<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 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 International Equity Fund (the "Fund").
The Fund's investment objective is to seek to provide investors with long-
term capital appreciation by investing, under ordinary market conditions, at
least 65% of its total assets in equity securities (including American,
European and Global Depositary Receipts) issued by companies based outside of
the United States. The balance of the Fund's assets will generally be invested
in equity and debt securities of companies based in, and debt securities of
governments and other issuers issued in, the United States and outside of the
United States, including bonds and money market instruments. The Fund may also
use other investment practices to enhance return or to hedge against
fluctuations in the value of portfolio securities. See "Investment Objective,
Policies and Risk Factors."
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. The Fund's
investment sub-adviser is Delaware International Advisers Ltd. ("Delaware
International" or "Sub-Adviser"). 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 PRINCIPLE. THE NET
ASSET VALUE OF THE FUND WILL FLUCTUATE FROM TIME TO TIME.
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 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 30, 1998, containing additional detailed information
about the Fund, has been filed with the Securities and Exchange Commission and
is available, along with other materials, on the SEC Internet web site
(http:/www.sec.gov). The SAI is 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 30, 1998 as revised September , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Redemption of Shares......... 21
Exchange Privilege........... 23
Dividends, Distributions and
Taxes....................... 23
Account Services............. 25
Transfer Agency and Fund Ac-
counting
Services.................... 25
Custodian.................... 26
Counsel...................... 26
Performance Information...... 26
Shares of Beneficial
Interest.................... 27
</TABLE>
<TABLE>
<S> <C>
Summary of Annual Fund Operating
Expenses..................... 2
Financial Highlights.......... 4
Investment Objective, Policies
and Risk Factors............. 5
Investment Restrictions....... 12
Management of the Fund........ 13
Transactions with Affiliates.. 17
Determination of Net Asset
Value........................ 17
Purchase of Shares............ 18
</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 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, 1997, as adjusted for changes
to the sub-advisory fee, estimated operating expenses and voluntary reductions
of investment advisory, administration and 12b-1 fees.
<TABLE>
<CAPTION>
SERVICE INSTITUTIONAL
SHARES SHARES
SHAREHOLDER TRANSACTION EXPENSES: ------- -------------
<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)*............... 0.56% 0.56%
12b-1 Fees (net of fees not imposed)**................... 0.00% none%
OTHER EXPENSES:
Administrative Services Fee***......................... 0.10% 0.10%
Other Operating Expenses............................... 0.57% 0.52%
---- ----
Total Fund Operating Expenses (net of fees and expenses
not imposed)*****........................................ 1.23% 1.18%
==== ====
Total Fund Operating Expenses Before Non-Imposition of
Fees and Expenses........................................ 1.97% 1.57%
==== ====
</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 THE 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............................................... $ 62 $ 12
3 years.............................................. $ 87 $ 37
5 years.............................................. $114 $ 65
10 years............................................. $191 $143
</TABLE>
- --------
* Reflects advisory fees not imposed in the past as a result of a
voluntary waiver by the Adviser. If these fees had been imposed in the
past or will be imposed in the future, the advisory fees for the Service
Class and Institutional Class shares would be 0.90%.
** 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 result of a voluntary
waiver by BISYS Fund Services of 0.05% for both share classes. See
"Management of the Fund--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.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following supplementary financial information for the period April 25,
1994 (commencement of operations) to December 31, 1994 for the Service Class
and March 1, 1995 (commencement of operations) to December 31, 1995 for the
Institutional Class, and the three years (two years in the case of the
Institutional Shares) ended December 31, 1997 has been audited by Ernst &
Young LLP, whose report thereon appears in the Funds' 1997 Annual Report to
Shareholders. This information should be read in conjunction with the
financial statements and notes thereto. The information below is for periods
prior to the appointment of Delaware International Advisers Ltd. as sub-
adviser to the Fund.
Selected data for a share outstanding throughout each period:
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SERVICE CLASS SHARES INSTITUTIONAL CLASS SHARES
-------------------------------------------------------- ------------------------------------------
FOR THE FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 25, 1994(A) YEAR ENDED YEAR ENDED MARCH 1, 1995(A)
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31 DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1995 1994 1997 1996 1995
------------ ------------ ------------ ----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, be-
ginning of period... $ 10.60 $ 9.97 $9.55 $ 10.00 $ 10.61 $ 9.98 $ 8.81
------- ------- ----- ------- ------- ------- -------
Investment Opera-
tions:
- -----------------
Net investment
loss**............. 0.06 (0.07) (0.07) -- 0.04 (0.01) (0.03)
Net realized and
unrealized gain
(loss) from invest-
ments.............. (0.28) 0.65 0.49 (0.43) (0.27) 0.64 1.20
------- ------- ----- ------- ------- ------- -------
Total from investment
operations.......... (0.22) 0.63 0.42 (0.43) (0.23) 0.63 1.17
Distributions:
- --------------
From net investment
income............. (0.03) -- -- -- (0.02) -- --
From excess of net
realized losses on
investments........ -- -- -- (0.02) (0.01) -- --
------- ------- ----- ------- ------- ------- -------
Total distributions.. (0.03) -- -- (0.02) (0.03) -- --
------- ------- ----- ------- ------- ------- -------
Net asset value, end
of period........... $ 10.35 $ 10.60 $9.97 $ 9.55 $ 10.35 $ 10.61 $ 9.98
======= ======= ===== ======= ======= ======= =======
Total return(b)...... (2.06)% 6.32% 4.40% (4.30)%(d) (2.15)% 6.31% 13.28%(d)
Ratios/Supplemental
Data:
- -------------------
Net assets at end of
period (000)....... $ 309 $ 409 $ 658 $16,819 $67,458 $21,100 $15,253
Ratio of expenses to
average net
assets (with fee
waivers)........... 1.17 % 2.10% 1.98 % 2.16%(c) 1.12% 2.04 % 2.62%(c)
Ratio of net invest-
ment loss to
average net assets
(with fee waivers). 0.54 % (0.19)% (1.01)% (0.04)%(c) 0.35 % (0.10)% (0.34)%(c)
Ratio of expenses
(without fee
waivers) to average
net assets*........ 2.19 % 2.94% 3.66 % 2.50%(c) 1.91% 2.89 % 3.12%(c)
Ratio of net
investment loss
(without fee
waivers) to average
net assets*........ (0.48)% (1.03)% (2.69)% (0.39)%(c) (0.44)% (0.95)% (0.84)%(c)
Portfolio turnover
rate............... 112.54% 77.91% 90.31 % 29.37%(d) 112.54% 77.91 % 90.31%(d)
Average commission
rate paid(e)....... $0.0321 $0.0006 N/A N/A $0.0321 $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, 1997, 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, under ordinary market conditions,
at least 65% of its total assets in equity securities (including American,
European and Global Depositary Receipts) issued by companies based outside of
the United States. The balance of the Fund's assets will generally be invested
in equity and debt securities of companies based in, and debt securities of
governments and other issuers issued in, the United States and outside of the
United States, including bonds and money market instruments. The Fund may, for
temporary defensive purposes, invest up to 100% of its assets in these
instruments. 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
Delaware International's approach in selecting investments is primarily
oriented to individual stock selection and is value driven. In selecting
stocks for the Fund, Delaware International will identify those stocks that it
believes will provide a high total return over a market cycle, taking into
consideration movements in the price of the individual security and the impact
of currency fluctuation on a United States domiciled, dollar-based investor.
Delaware International conducts fundamental research on a global basis in
order to identify securities that, in Delaware International's opinion, have
the potential for long-term total return. This research effort generally
centers on a value-oriented dividend discount methodology with respect to
individual securities and market analysis that isolates value across country
boundaries. The approach focuses on future anticipated dividends and discounts
the value of those dividends back to what they would be worth if they were
being received today. In addition, the analysis typically includes a
comparison of the values and current market prices of different possible
investments. Delaware International's general management strategy emphasizes
long-term holding of securities, although securities may be sold in Delaware
International's discretion without regard to the length of time they have been
held.
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 price
appreciation and income. The Fund's equity investments may include, but are
not limited to common stocks, preferred stocks, convertible securities,
depositary receipts and warrants. 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, Canada, Germany, Italy, France, Spain,
Switzerland, the Netherlands, Sweden, Australia, New Zealand, Hong Kong and
Singapore. While investments will be made mainly in marketable securities of
companies located in developed countries, 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 Fund may invest in securities issued in any currency and may hold
foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units, such as the European Currency Unit.
5
<PAGE>
As described below, currency considerations carry a special risk for a
portfolio of international securities. Delaware International employs a
purchasing power parity approach to evaluate currency risk, and the Fund may
actively carry on defensive hedging activities, including investment in
forward foreign currency exchange contracts to hedge currency risks associated
with the purchase of individual securities denominated in a particular
currency. See Forward Currency Contracts under "Other Investment Practices of
the Funds."
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 influenced by the returns
on the currencies in which the securities are denominated. Currency risk is
the risk that changes in foreign exchange rates will affect, favorably or
unfavorably, the value of foreign securities held by the Fund. In a period
when the U.S. dollar generally rises against foreign currencies, the value of
foreign stocks for a U.S. investor will be diminished. By contrast, in a
period when the U.S. dollar generally declines, the value of foreign
securities will be enhanced. Further, brokerage costs in purchasing and
selling securities in foreign securities markets generally are higher than
such costs in comparable transactions in domestic securities markets, and
foreign custodial costs relating to the Fund's portfolio securities are higher
than domestic custodial costs.
Investment in emerging market countries presents risks in greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in stocks. Repatriation of investment income, capital, and
the proceeds of sales of foreign investors may require governmental
registration and/or approval in some emerging market countries. A number of
the currencies of developing countries have experienced significant declines
against the U.S. dollar in recent years, and devaluation may occur subsequent
to investments in these currencies by the Fund. Inflation and rapid
fluctuations in inflation rates have had and may continue to have a negative
effect on the economies and securities markets of certain emerging market
countries.
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. The Fund may not invest more than 5% of its total assets in the
securities of one investment company.
6
<PAGE>
Long-Term and Short-Term Corporate Debt Obligations. The Fund may invest in
U.S. dollar-denominated debt obligations issued or guaranteed by U.S.
corporations or U.S. commercial banks, U.S. dollar-denominated obligations of
foreign issuers and debt obligations of 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 include certificates of deposit,
bankers' acceptances, and fixed time deposits. The Adviser, or Sub-Adviser, in
choosing corporate debt securities on behalf of the Fund will evaluate each
issuer based on factors such as (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 or Sub-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, are determined by the Adviser or Sub-
Adviser to be of 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.
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"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"). These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs and GDRs are receipts
typically issued by a United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. ADRs
typically may only be traded from one United States investor to another United
States investor, whereas GDRs can often be traded outside the United States.
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, GDRs, 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
7
<PAGE>
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 or Sub-
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 or Sub-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.
Securities of Foreign Governments and Supranational Organizations. The Fund
may invest in debt securities issues by foreign governments, their political
subdivisions, governmental authorities, agencies and instrumentalities and
supranational organizations. Such obligations may be U.S. dollar-denominated
or denominated in foreign currencies. A supranational organization is an
entity designated or supported by the national governments 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, the European Economic Community, the European
Coal and Steel Community, 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 is not backed by its full faith and
credit and general taxing powers.
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 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 expedite settlement of portfolio transactions and 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 and Sub-Adviser believe that
it is important to have the flexibility to enter into forward currency
contracts when they determine that the best interests of the
8
<PAGE>
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 or Sub-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.
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
9
<PAGE>
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.
Writing Covered Calls. The 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 the Fund owns the underlying securities covered by the call. The
purchaser of the call option obtains the right to acquire these securities at
a fixed price (which may be less than, the same as, or greater than the
current market price of such securities) during a specified period of time.
Until an option lapses or is cancelled by a closing transaction, the maximum
sales price the 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 the Fund may
not exceed 25% of the value of its net assets.
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 or Sub-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.
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.
10
<PAGE>
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 called
the "multiplier."
During a market decline or when the Adviser or Sub-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 or Sub-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 or Sub-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 and Sub-Adviser
possess the skills necessary for the successful utilization of hedging and
risk management transactions.
Positions in options, futures and options on futures may be closed out only
on an exchange which provides a secondary market for such purposes. There can
be no assurance that a liquid secondary market will exist for any particular
option, futures contract or related option at any specific time. Thus, it may
not be possible to close such an option or futures position which could have
an adverse impact on the Fund's ability to effectively hedge its securities.
The Fund will enter into an option or futures position only if there appears
to be a liquid secondary market for such options or futures.
Pursuant to undertakings with the Commodity Futures Trading Commission
("CFTC"), (i) the Fund has agreed to restrict the use of futures and related
options only for the purpose of hedging, as such term is defined in the CFTC's
rules and regulations; (ii) the Fund will not enter into futures and related
transactions if, immediately thereafter, the sum of the margin deposits on the
Fund's existing futures and related options
11
<PAGE>
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.
Lending of Portfolio Securities. The 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 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 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 or Sub-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.
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. Frequency of portfolio turnover will not be a limiting factor if the
Fund considers it advantageous to purchase or sell securities. For fiscal
years ended December 31, 1997 and December 31, 1996, the International Fund's
portfolio turnover rate was 112.54% and 77.91%, respectively.
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.
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
or Sub-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.
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:
12
<PAGE>
(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 including repurchase agreements
and loans of securities collateralized by U.S. Government Securities; and
(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.
* * * * *
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 140
Broadway, New York, New York 10005. At December 31, 1997, the Adviser managed
over $3.9 billion of assets of individuals, pension plans, corporations and
institutions.
Mr. Paul Guidone, Chief Investment Officer of HSBC Asset Management Americas
Inc. exercises general supervisory authority over all of the Advisor's
portfolio managers. 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 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, 1997 and may be obtained, without charge, from the Trust.
SUB-ADVISER
At a Board of Trustees Meeting held on May 5, 1998 the Board of Trustees
approved the appointment of Delaware International Advisers Ltd. ("Delaware
International") as a new sub-adviser for the International
13
<PAGE>
Equity Fund to replace the Fund's current sub-advisers. This appointment took
effect when shareholders approved Delaware International as sub-adviser at a
Special Meeting of Shareholders held on September 25, 1998.
Delaware International has its principal business address at 80 Cheapside,
London, England EC2V 6EE. Delaware International provides investment services
primarily to institutional accounts and mutual funds in the global and
international equity and fixed income markets. Delaware International is an
indirect wholly-owned subsidiary of Lincoln National Corporation and as of the
date of this Prospectus had assets under management of approximately $10.2
billion, with over $6 billion in international/global equity.
Under its Sub-Advisory Contract with the Adviser, the Sub-Adviser provides
at its own expense the personnel and equipment necessary to carry out its
duties. The Sub-Adviser will provide the Fund with quarterly reports with
respect to securities the Fund holds or markets in which the Fund has
invested.
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 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.
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.
SERVICING AGREEMENTS
The Fund may enter into agreements (the "Servicing Agreements") 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,
14
<PAGE>
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 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 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 Fund) 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 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
asset 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.
15
<PAGE>
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 Fund Services
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-Adviser will receive fees from the Adviser in
accordance with the following table rather than receiving a fee computed at a
flat-rate of a percentage of the assets. The fee earned is computed daily at
an annual rate based on the average daily net assets of the Fund.
<TABLE>
<CAPTION>
AVERAGE DAILY VALUE ANNUAL FEE RATE AS A PERCENTAGE
OF THE FUND'S ASSETS OF AVERAGE DAILY VALUE
- -------------------- -------------------------------
<S> <C>
First $20 Million............................... 0.75%
Next $30 Million................................ 0.50%
Next $50 Million................................ 0.40%
Thereafter...................................... 0.35%
</TABLE>
Subject to a minimum account size of $20 million (or fees equivalent
thereto).
Based on the Fund's net assets on June 1, 1998 of approximately $63,106,747,
the above fee schedule would result in an effective fee rate of approximately
0.56%. 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).
YEAR 2000 AND EUROPEAN MONETARY UNION RISKS
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund or its service providers and counter parties
do not properly process and calculate date-related information and data from
and after January 1, 2000. The Fund is in the process of assessing and
formulating responses to these potential problems with the Adviser and all
other major service providers and counter parties. There can be no assurance
that the Fund's actions will be sufficient to avoid any adverse impact.
The Fund is also taking steps to determine what actions, if any, may be
necessary for the Fund to prepare for the upcoming European Monetary Union
("EMU") conversion. The EMU is scheduled to begin on January 1, 1999 and will
ultimately result in the replacement of certain European currencies with the
"Euro." At this time, there can be no assurance that these steps will be
sufficient to avoid adverse impact on the Fund.
16
<PAGE>
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.
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 when the following holidays are observed: 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. While portfolio
securities that are primarily traded on foreign exchanges are generally valued
at the closing values of such securities on their respective exchanges
preceding the calculation of a Fund's net asset value, when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, the securities will be valued at fair value as determined by the
Board of Trustees. 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.
17
<PAGE>
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.
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>
<CAPTION>
REALLOWANCE
TO SERVICE
TOTAL SALES LOAD ORGANIZATIONS
------------------- -------------
AS A % OF AS A % OF AS A % OF
OFFERING NET ASSET OFFERING
PRICE VALUE PRICE
PER SHARE PER 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.
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<PAGE>
The sales load does not apply in any instance to reinvested dividends.
From time to time dealers who receive dealer discounts and broker
commissions from the Distributor may reallow all or a portion of such dealer
discounts and broker commissions to other dealers or brokers. The Distributor,
at its expense, may also provide additional compensation to dealers in
connection with sales of shares of the Fund. Such compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more Funds of the Trust, and/or other dealer-
sponsored special events. In some instances, this compensation may be made
available only to certain dealers whose representatives have sold a
significant number of such shares. Compensation will include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their registered
representatives and members of their families to locations within or outside
of the United States for meetings or seminars of a business nature.
Compensation may also include the following types of non-cash compensation
offered through sales contests: (1) vacation trips, including the provision of
travel arrangements and lodging at luxury resorts at an exotic location, (2)
tickets for entertainment events (such as concerts, cruises and sporting
events) and (3) merchandise (such as clothing, trophies, clocks and pens).
Dealers may not use sales of the Fund's shares to qualify for the compensation
to the extent such may be prohibited by the laws of any state or any self-
regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned compensation is paid for by the Fund or its
shareholders.
Stock certificates will not be issued with respect to the shares. The
Transfer Agent shall keep accounts upon the book of the Trust for
recordholders of such shares.
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.
19
<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. 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. A redemption of shares is a taxable transaction
on which gain or loss may be recognized for tax purposes. Redemption proceeds
for shares purchased by check will be made available 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.
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.
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. However,
this option may be suspended for a period of 30 days following a telephonic
address change; or
21
<PAGE>
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 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
22
<PAGE>
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.
The 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.
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.
23
<PAGE>
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. Distributions from net
realized long-term securities gains of the Fund generally are subject to
Federal income tax as long-term capital gains if you are a citizen or resident
of the United States. The Code provides that an individual generally will be
taxed on his or her net capital gain at a maximum rate of 28% with respect to
capital gain from securities held for more than one year but not more than 18
months and at a maximum rate of 20% with respect to capital gain from
securities held for more than 18 months. Under the Code, interest on
indebtedness incurred or continued to purchase or carry Fund shares which is
deemed to relate to exempt-interest dividends is not deductible.
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 a 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 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
24
<PAGE>
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.
If you elect to receive distributions in cash and checks (1) are returned
and marked as "undeliverable" or (2) remain uncashed for six months, your cash
election will be changed automatically and your future dividend and capital
gains distributions will be reinvested in the Fund at the per share net asset
value determined as of the date of payment of the distribution. In addition,
any undeliverable checks or checks that remain uncashed for six months will be
canceled and will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation.
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 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 (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
25
<PAGE>
its services the Transfer Agent receives from the Fund an annual base fee of
$25 per shareholder account plus additional transaction costs. BISYS Fund
Services also provides 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.
CUSTODIAN
The Bank of New York acts 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.
Rules adopted under the 1940 Act permit investment companies to maintain
their securities and cash in the custody of certain eligible foreign banks and
depositories. The International Equity Fund's portfolio of non-United States
securities are held by sub-custodians which are approved by the Trustees or a
foreign custody manager appointed by the Trustees in accordance with these
rules. The Board has appointed the Custodian as its foreign custody manager.
The determination to place assets with a particular foreign sub-custodian is
made pursuant to these rules which require a consideration of a number of
factors including, but not limited to, the reliability and financial stability
of the sub-custodian; the sub-custodian's practices, procedures and internal
controls; and the reputation and standing of the sub-custodian in its national
market.
COUNSEL
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel for the Trust and
from time to time provides advice to the Adviser.
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.
26
<PAGE>
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.
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 a 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 is
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 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 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 LOGO
HSBC SM MUTUAL FUNDS TRUST
3435 Stelzer Road
Columbus, Ohio 43219
INFORMATION:
(800) 634-2536
INVESTMENT ADVISER
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
INVESTMENT SUB-ADVISER
Delaware International Advisers Ltd.
80 Cheapside
London EC2V6EE
England
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
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
No dealer, salesman, or other
person has been authorized to
give any information or to
make any representations,
other than those contained in
this 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 30, 1998
as revised
October 4, 1998
- -------------------------------------
Fund:
International Equity Fund
Managed by:
HSBC Asset Management Americas Inc.
- -------------------------------------
Sponsored and Distributed by:
BISYS Fund Services
- -------------------------------------
HSBC3P1098
<PAGE>
HSBC MUTUAL FUNDS TRUST
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
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
Growth and Income Fund, the International Equity Fund (the "International
Fund"), the Fixed Income Fund, and the New York Tax-Free Bond Fund (the "New
York Fund") herein referred to individually as a "Fund" and collectively 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 balance
of the Fund's assets may be invested in various types of fixed income securities
and in money market instruments. The Fund 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 investment objective of the International Fund is to seek to provide
investors with long-term capital appreciation by investing, under ordinary
market conditions, at least 65% of its assets in equity securities (including
American, European and Global Depositary Receipts) issued by companies based
outside the United States. The balance of the Fund's assets will generally be
invested in equity and debt securities of companies based in, and debt
securities of governments and other issuers in, the United States and outside
the United States, including bonds and money market instruments.
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. Under normal conditions, at least 65% of its total
assets will be invested in fixed income securities rated at least Baa by Moody's
Investors Services or BBB by Standard & Poor's Corporation or which is
comparably rated by another rating agency or, if unrated, is determined by the
Adviser to be of comparable quality. The balance of the Fund's investments may
be invested in variable and floating rate debt securities which meet the issuer
and quality standard described above.
The investment objective of the New York 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. As a matter of
fundamental policy, the Fund will maintain 80% of net assets in tax-exempt
municipal obligations that are not subject to the Federal alternative minimum
tax. The Fund may elect to invest 20% of total assets in securities subject to
the Federal alternative minimum tax. Generally at least 65% of the Fund's total
assets will be invested in bonds of New York issuers. The balance of the Fund
may be invested in other New York obligations or other securities that are not
New York obligations and therefore subject to New York State and New York City
income taxes.
Except for the International Fund, each Fund offers only once class of
shares. Each such Fund is subject to a sales load, shareholder servicing and
Rule 12b-1 fees. The International 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.
<PAGE>
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 30, 1998. 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 30, 1998
-2-
<PAGE>
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TABLE OF CONTENTS
Page No.
--------
INVESTMENT POLICIES AND RISK FACTORS................................. 1
INVESTMENT RESTRICTIONS.............................................. 22
MANAGEMENT........................................................... 23
DETERMINATION OF NET ASSET VALUE..................................... 35
PORTFOLIO TRANSACTIONS............................................... 35
PORTFOLIO TURNOVER................................................... 36
EXCHANGE PRIVILEGE................................................... 36
REDEMPTIONS.......................................................... 37
INCOME TAXES......................................................... 37
SHARES OF BENEFICIAL INTEREST........................................ 41
CUSTODIAN, TRANSFER AGENTAND FUND ACCOUNTING AGENT................... 43
INDEPENDENT AUDITORS................................................. 45
FINANCIAL STATEMENTS................................................. 45
- --------------------------------------------------------------------------------
-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.
SHORT-TERM TRADING. (Growth and Income Fund and International Fund)
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 objective of the Funds. 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. The management believes unsettled market economic
conditions during certain periods require greater portfolio turnover in pursuing
the Funds' investment objectives than would otherwise be the case. A higher
incidence of portfolio turnover will result in greater transaction costs to the
Funds. During periods of relatively stable market and economic conditions,
management expects that the portfolio turnover of the Funds will not exceed 200%
for the International Fund and 100% for the Growth and Income Fund, annually.
DEPOSITARY RECEIPTS. (Growth and Income Fund and International Fund) The
International Fund may invest in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") and other depositary receipts. The Growth
and Income Fund may invest in ADR's only. These securities may not necessarily
be denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe typically by non-United States
banks and trust companies that evidence ownership of either foreign or domestic
securities. GDRs are issued globally and evidence a similar ownership
arrangement. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe and GDRs are designed for trading in non-U. S. securities
markets. The Fund may invest in ADRS, EDRs, CDRs and GDRs through "sponsored"
or "unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the underlying security and a depositary, whereas a depositary may
establish an unsponsored facility without participation by the issuer of the
deposited security. Holders of unsponsored depositary receipts generally bear
all the costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to holders of such receipts in respect of the deposited securities. The
Growth and Income Fund intends to invest less than 20% of the Fund's total net
assets in ADRs
There are certain risks associated with investments in unsponsored 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 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. (Growth and Income Fund and International Fund)
The Funds 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.
<PAGE>
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.
To the extent permitted in the Prospectus, the Funds 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. (Growth and Income Fund and International Fund) The
Funds may purchase and write put and call options on stock indexes listed on
national securities exchanges for the purpose of hedging their portfolio. A
stock index fluctuates with changes in the market values of the stocks included
in the index. Some stock index options are based on a broad market index such
as the New York Stock Exchange Composite Index, or a narrower market index such
as the Standard & Poor's 100. Indexes are also based on an industry or market
segment such as the American Stock Exchange Oil & Gas Index or the Computer and
Business Equipment Index.
Options on stock indexes are similar to options on stock, except that (a)
the expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make 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.
INVESTMENT IN BOND OPTIONS. (Fixed Income Fund) 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.
STOCK INDEX FUTURES CONTRACTS. (Growth and Income Fund and International
Fund) The Funds may enter into stock index futures contracts in order to
protect the value of their common stock investments. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific dollar
-2-
<PAGE>
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.
Each 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 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 the Fund then concludes not to invest in stock at that
time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract that
is not offset by a reduction in the price of securities purchases. The Funds
also may buy or sell stock index futures contracts to close out existing futures
positions.
OPTIONS ON STOCK INDEX FUTURES. (Growth and Income Fund and International
Fund) The Funds 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 Funds may use options on stock index futures contracts solely for bona
fide hedging or other appropriate risk management purposes. 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 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 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 the
securities held or to be acquired for the Fund's portfolio. If the option is
exercised, the Fund will incur a loss, which will be reduced by the amount of
the premium it receives. However, depending on the degree of correlation
between changes in the value of its portfolio securities (or the currency in
which they are denominated) and changes in the value of futures positions, the
Fund's losses from writing options on futures may be partially offset by
favorable changes in the value of portfolio securities or in the cost of
securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The
Funds' ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
-3-
<PAGE>
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 a 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 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. (International Fund) 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
-4-
<PAGE>
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.
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 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 incurring larger losses
than would otherwise be the case.
OPTION PREMIUMS. (Growth and Income Fund and International Fund ) In order
to comply with certain state securities regulations, the Funds have agreed to
limit maximum premiums paid on put and call options on other than futures
contracts to less than 2% of each Fund's net assets at any one time.
MORTGAGE-RELATED SECURITIES. (Growth and Income Fund and Fixed Income Fund)
Each Fund may, consistent with its investment objective and policies, invest in
mortgage-related securities.
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 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.
-5-
<PAGE>
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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. (All Funds) 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 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 or Sub-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.
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
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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 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 Funds 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 or Sub-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 or Sub-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 or Sub-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 or Sub-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 or Sub-Adviser
deems relevant. The Adviser or Sub-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% (15% in the case of the Fixed Income Fund) of the
respective Fund's average daily net assets. Rule 144A securities which are
determined to be liquid based upon their trading markets will not, however, be
required to be included among the securities considered to be illiquid for
purposes of Investment Restriction No. 9.
LOANS OF PORTFOLIO SECURITIES. (All Funds) Each 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% 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 or Sub-Adviser will consider all
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or financial institution. The Funds 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 Funds 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.
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The Funds 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. (International Fund
and Fixed Income Fund) The Funds 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 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.
MUNICIPAL OBLIGATIONS. (Fixed Income Fund and New York Tax-Free Fund) 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
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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 "1940 Act") 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.
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.
THE NEW YORK FUND'S INVESTMENT IN TAXABLE SECURITIES. 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 Fund) 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
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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 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 FUND
The following information as to certain New York risk factors is given to
investors in view of the New York 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
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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.
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 1997-1998 fiscal year
("Fiscal Year 1997-98") comprises approximately 48% 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 42% of total projected Governmental Funds receipts
in the Fiscal Year 1997-98; 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 1996-97, and 54% of the Fiscal Year 1997-98 budgeted figure), the 4%
user taxes and fees (25% in Fiscal Year 1995-96, 20% of the Fiscal Year 1996-97
budget), business taxes (14% of the fiscal 1996 budget and 14% of the Fiscal
1997 budget), and other taxes. The majority of Special Revenue Funds receipts
come from federal grants (75% of receipts in Fiscal Year 1996-97, 75% of the
Fiscal Year 1997-98 budget). Generally, approximately 87% of the
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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 1997-98. These grants include disbursements for elementary, secondary and
higher education, social services, drug abuse control, and mass transportation
programs.
Fiscal 1996-97 Financial Results (Cash Basis). The State ended its 1996-97
fiscal year on March 31, 1997 in balance on a cash basis, with a General Fund
cash surplus as reported by DOB of approximately $1.4 billion. The cash surplus
was derived primarily from higher-than-expected revenues and lower-than-expected
spending for social services programs. The Governor in his Executive Budget
applied $1.05 billion of the cash surplus amount to finance the 1997-98
Financial Plan, and the additional $373 million is available for use in
financing the 1997-98 Financial Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million, an increase of $146
million from 1995-96 levels. The TSR can be used in the event of any future
General Fund deficit as provided under the State Constitution and State Finance
Law. In addition, $41 million 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 $75 million reflects amounts on deposit
in the Community Projects Fund. In addition, $1.86 billion was on deposit in
the tax refund reserve account, of which $521 million was made available under
the LGAC program.
General Fund receipts totaled $33.04 billion, an increase of 0.7 percent
from 1995-96 levels. General Fund disbursements and transfers from other funds
totaled $32.90 billion for the 1996-97 fiscal year, an increase of 0.7 percent
from 1995-96 levels.
1997-98 State Financial Plan (Cash Basis). The State's budget for the
1997-98 fiscal year was enacted by the Legislature on August 4, 1997 more than
four months after the start of the fiscal year. Prior to adoption of the budget,
the Legislature enacted appropriations for disbursements considered to be
necessary for State operations and other purposes, including necessary
appropriations for all State-supported debt service. The State Financial Plan
for the 1997-98 fiscal year was formulated on August 11, 1997 and is based on
the State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current fiscal
year.
The adopted 1997-98 budget projects an increase in General Fund
disbursements of $1.7 billion or 5.2 percent over 1996-97 levels. The average
annual growth rate over the last three fiscal years is approximately 1.2
percent. State Funds disbursements (excluding federal grants) are projected to
increase by 5.4 percent from the 1996-97 fiscal year. All Governmental Funds
projected disbursements increase by 7.0 percent over the 1996-97 fiscal year.
The 1997-98 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised in February
1997, the State's adopted budget for 1997-98 increases General Fund spending by
$1.7 billion, primarily from increases for local assistance ($1.3 billion).
Resources used to fund these additional expenditures include increased revenues
projected for 1997-98, increased resources produced in the 1996-97 fiscal year
that will be utilized in 1997-98, reestimates of social service, fringe benefit
and other spending, and other resources including certain non-recurring
resources. The total amount of non-recurring resources included in the 1997-98
State budget is projected by DOB to be $270 million, or 0.7 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
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be changed materially and adversely from time to time. There are also risks and
uncertainties concerning the future-year impact of actions taken in the 1997-98
budget.
Financial Plan Updates. The State issued its first update to the cash-
----------------------
basis 1996-97 State Financial Plan (the "Mid-Year Update") on October 30, 1997.
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 through the first six months of
the fiscal year, and (3) an assessment of changing program requirements. The
Mid-Year Update made no changes to the fiscal year projections contained in the
Financial Plan released with the Adopted Budget Report. The Mid-Year Update
reflected a balanced 1997-98 State Financial Plan, and a projected reserve in
the General Fund of $530 million.
The State ended the first six months of its 1997-98 fiscal year with an
unaudited General Fund cash balance of $3.2 billion, or $254 million above the
August Financial Plan estimate. Total unaudited receipts, including transfers
from other funds, totaled $18.8 billion, or $340 million higher than expected.
The additional receipts reflected higher-than-anticipated tax revenues of $244
million and miscellaneous receipts of $93 million. Unaudited General Fund
Spending for the same period equaled $16.0 billion, or $86 million above the
cashflow projections published in the August Financial Plan. For fiscal year
1997-98, total General Fund receipts were projected at $35.09 billion, an
increase of $2.05 billion from 1996-97 results. Total disbursements, including
transfers to capital projects, debt service and other funds, were projected at
$34.60 billion, or 5.3 percent higher than disbursements in 1996-97.
The Mid-Year Update projected a closing balance in the General Fund of $927
million, which was composed of a $530 million reserve for future needs, a $332
million balance in the Tax Stabilization Reserve Fund (TSRF), and a $65 million
balance in the Contingency Reserve Fund (CRF).
The State revised the cash-basis 1997-98 State Financial Plan again on
January 20, 1998, in conjunction with the release of the Executive Budget for
the 1998-99 fiscal year.
The 1997-98 General Fund Financial Plan continues to be balanced, with a
projected cash surplus of $1.83 billion, an increase of $1.3 billion over the
surplus estimate of $530 million in the prior update. The increase in the
surplus results primarily from higher-than-expected tax receipts, which are
forecast to exceed the October estimate by $1.28 billion.
In order to make the surplus available to help finance 1998-99
requirements, the State plans to accelerate $1.18 billion in income tax refund
payments into 1997-98, or provide reserves for such payments. The balance in
the refund reserve on March 31, 1998 is projected to be $1.647 billion,
including $521 million as a result of LGAC. This acceleration decreases
reported personal income receipts by $1.18 billion in 1997-98, while increasing
available personal income receipts in 1998-99, as these refunds will no longer
be a charge against current revenues in 1998-99. As a result, projections of
available receipts in 1997-98 have been increased by only $103 million from the
Mid-Year Update.
Compared to the prior update, personal income tax collections for 1997-98
are now projected at $18.50 billion, or $363 million less than projected in
October after accounting for the refund reserve transaction discussed above.
Business tax receipts are projected at $4.98 billion, an increase of $158
million. User tax collections are estimated at $7.06 billion, or $52 million
higher than the prior update, and reflect a projected loss of $20 million in
sales tax receipts from an additional week of sales tax exemption for clothing
and footwear costing less than $500, which was authorized and implemented in
January 1998. Other tax receipts are projected to increase by $103 million over
the prior update and total $1.09 billion for the fiscal year. Miscellaneous
receipts and transfers from other funds are projected to reach $3.57 billion, or
$153 million higher than the Mid-Year Update.
The State projects that disbursements will increase by $565 million over
the Mid-Year Update, with nearly the entire increase attributable to one-time
disbursements of $561 million that pre-pay expenditures previously scheduled for
1998-99. In the absence of these accelerated payments, projected General Fund
spending in the current year would have remained essentially unchanged form the
Mid-Year Update. The Governor is proposing legislation to use a portion of the
current year surplus to transfer $425 million to pay for capital projects
authorized under the Community
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Enhancement Facilities Assistance Program (CEFAP) that were previously planned
to be financed with bond proceeds in 1998-99 and thereafter, and $136 million in
costs for an additional Medicaid payment originally scheduled for 1998-99. Aside
from these actions, a number of other changes produced a net increase of $4
million in projected disbursements over the Mid-Year Update. These included
higher spending in General State charges ($80 million), largely as a result of
litigation settlements and collective bargaining costs, an increase in General
Fund transfers for education ($70 million) to offset declines in Lottery
receipts, and additional costs associated with a delay of Housing Finance Agency
(HFA) receipts into 1998-99 that were originally planned to offset capital
projects spending ($25 million). These increases were offset in part by
projected savings in Medicaid ($85 million), social services ($75 million), and
debt service ($37 million).
The General Fund closing balance is projected to be $465 million at the end
of 1997-98, a decline of $462 million from the Mid-Year Update. The decline
reflects the application of the $530 million undesignated reserve plus
additional surplus monies projected in the January Update to pay for certain
one-time costs in the State's Financial Plan (as described above). The effect
of this action is to help lower the State's projected disbursements in 1998-99.
The remaining General Fund closing balance will be held in two funds, the
TSRF and CRF. The TSRF is projected to have $400 million on deposit at the
close of the fiscal year, following a required deposit of $15 million and an
extraordinary deposit of $68 million made from the 1997-98 surplus. The CRF is
projected to have a closing balance of $65 million, following an earlier planned
deposit of $24 million in 1997-98.
1998-99 State Financial Plan. The Governor presented his 1998-99 Executive
Budget to the Legislature on January 20, 1998. The Executive Budget also
contains financial projections for the State's 1997-98 through 2000-01 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 1998-99 Financial Plan projects balance on a cash basis in the General
Fund. Total General Fund receipts and transfers from other funds are projected
to be $36.22 billion, an increase of $1.02 billion from total receipts projected
in the current fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $36.18 billion, an increase of $1.02 billion
from spending totals projected for the current fiscal year. As compared to the
1997-98 State Financial Plan, the Executive Budget proposes year-to-year growth
in General Fund spending of 2.89 percent. State funds spending (i.e., General
Fund plus other dedicated funds, with the exception of federal aid) is projected
to grow by 8.5 percent. Spending from all Governmental Funds (excluding
transfers) is proposed to increase by 7.6 percent from the prior fiscal year.
Current law and programmatic requirements are primarily responsible for
the year-to-year growth in General Fund spending. These include an increase in
school aid ($607 million ), cost and enrollment growth in handicapped education
($91 million) and Medicaid ($212 million), and employee contract increases and
inflation adjustments for State agency operations. The Executive Budget also
includes increases of $84 million for corrections programs to cover new capacity
demands and $152 million for mental health programs to finance current law
increases and the expansion of community beds. Other spending growth reflects a
requested increase of $108 million for the Judiciary and $117 million for long-
term debt service. New spending is partially offset by reductions of $453
million in capital projects transfers due to the financing of CEFAP from
resources available in 1997-98, $37 million in welfare assistance savings, $36
million from lower spending in General State charges, and $68 million in lower
transfers primarily due to the elimination of the Lottery transfer made in 1997-
98.
The 1998-99 Financial Plan projects that the State will end 1998-99 with a
closing balance in the General Fund of $500 million, which reflects $400 million
in the TSFR and $100 million in the CRF, following an anticipated deposit of $35
million in the latter fund during the year.
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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.
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
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 included no seasonal borrowing; this reflected 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.
1997-98 Borrowing Plan. Section 22-c of the State Finance Law, as amended
by Chapter 389 of the Laws of 1997, now requires the Governor to submit the
five-year Capital Program and Financing Plan with the Executive Budget. That
plan also is required to be updated by the later of July 30 or 90 days after
enactment of the State budget.
The Update to the five-year Capital Program and Financing Plan was released
on November 18, 1997. The Update reflected voter disapproval of the School
Facility Health and Safety Bond Act, additional issuances for 1997-98 of
approximately $225 million of CEFAP, $42 million of the Albany County Airport,
and $228 million in Certificates of Participation (COPs) to finance welfare
information systems.
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The proposed 1997-98 through 2002-03 Capital Program and Financing Plan was
released with the 1998-99 Executive Budget on January 20, 1998. As a part of
that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
purposes of redeeming outstanding BANs) and $140 million in general obligation
commercial paper; the issuance of $83 billion in COPs for equipment purchases;
and approximately $1.8 billion in borrowings by public authorities pursuant to
lease-purchase and contractual-obligation financings for capital programs of the
State, including costs of issuance, reserve funds, and other costs, net of
anticipated refundings and other adjustments for 1997-98 capital projects. The
projection of State borrowings for the 1997-98 fiscal year is subject to change
as market conditions, interest rates and other factors vary through the end of
the fiscal year.
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 "A2" 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 1997-98 fiscal year or thereafter.
Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced 1997-98
State Financial Plan. The State believes that the 1997-98 State Financial Plan
includes sufficient reserves for the payment of judgments that may be required
during the 1997-98 fiscal year. There can be no assurance, however, that an
adverse decision in any of these proceedings would not exceed the amount of the
1997-98 State Financial Plan reserves for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced 1997-98
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, as of the date of this SAI, 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. Proceedings have been brought by two groups of petitioners
-------------
challenging regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the
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1986-87 through 1995-96 and 1996-97 fiscal years, respectively (New York State
Health Maintenance Organization Conference, Inc., et al. v. Muhl, et al.
["HMO"], and New York Conference of Blue Cross and Blue Shield Plans, et al. v.
Muhl, et al. ["Blue Cross 'I' and 'II'"], Supreme Court, Albany County). By
Order filed January 22, 1997, the Court in Blue Cross I permitted the plaintiffs
in HMO to intervene and dismissed the challenges to the rates for the period
prior to 1995-96. By decision dated July 24, 1997, the Court in Blue Cross I
held that the determination made by the Superintendent in establishing the 1995-
96 rate was arbitrary and capricious and directed that premiums paid pursuant to
that determination be returned to the payors. The State has appealed this
decision.
Tax Law. In Matter of the Petition of Consolidated Rail Corporation v. Tax
-------
Appeals Tribunal (Appellate Division, Third Department, commenced December 22,
1995), petitioner, a rail freight corporation that purchases diesel motor fuel
out of State and imports the fuel into the State for use, distribution, storage
or sale in the State, contended that the assessment of the petroleum business
tax imposed pursuant to Tax Law (S)301-a to such fuel purchases violated the
Commerce Clause of the United Stated Constitution. Petitioner contended that
the application of Section 302-a to the interstate transaction, but not to
purchasers who purchase fuel within the State for use, distribution, storage or
sale within the State, discriminates against interstate commerce. In a decision
dated July 17, 1997, the Appellate Division, Third Department, dismissed the
petition. Petitioner appealed to the Court of Appeals. On December 4, 1997,
the Court of Appeals dismissed the appeal, upon the ground that no substantial
Constitutional question was directly involved.
In New York Association of Convenience Stores, et al. v. Urbach, et al.,
petitioners, New York Association of Convenience Stores, National Association of
Convenience stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes imposed pursuant to
Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to non-
Indian customers on Indian reservations. In orders dated August 13, 1996 and
August 24, 1996, the Supreme Court, Albany County, ordered, among other things,
that there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced into Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department, and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, among other things, that petitioners had not sought such relief
in their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners' motion for leave to cross-appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco.
STATE PROGRAMS
Medicaid. Several cases, including Port Jefferson Health Care Facility, et
--------
al. v. Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law (S)2807-d, which imposes a tax on the gross receipts hospitals
and residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law (S)(S)2807-d(2)(b)(ii) and 2807d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997 enforced
the terms of the decision. The State has appealed that order.
Shelter Allowance. In an action commenced in March 1987 against State and
-----------------
New York City officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New
York County), plaintiffs allege that the shelter allowance granted to recipients
of public assistance is not adequate for proper housing. In a decision dated
April 16, 1997, the Court held that the shelter allowance promulgated by the
Legislature and enforced through Department of Social Services regulations is
not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York
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City. A judgement was entered on July 25, 1997, directing, among other things,
that the State (i) submit a proposed schedule of shelter allowances (for the Aid
to Dependent Children program and any successor program) that bears a reasonable
relation to the cost of housing in New York City; and (ii) compel the New York
City Department of Social Services to pay plaintiffs a monthly shelter allowance
in the full amount of their contract rents, provided they continue to meet the
eligibility requirements for public assistance, until such time as a lawful
shelter allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has sought relief from each and every
provision of this judgement except that portion directing the continued
provision of interim relief.
Civil Rights Claims. In an action commenced in 1980 (United States, et al.
-------------------
v. Yonkers Board of Education, et al.), the United States District Court for the
Southern District of New York found, in 1985, that Yonkers and its public
schools were intentionally segregated. In 1986, the District Court ordered
Yonkers to develop and comply with a remedial educational improvement plan ("EIP
I"). On January 19, 1989, the District Court granted motions by Yonkers and the
NAACP to add the State Education Department, the Yonkers Board of Education, and
the State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school system
continued to exist in Yonkers. On March 27, 1995, the District Court made
factual findings regarding the role of the State and other State defendants (the
"State") in connection with the creation and maintenance of the dual school
system, but found no legal basis for imposing liability. On September 3, 1996,
the Court of Appeals, based on the District Court's factual findings, held the
State defendants liable under 42 USC (S)1983 and the Equal Educational
Opportunity Act, 20 USC (S)(S)1701, et seq., for the unlawful dual school
system, because the State, inter alia, had taken no action to force the school
district to desegregate despite its actual or constructive knowledge of de jure
segregation. By Order dated October 8, 1997, the District Court held that
vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan ("EIP II") to eradicate these vestiges of segregation. The
October 8, 1997 Order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State made
available to Yonders $450,000 to support planning activities to prepare the EIP
II budget for 1997-98 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. The State intends
to appeal that judgment. Additionally, the Court adopted a requirement that the
State pay to Yonkers $9 million as its pro rata share of the funding of EIP I
for the 1996-97 school year. The requirement for State funding of EIP I has not
yet been reduced to an order.
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. The parties have agreed to settle this case for $29
million.
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.
After noticeable improvements in the City's economy during calendar year
1994, economic growth slowed in calendar year 1995, and thereafter improved
commencing in calendar year 1996, reflecting improved securities industry
earnings and employment in other sectors. The City's current four-year
financial plan assumes that moderate economic growth will exist through calendar
year 2001, with moderating job growth and wage increases.
For each of the 1981 through 1997 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 gaps between forecast revenues and forecast expenditures 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 a surplus in the 1998 fiscal year,
before discretionary transfers and substantial budget gaps for each of the 1999
through 2001 fiscal years. 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, the ability
of the New York City Health and Hospitals Corporation ("HHC") to take actions to
offset potential budget shortfalls, the ability to complete revenue generating
transactions, provision of State and Federal aid and mandate relief and the
impact on City revenues and expenditures of 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 1998 through 2001 contemplates the issuance of $4.0 billion of
general obligation bonds and $7.3 billion of bonds to be issued by the proposed
New York City Finance Authority (the "Finance Authority") to finance City
capital projects. The Finance Authority was created 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. In addition, the 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 25, 1997, the City submitted to the Control Board the Financial
Plan for the 1998 through 2001 fiscal years, which relates to the City, Board of
Education ("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 10, 1997 (the "June Financial Plan").
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1998 Fiscal Year. The June Financial Plan identified actions to close a
previously projected budget gap for the 1998 fiscal year. The proposed actions
in the June Financial Plan for the 1998 fiscal year included (i) agency actions
totaling $621 million; (ii) the proposed sale of various assets; (iii)
additional State aid of $294 million including a proposal that the State
accelerate a $142 million revenue sharing payment to the City from March 1999.
The 1998-2001 Financial Plan published on November 25, 1997 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June Financial Plan. The 1998-2001 Financial Plan projects revenues
and expenditures for the 1998 fiscal year balance in accordance with GAAP, and
projects gaps of $1.2 billion, $2.7 billion and $2.6 billion for the 1999, 2000,
and 2001 fiscal years, respectively. Changes since the June Financial Plan
include: (i) an increase in projected tax revenues of $318 million, $297
million, $210 million and $226 million in the 1998 through 2001 fiscal years;
(ii) an increase in sales tax revenues of $150 million, $272 million, $177
million and $101 million in the 1998 through 2001 fiscal years, respectively,
resulting from the State adopting a smaller sales tax reduction than previously
assumed; (iii) a reduction in assumed State aid of between $134 million and $142
million in each of the 1998 through 2001 fiscal years, reflecting the State
adopted budget; (iv) a reduction in projected debt service expenditures totaling
$92 million, $69 million, $49 million and $55 million, and reduced pension costs
of $9 million, $39 million, $36 million and $31 million, in the 1998 through
2001 fiscal years, respectively; (v) a $70 million increase in expenditures of
BOE in the 1998 fiscal year; and (vi) an increase in expenditures of between
$192 million and $216 million in each of the 1998 through 2001 fiscal years,
reflecting additional agency spending and costs for the City's proposed drug
initiative. The 1998-2001 Financial Plan also includes a proposed discretionary
transfer in the 1998 fiscal year of an additional $240 million of debt service
due in the 1999 fiscal year for budget stabilization purposes. Subsequently, the
City modified its expense budget for the 1998 fiscal year to reflect the changes
made in the 1998-2001 Financial Plan and an additional $20 million of spending
not included in the 1998-2001 Financial Plan, primarily for the City's proposed
drug initiative. The increased spending was offset by reducing the proposed
discretionary transfer in the 1998 fiscal year of debt service due in the 1999
fiscal year from $240 million to $214 million.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and the extension of which is projected
to provide revenue of $166 million and $494 million in the 2000 and 2001 fiscal
years, respectively, and of the extension of the 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and the extension
of $188 million, $527 million and $554 million in the 1999 through 2001 fiscal
years, respectively; and (ii) collection of the projected rent payments for the
City's airports, totaling $385 million, $175 million, and $170 million in the
1999, 2000 and 2001 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 through pending legal actions.
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 1998-1999 Executive Budget on January 20, 1998,
which will be considered for adoption by the State Legislature. 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 projections for the 1998 through 2002 fiscal years reflect the costs of
the settlements and arbitration awards with the United Federation of Teachers
(''UFT"), a coalition of unions headed by District Council 37 of the American
Federation of State, County and Municipal Employees ("District Council 37") and
other bargaining units 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 and arbitration awards. The settlement and arbitration awards
provide 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 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 $459 million and $1.2 billion in the 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
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<PAGE>
the terms contained in the Financial Plan. The Financial plan provides no
additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001.
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 due to
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. On August 28, 1997, S&P revised its
ratings on the State's general obligation bonds from A- to A. 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.
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.
Except as otherwise noted, each Fund may not:
(1) purchase securities on margin or purchase real estate or interests
therein, commodities or commodity contracts (except that the International
Fund, Growth and Income and Fixed Income Funds may purchase and make margin
payments in connection with 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. The Fixed Income Fund may not loan more than 10% of the
value of its total assets;
(2) with respect to 75% (100% in the case of the Growth and Income
Fund) of its total assets (taken at market value), purchase a security if
as a result (1) more than 5% of its total assets (taken at market value)
would be invested in the securities (including securities subject to
repurchase agreements), of any one issuer, other than obligations which are
issued or guaranteed by the United States Government, its agencies or
instrumentalities or (2) the Fund would own more than 10% of the
outstanding voting securities of such issuer. The Fixed Income Fund will
not purchase a security if as a result it would have more than 10% of its
total assets in the securities of any one issuer or own more than 10% of
the outstanding voting 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;
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<PAGE>
(4) effect a short sale of any security (other than index options or
hedging strategies to the extent otherwise permitted, or issue senior
securities except as permitted in paragraph (5). For purposes of this
restriction, the purchase and sale of financial futures contracts and
related options does not constitute the issuance of a senior security;
(5) borrow money, except that each Fund may borrow from banks as a
temporary measure for emergency purposes where such borrowings would not
exceed 10% of its total assets (5% in the case of the International Fund
and Growth and Income Fund) (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 International Fund and the Growth
and Income Fund are limited to 5%). 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(does not apply to the International
Fund);
(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 marketable, if as
a result more than 15% (10% in the case of the Growth and Income Fund and
New York Fund) of the market value of the respective 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
(does not apply to the International Fund);
(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 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 (a) there is no limitation with respect to investments in
obligations of the United States Government, its agencies or
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
and in the case of the New York 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).
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<PAGE>
(14) investments 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
(does not apply to the International Fund).
In addition, the Fixed Income Fund and New York Fund may not:
(15) purchase equity securities or other securities convertible into
equity securities.
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.
HARALD PAUMGARTEN, Chairman of the Board of Trustees - age 59, 405
---------------------------------
Lexington Avenue, New York, NY 10017; Managing Director, Adirondack Capital
Group since 1997; President, Paumgarten and Company 1991 to 1997; Advisory
Managing Director, Lepercq de Neuflize & Co. Incorporated 1993 to 1995;
Director, Price Waterhouse AG 1992 to 1993; Trustee, HSBC Funds Trust.
WOLFE J. FRANKL, Trustee - age 77, 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.
ROBERT A. ROBINSON, Trustee - age 72, 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.
JOHN P. PFANN, Trustee - age 68, 43 Captains Walk, Marina Cove, Palm Coast,
-------
Florida 32137. Chairman and President, JPP Equities, Inc. 1982 to 1995;
Trustee, HSBC Funds Trust.
RICHARD J. LOOS, Vice Chairman Emeritus, 97 Southport Wood Drive,
----------------------
Southport, CT 06490.
WALLY GRIMM, President - Executive Vice President, Fund Services Division
---------
of BISYS Fund Services, Inc., June 1992 to present.
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.
CHARLES BOOTH, Vice President - Chief Compliance Officer and Vice President
--------------
of Fund Administration, Fund Services Division of BISYS Fund Services,
Inc., 1988 to present.
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.
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<PAGE>
THOMAS LINE, Treasurer - Vice President and Treasurer, Fund Services
---------
Division of BISYS Fund Services, Inc., December 1996 to present; Audit
Senior Manager, KPMG Peat Marwick LLP, September 1989 to December 1996.
STEVEN R. HOWARD, Secretary -1285 Avenue of the Americas, New York, New
---------
York 10019. Partner, Paul, Weiss, Rifkind, Wharton & Garrison since April,
1998; Partner, Baker & McKenzie 1991 to 1996; 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.
* Mr. Loos has been elected Vice Chairman Emeritus, such voting member of the
Board of Trustees. appointment to be effective May 5, 1998. Mr. Loos is not
a voting member of the Board of Trustees.
<TABLE>
<CAPTION>
COMPENSATION TABLE
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL
COMPENSATION FROM BENEFITS ACCRUED AS ANNUAL COMPENSATION
THE FUNDS PART OF FUND EXPENSES BENEFITS UPON FROM THE FUND
RETIREMENT COMPLEX*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee $9,370 0 N/A $20,000
William Kufta, Trustee 1,942 0 N/A 4,000
Harald Paumgarten, Trustee 8,399 0 N/A 18,000
John P. Pfann, Trustee 9,370 0 N/A 20,000
Robert A. Robinson, Trustee 9,370 0 N/A 20,000
Richard J. Loos,Vice Chairman 9,370 0 N/A 20,000
Emeritus
</TABLE>
*Represents the total compensation paid to such persons during the calendar year
ended December 31, 1997. In the case of Mr. Loos, the amount represents the
amount estimated to be paid to him for the current fiscal 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 140 Broadway, New
York, New York 10005.
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<PAGE>
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 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.
SUB-ADVISER OF THE INTERNATIONAL FUND. The Adviser retains Delaware
International Advisers Ltd. to act as sub-adviser (the "Sub-Adviser") to the
International Fund. The Sub-Adviser's principal offices are located at Third
Floor, 80 Cheapside, London EC2V 6EE England.
The Sub-Adviser is an indirect wholly-owned subsidiary of Delaware
Management Holdings, Inc., a Delaware corporation ("DMH"), with principal
offices at One Commerce Square, 2005 Market Street, Philadelphia, PA 19103. DMH
and its subsidiaries (collectively, "Delaware Investments") trace their origins
to an investment counseling firm founded in 1929. The Sub-Adviser was formed in
1990 and provides investment advisory services primarily to institutional
accounts and mutual funds in the global and international equity and fixed
income markets. As of September 30, 1998 the Sub-Adviser managed approximately
$10 billion in global and foreign stock and bond portfolios for separate account
and investment company clients. As of that date, advisory affiliates within
Delaware Investments had total assets under management of approximately $40
billion, including assets managed by the Sub-Adviser.
DMH is an indirect, wholly-owned subsidiary of Lincoln National Corporation
("Lincoln National"). Lincoln National, a publicly held company with
headquarters in Fort Wayne, Indiana is a financial services holding company. Its
wealth accumulation and protection businesses provide annuities, life insurance,
401(k) plans, life-health reinsurance, institutional investment management and
mutual funds.
Pursuant to terms of its sub-advisory contract, the Sub-Adviser commenced
its sub-advisory services on October 1, 1998. Prior to that date, HSBC Asset
Management Europe Ltd., HSBC Asset Management Hong Kong Ltd., HSBC Asset
Management (Japan) KK, and HSBC Asset Management Singapore Ltd., affiliates of
the Adviser, served as sub-advisers to the International Fund.
Under its Sub-Advisory Contract with the Adviser, the Sub-Adviser provides
at its own expense the personnel and equipment necessary to carry out its
duties. The Sub-Adviser will provide the Fund with quarterly reports with
respect to securities the Fund holds or markets in which the Fund has invested.
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<PAGE>
SHAREHOLDER SERVICER ASSISTANT
The Trust retains the Adviser to act as Shareholder Servicer Assistant of
each of the Funds except the International 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 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 Assistance, the Adviser is paid an
annual fee equal to 0.04% of the Funds' daily average net assets.
For the year ended December 31, 1997, the Adviser earned co-
administration/shareholder servicer assistance fees totaling $18,574, $96,166,
$45,179 and $27,551 for the International Equity Fund, Growth and Income Fund,
Fixed Income Fund and New York Tax-Free Bond Fund, respectively, all of which
was waived.
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;
0.125% 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 year ended December 31, 1997, BISYS Fund Services earned
administration service fees totaling $46,781, $137,244, $64,477 and $39,320 net
of fee waivers of $22,123, $68,828, $32,336 and $19,719, for the International
Equity Fund, Growth and Income Fund, Fixed Income Fund and the New York Fund,
respectively.
For the period from March 1, 1996 to December 31, 1996, BISYS Fund Services
earned $18,016 (net of fee waivers of $6,109) in administration fees from the
International Equity Fund, $99,227 (net of fee waivers of $52,606) in
administration fees from the Growth and Income Fund, $88,619 (net of fee waivers
of $48,426) in administration fees from the Fixed Income Fund and $38,260 (net
of fee waivers of $21,167) in administration fees from the New York Fund. For
the two months ended February 29, 1996. PFPC, the previous Administrator,
earned $22,548 (net of fee waivers of $134) from the International Fund, $10,725
(net of fee waivers of $564) from the Growth and Income Fund, $15,598 (net of
fee waivers of $821) for the Fixed Income Fund and $7,660 (net of fee waivers
of $403) for the New York Fund.
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<PAGE>
For the year ended December 31, 1995, the Growth and Income Fund, Fixed
Income Fund and New York Fund paid $61,800 (net of fee waivers of $5,000),
$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.
The International Fund, for the year ended December 31, 1995, as Adviser
and Administrator, HSBC Americas earned $149,012 (before fee waivers of $66,081)
and $24,797, respectively. Effective February 1, 1995, HSBC Americas earned co-
administration fees of 0.03% for both share classes and shareholder servicing
fees of 0.04% for the Service Class (Class A) of the Fund's average net assets,
respectively. For the period ending December 31, 1995 the Fund paid co-
administrative/shareholder servicing fees of $6,343. HSBC Americas waived co-
administrative fees for the month of January totaling $944.
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:
For the International Fund, the Adviser is paid a monthly advisory fee at
an annual rate of 0.90% of the Fund's average daily net assets.
Portion of Average Daily Value of Net Assets of Advisory
the Growth and Income Fund and Fixed Income Fund
------------------------------------------------ --------
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
Portion of Average Daily Value of Net Assets of Advisory
the New York Tax-Free Fund
----------------------------------------------- --------
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
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<PAGE>
Portion of Average Daily Value of Net Assets of Advisory
the New York Tax-Free Fund
----------------------------------------------- --------
In excess of $1.5 billion but
not exceeding $2 billion 0.315
In excess of $2 billion 0.280
With respect to the International Fund for the years ended December 31,
1997, 1996 and 1995, the Adviser (and also as the Administrator in the case of
1995) earned $89,584, $20,367 and $149,012 net of fee waivers of $307,447,
$140,552 and $66,081, respectively.
With respect to the Growth and Income Fund for the years ended December
31, 1997, 1996 and 1995, the Adviser earned $755,596, $597,497 and $367,300,
respectively, in advisory fees, net of fee waivers of $0, $88 and $0
respectively.
With respect to the Fixed Income Fund, for the years ended December 31,
1997, 1996 and 1995, the Adviser was paid $354,982, $562,307 and $464,400.
With respect to the New York Fund, for the years ended December 31, 1997,
1996 and 1995, the Adviser was paid $98,398, $1112,830 and $128,900 net of fee
waivers of $78,720, $89,511 and $128,900, respectively.
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 January 28, 1998.
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% (0.50% in the case of the Growth and Income Fund).
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
-28-
<PAGE>
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
January 28, 1998.
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<PAGE>
For the fiscal year ended December 31, 1997, 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
International 0 0 0 0 0 0
Fund
(Service
Class)
Fixed Income 0 0 0 0 0 0
Fund
New York $69,731 $0 $0 $0 $0 $69,731
Fund
</TABLE>
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 Funds 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 of
funds in connection with shareholder 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 a Fund to its shareholders; and providing such other
services as each Fund or 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 each 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 a 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 part of its servicing activities. In addition, state securities laws on this
issue may differ from
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<PAGE>
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.
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 current yields for the Fixed Income and New York Funds as of December
31, 1997, were 5.54% and 3.81%, 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 5.28% and 3.63%, respectively, for the Fixed Income
and New York 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
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
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<PAGE>
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:
Shares Charge * NAV
----------------- -------
INTERNATIONAL EQUITY FUND
INSTITUTIONAL CLASS **
One year ended December 31, 1997 N/A (2.15%)
Inception (March 1, 1995 to December 31, 1997 N/A 5.94%
SERVICE CLASS
One year ended December 31, 1997 (6.97%) (2.06%)
Inception (April 25, 1994) to December 31, 1997 (0.42%) 1.07%
GROWTH AND INCOME FUND
One year ended December 31, 1997 21.19% 27.42%
Five years ended December 31, 1997 15.49% 16.63%
Inception (June 6, 1986) to December 31, 1997 13.08% 13.59%
FIXED INCOME FUND
One Year Ended December 31, 1997 3.49% 8.12%
Inception (January 15, 1993) to December 31, 1997 5.64% 6.69%
NEW YORK TAX-FREE BOND FUND
One Year Ended December 31, 1997 3.80% 8.97%
Five Years Ended December 31, 1997 5.46% 6.50%
Inception (March 21, 1989) to December 31, 1997 7.24% 7.83%
* INCLUDES MAXIMUM SALES CHARGE. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
PERFORMANCE.
**THE FUND'S PRIOR SUB-ADVISERS MANAGED THE FUND'S ASSETS FOR THE PERIODS
SHOWN.
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
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<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.
-33-
<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
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 Day and Christmas. The net asset value
per share of each Fund is computed by dividing the total current market 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 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. The
public offering price (net asset value of $10.35 and $12.36 for the
International Fund and Growth and Income Fund, plus maximum sales charge of
5.00% of the offering price) per share at December 31, 1997 was $10.89 and
$13.01 respectively. he public offering price (net asset value of $10.12, and
$11.48 plus maximum sales charge of 4.75% of the offering price for the Fixed
Income Fund and New York Fund, respectively) per share at December 31, 1997 was
$10.62 and $12.05 for the Fixed Income Fund and New York 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 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 (and in the
case of the International Fund, securities for which market quotations are
available but the Adviser determines that a given quotation is not
representative of a security's market value) 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 (or Sub-Adviser, as appropriate) 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
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<PAGE>
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.
Investment decisions for a Fund concerning specific portfolio securities
are made independently from those for other clients advised by its Adviser.
Such other investment clients may invest in the same securities as a Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which the Adviser
believes to be equitable to each client, including the Fund. In some instances,
this investment procedure may adversely affect the price paid or received by a
Fund or the size of the position obtained or sold for a Fund. To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
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
1940 Act, 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 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 1940 Act. Under the 1940 Act, 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.
As permitted by Section 28(e) of the "Securities Exchange Act of 1934 (the
"1934 Act") the Adviser may cause the Funds to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to the
Adviser an amount of disclosed commission for effecting a securities transaction
for the Funds in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
The Adviser and Portfolio Advisers may, in circumstances in which two or
more dealers are in a position to offer comparable results, give preference to a
dealer which has provided statistical or other research services to the Adviser.
By allocating transactions in this manner, the Adviser is able to supplement its
research and analysis with the view and information of securities firms.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser and Portfolio Adviser may consider sales of shares of the Funds as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Funds.
The aggregate brokerage commissions paid by the International Fund for the
years ended December 31, 1997, 1996 and 1995 were $330,959, $113,445 and
$113,904, respectively. The Fund paid $0, $0 and $0 in brokerage commissions to
affiliated brokers during the same periods.
For the years ended December 31, 1997, 1996 and 1995 the Growth and Income
Fund paid an aggregate of $288,300, $113,241 and $117,652 respectively, in
brokerage commissions.
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<PAGE>
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 addition,
increased portfolio turnover may increase the likelihood of additional capital
gains for each Fund. The International Fund's portfolio turnover rate for the
years ended December 31, 1997 and December 31, 1996 was 112.54% and 77.91%
respectively. The Growth and Income Fund's portfolio turnover rate for the years
ended December 31, 1997 and December 31, 1996 was 69.1% and 61.7% respectively.
The Fixed Income Fund's portfolio turnover rate for the years ended December 31,
1997 and 1996 was 61% and 156%, respectively (the relatively higher 1996
turnover was due to market volatility). The New York Tax-Free Fund's portfolio
turnover rate for the years ended December 31, 1997 and 1996 was 35.6% and
87.4%, 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.
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
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<PAGE>
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 1940 Act, 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.
INCOME TAXES
The Funds have elected and qualified to be treated and intend to continue
to be treated, 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)
diversify its holdings so that, at the end of each 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.
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
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<PAGE>
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.
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 a 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 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, a
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<PAGE>
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 distribution paid by the
Fund that will be eligible for the dividends received deduction available to
corporate shareholders of the 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 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.
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.
SPECIAL TAX CONSIDERATIONS FOR THE INTERNATIONAL EQUITY FUND. 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 federal 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 each 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.
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.
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<PAGE>
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, 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.
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<PAGE>
The International 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 shareholder
servicing fees. All other funds currently offer only one class of shares
which are subject to a sales charge, Rule 12b-1 fees and shareholder servicing
charges. All shares of the Trust issued and outstanding are fully paid and non-
assessable. 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.
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 or class. 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
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 9, 1998 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:
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<PAGE>
SHARES HELD & PERCENT OF CLASS
INTERNATIONAL EQUITY FUND
Service Class
Name and Address of
Holder of Record Shares Held Percent of Class
- ------------------------------------------------------------------
Donaldson, Lufkin Jenrette 1,618 6.348%
Jersey City NJ 07303
Marine Midland Bank, Custodian 4,714 18.492%
Paul M. Dudney, IRA
Seven Oaks, Kent, England TN13
Kathleen M. Hariff 1,350 5.295%
Ontario, NY 14519
Total Shares Outstanding 25,494
INTERNATIONAL EQUITY FUND 5,129,779 99.991%
Institutional Class
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 5,130,216
GROWTH AND INCOME FUND 6,315,394 91.958%
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 6,867,661
FIXED INCOME FUND 5,364,126 97.215%
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 5,517,778
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<PAGE>
Name and Address of
Holder of Record Shares Held Percent of Class
- ------------------------------------------------------------------
NEW YORK TAX-FREE FUND 682,199 21.779%
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 3,132,261
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 FUND ACCOUNTING 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.
Rules adopted under the 1940 Act permit investment companies to maintain
their securities and cash in the custody of certain eligible foreign banks and
depositories. The International Fund's portfolio of non-United States
securities are held by sub-custodians which are approved by the Trustees or a
foreign custody manager appointed by the Trustees in accordance with these
rules. The Board has appointed the Custodian as its foreign custody manager.
The determination to place assets with a particular foreign sub-custodian is
made pursuant to these rules which require a consideration of a number of
factors including, but not limited to, the reliability and financial stability
of the sub-custodian; the sub-custodian's practices, procedures and internal
controls; and the reputation and standing of the sub-custodian in its national
market.
For the period July 1, 1997 to December 31, 1997, the Bank of New York
received $40,115 for custody services for the International Fund. For the
period January 1, 1997 to June 30, 1997 and for the years ended December 31,
1996 and December 31, 1995, State Street Bank & Trust Company received $104,438,
$180,302 and $179,616, respectively for custody services.
For the period ended December 31, 1997 the Bank of New York received a fee
of $20,738 for custody services for the Growth and Income Fund. For the year
ended December 31, 1996 and for the period September 26, 1995 to December 31,
1996, the Bank of New York received fees of $14,270 and $963 from the Growth and
Income Fund for custody services. For the period January 1, 1995 to September
25, 1995 Marine Midland received $8,200 (all of which was paid by the adviser) ,
for the Growth and Income Fund for custody services. For the year ended December
31, 1997 the New York Fund paid $5,586 in custody fees and the Fixed Income Fund
paid $9,647.
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<PAGE>
For the year ended December 31, 1996 the New York Fund paid $7,893 in
custody fees and the Fixed Income Fund paid $13,337 to Marine Midland Bank. For
the period from January 1, 1995 to September 25, 1995, the New York Fund paid
$6,400 in custody fees to Marine Midland Bank.
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 1940 Act 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 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 $37,587 to BISYS for transfer agency services
for the year ended December 31, 1997. 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 New York Tax-Free Fund paid $92,884 to BISYS for transfer agency fees
for the year ended December 31, 1997. 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
to PFPC Inc., for transfer agency services for the year ending December 31,
1995.
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.
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<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.
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