes in shareholders designating accounts; providing periodic
statements showing a shareholder's account balance and, to the extent
practicable, integrating such information with other client transactions;
furnishing periodic and annual statements and confirmations of all purchases and
redemptions of shares in a shareholder's account; transmitting proxy statements,
annual reports, and updating prospectuses and other communications from the Fund
to shareholders; and providing such other services as the Fund or a shareholder
reasonably may request, to the extent permitted by applicable statute, rule or
regulation.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than the minimum
initial or subsequent investments specified by the Fund or charging a direct fee
for servicing. If imposed, these fees would be in addition to any amounts which
might be paid to the Service Organization by the Fund. Each Service Organization
has agreed to transmit to its clients a schedule of any such fees. Shareholders
using Service Organizations are urged to consult them regarding any such fees or
conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law.
If a bank were prohibited from so acting, its shareholder clients would be
permitted to remain shareholders of the Trust and alternative means for
continuing the servicing of such shareholders would be sought. In that event,
changes in the operation of the Trust might occur and a shareholder serviced by
such a bank might no longer be able to avail itself of any services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
PERFORMANCE INFORMATION
The Fund from time to time may advertise total return and cumulative total
return figures. Total return is the average annual compound rate of return for
the periods of one year and the life of the Fund, each ended on the last day of
a recent calendar quarter. Total return quotations reflect the change in the
price of the Fund's shares and assume that all dividends and capital gains
distributions during the respective periods were reinvested in shares of the
Fund. Total return is calculated by finding the average annual compound rates of
return of a hypothetical investment over such
-13-
<PAGE>
periods, that would compare the initial amount to the ending redeemable value of
such investment according to the following formula (total return is then
expressed as a percentage):
Where: P(1+T)/n/ = ERV
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
Total return will generally be lower for the Service Class shares due to
the shareholder servicing and Rule 12b-1 fees on the Service Class shares.
The average annual total return information for shares of the Fund are as
follows:
<TABLE>
<CAPTION>
Service Class Shares Sales Charge* NAV
-------------------- ------------- ---
<S> <C> <C>
One year ended December 31, 1996 1.05% 6.32%
Inception (April 25, 1994) to December 31, 1996 0.31% 2.25%
<CAPTION>
Institutional Class Shares Sales Charge* NAV
-------------------------- ------------- ---
<S> <C> <C>
One year ended December 31, 1996 N/A 6.31%
Inception (March 1, 1995) to December 31, 1996 N/A 10.63%
</TABLE>
* Includes maximum sales charge of 5.00%. Past performance not predictive of
future performance.
Cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Cumulative total return is calculated by finding the rate of
return of a hypothetical investment over such period, according to the following
formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
-14-
<PAGE>
From time to time, in marketing pieces and other Fund literature, the
Fund's total performance may be compared to the performance of broad groups of
comparable funds or unmanaged indices of comparable securities. Evaluations of
Fund performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for Fund performance information may include, but
are not limited to, the following:
Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds
investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Financial Times, Europe's business newspaper, which features from time
to time articles on international or country-specific funds.
Forbes, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of
fund.
Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly
covers financial news.
Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on
personal money management that periodically rates and ranks mutual
funds by performance.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies,
including comparative data on funds' backgrounds, management policies,
salient features, management results, income and dividend records, and
price ranges.
-15-
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share for the purpose of pricing and
redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Fund's transfer agent is open for business. The net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per
share of the Fund is computed by dividing the value of the net assets of each
class (i.e. the value of the assets less the liabilities) by the total number of
shares outstanding of each class of the Fund. All expenses, including the
advisory and administrative fees, are accrued daily and taken into account for
the purpose of determining the net asset value. The public offering price for
the Service Class Shares of the Fund (net asset value of $10.60 plus maximum
sales charge of 5.00% of the offering price) was $11.16 at December 31,
1996.
Portfolio securities are valued at the last quoted sales price as of
the close of business on the day the valuation is made, or lacking any sales, at
the mean between closing bid and asked prices. Price information on listed
securities is taken from the exchange where the security is primarily traded.
The value for each unlisted security is based on the last trade price for that
security on a day in which the security is traded. The value for each unlisted
security on a day such security is not traded shall be based on the mean of the
bid and ask quotations for that day. The value of each security for which
readily available market quotations exist will be based on a decision as to the
broadest and most representative market for such security. Options on stock
indices traded on national securities exchanges are valued at the close of
options trading on such exchanges (which is currently 4:10 p.m., Eastern time).
Stock index futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such exchanges
(which is currently 4:15 p.m., Eastern time). Other assets and securities for
which no quotations are readily available are valued at fair value as determined
in good faith by the Trustees. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. Short-term investments are valued at amortized
cost, which approximates market value. The Board of Trustees has determined in
good faith that amortized cost equals fair market value.
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.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the Investment Company Act of 1940, persons
affiliated with Marine Midland, 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 SEC. 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 Investment Company
Act of 1940. Under the Investment Company Act of 1940, persons affiliated with
the Adviser, the Fund or BISYS Fund Services may act as a broker for the Fund.
In order for
-16-
<PAGE>
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 Adviser may, in circumstances in which two or more dealers are in
a position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms.
The aggregate brokerage commissions paid by the Fund for the years
ended December 31, 1996 and 1995 and for the period of April 25, 1994
(commencement of operations) to December 31, 1994 was $113,445, $113,904 and
$102,490, respectively. The Fund paid $0, $0 and $1,065 in brokerage commissions
to affiliated brokers during the same periods.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate measures the frequency with which a
Fund's portfolio of securities is traded. The Fund will attempt to purchase
securities with intent of holding them for investment but may purchase and sell
portfolio securities whenever the adviser believes it to be warranted (e.g., the
Fund may sell portfolio securities in anticipation of an adverse market
movement). The purchase and sale of portfolio securities may involve dealer
mark-ups, underwriting commissions or other transaction costs. Generally, the
higher the portfolio turnover rate, the higher the transaction costs to the
Fund, which will generally increase the Fund's total operating expenses. In
order to qualify as a regulated investment company, less than 30% of the Fund's
gross income must be derived from the sale or other disposition of stock,
securities or certain other investments held for less than 3 months. Although
increased portfolio turnover may increase the likelihood of additional capital
gains for the Fund, the Fund expects to satisfy the 30% income test. The Fund's
portfolio turnover rate for the years ended December 31, 1996 and December 31,
1995, was 77.91% and 90.3%, respectively.
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in the Fund for
at least seven days may exchange those shares for shares of the other portfolios
of the Trust and the HSBC Funds Trust which are available for sale in their
state. A shareholder who has paid a sales load in connection with the purchase
of shares of a Fund will be subject only to that portion of the sales load of
the Fund into which the shareholder is exchanging which exceeds the sales load
originally paid by the shareholder. Shareholders of any of the HSBC Money Market
Funds who exchange shares of any of such Money Market Funds for shares of any of
such Funds of HSBC Funds Trust are charged the sales loads applicable to the
Fund as stated in the Prospectus.
Before effecting an exchange, shareholders should review the
prospectuses. Exercise of the exchange privilege is treated as a redemption for
Federal income tax purposes and, depending on the circumstances, a gain or loss
may be recognized. See the Prospectus discussion of the federal tax treatment of
load reductions or eliminations in an exchange.
The exchange privilege may be modified or terminated upon sixty (60)
days' written notice to shareholders. Although initially there will be no limit
on the number of times a shareholder may exercise the exchange privilege, the
Fund reserves the right to impose such a limitation. Call or write the Fund for
further details.
-17-
<PAGE>
REDEMPTIONS
The proceeds of a redemption may be more or less than the amount
invested and, therefore, a redemption may result in a gain or loss for Federal
and state and local income tax purposes. Any loss realized on the redemption of
Fund shares held, or treated as held, for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gain dividends
received on the redeemed shares.
A shareholder's account with the Fund remains open for at least one
year following complete redemption and all costs during the period will be borne
by the Fund. This permits an investor to resume investments in the Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive shareholder expense
burdens, the Fund reserve the right to adopt a policy pursuant to which it may
redeem, upon not less than 30 days' notice, shares of the Fund in an account
which has a value below a designated amount. However, any shareholder affected
by the exercise of this right will be allowed to make additional investments
prior to the date fixed for redemption to avoid liquidation of the account.
The Fund may suspend the right of redemption during any period when
(i) trading on the New York Stock Exchange is restricted or that Exchange is
closed, other than customary weekend and holiday closings, (ii) the Securities
and Exchange Commission has by order permitted such suspension or (iii) an
emergency exists making disposal of portfolio securities or determination of the
value of the net assets of the Fund not reasonably practicable.
Although it would not normally do so, the Trust has the right to pay
the redemption price in whole or in part in securities of the Fund's portfolio
as prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act
of 1940, as amended. Under that rule, the Trust must redeem its shares for cash
except to the extent that the redemption payments to any shareholder during any
90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period.
FEDERAL INCOME TAXES
The Fund has elected to be treated and has qualified and intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") in 1996. The Fund intends
to continue to so qualify by complying with the provisions of the Code
applicable to regulated investment companies so that it will not be liable for
Federal income tax with respect to amounts distributed to shareholders in
accordance with the timing requirements of the Code.
In order to qualify as a regulated investment company for a taxable
year, the Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock or
securities and gains from the sale or other disposition of stock or securities
or foreign currency gains related to investments in stock or securities or other
income (including gains from options, futures or forward contracts) derived with
respect to the business of investing in stock, securities or currency; (b)
derive less than 30% of its gross income from the sale or other disposition of
certain investments held less than three months (including stocks and securities
and excluding some amounts included in income as a result of certain hedging
transactions); and (c) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other stock and
securities limited, in the case of other securities for purposes of this
calculation, in respect of any one issuer, to an amount not greater than 5% of
the Fund's assets or 10% of the voting stocks or securities of the issuer, and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than U.S. Government securities or stocks or securities
of other regulated investment companies). As such, and by complying with the
applicable provisions of the Code, the Fund will not be subject to Federal
income tax on taxable income (including realized capital gains) which
-18-
<PAGE>
is distributed to shareholders in accordance with the timing requirements of the
Code. Compliance with the "30% test" described in clause (b) above may, in
particular, limit the Fund's ability to engage in some transactions involving
options, short-term trading and stock index futures.
The amount of capital gains, if any, realized in any given year will
result from sales of securities made with a view to the maintenance of a
portfolio believed by the Fund's management to be most likely to attain the
Fund's investment objective. Such sales and any resulting gains or losses, may
therefore vary considerably from year to year. Since at the time of an
investor's purchase of shares, a portion of the per share net asset value by
which the purchase price is determined may be represented by realized or
unrealized appreciation in the Fund's portfolio or undistributed income of the
Fund, subsequent distributions (or portions thereof) on such shares may be
taxable to such investor even if the net asset value of his shares is, as a
result of the distributions, reduced below his cost for such shares and the
distributions (or portions thereof) represent a return of a portion of his
investment.
The Fund is required to report to the Internal Revenue Service (the
"IRS") all distributions of taxable dividends and of capital gains, as well as
the gross proceeds of share redemptions. The Fund may be required to withhold
Federal income tax at a rate of 31% ("backup withholding") from taxable
dividends (including capital gain dividends) and the proceeds of redemptions of
shares paid to non-corporate shareholders who have not furnished the Fund with a
correct taxpayer identification number and made certain required certifications
or who have been notified by the IRS that they are subject to backup
withholding. In addition, the Fund may be required to withhold Federal income
tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer
identification number is incorrect or that backup withholding applies because of
under reporting of interest or dividend income.
Distributions of taxable net investment income and net realized
capital gains will be taxable as described in the Prospectus whether made in
shares or in cash. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions will also be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
Any loss realized upon the redemption of shares held (or treated as
held) for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gain dividend received on the redeemed shares.
Any loss realized upon the redemption of shares within six months after receipt
of an exempt-interest dividend will be disallowed. All or a portion of a loss
realized upon the redemption of shares may be disallowed to the extent shares
are purchased (including shares acquired by means of reinvested dividends)
within 30 days before or after such redemption. Exchanges are treated as
redemptions for Federal tax purposes.
Different tax treatment is accorded to accounts maintained as IRAs,
including a penalty on early distributions. Shareholders should consult their
tax advisers for more information.
Each portfolio within the Trust will be separate for investment and
accounting purposes and will be treated as a separate taxable entity for Federal
income tax purposes. Provided that the Fund qualifies as a regulated investment
company under the Code, it will not be required to pay Massachusetts income or
excise taxes.
Gains or losses on sales of stock or securities by the Fund will
ordinarily be long-term capital gains or losses if the stock or securities have
been held by it for more than one year. However, if the Fund writes a covered
call option which has an exercise price below the price of the underlying stock
or security at the time the call is written, or if it acquires a put option with
respect to stock or securities which have been held for less than the applicable
capital gain holding period, the holding period of such stock or securities will
be terminated or suspended for purposes of determining long-term capital gains
treatment and will start again only when the Fund enters into a closing
transaction with respect to such option or when such option expires.
-19-
<PAGE>
The Fund will be required to treat stock index futures, options on
such futures and options on the stock indices held at the end of each taxable
year as having been sold at market value on the last business day of the year.
For purposes of computing gain or loss, 60% of any gain or loss recognized on
these deemed sales, on actual sales or on termination by closing transactions,
delivery, exercise, lapse or otherwise will be treated as long-term capital gain
or loss, and the remaining 40% will be treated as short-term capital gain or
loss. However, under certain circumstances, the Fund may be able to make an
election under which these provisions would not apply to such futures and
options.
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.
The "straddle" rules of Section 1092 of the Code may require the Fund
to defer the recognition of certain losses incurred on its transactions
involving certain stock or securities, futures contracts or options. Section
1092 defines a "straddle" to include "offsetting positions" with respect to
publicly traded stock or securities. A "position" is defined to include a
futures contract and an option. In general, the Fund will be considered to hold
offsetting positions if there is a substantial diminution of its risk of loss
from holding one position by reason of its holding one or more other positions.
Section 1092 generally provides that in the case of a straddle, any loss from
the disposition of a position (the "loss position") in the straddle shall be
recognized for any taxable year only to the extent that the amount of such loss
exceeds the unrealized gains on any offsetting straddle position (the "gain
position") and the unrealized gain on any successor position (which is a
position that is itself offsetting to the gain position and is acquired during a
period commencing 30 days prior to, and ending 30 days after, the disposition of
the loss position).
These special tax rules applicable to options and futures transactions
could affect the amount, timing and character of capital gain distributions to
shareholders by causing holding period adjustments, converting short-term
capital losses into long-term capital losses, and accelerating the Fund's income
or deferring its losses.
For purposes of the dividends-received deduction available to
corporations, dividends received by the Fund from taxable domestic corporations
in respect of any share of stock treated as debt-financed under the Code or held
by the Fund for 45 days or less (90 days or less in the case of certain
preferred stock) will not be treated as qualifying dividends. To the extent
applicable, for purposes of the dividends-received deduction, the holding period
of any share of stock will not include any period during which the Fund has an
option or a contractual obligation to sell, or has granted certain call options
with respect to, substantially identical stock or securities or, under Treasury
regulations to be promulgated, the Fund may diminish its risk of loss by holding
one or more other positions with respect to substantially similar or related
property. It is anticipated that these rules will operate so as to reduce the
portion of distributions paid by the Fund that will be eligible for the
dividends-received deduction available to corporate shareholders of such Fund.
The dividends-received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under the Code and is eliminated if the shares are deemed to have been held for
less than 46 days.
Corporate shareholders should also note that their basis in shares of
the Fund may be reduced by the untaxed portion (i.e., the portion qualifying for
the dividends-received deduction) of an "extraordinary dividend" if the shares
have not been held for at least two years prior to declaration of the dividend.
Extraordinary dividends are dividends paid during a prescribed period which
equal or exceed 10% of a corporate shareholder's basis in its Fund shares or
which satisfy an alternative test based on the fair market value of the shares.
To the extent dividend payments received by corporate shareholders of the Fund
constitute extraordinary dividends, such shareholders' basis in their Fund
shares will be reduced and any gain realized upon a subsequent disposition of
such shares will therefore be increased.
The untaxed portion of dividends received by such shareholders is also
included in adjusted alternative minimum taxable income in determining
shareholders' liability under the alternative minimum tax.
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<PAGE>
The Fund is subject to a 4% nondeductible excise tax to the extent
that it fails to distribute to its shareholders during each calendar year an
amount equal to at least the sum of (a) 98% of its taxable ordinary investment
income (excluding long-term and short-term capital gain income) for the calendar
year; plus (b) 98% of its capital gain net income for the one year period ending
on October 31 of such calendar year; plus (c) any ordinary investment income or
capital gain net income from the preceding calendar year which was neither
distributed to shareholders nor taxed to the Fund during such year. The Fund
intends to distribute to shareholders each year an amount sufficient to avoid
the imposition of such excise tax.
The Fund's use of equalization accounting, if such method of tax
accounting is used for any taxable year, may affect the amount, timing and
character of its distributions to shareholders.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
Special Tax Considerations. Certain foreign governments levy
withholding taxes against dividend and interest income. Although in some
countries a portion of these taxes are recoverable, the non-recovered portion of
foreign withholding taxes will reduce the income received from the companies
comprising the Fund. See the Prospectus for more information on foreign
withholding taxes and foreign tax credits.
Shareholders should consult their own tax advisers with respect to the
tax status of distributions from the Fund, and redemptions of shares of the
Fund, in their own states and localities. Shareholders who are not United States
persons should also consult their tax advisers as to the potential application
of foreign and U.S. taxes, including a 30% U.S. withholding tax (or lower treaty
rate) on dividends representing ordinary income to them.
SHARES OF BENEFICIAL INTEREST
The authorized capitalization of the Trust consists of an unlimited
number of shares of beneficial interest having a par value of $0.001 per share.
The Trust's Board of Trustees has authorized the issuance of multiple series
representing shares in corresponding investment portfolios of the Trust. All
shares of the Trust have equal voting rights and will be voted in the aggregate,
and not by class, except where voting by class is required by law or where the
matter involved affects only one class.
The Fund offers and the Prospectus relates to two classes of shares -
the Institutional and Service classes of shares. The Institutional Shares are
available to customers of 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. The Service Shares are
available to all other investors. Institutional Shares of the Fund are not
subject to a sales charge, Rule 12b-1 fee or a shareholder servicing fee. The
Fund's Service Shares are subject to a sales charge, Rule 12b-1 fee and a
shareholder servicing fee. All shares of the Trust issued and outstanding are
fully paid and nonassessable. The Trust is not required by law to hold annual
shareholder meetings and does not intend to hold such meetings; however, the
Trustees are required to call a meeting for the purpose of considering the
removal of persons serving as Trustee if requested to do so in writing by the
holders of not less than 10% of the outstanding shares of the Trust.
As used in the Prospectus and in this SAI, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Fund (e.g., election of Trustees and ratification
of independent auditors), means the vote of a majority of the Fund's outstanding
shares represented at a meeting. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with approval of the
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<PAGE>
Advisory Contract or changing the fundamental policies of the Fund, means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held.
Vacancies on the Board of Trustees are filled by the Board of Trustees
if immediately after filling any such vacancy at least two-thirds of the
Trustees then holding office have been elected to such office by shareholders at
an annual or special meeting. In the event that at any time less than a majority
of Trustees holding office were elected by shareholders, the Board of Trustees
will cause to be held within 60 days a shareholders' meeting for the purpose of
electing Trustees to fill any existing vacancies. Trustees are subject to
removal with cause by two-thirds of the remaining Trustees or by a vote of a
majority of the outstanding shares of the Trust. The Trustees are required to
promptly call a shareholders' meeting for voting on the question of removal of
any Trustee when requested to do so in writing by not less than 10% of the
outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
Each share of the Fund represents an equal proportionate interest in
the Fund with each other share of the Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Trustees. In the event of liquidation or
dissolution, shares of the Fund are entitled to receive the assets belonging to
the Fund which are available for distribution, and of any general assets not
belonging to the Fund which are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Fund.
As of March 31, 1997, no person owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of the
Fund except as set forth below:
<TABLE>
<CAPTION>
Name and Address of holder of record Shares held and Percent of Class
<S> <C> <C>
Institutional Class Shares
- ---------------------------
Marine Midland Bank 1,373,183 62.85%*
Buffalo, NY 14240
Nabank & Company 799,281 36.58%
Tulsa, OK 74101
Total Outstanding Shares: 2,184,689
Service Class Shares
- --------------------
Paul M. Dudney 4,700 13.37%
Seven Oaks Kent, England
Ann B. Birmingham 3,185 9.00%
Pittsford, NY 14534
Total Shares Outstanding: 35,134
</TABLE>
* Marine Midland Bank has informed the Trust it was not the beneficial owner
of any of the shares it held of record.
-22-
<PAGE>
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
Effective on or about June 15, 1997, The Bank of New York will act as
Custodian for the Fund pursuant to a Custodian Agreement, replacing State Street
Bank and Trust Compnay. The Bank of New York's address is 90 Washington Street,
New York, New York 10286. Under the Custodian Contract, the Custodian maintains
a custody account or accounts in the name of the Fund; receives and delivers all
assets upon purchase and upon sale or maturity; collects and receives all income
and other payments and distributions; receives and pays out cash for purchases
and redemptions of shares of the Fund and pays out cash if requested for
dividends on shares of the Fund; and maintains records for the foregoing
services.
Under the Custodian Contract, the Trust agreed to pay State Street for
furnishing Custodian Services to the Fund, certain transaction charges and out-
of-pocket expenses.
The Board of Trustees has also authorized the Custodian, in such
capacity, to enter into Subcustodian Agreements with certain foreign banking
institutions and foreign securities depositaries pursuant to rule 17f-5 of the
Investment Company Act of 1940.
BISYS Fund Services, Inc. (the "Transfer Agent") has been retained by
the Trust to act as transfer agent and dividend agent for the Fund. Under the
Transfer Agency Agreement, BISYS Fund Services, Inc. performs general transfer
agency and dividend disbursing services. It maintains an account in the name of
each shareholder of record in the Fund reflecting purchases, redemptions, daily
dividend accruals and monthly dividend disbursements, processes purchase and
redemption requests, issues and redeems shares of the Fund, addresses and mails
all communications by the Fund to its shareholders, including financial reports,
other reports to shareholders, dividend and distribution notices, tax notices
and proxy material for its shareholder meetings, and maintains records for the
foregoing services. Under the Agency Agreement, the Fund have agreed to pay
BISYS Fund Services, Inc. $16,000 per annum. In addition, the Fund has agreed to
pay BISYS Fund Services, Inc. certain account based fees and out-of-pocket
expenses incurred by BISYS Fund Services, Inc. For the period from April 15,
1996 until December 31, 1996 BISYS Fund Services, Inc. earned $27,294 in
transfer agency fees from the Fund. For the period from January 1, 1996 through
April 15, 1996 the year ended December 31, 1995 and the period ended December
31, 1994, PFPC Inc. earned $2,311, $12,067 and $5,313, respectively, in transfer
agency fees from the Fund.
In addition, effective on or about June 15, 1997, BISYS Fund Services,
Inc. will provide certain fund accounting services to the Fund pursuant to Fund
Accounting Agreement replacing State Street Bank and Trust Company. Under such
Agreement, BISYS Fund Services, Inc. will maintain the accounting books and
records for the Fund, maintain a monthly trial balance of all ledger accounts;
perform certain accounting services for the Fund, including calculation of the
net asset value per share, calculate the dividend and capital gains
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity. BISYS feees for performing accounting services will
be paid under the Management and Administration Agreement.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as the independent auditors for the Fund.
Ernst & Young LLP provides audit services, tax return preparation and assistance
and consultation in connection with review of Securities and Exchange Commission
filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York
10019.
-23-
<PAGE>
FINANCIAL STATEMENTS
The financial statements appearing in the most current fiscal year
Annual Report to shareholders and the report thereon of the independent auditors
appearing therein, namely Ernst & Young LLP, are incorporated by reference in
this Statement of Additional Information and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
The Annual Reports to shareholders which contains the referenced statements, are
available upon request and without charge.
-24-
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements
--------------------
(a) Financial Statements:
Financial Statements included in Part A:
---------------------------------------
ALL FUNDS
Financial Highlights
Financial Information incorporated by reference in Part B:
---------------------------------------------------------
ALL FUNDS
Statements of Net Assets at December 31, 1996
Statements of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the two years
ended December 31, 1995 and December 31, 1996. Notes to
Financial Statements
Financial Highlights
Reports of Independent Auditors, dated February 10, 1997
C-1
<PAGE>
Exhibit
Number Description
- ------- -----------
++1 -- Amended and Restated Declaration of Trust.
====================
2 -- By-Laws of Registrant.
3 -- None.
*4 -- Form of Specimen Certificates of Shares.
+5(a) -- Advisory Contract between Registrant and HSBC Asset Management
Americas Inc. (Also Previously filed with Post-Effective
Amendment No. 1 to Registration Statement on March 4, 1991.)
++5(b) -- Management and Administration Agreement between Registrant and
BISYS Fund Services.
***5(c) -- Form of Advisory Contract between Mariner U.S. Government
Securities Fund and Marine Midland Bank, N.A.
++5(d) -- Accounting Services Agreement between Registrant and BISYS Fund
Services
++5(e) -- Co-Administration Services Contract between HSBC Asset
Management Americas Inc. and Registrant dated July 1, 1994
++5(f) -- Sub-Advisory Contract between HSBC Asset Management Americas,
Inc. and HSBC Asset Management Europe Ltd. with respect to the
Mariner International Equity Fund dated April 25, 1995
++5(g) -- Sub-Advisory Contract between HSBC Asset Management Americas,
Inc. and HSBC Asset Management Australia Limited with respect to
the Mariner International Equity Fund dated April 25, 1995
++5(h) -- Sub-Advisory Contract between HSBC Asset Management Americas,
Inc. and HSBC Asset Management Japan (KK) with respect to the
Mariner International Equity Fund dated April 25, 1995
++5(i) -- Sub-Advisory Contract between HSBC Asset Management Americas,
Inc. and HSBC Asset Management Hong Kong Ltd. with respect to
the Mariner International Equity Fund dated April 25, 1995
++5(j) -- Sub-Advisory Contract between HSBC Asset Management Americas,
Inc. (formerly Marinvest Inc.) and Investment Concepts, Inc.
with respect to the Mariner Small Cap Fund dated September 22,
1992
C-2
<PAGE>
++6 -- Distribution Agreement between Registrant and BISYS Fund
Services.
++7 -- None.
++8(a) -- Custodian Agreement between Registrant and The Bank of New York.
++8(b) -- Custodian Agreement between Registrant and State Street Bank and
Trust Company
++9(a) -- Transfer Agency Agreement between Registrant and BISYS Fund
Services
**9(b) -- Agreement concerning the name "Mariner."
****9(c) -- Shareholder Servicing Agreement between Registrant and HSBC
Asset Management Americas Inc. dated November 1, 1994
9(d) -- Form of Shareholder Servicer Assistant Agreement between
Registrant and HSBC Asset Management Americas Inc.
++9(e) -- Service Organization Agreement between Bank of Oklahoma and
Registrant, dated October 25, 1994
++9(f) -- Fund Accounting Agreement between Registrant and BISYS Fund
Services
++9(g) -- Fund Accounting Agreement between Registrant and State Street
Bank and Trust on behalf of International Equity Fund
10 -- Consent of Baker & McKenzie, counsel to Registrant.
11 -- Consent of Ernst & Young LLP, independent auditors
12 -- Annual Report as filed on March 7, 1997 and incorporated by
reference.
*13 -- Subscription Agreement.
14 -- None.
++15(a) -- Rule 12b-1 Distribution Plan.
+15(b) -- Rule 12b-1 Shareholder Servicing Agreement between Registrant
and BISYS Fund Services, Inc.
+15(c) -- Distributor's Selected Dealer Agreement.
*****16 -- Schedule for Computation of Performance Quotations.
C-3
<PAGE>
17 -- Financial Data Schedules
a) Growth and Income Fund
b) Small Cap Fund
c) Fixed Income Fund
d) New York Tax-Free Bond Fund
e) International Equity Fund
++18 -- Form of Rule 18f-3 Plan
Other Exhibits
- --------------
++(a) -- Power of Attorney for Wolfe J. Frankl, William L. Kufta, John P.
Pfann, Robert A. Robinson, Harald Paumgarten.
- --------------
* Filed with the Trust's Registration Statement dated March 2, 1990.
** Filed with Post-Effective Amendment No. 1 and 3 to the Trust's
Registration Statement on March 4, 1991 and January 23, 1992,
respectively.
*** Filed with Post-Effective Amendment No. 9 on July 12, 1993.
**** Filed with Post-Effective Amendment No. 13 on November 7, 1994.
***** Filed with Post-Effective Amendment No. 4 to the Trust's Registration
Statement on May 1, 1992.
+ Filed with Post-Effective Amendment No. 6 to the Trust's Registration
Statement on November 6, 1992.
++ Filed with Post-Effective Amendment No. 17 to the Trust's
Registration Statement on April 18, 1996 and incorporated by
reference.
Item 25. Persons Controlled by or under Common Control with Registrant.
-------------------------------------------------------------
None.
Item 26. Number of Holders of Securities at April 3, 1997.
------------------------------------------------
Growth & Income Fund 510
New York Tax-Free Bond Fund 1,230
Small Cap Fund 205
Fixed Income Fund 105
International Equity Fund- Service Class Shares 84
International Equity Fund - Institutional Shares. 6
C-4
<PAGE>
Item 27. Indemnification.
---------------
Reference is made to Article IV of Registrant's By-Laws and
paragraphs 9 and 10 of the Distribution Contract.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities 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
Securities Act and will be governed by the final adjudication of such issue.
The Registrant, has in force a Directors and Officers Liability
Policy which covers all present and future directors and officers of Registrant
against loss arising from any civil claim or claims by reason of "any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done
or wrongfully attempted" while acting as trustees or officers of the Registrant.
The period of insurance under the present policy is for the period ending August
1, 1997. The policy covers 100% of the excess of $100,000 up to an annual
aggregate limit of $10,000,000 of any losses including legal and other expenses
in connection with any claim.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
HSBC Asset Management Americas Inc. also serves as investment
adviser to HSBC Funds Trust.
Item 29. Principal Underwriter
---------------------
(a) BISYS Fund Services is also Distributor for
HSBC Funds Trust. BISYS Fund Services also
acts as Distributor to a number of other
registered companies not affiliated with the
HSBC Funds.
(b) Officers and Directors
C-5
<PAGE>
<TABLE>
<CAPTION>
Name and Positions and Offices Positions and Offices
Principal Business Address with Registrant with Underwriter
----------------------------------- ----------------------------- ----------------------------
<S> <C> <C>
BISYS Fund Service, Inc. None Sole General Partner
3435 Stelzer Road
Columbus, OH 43219
WC Subsidiary Corporation None Sole Limited Partner
150 Clove Road
Little Falls, New Jersey 07424
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act
of 1940 and the rules thereunder are maintained at the
offices of HSBC Asset Management Americas Inc., the
Registrant's Investment Adviser at 250 Park Avenue, New
York, New York, 10177, and at the offices of BISYS Fund
Services, the Registrant's Administrator, Distributor,
Transfer Agent and Dividend Disbursing Agent, at 3435
Stelzer Road Columbus, OH 43219 and at The Bank of New
York, the Registrant's Custodian, at 90 Washington Street,
New York, New York 10286. For the period ending June 15,
1997 the International Equity Fund, accounts, books and
other documents are also maintained at State Street Bank,
at P.O. Box 1713, Boston, Massachusetts 02105.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
(a) Registrant undertakes to call a meeting of
shareholders for the purpose of voting upon the
removal of a Trustee if requested to do so by the
holders of at least 10% of the Registrant's
outstanding shares.
(b) Registrant undertakes to provide the support to
shareholders specified in Section 16(c) of the
1940 Act as though that Section applied to the
Registrant.
(c) Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders
upon request without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all of the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to the Registration Statement to be signed in its behalf
by the undersigned, thereunto duly authorized, in the City of New York, on April
29, 1997.
HSBC MUTUAL FUNDS TRUST
(Registrant)
By:/s/ Michael J. Kane
--------------------------------
Title: President
C-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
MICHAEL J. KANE President
- ---------------------------------
Michael J. Kane April 29, 1997
KEVIN MARTIN
- --------------------------------- Treasurer (Principal Financial &
Kevin Martin Accounting Officer) April 29, 1997
* WOLFE J. FRANKL Trustee April 29, 1997
- ---------------------------------
Wolfe J. Frankl
* WILLIAM L. KUFTA Trustee and Chairman April 29, 1997
- ---------------------------------
William L. Kufta
* HARALD PAUMGARTEN Trustee April 29, 1997
- ---------------------------------
Harald Paumgarten
* JOHN P. PFANN Trustee April 29, 1997
- ---------------------------------
John P. Pfann
* ROBERT A. ROBINSON Trustee April 29, 1997
- ---------------------------------
Robert A. Robinson
</TABLE>
* Pursuant to Power of Attorney filed with Post-Effective Amendment 17 to
Registration Statement Nos. 33-33734 and 811-6057.
C-8
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
EXHIBITS
to
POST-EFFECTIVE AMENDMENT NO. 18
to
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
- --------------------------------------------------------------------------------
HSBC MUTUAL FUNDS TRUST
C-9
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2 By-Laws of Registrant
9(d) Shareholder Servicer Assistance Agreement
10 Consent of Baker & McKenzie
11 Consent of Ernst & Young LLP
12 Annual Report as filed on March 7, 1997 and
incorporated by reference
17 Financial Data Schedules
(a) Growth and Income Fund
(b) Small Cap Fund
(c) Fixed Income Fund
(d) New York Tax-Free Money Market Fund
(e) International Equity Fund
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 05
<NAME> HSBC SHORT-TERM U.S. GOVERNMENT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,322,484
<INVESTMENTS-AT-VALUE> 9,294,382
<RECEIVABLES> 184,494
<ASSETS-OTHER> 13,949
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,492,825
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,217
<TOTAL-LIABILITIES> 74,217
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,969,362
<SHARES-COMMON-STOCK> 967,143
<SHARES-COMMON-PRIOR> 1,094,435
<ACCUMULATED-NII-CURRENT> 7,729
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 530,381
<ACCUM-APPREC-OR-DEPREC> (28,102)
<NET-ASSETS> 9,418,608
<DIVIDEND-INCOME> 18,929
<INTEREST-INCOME> 640,321
<OTHER-INCOME> 0
<EXPENSES-NET> 109,979
<NET-INVESTMENT-INCOME> 549,271
<REALIZED-GAINS-CURRENT> (108,567)
<APPREC-INCREASE-CURRENT> (135,067)
<NET-CHANGE-FROM-OPS> 305,637
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 550,659
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 66,401
<NUMBER-OF-SHARES-REDEEMED> 193,354
<SHARES-REINVESTED> 1,662
<NET-CHANGE-IN-ASSETS> (1,489,201)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 412,697
<GROSS-ADVISORY-FEES> 55,641
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 155,887
<AVERAGE-NET-ASSETS> 10,107,858
<PER-SHARE-NAV-BEGIN> 9.97
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> (.25)
<PER-SHARE-DIVIDEND> .53
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.74
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 06
<NAME> HSBC FIXED INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 68,869,990
<INVESTMENTS-AT-VALUE> 69,108,780
<RECEIVABLES> 36,389,796
<ASSETS-OTHER> 24,066
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 105,522,642
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 617,593
<TOTAL-LIABILITIES> 617,593
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,196,988
<SHARES-COMMON-STOCK> 10,608,588
<SHARES-COMMON-PRIOR> 9,718,065
<ACCUMULATED-NII-CURRENT> 10,321
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 2,571,050
<ACCUM-APPREC-OR-DEPREC> 238,790
<NET-ASSETS> 104,875,049
<DIVIDEND-INCOME> 147,829
<INTEREST-INCOME> 6,820,919
<OTHER-INCOME> 0
<EXPENSES-NET> 895,642
<NET-INVESTMENT-INCOME> 6,073,106
<REALIZED-GAINS-CURRENT> (1,449,259)
<APPREC-INCREASE-CURRENT> (2,191,530)
<NET-CHANGE-FROM-OPS> 2,432,317
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,074,602
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,608,906
<NUMBER-OF-SHARES-REDEEMED> 2,726,104
<SHARES-REINVESTED> 7,721
<NET-CHANGE-IN-ASSETS> 4,933,004
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1,109,914
<GROSS-ADVISORY-FEES> 562,307
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,003,910
<AVERAGE-NET-ASSETS> 102,188,888
<PER-SHARE-NAV-BEGIN> 10.28
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> (.39)
<PER-SHARE-DIVIDEND> .59
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 07
<NAME> HSBC NEW YORK TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 40,747,267
<INVESTMENTS-AT-VALUE> 42,419,219
<RECEIVABLES> 796,100
<ASSETS-OTHER> 5,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,220,886
<PAYABLE-FOR-SECURITIES> 1,000,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 246,203
<TOTAL-LIABILITIES> 1,246,203
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,213,580
<SHARES-COMMON-STOCK> 3,799,558
<SHARES-COMMON-PRIOR> 4,538,498
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1,910,847
<ACCUM-APPREC-OR-DEPREC> 1,671,952
<NET-ASSETS> 41,974,685
<DIVIDEND-INCOME> 41,281
<INTEREST-INCOME> 2,623,122
<OTHER-INCOME> 0
<EXPENSES-NET> 407,359
<NET-INVESTMENT-INCOME> 2,257,044
<REALIZED-GAINS-CURRENT> 1,168,816
<APPREC-INCREASE-CURRENT> (1,819,652)
<NET-CHANGE-FROM-OPS> 1,606,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,257,044
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 130,184
<NUMBER-OF-SHARES-REDEEMED> 983,166
<SHARES-REINVESTED> 114,042
<NET-CHANGE-IN-ASSETS> (6,702,079)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 3,079,663
<GROSS-ADVISORY-FEES> 202,341
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 543,568
<AVERAGE-NET-ASSETS> 44,929,443
<PER-SHARE-NAV-BEGIN> 11.17
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> (.12)
<PER-SHARE-DIVIDEND> .55
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.05
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 08
<NAME> HSBC SMALL CAP FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 68,933,154
<INVESTMENTS-AT-VALUE> 77,541,712
<RECEIVABLES> 32,462
<ASSETS-OTHER> 10,232
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,584,406
<PAYABLE-FOR-SECURITIES> 404,238
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 511,819
<TOTAL-LIABILITIES> 916,057
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67,889,222
<SHARES-COMMON-STOCK> 4,623,068
<SHARES-COMMON-PRIOR> 1,800,980
<ACCUMULATED-NII-CURRENT> 3,313
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 167,256
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,608,558
<NET-ASSETS> 76,608,349
<DIVIDEND-INCOME> 269,472
<INTEREST-INCOME> 86,054
<OTHER-INCOME> 0
<EXPENSES-NET> 537,481
<NET-INVESTMENT-INCOME> (181,955)
<REALIZED-GAINS-CURRENT> 902,064
<APPREC-INCREASE-CURRENT> 907,431
<NET-CHANGE-FROM-OPS> 1,627,540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 420,802
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,115,471
<NUMBER-OF-SHARES-REDEEMED> 296,513
<SHARES-REINVESTED> 3,130
<NET-CHANGE-IN-ASSETS> 50,632,657
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 314,013
<GROSS-ADVISORY-FEES> 362,401
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 595,845
<AVERAGE-NET-ASSETS> 51,739,393
<PER-SHARE-NAV-BEGIN> 14.46
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 2.25
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .09
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.58
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 09
<NAME> HSBC GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 129,548,737
<INVESTMENTS-AT-VALUE> 149,859,221
<RECEIVABLES> 191,700
<ASSETS-OTHER> 5,639
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 150,056,560
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,368,821
<TOTAL-LIABILITIES> 9,368,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,108,016
<SHARES-COMMON-STOCK> 8,640,285
<SHARES-COMMON-PRIOR> 4,474,227
<ACCUMULATED-NII-CURRENT> 39,543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,229,696
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,310,484
<NET-ASSETS> 140,687,739
<DIVIDEND-INCOME> 2,474,748
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 919,259
<NET-INVESTMENT-INCOME> 1,555,489
<REALIZED-GAINS-CURRENT> 9,426,589
<APPREC-INCREASE-CURRENT> 8,757,934
<NET-CHANGE-FROM-OPS> 17,740,012
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,557,713
<DISTRIBUTIONS-OF-GAINS> 8,195,067
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,433,181
<NUMBER-OF-SHARES-REDEEMED> 1,287,720
<SHARES-REINVESTED> 20,597
<NET-CHANGE-IN-ASSETS> 74,625,681
<ACCUMULATED-NII-PRIOR> 5,770
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 6,591
<GROSS-ADVISORY-FEES> 597,585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,040,487
<AVERAGE-NET-ASSETS> 108,726,822
<PER-SHARE-NAV-BEGIN> 14.77
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> 2.46
<PER-SHARE-DIVIDEND> .18
<PER-SHARE-DISTRIBUTIONS> .95
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.28
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 101
<NAME> HSBC INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 19,550,871
<INVESTMENTS-AT-VALUE> 21,108,560
<RECEIVABLES> 172,258
<ASSETS-OTHER> 303,158
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,583,976
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,748
<TOTAL-LIABILITIES> 74,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,299,302
<SHARES-COMMON-STOCK> 38,578<F1>
<SHARES-COMMON-PRIOR> 65,937<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 6,491
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 345,289
<ACCUM-APPREC-OR-DEPREC> 1,561,706
<NET-ASSETS> 21,509,228
<DIVIDEND-INCOME> 324,212
<INTEREST-INCOME> 20,983
<OTHER-INCOME> 0
<EXPENSES-NET> 354,102
<NET-INVESTMENT-INCOME> (18,907)
<REALIZED-GAINS-CURRENT> 492,258
<APPREC-INCREASE-CURRENT> 741,037
<NET-CHANGE-FROM-OPS> 1,214,308
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 788,991
<NUMBER-OF-SHARES-REDEEMED> 355,941
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,598,834
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 776,197
<GROSS-ADVISORY-FEES> 160,919
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 516,491
<AVERAGE-NET-ASSETS> 494,327<F1>
<PER-SHARE-NAV-BEGIN> 9.97<F1>
<PER-SHARE-NII> (.02)<F1>
<PER-SHARE-GAIN-APPREC> .65<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.60<F1>
<EXPENSE-RATIO> 2.10<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Service Class
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 102
<NAME> HSBC INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 19,550,871
<INVESTMENTS-AT-VALUE> 21,108,560
<RECEIVABLES> 172,258
<ASSETS-OTHER> 303,158
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,583,976
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,748
<TOTAL-LIABILITIES> 74,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,299,302
<SHARES-COMMON-STOCK> 1,988,504<F1>
<SHARES-COMMON-PRIOR> 1,528,095<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 6,491
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 345,289
<ACCUM-APPREC-OR-DEPREC> 1,361,706
<NET-ASSETS> 21,509,228
<DIVIDEND-INCOME> 324,212
<INTEREST-INCOME> 20,983
<OTHER-INCOME> 0
<EXPENSES-NET> 364,102
<NET-INVESTMENT-INCOME> (18,907)
<REALIZED-GAINS-CURRENT> 492,258
<APPREC-INCREASE-CURRENT> 741,037
<NET-CHANGE-FROM-OPS> 1,214,383
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 788,991
<NUMBER-OF-SHARES-REDEEMED> 355,941
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,598,834
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 776,197
<GROSS-ADVISORY-FEES> 160,919
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 516,491
<AVERAGE-NET-ASSETS> 17,376,833<F1>
<PER-SHARE-NAV-BEGIN> 9.98<F1>
<PER-SHARE-NII> (.01)<F1>
<PER-SHARE-GAIN-APPREC> .64<F1>
<PER-SHARE-DIVIDEND> 0<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.61<F1>
<EXPENSE-RATIO> 2.04<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> INSTITUTIONAL CLASS
</FN>
</TABLE>
<PAGE>
BY-LAWS
OF
HSBC MUTUAL FUNDS TRUST
ARTICLE I
Definitions
-----------
The terms "Affiliated Person", "Commission", "Declaration",
"Interested Person", "Investment Adviser", "Majority Shareholder Vote", "1940
Act", Principal Underwriter", "Series", "Series Majority Shareholder Vote,
"Shareholder", "Shares", "Trust", "Trust Property" and "Trustees" have the
meanings given them in the Declaration of Trust (the "Declaration") of Mariner
Mutual Funds Trust (the "Trust"), dated November 1, 1989, as amended from time
to time.
ARTICLE II
Offices and Seal
----------------
Section 2.1 Principal Office. The principal office of the Trust
----------------
shall be located in the City of New York, State of New York.
Section 2.2 Registered Office. The Trust shall maintain a registered
-----------------
office in the City of Boston, Commonwealth of Massachusetts.
Section 2.3 Other Offices. The Trust may establish and maintain
-------------
such other offices and places of business within or without the Commonwealth of
Massachusetts as the Trustees may from, time to time determine.
Section 2.4 Seal. The seal of the Trust shall be circular in form
----
and shall bear the name of the Trust, the year of its organization, and the
words "Common Seal" and "A Massachusetts Voluntary Association". The form of the
seal shall be subject to alteration by the Trustees and the seal may be used by
causing it or a facsimile to be impressed or affixed or
<PAGE>
printed or otherwise reproduced. Any officer or Trustee of the Trust shall have
authority to affix the seal of the Trust to any document requiring the same but,
unless otherwise required by the Trustees, the seal shall not be necessary to be
placed on, and its absence shall not impair the validity, of any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
ARTICLE III
Shareholders
------------
Section 3.1 Meetings. A Shareholders' meeting for the election of
--------
Trustees and the transaction of other proper business shall be held when
authorized under or required by the Declaration.
Section 3.2 Place of Meeting. All Shareholders' meetings shall be
----------------
held at such place within or without the Commonwealth of Massachusetts as the
Trustees shall designate.
Section 3.3 Notice of Meetings. Notice of all Shareholders' meetings,
------------------
stating the time, place and purpose of the meeting, shall be given by the
Secretary or an Assistant Secretary of the Trust by mail to each Shareholder
entitled to notice of and to vote at such meeting at his address as recorded on
the register of the Trust mailed at least 10 days and not more than 60 days
before the meeting. Such notice shall be deemed to be given when deposited in
the United States mail, with postage thereon prepaid. Any adjourned meeting may
be held as adjourned without further notice. No notice need be given (a) to any
Shareholder if a written waiver of notice, executed before or after the meeting
by such Shareholder or his attorney thereunto duly authorized, is filed with the
records of the meeting, or (b) to any Shareholder who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him. A waiver of notice need not specify the purposes of the meeting.
-2-
<PAGE>
Section 3.4 Shareholders Entitled to Vote. If, pursuant to Section
-----------------------------
3.9 hereof, a record date has been fixed for the determination of Shareholders
entitled to notice of and to vote at any Shareholders' meeting, each Shareholder
of the Trust shall be entitled to vote, in person or by proxy, each Share or
fraction thereof standing in his name on the register of the Trust at the time
of determining net asset value on such record date. If the Declaration or the
1940 Act require that Shares be voted by Series, each Shareholder shall only be
entitled to vote, in person or by proxy, each Share or fraction thereof of such
Series standing in his name on the register of the Trust at the time of
determining net asset value on such record date. If no record date has been
fixed for the determination of Shareholders so entitled, the record date for the
determination of Shareholders entitled to notice of and to vote at a
Shareholders' meeting shall be at the close of business on the day on which
notice of the meeting is mailed or, if notice is waived by all Shareholders, at
the close of business on the tenth day next preceding the day on which the
meeting is held.
Section 3.5 Quorum. The presence at any Shareholders' meeting in
------
person or by proxy, of Shareholders entitled to cast a majority of the votes
thereat shall be a quorum for the transaction of business.
Section 3.6 Adjournment. The holders of a majority of the Shares
-----------
entitled to vote at the meeting and present thereat in person or by proxy,
whether or not constituting a quorum, or, if no Shareholder entitled to vote is
present thereat in person or by proxy, any Trustee or officer present thereat
entitled to preside or act as Secretary of such meeting, may adjourn the meeting
sine die or from time to time. Any business that might have been transacted at
- ---- ---
the meeting originally called may be transacted at any such adjourned meeting at
which a quorum is present.
-3-
<PAGE>
Section 3.7 Proxies. Shares may be voted in person or by proxy. When
-------
any Share is held jointly by several persons, any one of them may vote at any
meeting in person or by proxy in respect of such Share unless at or prior to
exercise of the vote the trustees receive a specific written notice to the
contrary from any one of them, but if more than one of them shall be present at
such meeting in person or by proxy, and such joint owners or their proxies so
present disagree as to any vote cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise
and the burden of proving invalidity shall rest on the challenger.
Section 3.8 Inspection of Records. The records of the Trust shall be
---------------------
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 3.9 Record Dates. The Trustees may fix in advance a date as
------------
a record date for the purpose of determining the Shareholders who are entitled
to notice of and to vote at any meeting or any adjournment thereof, or to
express consent in writing without a meeting to any action of the Trustees, or
who shall receive payment of any dividend or of any other distribution, or for
the purpose of any other lawful action, provided that such record date shall be
not more than 60 days before the date on which the particular action requiring
such determination of Shareholders is to be taken. In such case, subject to the
provisions of Section 3.4, each eligible Shareholder of record on such record
date shall be entitled to notice of, and to vote at, such meeting or
adjournment, or to express such consent, or to receive payment of such dividend
or distribution or to take such other action, as the case may be,
notwithstanding any transfer of Shares on the register of the Trust after the
record date.
-4-
<PAGE>
ARTICLE IV
Meetings of Trustees
--------------------
Section 4.1 Regular Meetings. The Trustees from time to time shall
----------------
provide by resolution for the holding of regular meetings for the election of
officers and the transaction of other proper business and fix their time and
place within or without the Commonwealth of Massachusetts.
Section 4.2 Special Meetings. Special meetings of the Trustees shall
----------------
be held whenever called by the Chairman of the Board, the President (or, in the
absence or disability of the President, by any Vice President), the Treasurer,
the Secretary or two or more Trustees, at the time and place within or without
the Commonwealth of Massachusetts specified in the respective notices or waivers
of notice of such meetings.
Section 4.3 Notice. Notice of regular and special meetings, stating
------
the time and place, shall be (a) mailed to each Trustee at his residence or
regular place of business at least five days before the day on which the meeting
is to be held or (b) caused to be delivered to him personally or to be
transmitted to him by telegraph, cable or wireless at least two days before the
day on which the meeting is to be held. Unless otherwise required by law, such
notice need not include a statement of the business to be transacted at, or the
purpose of, the meeting. No notice of adjournment of a meeting of the Trustees
to another time or place need be given if such time and place are announced at
such meeting.
Section 4.4 Waiver of Notice. Notice of a meeting need not be given
----------------
to any Trustee if a written waiver of notice, executed by him before or after
the meeting, is filed with the records of the meeting, or to any Trustee who
attends the meeting without protesting prior
-5-
<PAGE>
thereto or at its commencement the lack of notice to him. A waiver of notice
need not specify the purposes of the meeting.
Section 4.5 Quorum, Adjournment and Voting. At all meetings of the
------------------------------
Trustees, the presence of a majority of the total number of Trustees authorized,
but not less than two, shall constitute a quorum for the transaction of
business. A majority of the Trustees present, whether or not constituting a
quorum, may adjourn the meeting, from time to time. The action of a majority of
the Trustees present at a meeting at which a quorum is present shall be the
action of the Trustees unless the concurrence of a greater proportion is
required for such action by law, by the Declaration or by these By-Laws.
Section 4.6 Compensation. Each Trustee may receive such remuneration
------------
for his services as such as shall be fixed from time to time by resolution of
the Trustees.
ARTICLE V
Executive Committee and Other Committees
----------------------------------------
Section 5.1 How Constituted. The Trustees may, by resolution,
---------------
designate one or more committees, including an Executive Committee, an Audit
Committee, a Nominating Committee and a Committee on Administration, each
consisting of at least two Trustees. The Trustees may, by resolution, designate
one or more alternate members of any committee to serve in the absence of any
member or other alternate member of such committee. Each member and alternate
member of a committee shall be a Trustee and shall hold office at the pleasure
of the Trustees. The Chairman of the Board and the President shall be members of
the Executive Committee.
Section 5.2 Powers of the Executive Committee. Unless otherwise
---------------------------------
provided by resolution of the Trustees, the Executive Committee shall have and
may exercise all of the
-6-
<PAGE>
power and authority of the Trustees, provided that the power and authority of
the Executive Committee shall be subject to the limitations contained in the
Declaration.
Section 5.3 Other Committees of Trustees. To the extent provided by
----------------------------
resolution of the Trustees, other committees shall have and may exercise any of
the power and authority that may lawfully be granted to the Executive Committee.
Section 5.4 Proceedings, Quorum and Manner of Acting. In the absence
----------------------------------------
of appropriate resolution of the Trustees' each committee may adopt such rules
and regulations governing its proceedings, quorum and manner of acting as it
shall deem proper and desirable, provided that the quorum shall not be less than
two Trustees. In the absence of any member or alternate member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a Trustee to act in the place of such absent
member or alternate member. Members and alternate members of a committee may
participate in a meeting of such committee by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5.5 Other Committees. The Trustees may appoint other
----------------
committees, each consisting of one or more persons who need not be Trustees.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Trustees, but shall not exercise any
power which may lawfully be exercised only by the Trustees or a committee
thereof.
-7-
<PAGE>
ARTICLE VI
Officers
--------
Section 6.1 General. The officers of the Trust shall be a
-------
President, a Secretary, and a Treasurer, and may include a Chairman of the
Board, one or more Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 6.10 of this Article VI.
Section 6.2 Election, Term of Office and Qualifications. The officers
-------------------------------------------
of the Trust (except those appointed pursuant to Section 6.10) shall be elected
by the Trustees at their first meeting. If any officer or officers are not
elected at any such meeting, such officer or officers may be elected at any
subsequent regular or special meeting of the Trustees. Each officer elected by
the Trustees shall hold office subject to Sections 6.3 and 6.4 of this Article
VI and until his successor shall have been chosen and qualified. No person shall
hold more than one office of the Trust, except that the President may hold the
office of Chairman of the Board and any Treasurer, Assistant Treasurer,
Secretary or Assistant Secretary of the Trust may also hold the office of Vice
President. Neither the Chairman of the Board or the President need be selected
from among the Trustees of the Trust. Any Trustee or officer may be but need not
be a Shareholder of the Trust.
Section 6.3 Resignations and Removals. Any officer may resign his
-------------------------
office at any time by delivering a written resignation to the Trustees, the
President, the Secretary or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery. Any officer may be
removed from office with or without cause by the vote of a majority of the
Trustees at any regular meeting or any special meeting. Except to the extent
expressly provided in a written agreement with the Trust, no officer resigning
and no officer
-8-
<PAGE>
removed shall have any right to any compensation for any period following his
resignation or removal, or any right to damages on account of such removal.
Section 6.4 Vacancies and Newly Created Offices. If any vacancy shall
-----------------------------------
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Trustees at any regular or special meeting
or, in the case of any office created pursuant to Section 6.10 of this Article
VI, by any officer upon whom such power shall have been conferred by the
Trustees.
Section 6.5 Chairman of the Board. The Chairman of the Board shall be
---------------------
the chief executive officer of the Trust. He or his delegate shall preside at
all Shareholders' meetings and at all meetings of the Trustees and he shall be
ex officio a member of all committees of the Trustees, except the Audit
- -- -------
Committee. Subject to the supervision of the Trustees, he shall have general
charge of the business of the Trust, the Trust Property and the officers,
employees and agents of the Trust. He shall have such other powers and perform
such other duties as may be assigned to him from time to time by the
Trustees.
Section 6.6 President. The President shall be the chief operating
---------
officer of the Trust and, at the request of or in the absence or disability of
the Chairman of the Board, he shall act as chief executive officer of the Trust.
He or his delegate shall preside at all Shareholders' meetings and at
all meetings of the Trustees and he shall in general exercise the powers and
perform the duties of the Chairman of the Board. Subject to the supervision of
the Trustees and such direction and control as the Chairman of the Board may
exercise, he shall have general charge of the operations of the Trust and its
officers, employees and agents. He shall exercise such other powers and perform
such other duties as from time to time may be assigned to him by the Trustees.
-9-
<PAGE>
Section 6.7 Vice President. The Trustees may, from time to time,
--------------
designate and elect one or more Vice Presidents who shall have such powers and
perform such duties as from time to time may be assigned to them by the Trustees
or the President. At the request or in the absence or disability of the
President, the Vice President (or, if there are two or more Vice Presidents, the
Vice President designated by the Trustees) may perform all the duties of the
President and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
Section 6.8 Treasurer and Assistant Treasurers. The Treasurer shall
----------------------------------
be the principal financial and accounting officer of the Trust and shall have
general charge of the finances and books of account of the Trust. Except as
otherwise provided by the Trustees, he shall have general supervision of the
funds and property of the Trust and of the performance by the Custodian
appointed pursuant to Section 8.1 of the Declaration of its duties with respect
thereto. The Treasurer shall render a statement of condition of the finances of
the Trust to the Trustees as often as they shall require the same and he shall
in general perform all the duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to him by the Trustees.
Any Assistant Treasurer may perform such duties of the Treasurer as
the Treasurer or the Trustees may assign, and, in the absence of the Treasurer,
he may perform all the duties of the Treasurer.
Section 6.9 Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
attend to the giving and serving of all notices of the Trust and shall record
all proceedings of the meetings of the Shareholders and Trustees in one or more
books to be kept for that purpose. He shall keep in safe custody the seal of the
Trust, and shall have charge of the records of the Trust, including
-10-
<PAGE>
the register of shares and such other books and papers as the Trustees may
direct and such books, reports, certificates and other documents required by law
to be kept, all of which shall at all reasonable times be open to inspection by
any Trustee. He shall perform such other duties as appertain to his office or as
may be required by the Trustee.
Any Assistant Secretary may perform such duties of the Secretary as
the Secretary or the Trustees may assign, and, in the absence of the Secretary,
he may perform all the duties of the Secretary.
Section 6.10 Subordinate Officers. The Trustees from time to time
--------------------
may appoint such other subordinate officers or agents as they may deem
advisable, each of whom shall have such title, hold office for such period, have
such authority and perform such duties as the Trustees may determine. The
Trustees from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 6.11 Remuneration. The salaries or other compensation of the
------------
officers of the Trust shall be fixed from time to time by resolution of the
Trustees, except that the Trustees may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 6.10 hereof.
Section 6.12 Surety Bonds. The Trustees may require any officer or
------------
agent of the Trust to execute a bond (including, without limitation, any bond
required by the 1940 Act and the rules and regulations of the Commission) to the
Trustees in such sum and with such surety or sureties as the Trustees may
determine, conditioned, upon the faithful performance of his duties to the
Trust, including responsibility for negligence and for the accounting of any of
-11-
<PAGE>
the Trust Property that may come into his hands. In any such case, a new bond of
like character shall be given at least every six years, so that the date of the
new bond shall not be more than six years subsequent to the date of the bond
immediately preceding.
ARTICLE VII
Execution of Instruments, Voting of Securities
----------------------------------------------
Section 7.1 Execution of Instruments. All deeds, documents,
------------------------
transfers, contracts, agreements, requisitions or orders, promissory notes,
assignments, endorsements, checks and drafts for the payment of money by the
Trust, and other instruments requiring execution either in the name of the Trust
or the names of the Trustees or otherwise may be signed by the Chairman, the
President, a Vice President or the Secretary and by the Treasurer or an
Assistant Treasurer, or as the Trustees may otherwise, from time to time,
authorize, provided that instructions in connection with the execution of
portfolio securities transactions may be signed by one such officer. Any such
authorization may be general or confined to specific instances.
Section 7.2 Voting of Securities. Unless otherwise ordered by the
--------------------
Trustees, the Chairman, the President or any Vice President shall have full
power and authority on behalf of the Trustees to attend and to act and to vote,
or in the name of the Trustees to execute proxies to vote, at any meeting of
stockholders of any company in which the Trust may hold stock. At any such
meeting such officer shall possess and may exercise (in person or by proxy) any
and all rights, powers and privileges incident to the ownership of such stock.
The Trustees may by resolution from time to time confer like powers upon any
other person or persons.
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<PAGE>
ARTICLE VIII
Fiscal Year, Accountants
------------------------
Section 8.1 Fiscal Year. The fiscal year of the Trust shall be
-----------
established by resolution of the Trustees.
Section 8.2 Accountants.
-----------
(a) The Trustees shall employ an independent public accountant or firm
of independent public accountants as their accountant to examine the accounts of
the Trust and to sign and certify at least annually financial statements filed
by the Trust. The accountant's certificates and reports shall be addressed both
to the Trustees and to the Shareholders.
(b) A majority of the Trustees who are not Interested Persons of the
Trust shall select the accountant at any meeting held before the first
Shareholders' meeting, and thereafter shall select the accountant annually by
votes, cast in person, at a meeting held within 30 days before or after the
beginning of the fiscal year of the Trust. Such selection shall be submitted for
ratification or rejection at the next succeeding Shareholders' meeting. If such
meeting shall reject such selection, the accountant shall be selected by a
Majority Shareholder Vote, either at the meeting at which the rejection occurred
or at a subsequent Shareholders' meeting called for the purpose.
(c) Any vacancy occurring due to the death or resignation of the
accountant, may be filled at a meeting called for the purpose by the vote, cast
in person, of a majority of those Trustees who are not Interested Persons of the
Trust.
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<PAGE>
ARTICLE IX
Amendments
----------
Section 9.1 General. These By-Laws may be amended or repealed, in
-------
whole or in part, by a majority of the Trustees then in office at any meeting of
the Trustees, or by one or more writings signed by such a majority.
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<PAGE>
BY-LAWS
OF
HSBC MUTUAL FUNDS TRUST
As adopted on November 1, 1989
and amended on April 29, 1997
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I -- Definitions.......................................................1
ARTICLE II -- Offices and Seal.................................................1
Section 2.1 Principal Office............................................1
Section 2.2 Registered Office...........................................1
Section 2.3 Other Offices...............................................1
Section 2.4 Seal........................................................1
ARTICLE III -- Shareholders....................................................2
Section 3.1 Meetings....................................................2
Section 3.2 Place of Meeting............................................2
Section 3.3 Notice of Meetings..........................................2
Section 3.4 Shareholders Entitled to Vote...............................3
Section 3.5 Quorum......................................................3
Section 3.6 Adjournment.................................................3
Section 3.7 Proxies.....................................................4
Section 3.8 Inspection of Records.......................................4
Section 3.9 Record Dates................................................4
ARTICLE IV -- Meetings of Trustees.............................................5
Section 4.1 Regular Meetings............................................5
Section 4.2 Special Meetings............................................5
Section 4.3 Notice......................................................5
Section 4.4 Waiver of Notice............................................5
Section 4.5 Quorum, Adjournment and Voting..............................6
Section 4.6 Compensation................................................6
ARTICLE V -- Executive Committee and Other Committees..........................6
Section 5.1 How Constituted.............................................6
Section 5.2 Powers of the Executive Committee...........................6
Section 5.3 Other Committees of Trustees................................7
Section 5.4 Proceedings, Quorum and Manner of Acting....................7
Section 5.5 Other Committees............................................7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI -- Officers.........................................................8
Section 6.1 General.....................................................8
Section 6.2 Election, Term of Office and Qualifications.................8
Section 6.3 Resignations and Removals...................................8
Section 6.4 Vacancies and Newly Created Offices.........................9
Section 6.5 Chairman of the Board.......................................9
Section 6.6 President...................................................9
Section 6.7 Vice President.............................................10
Section 6.8 Treasurer and Assistant Treasurers.........................10
Section 6.9 Secretary and Assistant Secretaries........................10
Section 6.10 Subordinate Officers.......................................11
Section 6.11 Remuneration...............................................11
Section 6.12 Surety Bonds...............................................11
ARTICLE VII -- Execution of Instruments, Voting of Securities.................12
Section 7.1 Execution of Instruments...................................12
Section 7.2 Voting of Securities.......................................12
ARTICLE VIII -- Fiscal Year, Accountants......................................13
Section 8.1 Fiscal Year................................................13
Section 8.2 Accountants................................................13
ARTICLE IX -- Amendments......................................................14
Section 9.1 General....................................................14
</TABLE>
ii
<PAGE>
SHAREHOLDER SERVICER ASSISTANCE AGREEMENT
SHAREHOLDER SERVICER ASSISTANCE AGREEMENT (formerly, Shareholder
Servicing Agreement), dated as of November 1, 1994, (as amended as of April 29,
1997) by and between HSBC Mutual Funds Trust (the "Trust"), a Massachusetts
business trust, and HSBC Asset Management Americas Inc. (the "Financial
Institution"), as a shareholder servicer assistant hereunder (the "Agent")
relating to transactions in shares of capital stock, $.001 par value (the
"Shares"), of any of the existing investment portfolios offered by the Trust
(the "Funds"). In the event that the Trust establishes one or more portfolios
other than the Funds with respect to which it decides to retain the Financial
Institution hereunder, the Trust shall promptly notify the Financial Institution
in writing. If the Financial Institution is willing to render such services, it
shall notify the Trust in writing whereupon such portfolio shall become a Fund
hereunder.
The Trust and the Financial Institution hereby agree as follows:
1. Appointment. The Financial Institution hereby agrees to perform
-----------
certain services to assist third parties including Marine Midland Bank, the
Funds' Distributor, and any Service Organization (as defined in Prospectus) and
other entities whose customers invest in the Funds (collectively, "Shareholder
Servicers") as hereinafter set forth. The Agent's appointment hereunder is non-
exclusive, and the parties recognize and agree that, from time to time, the
Trust may enter into other shareholder servicing agreements, in writing, with
other financial institutions.
2. Services to be Performed. The Agent shall be responsible for
------------------------
performing Shareholder Servicer administrative support services, which may, but
is not specifically required to, include any or all of the following: (i)
assist personnel who (a) hand out prospectuses and Fund applications, (b) assist
customers with filling out Fund applications and (c) effect
<PAGE>
purchases and redemptions; (ii) assist with preparation of and review Fund
written communications, including marketing material, semi-annual and Annual
Reports and prospectus updates; (iii) educate, describe the Funds, and answer
questions from Shareholder Servicers to enhance understanding of the Funds and
their investment objectives; and (iv) generally assist the activities of the
Shareholder Servicers.
The Agent shall provide all personnel and facilities necessary in
order for it to perform the functions described in this paragraph.
3. Fees.
----
3.1. Fees from the Trust. In consideration for the services
-------------------
described in Section 2 hereof and the incurring of expenses in connection
therewith, the Agent shall receive a fee, computed daily and payable monthly, at
the annual rate of 0.04% of 1% of the average daily net asset value of Shares of
each Fund for which the Agent from time to time performs services under this
Agreement. Fees with respect to Shareholder Servicers' customers Shares in any
one Fund will be paid exclusively from the assets of that Fund in which such
Customer's assets are invested. For purposes of determining the fees payable to
the Agent hereunder, the value of the Trust's net assets shall be computed in
the manner specified in the Trust's then-current prospectus and statement of
additional information (the "Prospectus") for computation of the net asset value
of the Trust's Shares.
4. Approval of Materials to be Circulated. Advance copies or proofs
--------------------------------------
of all materials which are to be generally circulated or disseminated by the
Agent to Shareholder Servicers or prospective Shareholder Servicers which
identify or describe the Trust shall be provided to the Trust at least 10 days
prior to such circulation or dissemination (unless the Trust consents in writing
to a shorter period), and such materials shall not be circulated or disseminated
or further circulated or disseminated at any time after the Trust shall have
given written notice to the Agent of any objection thereto.
-2-
<PAGE>
Nothing in this Section 4 shall be construed to make the Trust liable
for the use of any information about the Trust which is disseminated by the
Agent.
5. Compliance with Laws, etc. The Agent shall comply with all
-------------------------
applicable federal and state laws and regulations in the performance of its
duties under this Agreement, including securities laws.
6. Limitation of Agent's Liability. In consideration of the Agent's
-------------------------------
undertaking to render the services described in this Agreement, the Trust agrees
that the Agent shall not be liable under this Agreement for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the performance of this Agreement, provided that nothing in this Agreement
shall be deemed to protect or purport to protect the Agent against any liability
to the Trust or its stockholders to which the Agent would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of the Agent's duties under this Agreement or by reason of the
Agent's reckless disregard of its obligations and duties hereunder.
7. Indemnification. The Trust agrees to indemnify and hold harmless
---------------
the Agent from all taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the
Investment Company Act of 1940, as amended, and any state and foreign securities
and blue sky laws, all as or to be amended from time to time) and expenses,
including attorneys' fees and disbursements arising directly or indirectly from
(i) any misstatements or omissions in the Trust's Prospectus, or (ii) any action
or thing which the Agent takes or does or omits to take or do reasonably
believed by the Agent to be at the request or direction or in reliance on the
advice or instructions, whether oral or written, of the Trust provided, that the
Agent shall not be indemnified against any liability to the Trust or to its
shareholders (or any expenses incident to such liability) arising out of the
Agent's own willful misfeasance, bad faith or gross negligence in the
performance of its duties hereunder or by reason of its reckless disregard of
its obligations and duties hereunder. In order that the indemnification
provision contained
-3-
<PAGE>
in this paragraph shall apply, it is understood that if in any case the Trust
may be asked to indemnify or save the Agent harmless, the Trust shall be fully
and promptly advised of all pertinent facts concerning the situation in
question, and it is further understood that the Agent will use all reasonable
care to identify and notify the Trust promptly concerning any situation which
presents or appears likely to present the probability of such a claim for
indemnification against the Trust. The Trust shall have the option to defend
the Agent against any claim which may be the subject of this indemnification
and, in the event that the Trust so elects, it will so notify the Agent and
thereupon the Trust shall take over complete defense for the claim, and the
Agent shall in such situation incur no further legal or other expenses for which
it shall seek indemnification under this paragraph. The Agent shall in no case
confess any claim or make any compromise or settlement in any case in which the
Trust will be asked to indemnify the Agent, except with the Trust's prior
written consent.
8. Limitation of Shareholder Liability, etc. The Agent hereby agrees
-----------------------------------------
that obligations assumed by the Trust pursuant to this Agreement shall be
limited in all cases to the Trust and its assets and that the Agent shall not
seek satisfaction of any such obligation from the shareholders or any
shareholder of the Trust. It is further agreed that the Agent shall not seek
satisfaction of any such obligations from the Board of Trustees or any
individual Trustee of the Trust.
9. Notices. All notices or other communications hereunder to either
-------
party shall be in writing or by confirming telegram, cable, telex or facsimile
sending device. Notices shall be addressed (a) if to the Trust, at the address
of the Trust, or (b) if to the Agent, at 250 Park Avenue, New York, New York
10017, Attention: Angela DeRosa.
10. Further Assurances. Each party agrees to perform such further
------------------
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
11. Termination. This Agreement will continue in effect until two
-----------
years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a) by
the Trust's Board
-4-
<PAGE>
of Trustees and (b) by the vote, cast in person at a meeting called for the
purpose, of a majority of the Trust's trustees who are not parties to this
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. This Agreement may be terminated at any time, without the payment of any
penalty, by a vote of a majority of the Trust's outstanding voting securities
(as defined in the 1940 Act) or by a vote of a majority of the Trust's entire
Board of Trustees on 60 days' written notice to the Agent or by the Agent on
(60) days' written notice to the Trust. Notice of termination of the
Shareholder Servicing Plan by the Board of Trustees, pursuant to which this
Agreement has been entered, shall constitute a notice of termination of this
Agreement.
12. Changes; Amendments. This Agreement may be changed or amended
-------------------
only by written instrument signed by both parties.
13. Reports. The Agent will provide the Trust or its designees such
-------
information as the Trust or its designees may reasonably request (including,
without limitation, periodic certifications confirming the provision to
Shareholder Servicers of the services described herein), and will otherwise
cooperate with the Trust and its designees (including, without limitation, any
auditors designated by the Trust), in connection with the preparation of reports
to its Board of Trustees concerning this Agreement and the monies paid or
payable under this Agreement, as well as any other reports or filings that may
be required by law.
14. Subcontracting by Agent. The Agent may subcontract for the
-----------------------
performance of the Agent's obligations hereunder with any one or more persons,
including but not limited to any one or more persons which is an affiliate of
the Agent; provided, however, that the Agent shall be as fully responsible to
-------- -------
the Trust for the acts and omissions of any subcontractor as it would be for its
own acts or omissions. The Agent shall notify the Trust of any such arrangements
no later than the next meeting of the Trust's Board of Trustees following the
entry by the Agent into such arrangements. Notwithstanding this paragraph or
paragraph 11 of this Agreement, the Trust reserves the right to terminate this
Agreement immediately or upon such notice as the Trust, in its sole discretion,
determines to give, and without payment of any penalty, if the Trust notifies
the Agent
-5-
<PAGE>
that any subcontractor of the Agent is unacceptable to the Trust for any reason
and the Agent does not terminate its arrangements with such subcontractor as
promptly as reasonably practicable.
15. Governing Law. This Agreement shall be governed by the laws of
-------------
the State of New York.
16. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement has been executed on behalf of the Trust by the undersigned not
individually, but in the capacity indicated.
HSBC MUTUAL FUNDS TRUST
By:
-------------------------------
Title: Secretary
HSBC ASSET MANAGEMENT AMERICAS INC.
By:
-------------------------------
Title:
-6-
<PAGE>
[LETTERHEAD OF BAKER & McKENZIE APPEARS HERE]
April 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: HSBC Mutual Funds Trust (Registration No. 33-33734)
---------------------------------------------------
Dear Sir/Madam:
As counsel to HSBC Mutual Funds Trust (the "Trust"), we have reviewed
Post-Effective Amendment No. 18 to the Trust's Registration Statement on Form N-
1A (the "Amendment"). The Amendment is being filed pursuant to Rule 485 of the
1933 Act and it is proposed that it will become effective immediately upon
filing pursuant to paragraph (b).
Based on our review, it is our view that the Amendment does not
include disclosure which we believe would render it ineligible to become
effective under paragraph (b) of Rule 485.
If you have any questions or comments concerning the enclosed, please
telephone Scott R. MacLeod at (212) 891-3947.
Sincerely,
BAKER & McKENZIE
SRM/ear
Enclosures
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Independent Auditors" and "Financial Statements" and to the
incorporation by reference of our reports dated February 10, 1997, in this
Registration Statement (Form N-1A 33-33734) of HSBC Mutual Funds Trust.
/s/ Ernst & Young LLP
-------------------------
ERNST & YOUNG LLP
New York, New York
April 25, 1997
