<PAGE>
As Filed with the Securities and Exchange Commission on April 30, 1999
Registration Nos. 33-33734 and 811-6057
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. 23 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24 [X]
HSBC MUTUAL FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 634-2536
Steven R. Howard, Secretary
Paul, Weiss, Rifkind, Wharton & Garrison,
1285 Avenue of the Americas, 23rd Floor
New York, New York 10019
(Name and Address of Agent for Service)
--------------------------
It is proposed that this filing will become effective (check appropriate box):
[x] immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
75 days after filing pursuant to paragraph (a)
[_] on (April 30,1999) pursuant to paragraph (a) of Rule 485
--------------------------
================================================================================
<PAGE>
HSBC Mutual Funds Trust Prospectus
[ARTWORK APPEARS HERE]
Growth and Income Fund
Fixed Income Fund
New York Tax-Free Bond Fund
Managed by HSBC Asset Management Americas, Inc.
April 30, 1999
An investment in the Fund is not a deposit of the bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The Securities and Exchange Commission has not approved or disapproved the
shares described in this Prospectus or determined whether this Prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Question?
Call 1-800-634-2536 or your
Investment Representative.
<PAGE>
Table of Contents
HSBC Mutual Funds Trust Prospectus
<TABLE>
<CAPTION>
Risk/Return Summary and Fund Expenses
- ------------------------------------------------------------------------
<S> <C> <C>
[GRAPHIC]
Carefully review this 4 Growth and Income Fund
important section, which 8 Fixed Income Fund
summarizes each Fund's 12 New York Tax-Free Bond Fund
investments, risks, past
performance, and fees.
Investment Objectives, Policies and Risks
- ------------------------------------------------------------------------
[GRAPHIC]
Review this section for 17 Growth and Income Fund
information on investment 18 Fixed Income Fund
strategies and their risks. 19 New York Tax-Free Bond Fund
20 Other Considerations--All Funds
Fund Management
- ------------------------------------------------------------------------
[GRAPHIC]
Review this section for 21 The Investment Adviser
details on the people and 21 Portfolio Managers
organizations who oversee 22 The Distributor and Administrator
the Funds.
Shareholder Information
- ------------------------------------------------------------------------
[GRAPHIC]
Review this section for 24 Pricing of Fund Shares
details on how shares are 25 Purchasing and Adding to Your
valued, Shares
how to purchase, sell and 29 Selling Your Shares
exchange shares, related 33 Distribution Arrangements/Sales
charges Charges
and payments of dividends 40 Exchanging Your Shares
and distributions. 42 Dividends, Distributions and Taxes
Financial Highlights
- ------------------------------------------------------------------------
[GRAPHIC]
43
Back Cover
- ------------------------------------------------------------------------
[LOGO]
Where to learn more about this
Fund
</TABLE>
2
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
The following is a summary of certain key information about the HSBC Mutual
Funds. You will find additional information about the Funds, including a
detailed description of the risks of an investment in the Fund, after this
summary.
Each Fund offers three different classes of shares; Class A, Class B and Class
C. All shares purchased prior to the introduction of multiple classes in May,
1999, are Class A shares. All classes of shares are offered in this prospectus.
The Risk/Return Summary describes certain kinds of risks that apply to one or
more of the Funds. These risks are:
. Market Risk. Risk that the value of a Fund's investments will fluctuate as
the stock market fluctuates and that stock prices overall may decline over
short or longer-term periods.
. Interest Rate Risk. Risk that changes in interest rates will affect the
value of a Fund's investments in income-producing or fixed-income or debt
securities. Increases in interest rates may cause the value of a Fund's
investments to decline.
. Credit Risk. Risk that the issuer of a security will be unable or unwilling
to make timely payments of interest or principal, or to otherwise honor its
obligations.
. Prepayment Risk. Risk that the principal amount of the underlying mortgage
will be repaid prior to the bond's maturity date. When such repayment
occurs, no additional interest will be paid on the investment.
. Security-Specific Risk. Risk that the issuer will be unable to achieve its
earnings or growth expectations.
Other important things for you to note:
. You may lose money by investing in the Funds.
. Because the value of a Funds' investments will fluctuate with market
conditions, so will the value of your investment in a Fund.
The Risk/Return Summary also includes a bar chart for each Fund showing its
annual returns and a table showing its average annual returns.
A Fund's past performance, of course, does not necessarily indicate how it will
perform in the future.
Fund Expenses include, for all Funds, a Fees and Expenses table and an Expense
Example.
3
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Growth and
Income Fund
Investment Objective The Fund's investment objective is long-term growth of
capital and current income.
Principal Investment
Strategies The Fund normally invests at least 65% of its total
assets in common stocks, preferred stocks, and
convertible securities. The Fund may invest the balance
of its assets in various types of fixed income
securities and in money market instruments. The Fund's
Adviser selects securities for the portfolio that appear
to be undervalued, some of which will be income-
producing.
Principal
Investment Risks The principal risks of investing in the Fund are market
risk, security-specific risk, interest rate risk,
prepayment risk and credit risk. Additionally, there is
the risk that stocks selected because they represent
value will remain undervalued or out-of-favor.
Who may want to Consider investing in the Fund if you are:
invest? . seeking a long-term goal such
as retirement
. looking to add a growth
component to your portfolio
. willing to accept higher risks
of investing in the stock
market
This Fund will not be appropriate for anyone:
. seeking monthly income
. pursuing a short-term goal or
investing emergency reserves
. seeking safety of principal
4
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Growth and Income Fund
Performance
Information
The bar chart shows
changes in the
Growth and Income
Fund's annual
performance over ten
years to demonstrate
that the Fund's
return varied at
different times. The
table below compares
the Fund's
performance over
time to that of the
S&P 500(R) Composite
Index, a widely
recognized,
unmanaged index of
common stocks. Both
the chart and table
assume reinvestment
of dividends and
distributions.
If fee waivers or
expense
reimbursements had
not been reflected
in both the chart
and table, the
Fund's performance
would have been
lower.
Bar Chart
Year-by-Year Total Returns as of
12/31
for Class A Shares*
[BAR GRAPH APPEARS HERE]
1989 25.56%
1990 -4.41%
1991 31.92%
1992 7.74%
1993 11.23%
1994 -2.97%
1995 33.11%
1996 17.90%
1997 27.42%
1998 26.97%
- ------------------------------------
The bar chart above does not
reflect the impact of any
applicable sales charges or account
fees which would reduce returns.
The chart, however, does include
management fees and operating
expenses. Of course, past
performance does not indicate how
the Fund will perform in the
future.
The Fund's returns will fluctuate
over long and short periods. For
example, during the ten year period
shown in the bar chart, the Fund's:
<TABLE>
<S> <C> <C>
Best quarter: Q4 1998 22.51%
Worst quarter: Q3 1998 -11.35
</TABLE>
------------------------------------
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
-----------------------------------------------------
<S> <C> <C> <C> <C>
Growth and Income Fund 6/23/86 20.63% 18.54% 16.07%
Class A* (includes maximum
5% sales charge)
-----------------------------------------------------
S&P 500(R) Composite Index N/A 33.35% 20.25% 18.03%
-----------------------------------------------------
Lipper Growth and Income N/A 13.58% 17.83% 15.54%
Fund Index
</TABLE>
- --------------------------------------------------------------------------------
*Returns are for Class A shares only; Class B and C shares
had not yet been offered prior to the date of this
prospectus.
5
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Growth and
Income Fund
Fees and Expenses
As an investor in
the Growth and
Income Fund, you
will pay the
following fees and
expenses.
Shareholder
transaction fees
are paid from your
account. Annual
Fund operating
expenses are paid
out of Fund assets,
and are reflected
in the share price.
Contingent Deferred
Sales Charge
Some Fund share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called
a Contingent De-
ferred Sales
Charge.
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses (fees paid by you directly) A Shares B Shares C Shares
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases 5.00%/1/ None None
---------------------------------------------------------
Maximum deferred sales charge (load) None 4.00%/2/ 1.00%/3/
---------------------------------------------------------
<CAPTION>
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
<S> <C> <C> <C>
Management fee .55% .55% .55%
--------------------------------------------------
Administrative Services fee/4/ .15% .15% .15%
--------------------------------------------------
Distribution (12b-1) fee/5/ .50% .75% .75%
--------------------------------------------------
Service Organization fee/6/ .35% .50% .50%
--------------------------------------------------
Other expenses .25% .25% .25%
--------------------------------------------------
Total fund
operating expenses 1.80% 2.20% 2.20%
--------------------------------------------------
Fee waivers & expense
reimbursements/4/,/5/,/6/ .65% .30% .30%
--------------------------------------------------
Net expense/7/ 1.15% 1.90% 1.90%
--------------------------------------------------
</TABLE>
- ---------
/1/ Lower sales charges are available depending upon the amount invested.
/2/ A CDSC on Class B shares declines over four years starting with year one and
ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares within the first year.
/4/ The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/5/ The Distributor is contractually waiving .25% of its Distribution fee for
Class A shares.
/6/ The Service Organization fee is being contractually waived in its entirety
for Class A shares and contractually limited to .25% for the Class B and
Class C shares.
/7/ The contractual expense limitations are in effect through December 31, 1999.
6
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Growth and
Income Fund
Expense Example
Use this table to
compare fees and
expenses with
those of other
Funds.
It illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in
the
Fund's operating
expenses except
the expiration
of the current
contractual fee
waiver
on December 31,
1999.
Because this
example
is hypothetical
and for comparison
only, your actual
costs will
be different.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $611 $978 $1,368 $2,459
------------------------------------------------
Class B Shares
Assuming redemption $593 $859 $1,152 $2,511
Assuming no redemption $193 $659 $1,152 $2,511
------------------------------------------------
Class C Shares
Assuming redemption $293 $659 $1,152 $2.511
Assuming no redemption $193 $659 $1,152 $2,511
------------------------------------------------
</TABLE>
7
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Fixed Income
Fund
Investment Objective
The Fund's investment objective
is generation of high current
income consistent with
appreciation of capital.
Principal The Fund normally invests at
Investment Strategies least 65% of its total assets in
fixed income securities rated at
least Baa by Moody's Investors
Service ("Moodys") or BBB by
Standard and Poors Corporation
("S&P") or securities of
comparable quality. The Fund may
invest the balance of its assets
in variable and floating rate
debt securities that meet
similar standards. The Fund will
base its investment selection
upon analysis of prevailing
market and economic conditions.
Principal The principal risks of investing
Investment Risks in the Fund are interest rate
risk and credit risk.
Who may Consider investing in the Fund
if you are:
want to invest? . looking to add a monthly
income component to your
portfolio
. willing to accept the risks of
price and dividend
fluctuations
This Fund will not be
appropriate for anyone:
. investing emergency reserves
. seeking safety of principal
8
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Fixed Income Fund
Performance
Information
The bar chart shows
changes in the Fixed
Income Fund's annual
performance since
inception to
demonstrate that the
Fund's return varied
at different times.
The table below
compares the Fund's
performance over
time to that of the
Lehman Brothers
Aggregate Bond
Index, an unmanaged
index generally
representative of
the bond market as a
whole. Both the
chart and table
assume reinvestment
of dividends and
distributions.
If fee waivers or
expense
reimbursements had
not been reflected
in both the chart
and table, the
Fund's performance
would have been
lower.
Bar Chart
Year-by-Year Total Returns as of
12/31
for Class A Shares*
[HSBC MUTUAL FUNDS BAR CHART APPEARS HERE]
1994 -1.89%
1995 16.73%
1996 2.11%
1997 8.62%
1998 8.33%
- ------------------------------------
The bar chart above does not reflect the impact of
any applicable sales charges or account fees which
would reduce returns. The chart, however, does
include management fees and operating expenses. Of
course, past performance does not indicate how the
Fund will perform in the future.
The Fund's returns will fluctuate over long and short
periods. For example, during the period shown in the
bar chart, the Fund's:
<TABLE>
<S> <C> <C>
Best quarter: Q2 1995 6.03%
Worst quarter: Q4 1996 -2.49%
</TABLE>
------------------------------------
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income Fund Class 1/15/93 3.23% 5.55% 6.10%
A*
(includes maximum
4.75% sales charge)
-----------------------------------------------------------
Lehman Brothers N/A 9.65% 7.48% 8.49%
Aggregate Bond Index
- ------------------------------------------------------------------------------
</TABLE>
*Returns are for Class A shares only; Class B and C shares had not yet been
offered prior to the date of this prospectus.
9
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Fixed Income Fund
Fees and Expenses
As an investor in
the Fixed Income
Fund, you will pay
the following fees
and expenses.
Shareholder
transaction fees
are paid from your
account. Annual
Fund operating
expenses are paid
out of Fund assets,
and are reflected
in the share price.
Contingent Deferred
Sales Charge
Some Fund share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called
a Contingent
Deferred Sales
Charge.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses
(fees paid
by you directly) A Shares B Shares C Shares
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases 4.75%/1/ None None
--------------------------------------------------------
Maximum deferred sales charge (load) None 4.00%/2/ 1.00%/3/
--------------------------------------------------------
<CAPTION>
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
<S> <C> <C> <C>
Management fee .55% .55% .55%
--------------------------------------------------
Administrative Services fee/4/ .15% .15% .15%
--------------------------------------------------
Distribution (12b-1) fee/5/ .35% .75% .75%
--------------------------------------------------
Service Organization fee/6/ .35% .50% .50%
--------------------------------------------------
Other expenses .24% .24% .24%
--------------------------------------------------
Total fund operating expenses 1.64% 2.19% 2.19%
--------------------------------------------------
Fee waivers & expense
reimbursements/4/,/5/,/6/ .50% .30% .30%
--------------------------------------------------
Net expenses/7/ 1.14% 1.89% 1.89%
--------------------------------------------------
</TABLE>
- ---------
/1/ Lower sales charges are available depending upon the
amount invested.
/2/ A CDSC on Class B shares declines over four years
starting with year one and ending in year five from: 4%,
3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares
within the first year.
/4/ The Administrator is contractually limiting its
Administrative Services fee to .10% for each class of
shares.
/5/ The Distributor is contractually waiving .10% of its
Distribution fee for Class A shares.
/6/ The Service Organization fee is being, waived in its
entirety for Class A shares and contractually limited to
.25% for the Class B and Class C shares.
/7/ The contractual expense limitations are in effect
through December 31, 1999.
10
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Fixed Income
Fund
Expense Example
Use this table to
compare fees and
expenses with those
of other Funds. It
illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in
the
Fund's operating
expenses except
the expiration
of the current
contractual fee
waiver on
December 31,
1999.
Because this
example
is hypothetical and
for comparison
only, your actual
costs will
be different.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $586 $921 $1,280 $2,286
------------------------------------------------
Class B Shares
Assuming redemption $592 $856 $1,147 $2,500
Assuming no redemption $192 $656 $1,147 $2,500
------------------------------------------------
Class C Shares
Assuming redemption $292 $656 $1,147 $2,500
Assuming no redemption $192 $656 $1,147 $2,500
------------------------------------------------
</TABLE>
11
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
New York Tax-
Free Bond
Fund
Investment Objective
The Fund's investment objective is
a high level of current income,
exempt from regular Federal, New
York State, and New York City
personal income taxes, as is
consistent with preservation of
capital.
Principal
Investment Strategies The Fund invests primarily in
municipal obligations of New York,
its cities and municipalities, or
other public authorities that are
exempt from regular federal, New
York State, and New York City
income taxes in the opinion of bond
counsel to the issuer. The Fund
maintains 80% of its net assets in
tax-exempt, interest paying
municipal obligations that are not
subject to the Federal income tax
or the Federal alternative minimum
tax ("AMT"). Generally, the Fund
will invest at least 65% of its
total assets in bonds of New York
issuers. The Fund may invest the
balance of its assets in: (i) other
New York municipal obligations,
such as participation
certifications, or (ii) other
municipal securities, that are
subject to New York State and New
York City income taxes. The Fund's
investments have an average
portfolio maturity ranging from
three to 30 years.
The Fund's Adviser will vary the
Fund's average portfolio maturity
and re-allocate the Fund's assets
in response to actual and expected
market and economic changes.
Principal The principal risks of investing in
Investment Risks the Fund are interest rate risk and
credit risk. The Fund's investments
also have municipal market risk,
which is the risk that special
factors, such as political or
legislative changes or
uncertainties related to the tax
status of municipal securities, may
adversely affect the value of
municipal securities and have a
significant effect on the value of
a Fund's investments. Because the
Fund
12
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
New York Tax-
Free Bond
Fund
invests in a particular state, its
investments have
the risks that factors affecting
New York State could have a
specific effect on the Fund's net
asset value.
Who may
want to invest? Consider investing in the Fund
if you are:
. seeking a long-term goal such
as retirement
. looking to reduce taxes on
investment income
. seeking regular monthly tax
free dividends
This Fund will not be
appropriate for anyone:
. investing through a tax-exempt
retirement plan
. pursuing an aggressive high
growth investment strategy
. seeking a stable share price
13
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
New York Tax- Free Bond Fund
Performance
Information
The bar chart shows
changes in the New
York Tax-Free Bond
Fund's yearly
performance over the
past nine years
since inception to
demonstrate that the
Fund's value varied
at differing times.
The table below
compares the Fund's
performance over
time to that of the
Lehman Brothers 7-
year Municipal Bond
Index, an unmanaged
index generally
representative of
the intermediate
municipal bond
market. Both the
chart and table
assume reinvestment
of dividends and
distributions.
If fee waivers or
expense
reimbursements had
not been reflected
in both the chart
and table, the
Fund's performance
would have been
lower.
Bar Chart
Year-by-Year Total Returns as of
12/31
Class A Shares*
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1990 91 92 93 94 95 96 97 98
---- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6.13% 12.59% 10.66% 14.27% -8.13% 15.17% 3.99% 8.97% 5.99%
</TABLE>
- ------------------------------------
The bar chart above does not
reflect the impact of any
applicable sales charges or account
fees which would reduce returns.
The chart, however, does include
management fees and operating
expenses. Of course, past
performance does not indicate how
the Fund will perform in the
future.
The Fund's returns will fluctuate
over long and short periods. For
example, during the period shown in
the bar chart, the Fund's:
<TABLE>
<S> <C> <C>
Best quarter: Q2 1992 5.15%
Worst quarter: Q3 1994 -6.15%
</TABLE>
------------------------------------
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
-------------------------------------------------------
<S> <C> <C> <C> <C>
New York Tax Free Bond 3/21/89 .98% 3.90% 7.11%
Fund
Class A* (includes
maximum 4.75% sales
charge)
-------------------------------------------------------
Lehman Brothers 7-year N/A 7.67% 6.62% 7.51%
Municipal Bond Index
- -----------------------------------------------------------------------------
</TABLE>
* Returns are for Class A shares only; Class B and C shares had not yet been
offered prior to the date of this prospectus.
14
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
New York Tax-
Free Bond
Fund
Fees and Expenses
As an investor in
the New York Tax-
Free Bond Fund, you
will pay the
following fees and
expenses.
Shareholder
transaction fees
are paid from your
account. Annual
Fund operating
expenses are paid
out of Fund assets,
and are reflected
in the share price.
Contingent Deferred
Sales Charge
Some Fund share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called a
Contingent Deferred
Sales Charge.
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses (fees paid by you directly) A Shares B Shares C Shares
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases 4.75%/1/ None None
---------------------------------------------------------
Maximum deferred sales charge (load) None 4.00%/2/ 1.00%3
---------------------------------------------------------
<CAPTION>
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
<S> <C> <C> <C>
Management fee .45% .45% .45%
-------------------------------------------------
Administrative Services fee/4/ .15% .15% .15%
-------------------------------------------------
Distribution (12b-1) fee/5/ .35% .75% .75%
-------------------------------------------------
Service Organization fee/6/ .35% .50% .50%
-------------------------------------------------
Other expenses .45% .45% .45%
-------------------------------------------------
Total fund operating expenses 1.75% 2.30% 2.30%
-------------------------------------------------
Fee waivers & expense
reimbursements/4/, /5/, /6/ .50% .50% .50%
-------------------------------------------------
Net expenses/7/ 1.25% 1.80% 1.80%
-------------------------------------------------
</TABLE>
- ---------
/1/ Lower sales charges are available depending upon the
amount invested.
/2/ A CDSC on Class B shares declines over four years
starting with year one and ending in year five from: 4%,
3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares
within the first year.
/4/ The Administrator is contractually limiting its
Administrative Services fee to .10% for each class of
shares.
/5/ The Distributor is contractually waiving .10% of its
Distribution fee for Class A shares.
/6/ The Service Organization fee is being waived in its
entirety for Class A shares and contractually limited to
.25% for the Class B and Class C shares.
/7/ The contractual expense limitations are in effect
through December 31, 1999.
15
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
New York Tax-
Free Bond Fund
Expense Example
Use this table to
compare fees and
expenses with
those of other
Funds. It
illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in
the
Fund's operating
expenses except
the expiration
of the
current contractual
fee waiver on
December 31,
1999.
Because this
example
is hypothetical
and for comparison
only, your actual
costs will
be different.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming Redemption $596 $954 $1,334 $2,400
------------------------------------------------
Class B Shares
Assuming Redemption $583 $871 $1,185 $2,597
Assuming no Redemption $183 $671 $1,185 $2,597
------------------------------------------------
Class C Shares
Assuming Redemption $283 $671 $1,185 $2,597
Assuming no Redemption $183 $671 $1,185 $2,597
------------------------------------------------
</TABLE>
16
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
Growth and
Income Fund
Ticker Symbol: Class A MTREX Class B N/A Class C N/A
This section of the Prospectus provides a more complete description of the
principal investment objectives and policies of the Funds. Of course, there can
be no assurance that the Funds will achieve their investment objectives.
Additional descriptions of the Funds' risks, strategies, and investments, as
well as other strategies and investments not described below, may be found in
the Funds' Statement of Additional Information or SAI.
Investment Objective, Policies And Strategy
The Fund's investment objective is long-term growth of capital and current
income. The Fund seeks to achieve this objective by investing primarily in
common stocks, preferred stocks, and convertible securities. The Fund normally
invests at least 65% of its total assets in equity securities. The Fund may
invest up to 35% of its total assets in fixed income securities and money
market instruments. The Fund's investments in fixed income securities will
primarily consist of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, and investment grade debt obligations
issued or guaranteed by domestic corporations or commercial banks.
The Fund's criteria for selecting equity securities are the issuer's managerial
strength, competitive position, price to earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value. The
Fund's Adviser selects securities for the portfolio that appear to be
undervalued, some of which will be income-producing. The Fund may invest in
securities that appear to be undervalued because the value or potential for
growth has been overlooked by many investors or because recent changes in the
economy, industry or the company have not yet been reflected in the price of
the securities. In order to increase the Fund's portfolio income, the Fund may
invest in securities that provide current dividends or, in the opinion of the
Adviser, have a potential for dividend growth in the future.
The Fund will place greater emphasis on capital appreciation as compared to
income, although changes in market conditions and interest rates will cause the
Fund to vary emphasis of these two elements of its investment program in order
to meet its investment objective.
Risk Considerations
The principal risk of investing in the Fund is market risk, which is the risk
that the value of a Fund's investments will fluctuate as the stock market
fluctuates and that stock prices overall will generally decline over short or
longer-term periods. In addition, there is the risk that stocks selected
because they represent value will remain undervalued or out-of-favor. Therefore
the Fund could underperform other stock investments. The Fund's investments in
fixed-income securities and
17
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
Fixed
Income Fund
Ticker Symbol: Class A MFIFX Class B N/A Class C N/A
money market securities may have interest rate risk, prepayment risk and credit
risk. Increases in interest rates may cause the value of the Fund's investments
to decline. Prepayment risk may expose the Fund to potentially lower return
upon subsequent reinvestment of the principal.
Investment Objective, Policies and Strategy
The Fund's investment objective is generation of high current income consistent
with appreciation of capital. The Fund normally invests at least 65% of its
total assets in fixed-income securities that are rated at least Baa by Moody's
or BBB by S&P, comparably rated securities or, if unrated, of comparable
quality. The Fixed Income Fund invests primarily in notes, bonds, debentures
and other fixed income securities. The Fund expects to maintain an average
quality rating of its investment portfolio of Aa by Moody's or AA by S&P or
equivalent quality. The Fund currently has no policy with respect to the Fund's
average portfolio maturity. The Fund also may invest in U.S. Government
mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The Fund also may invest up to
35% of its total assets in variable and floating rate debt securities meeting
its quality standards.
The Fund bases its investment selection upon analysis of prevailing market and
economic conditions. If a security held by the Fund has its rating reduced
below the Fund's quality standards or revoked, the Fund may continue to hold
the security. The Adviser will, however, consider whether the Fund should
continue to hold the security. These securities may be subject to greater
credit risk and have greater price volatility than securities in the higher
rating categories.
Risk Considerations
The principal risks of investing in the Fund are interest rate risk and credit
risk. The Fund's investments in Baa/BBB rated securities may be subject to a
greater degree of market fluctuation and credit risk than the Fund's
investments in higher quality securities. Increases in interest rates may cause
the value of the Fund's investments to decline. Interest rate risk is greater
for the Fund's investments in mortgage-related securities because when interest
rates rise, the maturities of these type of securities tend to lengthen and the
value of the securities decreases more significantly. In addition, these types
of securities are subject to prepayment when interest rates fall, which
generally results in lower returns as the Fund must reinvest its assets in debt
securities with lower interest rates.
18
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
New York Tax-
Free Bond Fund
Ticker Symbol: Class A MNYBX Class B N/A Class C N/A
Investment Objective, Policies and Strategy
The Fund's investment objective is a high a level of current income, exempt
from regular Federal, New York State, and New York City income taxes, as is
consistent with preservation of capital. The Fund normally invests at least 80%
of its net assets in federally tax-exempt, interest paying municipal
obligations that are not subject to Federal income tax and AMT. In addition,
the Fund normally invests at least 65% of its total assets in bonds of New York
issuers.
The Fund generally invests primarily in municipal obligations that are exempt
from Federal, New York State, and New York City income tax in the opinion of
bond counsel to the issuer and in participation certificates and obligations
purchased from banks, insurance companies, and other financial institutions.
The Fund also may invest in securities that are subject to New York State and
New York City income taxes. The Fund's investments have an average portfolio
maturity ranging from three to 30 years.
The Fund invests in:
. municipal bonds that are rated at least Baa by Moody's or BBB by S&P or of
comparably quality;
. municipal notes that are rated MIG-2 or better by Moody's or "SP-2" or
better by S&P or of comparable quality; and
. municipal commercial paper rated "Prime-2" or better by Moody's or "A-2" or
better by S&P or of comparable quality.
If a security held by the Fund has its rating reduced below the Fund's quality
standards or revoked, the Fund may continue to hold the security. The Adviser
will, however, consider whether the Fund should continue to hold the security.
These securities may be subject to greater credit risk and have greater price
volatility than securities in the higher rating categories.
The Fund may invest 25% or more of its total assets in municipal obligations
that are related in other ways such that an economic, business or political
development or change affecting one such obligation could also affect the other
obligations; for example, municipal obligations, with interest that is paid
from revenues of similar types of projects. In addition, from time to time, the
Fund may invest 25% or more of its assets in industrial development bonds,
which, although issued by industrial development authorities, may be backed
only by those assets and revenues of non-governmental users.
Risk Considerations
The principal risks of investing in the Fund are interest rate risk, credit
risk, and municipal market risk. Municipal market risk is the risk that special
factors, such as political or legislative changes or uncertainties related to
the tax status of municipal securities, may adversely affect the value of
municipal securities and have a significant effect on the value of a Fund's
investments.
19
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
Because the Fund invests in a particular state's municipal obligations, factors
affecting New York State and its municipalities, including economic, political,
or regulatory occurrences, may have a significant effect on the Fund's net
asset value. In addition, the Fund may invest up to 25% of its total assets in
a single issuer's securities. Factors affecting a single issuer in which the
Fund invests could have a more significant effect on the Fund's net asset
value.
Other Considerations--All Funds
Portfolio Turnover. The portfolio turnover rate for each Fund is included in
the Financial Highlights section of this Prospectus. The Funds are actively
managed and, in some cases in response to market conditions, a Fund's portfolio
turnover, may exceed 100%. A higher rate of portfolio turnover increases
brokerage and other expenses, which must be borne by the Fund and its
shareholders. High portfolio turnover (over 100%) also may result in the
realization of substantial net short-term capital gains, which when distributed
are taxable to shareholders.
Temporary Defensive Positions. In order to meet liquidity needs or for
temporary defensive purposes, each Fund may invest up to 100% of its assets in
fixed income securities, money market securities, certificates of deposit,
bankers' acceptances, commercial paper or in equity securities which in the
Sub-Adviser's opinion are more conservative than the types of securities that
the Fund typically invests in. Funds which have policies to invest 65% or 80%
of their assets in specified investments will not invest more than 35% or 20%
of their assets, respectively, in order to meet liquidity needs. To the extent
the Funds are engaged in temporary or defensive investments, a Fund will not be
pursuing its investment objective.
20
<PAGE>
Fund Management [GRAPHIC]
The Investment Adviser
HSBC Asset Management Americas Inc. (HSBC or the "Adviser"), 140 Broadway, New
York, NY 10005 is the adviser for the Funds. HSBC manages more than $3.3
billion of assets of individuals, pension plans, corporations and institutions.
Through its portfolio management team, HSBC makes the day-to-day investment
decisions and continuously reviews, supervises and administers the Funds'
investment programs.
For these advisory services, the Funds paid the Adviser at the rates shown
below during their fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
Percentage of
average net assets
as of 12/31/98
- ---------------------------------------------
<S> <C>
Growth and Income Fund .55%
- ---------------------------------------------
Fixed Income Fund .55%
- ---------------------------------------------
New York Tax Free Bond
Fund .25%*
- ---------------------------------------------
</TABLE>
*HSBC waived a portion of its contractual fees with the New York Tax-Free Bond
Fund for the most recent fiscal year. Contractual fees (without waivers) for
this Fund are .45%.
Portfolio Managers
Mr. Fredric Lutcher III, Managing Director, U.S. Equities, is responsible for
the day-to-day management of the Growth and Income Fund. Prior to joining the
Adviser in late 1997, Mr. Lutcher worked as Vice President and Senior Mutual
Fund Portfolio Manager at Merrill Lynch Asset Management for nine years.
Mr. James Lark, Director, HSBC Taxable Fixed Income Products, is responsible
for the day-to-day management of the Fixed Income Fund's portfolio. Mr. Lark
joined the Adviser in 1986 and is responsible for managing institutional and
retail fixed income portfolios.
Mr. Jerry Samet, Municipal Bond Portfolio Manager, Fixed Income Group of the
Adviser, is responsible for the day-to-day management of the New York Tax Free
Bond Fund. Before joining the Adviser in February 1996, Mr. Samet worked for
Bankers Trust in the Private Clients Group for eight years. He was a portfolio
manager/trader for six years, and before that, he was a trading assistant for
two years.
21
<PAGE>
Fund Management [GRAPHIC]
The Distributor and Administrator
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Funds' administrator. Management and
administrative services of BISYS include providing office space, equipment and
clerical personnel to the Funds and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend dispersing services.
BISYS also serves as the distributor of each Fund's shares. BISYS may provide
financial assistance in connection with pre-approved seminars, conferences and
advertising to the extent permitted by applicable state or self-regulatory
agencies, such as the National Association of Securities Dealers.
The Statement of Additional Information has more detailed information about the
Investment Adviser and other service providers.
Year 2000
Like other funds and business organizations around the world, the Funds could
be adversely affected if the computer systems used by the Adviser and the
Funds' other service providers do not properly process and calculate date-
related information for the year 2000 and beyond. In addition, Year 2000 issues
may adversely affect companies in which the Funds invest where, for example,
such companies incur substantial costs to address Year 2000 issues or suffer
losses caused by the failure to adequately or timely do so.
The Funds have been assured that the Adviser and the Funds' other service
providers (i.e., Administrator, Transfer Agent, Fund Accounting Agent,
Custodian and Distributor) have developed and are implementing clearly defined
and documented plans intended to minimize risks to services critical to the
Funds' operations associated with Year 2000 issues. Internal efforts include a
commitment to dedicate adequate staff and funding to identify and remedy Year
2000 issues, and specific actions such as inventorying software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems, and retesting for Year 2000
readiness. The Funds' Adviser and service providers are likewise seeking
assurances from their respective vendors and suppliers that such entities are
addressing any Year 2000 issues, and each provider intends to engage, where
appropriate, in private and industry or "streetwide" interface testing of
systems for Year 2000 readiness.
In the event that any systems upon which the Funds are dependent are not Year
2000 ready by December 31, 1999, administrative errors and account maintenance
failures would likely occur. While the ultimate costs or consequences of
incomplete or untimely resolution of Year 2000 issues by the Adviser or the
Funds' service providers cannot be accurately assessed at this time, the Funds
currently have no reason to believe that the Year 2000 plans of the Adviser and
the Funds' service providers will not be completed by December 31, 1999, or
that
22
<PAGE>
Fund Management [GRAPHIC]
the anticipated costs associated with full implementation of their plans will
have a material adverse impact on either their business operations or financial
condition of those of the Funds. The Funds and the Adviser will continue to
closely monitor developments relating to this issue, including development by
the Adviser and the Funds' service providers of contingency plans for providing
back-up computer services in the event of a systems failure or the inability of
any provider to achieve Year 2000 readiness. Separately, the Adviser will
monitor potential investment risk related to Year 2000 issues.
23
<PAGE>
Shareholder Information [GRAPHIC]
Pricing of Fund Shares
- ----------------------
How NAV is Calculated
Funds
The NAV is Per share net asset value (NAV) is
calculated by determined and its shares are
adding the total priced at the close of regular
value of a Fund's trading on the New York Stock
investments and Exchange, normally at 4:00 p.m.
other assets, Eastern time on days the Exchange
subtracting its is open.
liabilities and
then dividing that
figure by the Some of the Funds invest in
number of securities that are primarily
outstanding shares listed on foreign exchanges and
of the Fund: trade on weekends or other days
when the Fund does not price its
NAV = shares. As a result, the Funds'
Total Assets- NAVs may change on days when
Liabilities shareholders will be unable to
---------------- purchase or redeem the Funds'
shares.
Number of Shares Your order for purchase, sale or
Outstanding exchange of shares is priced at
the next NAV calculated after your
order is accepted by the Fund less
You can find the any applicable sales charge as
Fund's NAV daily in noted in the section on
The Wall Street "Distribution Arrangements/Sales
Journal and other Charges." This is what is known as
newspapers. the offering price.
- ---------------------
The Funds' securities are
generally valued at current market
prices. If market quotations are
not available, prices will be
based on fair value as determined
by the Funds' Trustees.
-----------------------------------
24
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding To Your Shares
You may purchase
the Funds through
the HSBC Funds
Distributor or
through banks,
brokers and other
investment
representatives,
who may charge
additional fees and
may require higher
minimum investments
or impose other
limitations on
buying and selling
shares. If you
purchase shares
through an
investment
representative,
that party is
responsible for
transmitting orders
by close of
business and may
have an earlier
cut-off time for
purchase and sale
requests. Consult
your investment
representative or
institution for
specific
information.
<TABLE>
<CAPTION>
Minimum Minimum
Initial Subsequent
Account type Investment Investment
<S> <C> <C>
Class A, B, or C
Regular $1,000 $50
--------------------------------------
Automatic Investment Plan $50 $50
---------------------------------------
</TABLE>
All purchases must be in U.S. dollars. A fee will be
charged for any checks that do not clear. Third-party
checks are not accepted.
- -------------------------------------------------------------
A Fund may waive its minimum purchase requirement and the Distributor may
reject a purchase order if it considers it in the best interest of the Fund and
its shareholders.
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 Service 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.
- -------------------------------------------------------------
Avoid 31% Tax Withholding
The Funds are required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- -------------------------------------------------------------
25
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding To Your Shares
By Regular Mail
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
<TABLE>
<CAPTION>
By Regular Mail: By Express Mail:
<S> <C>
HSBC Funds Trust HSBC Funds Trust
PO Box 163850 3435 Stelzer Road
Columbus, OH 43216-3850 Columbus, OH 43219
</TABLE>
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "HSBC Family of Funds."
3. Mail or deliver application and payment to the address above.
Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
. Fund
. Amount invested
. Account name and number
2. Make check, bank draft or money order payable to "HSBC Family of Funds".
3. Mail or deliver investment slip and payment to the address above.
26
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding To Your Shares
Electronic Purchases
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call 1-800-
634-2536. Your account can generally be set up for electronic purchases within
15 days.
Call 1-800-634-2536 to arrange a transfer from your bank account.
Electronic vs. Wire Transfer
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to eight days to
clear. There is generally no fee for ACH transactions.
By Wire Transfer
Telephone the Transfer Agent at 1-800-634-2536 for instructions. Please note
your bank will normally charge you a fee for handling this transaction.
You can add to your account by using the following convenient options. The Fund
reserves the right to change or eliminate these privileges at any time with 60
days notice.
27
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing And Adding To Your Shares
Automatic Investment Plan Directed Dividend Option
You can make automatic investments By selecting the appropriate box in the
in the Funds from your bank Account Application, you can elect to
account, through payroll deduction receive your distributions in cash
or from your federal employment, (check) or have distributions (capital
Social Security or other regular gains and dividends) reinvested in
government checks. Automatic another HSBC Fund without a sales
investments can be as little as charge. You must maintain the minimum
$50, once you've invested the $1000 balance in each Fund into which you plan
minimum required to open the to reinvest dividends or the
account. reinvestment will be suspended and your
dividends paid to you. The Fund may
modify or terminate this reinvestment
option without notice. You can change or
terminate your participation in the
reinvestment option at any time.
To invest regularly from your bank
account:
. Complete the Automatic
Investment Plan portion on ------------------------------------------
your Account Application.
Make sure you note:
- Your bank name, address and
account number
- The amount you wish to invest
automatically (minimum $50)
- How often you want to invest
(every month, 4 times a year,
twice a year or once a year)
. Attach a voided personal
check.
To invest regularly from your
paycheck or government check:
Call 1-800-634-2536 for an
enrollment form.
- --------------------------------------------------------------------------------
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for Class A shares than for Class B and C shares, because
Class A shares have lower distribution expenses. Capital gains are distributed
at least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date,
some of your investment will be returned to you in the form of a distribution.
- --------------------------------------------------------------------------------
28
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
You may sell your Withdrawing Money From Your Fund Investment
shares at any
time. Your sales
price will be the
next NAV after
your sell order is
received by the
Fund, its transfer
agent, or your
investment
representative.
Normally you will
receive your
proceeds within a
week after your
request is
received.
As a mutual fund shareholder, you are technically selling
shares when you request a withdrawal in cash. This is also
known as redeeming shares or a redemption of shares.
-----------------------------------------------------------
Contingent Deferred Sales Charge
When you sell Class B or Class C shares, you will be
charged a fee for any shares that have not been held for a
sufficient length of time. These fees will be deducted
from the money paid to you. See the section on
"Distribution Arrangements/Sales Charges" on page 33 for
details.
-----------------------------------------------------------
Instructions For Selling Shares
If selling your shares through your financial adviser or
broker, ask him or her for redemption procedures. Your
adviser and/or broker may have transaction minimums and/or
transaction times which will affect your redemption. For
all other sales transactions, follow the instructions
below.
By 1. Call 1-800-634-2536 with instructions as to how you
telephone(unless wish to receive your funds (mail, wire, electronic
you have declined transfer).
telephone sales
privileges on your
latest
application)
- --------------------------------------------------------------------------------
By mail 1. Call 1-800-634-2536 to request redemption forms or
write a letter of instruction indicating:
(See "Selling . your Fund and account number
Your Shares-- . amount you wish to redeem
Redemptions in . address where your check should be sent
Writing . account owner signature
Required")
2. Mail to:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43216-3850
- --------------------------------------------------------------------------------
See instruction 1 above.
By express
delivery service 2. Send to
(See "Selling HSBC Family of Funds
Your Shares-- co/BISYS Fund Services
Redemptions in Attn: T.A. Operations
Writing 3435 Stelzer Road
Required") Columbus, OH 43219
29
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
Call 1-800-634-2536 to request a wire transfer.
Wire transfer
You must indicate If you call in your redemption request of $1000 or more
this option on by 4 p.m. Eastern time, your payment will normally be
your application. wired to your bank on the next business day.
Your financial
institution may
charge a wire
transfer fee.
- --------------------------------------------------------------------------------
Electronic Redemptions Call 1-800-634-2536 to request an electronic redemption.
Your bank must
participate in the
Automated Clearing If you call by 4 p.m. Eastern time, the NAV of your
House (ACH) and shares will normally be determined on the same day and
must be a U.S. the proceeds credited within 7 days.
bank.
Your bank may
charge for this
service.
- --------------------------------------------------------------------------------
Systematic Withdrawal Plan
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
. Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-634-2536.
. Include a voided personal check.
. Your account must have a value of $10,000 or more to start withdrawals.
. If the value of your account falls below $500, you may be asked to add
sufficient funds to bring the account back to $500, or the Fund may close
your account and mail the proceeds to you.
30
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
Redemptions In Writing Required
You must request redemption in writing in the following situations:
1.Redemption requests requiring a signature guarantee which include each of the
following:
. Redemptions over $5,000
. Your account registration or the name(s) in your account has changed within
the last 30 days
. The check is not being mailed to the address on your account
. The check is not being made payable to the owner of the account
. The redemption proceeds are being transferred to another Fund account with
a different registration.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Medallion Signature Program) or SEMP (Stock Exchanges Medallion Program).
Members are subject to dollar limitations which must be considered when
requesting their guarantee. The Transfer Agent may reject any signature
guarantee if it believes the transaction would otherwise be improper.
Verifying Telephone Redemptions
The Funds make every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity. Given
these precautions, unless you have specifically indicated on your application
that you do not want the telephone redemption feature, you may be responsible
for any fraudulent telephone orders. If appropriate precautions have not been
taken, the Transfer Agent may be liable for losses due to unauthorized
transactions. Telephone redemption privileges will be suspended for a 30-day
period following a telephone address change.
Redemptions Within 15 Days of Initial Investment
When you have made your initial investment by check, payment on redemption
requests will be delayed until the Transfer Agent is reasonably satisfied that
the check has cleared (which may require up to 15 days from purchase date). You
can avoid this delay by purchasing shares with a certified check.
Refusal Of Redemption Request
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
31
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
Redemption In Kind
The Funds reserve the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
Closing Of Small Accounts
If your account falls below $500, the Fund may ask you to increase your
balance. If it is still below $500 after 30 days, the Fund may close your
account and send you the proceeds at the current NAV.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be considered void. The check will be
canceled and the money reinvested in the Fund.
32
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
The Funds offer investors a choice among multiple classes of shares with
different sales charges and expenses. In selecting which class of shares to
purchase, you should consider, among other things, (i) the length of time you
expect to hold your investment, (ii) the amount of any applicable sales charge
imposed at the time of redemption and Rule 12b-1 fees, as noted below, (iii)
whether you qualify for any reduction or waiver of any applicable sales charge,
(iv) the various exchange privileges among the different classes of shares and
(v) the fact that Class B shares automatically convert to Class A shares after
six years. The Class A, Class B and Class C shares are offered in this
Prospectus.
This section describes the sales charges and fees you will pay as an investor
in different share classes offered by the Fund and ways to qualify for reduced
sales charges.
<TABLE>
<CAPTION>
Class A Class B Class C
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Sales Charge (Load) Front-end No front-end No front-end
sales charge sales charge. sales charge.
(not A contingent A contingent
applicable to deferred sales deferred sales
money market charge (CDSC) charge (CDSC)
funds); may be imposed may be imposed
reduced sales on shares on shares
charges redeemed redeemed
available. within four within one
years after year after
purchase; purchase.
shares
automatically
convert to
Class A shares
after 6 years.
- ----------------------------------------------------------------------
Distribution (12b-1) Fee Subject to Subject to Subject to
annual annual annual
distribution distribution distribution
fee of up to fee of up to fee of up to
.35% (Fixed .75% of the .75% of the
Income Fund, Fund's net Fund's net
New York Tax- assets. assets.
Free Bond
Fund) or .50%
(Growth and
Income Fund)
of the Fund's
net assets.
- ----------------------------------------------------------------------
Service Organization Fee Subject to Subject to Subject to
annual fee of annual Service annual Service
up to .35% of Organization Organization
the Fund's net fee of up to fee of up to
assets.* .50% of the .50% of the
Fund's net Fund's net
assets.* assets.*
- ----------------------------------------------------------------------
Fund Expenses Lower annual Higher annual Higher annual
expenses than expenses than expenses than
Class B or C Class A Class A
shares. shares. shares.
- ----------------------------------------------------------------------
</TABLE>
* The Service Organization fee is being contractually
waived for Class A shares and contractually limited to
.25% for Class B and Class C shares.
33
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
Calculation Of Sales Charges
Class A Shares
This section describes the sales charges and fees you will pay as an investor
in the Fund and ways to qualify for reduced sales charges.
Shares are sold at their public offering price. This price includes the net
asset value plus the initial sales charge. Therefore, part of the money you
invest will be used to pay the sales charge. The remainder is invested in Fund
shares. The sales charge decreases with larger purchases. There is no sales
charge on reinvested dividends and distributions.
The current sales charge rates are as follows:
Growth And Income Fund
<TABLE>
<CAPTION>
Sales Charge Sales Charge
As A % Of As A % Of
Your Investment Offering Price Your Investment
- ---------------------------------------------------------
<S> <C> <C>
Up to $49,999 5.00% 5.26%
- ---------------------------------------------------------
$50,000 up to $99,999 4.50% 4.71%
- ---------------------------------------------------------
$100,000 up to $249,999 3.75% 3.90%
- ---------------------------------------------------------
$250,000 up to $499,999 2.50% 2.56%
- ---------------------------------------------------------
$500,000 up to $999,999 2.00% 2.04%
- ---------------------------------------------------------
$1,000,000 and above 1.00% 1.01%
- ---------------------------------------------------------
</TABLE>
Fixed Income Fund
<TABLE>
<CAPTION>
Sales Charge Sales Charge
As A % Of As A % Of
Your Investment Offering Price Your Investment
- ---------------------------------------------------------
<S> <C> <C>
Up to 49,999 4.75% 4.99%
- ---------------------------------------------------------
$50,000 up to $99,999 4.25% 4.44%
- ---------------------------------------------------------
$100,000 up to $249,999 3.50% 3.63%
- ---------------------------------------------------------
$250,000 up to $499,999 2.50% 2.56%
- ---------------------------------------------------------
$500,000 up to $999,999 2.00% 2.04%
- ---------------------------------------------------------
$1,000,000 and above 1.00% 1.01%
- ---------------------------------------------------------
</TABLE>
34
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
New York Tax Free Bond Fund
<TABLE>
<CAPTION>
Sales Charge Sales Charge
As A % Of As A % Of
Amount Of Purchase Offering Price Your Investment
- -----------------------------------------------------------
<S> <C> <C>
Up to 49,999 4.75% 4.99%
- -----------------------------------------------------------
$50,000 up to $99,999 4.25% 4.44%
- -----------------------------------------------------------
$100,000 up to $249,999 3.50% 3.63%
- -----------------------------------------------------------
$250,000 up to $499,999 2.50% 2.56%
- -----------------------------------------------------------
$500,000 up to $999,999 2.00% 2.04%
- -----------------------------------------------------------
$1,000,000 and above 1.00% 1.01%
- -----------------------------------------------------------
</TABLE>
Class B and Class C Shares
Class B and C shares are offered at NAV, without any up-front sales charge.
Therefore, all the money you invest is used to purchase Fund shares. However,
if you sell your Class B shares of the Fund before the fourth anniversary of
purchase, you will have to pay a contingent deferred sales charge at the time
of redemption. If you sell your Class C shares before the first anniversary of
purchase, you will pay a 1% CDSC at the time of redemption. The CDSC will be
based upon the lower of the NAV at the time of purchase or the NAV at the time
of redemption according to the schedule below. There is no CDSC on reinvested
dividends or distributions.
Class B Shares
<TABLE>
<CAPTION>
CDSC as a % of Dollar
Years Since Purchase Amount Subject to Charge
- ---------------------------------------------------
<S> <C>
0-1 4.00%
- ---------------------------------------------------
1-2 3.00%
- ---------------------------------------------------
2-3 2.00%
- ---------------------------------------------------
3-4 1.00%
- ---------------------------------------------------
more than 4 None
- ---------------------------------------------------
</TABLE>
If you sell some but not all of your Class B or C shares, certain shares not
subject to the CDSC (i.e., shares purchased with reinvested dividends) will be
redeemed first, followed by shares subject to the lowest CDSC (typically shares
held for the longest time).
35
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
The Class B CDSC is paid to the Distributor to reimburse expenses incurred in
providing distribution-related services to the Fund in connection with the sale
of Class B shares. Although Class B shares are sold without an initial sales
charge, the Distributor normally pays a sales commission of the purchase price
of Class B shares to the dealer from its own resources at the time of the sale.
The Distributor and its agents may assign their right to receive any Class B
CDSC, certain distribution and service organization fees, to an entity that
provides funding for up-front sales commission payments.
Class C Shares
There is no sales charge imposed upon purchases of Class C shares, but
investors may be subject to a CDSC. Specifically, if you redeem Class C shares
of the Funds, your redemption may be subject to a 1.00% CDSC if the shares are
redeemed less than one year after the original purchase of the Class C shares.
The CDSC will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Unlike Class B shares,
Class C shares do not convert to Class A shares.
Conversion Feature--Class B Shares
. Class B shares automatically convert to Class A shares of the same Fund
after six years from the end of the month of purchase.
. After conversion, your shares will be subject to the lower distribution and
shareholder servicing fees charged on Class A shares which will increase
your investment return compared to the Class B shares.
. You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
. If you purchased Class B shares of one Fund which you exchanged for Class B
shares of another Fund, your holding period will be calculated from the
time of your original purchase of Class B shares. The dollar value of Class
A shares you receive will equal the dollar value of the Class B shares
converted.
36
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
Sales Charge Reductions
Class A Shares
Reduced sales charges are available to shareholders with investments of $50,000
or more. In addition, you may qualify for reduced sales charges under the
following circumstances.
. By initially investing a minimum of $1,000 and informing the Fund in
writing that you intend to purchase enough shares over a 13-month period
to qualify for a reduced sales charge.
. Rights of Accumulation. When the value of shares you already own plus
the amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the
reduced sales charge.
Sales Charge Waivers
Class A Shares
The following qualify for waivers of sales charges:
. Shares purchased by investment representatives through fee-based
investment products or accounts.
. Proceeds from redemptions from another mutual fund complex within 90
days after redemption, if you paid a front end sales charge for those
shares.
. Reinvestment of distributions from a deferred compensation plan, agency,
trust, or custody account that was maintained by the Adviser or its
affiliates or invested in any HSBC Fund.
. Shares purchased for trust or other advisory accounts established with
the Adviser or its affiliates.
. Shares purchased by directors, trustees, employees, and family members
of the Adviser and its affiliates and any organization that provides
services to the Funds; retired Fund trustees; dealers who have an
agreement with the Distributor; and any trade organization to which the
Adviser or the Administrator belongs.
37
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
Class B Shares and Class C Shares
The CDSC will be waived under certain circumstances, including the following:
. Distributions from retirement plans if the distributions are made following
the death or disability of shareholders or plan participants.
. Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder.
. Returns of excess contributions to retirement plans.
. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan.
. Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
Reinstatement Privilege
If you have sold shares and decide to reinvest in the Fund within a 60 day
period, you will not be charged the applicable sales load on amounts up to the
value of the shares you sold. You must provide a written reinstatement request
and payment within 60 days of the date your instructions to sell were
processed.
Distribution (12b-1) Fees
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of the Fund's shares. 12b-1 fees are paid from Fund assets on an ongoing basis,
and will increase the cost of your investment. The 12b-1 fees vary by share
class as follows:
. Class A shares of the Fixed Income Fund and New York Tax-Free Bond Fund pay
a 12b-1 fee of up to .35% of the average daily net assets of a Fund. Class
A shares of the Growth and Income Fund pay a 12b-1 fee of up to .50% of the
average daily net assets of the Fund.
. Class B and Class C shares pay a 12b-1 fee of up to .75% of the average
daily net assets of the applicable Fund. This will cause expenses for Class
B and Class C shares to be higher and dividends to be lower than for Class
A shares.
. The higher 12b-1 fee on Class B and Class C Shares, together with the
CDSC, help the Distributor sell Class B and Class C shares without an
"up-front" sales charge. In particular, these fees help to defray the
Distributor's costs of advancing brokerage commissions to investment
representatives.
38
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/
Sales Charges
Service Organizations
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organizations") may provide certain
administrative services for its customers who invest in the Funds through
accounts maintained at that Service Organization. Under servicing agreements
with the Service Organization the Funds will pay the Service Organization fee
an annual rate up to .35% for Class A shares and up to .50% for Class B and
Class C shares (with contractual waivers, the fees are zero and .25%,
respectively) of the average daily net asset value of shares for which the
Service Organization from time to time performs these services. The services
provided include:
. receiving and processing shareholder orders
. performing the accounting for the customers sub-accounts
. maintaining retirement plan accounts
. answering questions and handling correspondence for individual accounts
. acting as the sole shareholder of record for individual
. issuing shareholder reports and transaction confirmations
. performing daily "sweep" functions
Investors who purchase, sell or exchange shares for the Funds through a
customer account maintained at a Service Organization may be charged extra for
other services which are not specified in the servicing agreement with the Fund
but are covered under separate fee schedules provided by the Service
Organization to their customers. Customers with accounts at Service
Organizations should consult their Service Organization for information
concerning their sub-accounts. The Adviser or Administrator also may pay
Service Organizations for rendering services to shareholders sub-accounts.
39
<PAGE>
Shareholder Information [GRAPHIC]
Exchanging Your Shares
Instructions For Exchanging Shares
You can exchange your Exchanges may be made by sending a written request to
shares that have been HSBC Family of Funds, PO Box 163850, Columbus OH
held for at least 43216-3850, or by calling 1-800-634-2536. Please
seven days in a Fund provide the following information:
for shares of the
same class of another
HSBC Fund, usually
without paying
additional sales
charges (see "Notes
on Exchanges"). No
transaction fees are
charged for
exchanges.
. Your name and telephone number
. The exact name on your account and account number
. Taxpayer identification number (usually your
Social Security number)
You must meet the
minimum investment
requirements for the . Dollar value or number of shares to be exchanged
Fund into which you
are exchanging.
Exchanges from one . The name of the Fund from which the exchange is to
Fund to another are be made
taxable. You should
review the prospectus . The name of the Fund into which the exchange is
of the HSBC Fund being made.
before making an
exchange.
See "Selling your Shares" for important information
about telephone transactions.
The Funds reserve the right to modify or terminate the
exchange privilege upon 60 days written notice.
40
<PAGE>
Shareholder Information [GRAPHIC]
Exchanging Your Shares
Automatic
Exchanges Notes On Exchanges
Long-term shareholders of Class B and Class C may pay
indirectly more than the equivalent of the maximum
permitted front-end sales charge due to the recurring
nature of 12b-1 distribution fee.
You can use the
Funds' Automatic
Exchange feature to
purchase shares of
the Funds at regular
intervals through
regular, automatic
redemptions from the
Money Market Fund. To
participate in the
Automatic Exchange:
When exchanging from a Fund that has no sales charge
or a lower sales charge to a Fund with a higher sales
charge, you will pay the difference.
The registration and tax identification numbers of the
two accounts must be identical.
The Exchange Privilege (including automatic exchanges)
may be changed or eliminated at any time upon a 60-day
notice to shareholders.
. Complete the
appropriate section
of the Account
Application.
Be sure to read the Prospectus carefully of any Fund
into which you wish to exchange shares.
. Keep a minimum of
$10,000 in the
Money Market Fund
and $1,000 in the
Fund whose shares
you are buying.
To change the
Automatic Exchange
instructions or to
discontinue the
feature, you must
send a written
request to HSBC
Family of Funds,
P.O. Box 163850,
Columbus, Ohio
43216-3850.
41
<PAGE>
Shareholder Information [GRAPHIC]
Dividends, Distributions and Taxes
Any income a Fund receives in the form of interest or dividends is paid out,
less expenses, to its shareholders as dividends. Income dividends on the Growth
and Income Fund are usually paid semi-annually. Dividends on all other Funds
are paid monthly. Capital gains for all Funds are distributed at least
annually.
An exchange of shares is considered a sale, and any related gains may subject
to applicable taxes.
Dividends are taxable as ordinary income as are dividends paid by the New York
Tax Free Bond Fund that are derived from taxable investments. Taxes on capital
gains by the Funds will vary with the length of time the Fund has held the
security--not how long you have invested in the Fund.
During normal market conditions, the New York Tax Free Bond Fund expects that
substantially all of its dividends will be excluded from gross income for
federal income tax purposes. The Fund may invest in certain securities with
interest that may be a preference item for the purposes of the alternative
minimum tax or a factor in determining whether Social Security benefits are
taxable. In such event, a portion of the Fund's dividends would not be exempt
from federal income taxes.
Dividends are taxable in the year in which they are paid, even if they appear
on your account statement the following year. Dividends and distributions are
treated in the same manner for federal income tax purposes whether you receive
them in cash or in additional shares.
You will be notified in January each year about the federal tax status of
distributions made by the Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a penalty on certain pre-retirement distributions from retirement accounts.
Consult your tax adviser about the federal, state and local tax consequences in
your particular circumstances.
42
<PAGE>
Financial Highlights [GRAPHIC]
The financial highlights table is intended to help you understand the Funds'
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report, along with the
Fund's financial statements, are included in the annual report and incorporated
by reference in the SAI, which is available upon request.
Growth and Income Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $ 12.36 $ 16.28 $ 14.77 $ 11.93 $ 12.87
-------- ------- -------- ------- -------
Investment Activities
Net investment income........ 0.07 0.18 0.18 0.30 0.29
Net realized and unrealized
gains (losses) from
investment transactions..... 3.23 4.28** 2.46 3.64 (0.67)
-------- ------- -------- ------- -------
Total from Investment
Activities.................. 3.30 4.46 2.64 3.94 (0.38)
-------- ------- -------- ------- -------
Distributions
From net investment income... (0.08) (0.19) (0.18) (0.30) (0.29)
From net realized gains...... (1.72) (8.19) (0.95) (0.80) (0.15)
In excess of net realized
gains....................... -- -- -- -- (0.12)
-------- ------- -------- ------- -------
Total Distributions.......... (1.80) (8.38) (1.13) (1.10) (0.56)
-------- ------- -------- ------- -------
Net Asset Value, End of Year.. $ 13.86 $ 12.36 $ 16.28 $ 14.77 $ 11.93
======== ======= ======== ======= =======
Total Return (excludes sales
or redemption charges)....... 26.97% 27.42% 17.90% 33.11% (2.97)%
Ratios/Supplemental Data:
Net Assets at end of
period (000)................ $106,267 $55,195 $140,688 $66,062 $64,999
Ratio of expenses to average
net assets.................. 0.89% 0.83% 0.85% 0.94% 0.78%
Ratio of net investment
income to average net
assets...................... 0.58% 0.95% 1.43% 2.06% 2.25%
Ratio of expenses to average
net assets*................. 1.01% 0.95% 0.96% 0.97% 0.86%
Portfolio Turnover Rate...... 82.19% 69.07% 61.68% 52.77% 23.31%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
** In addition to the net realized and unrealized gains from investment
transactions, this amount includes a decrease in net asset value per share
resulting from the timing of issuances and redemptions of Fund shares in
relation to fluctuating market values for the portfolio.
43
<PAGE>
Financial Highlights [GRAPHIC]
Fixed Income Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $ 10.12 $ 9.89 $ 10.28 $ 9.35 $ 10.13
------- ------- -------- ------- -------
Investment Activities
Net investment income.......... 0.57 0.59 0.59 0.59 0.59
Net realized and unrealized
gains (losses) from
investments................... 0.25 0.23 (0.39) 0.93 (0.78)
------- ------- -------- ------- -------
Total from Investment
Activities.................... 0.82 0.82 0.20 1.52 (0.19)
------- ------- -------- ------- -------
Distributions
From net investment income..... (0.57) (0.59) (0.59) (0.59) (0.59)
From net realized gains........ -- -- -- -- --
------- ------- -------- ------- -------
Total Distributions............ (0.57) (0.59) (0.59) (0.59) (0.59)
------- ------- -------- ------- -------
Net Asset Value, End of Year.... $ 10.37 $ 10.12 $ 9.89 $ 10.28 $ 9.35
======= ======= ======== ======= =======
Total Return (excludes sales or
redemption charges)............ 8.33% 8.62% 2.11% 16.73% (1.89)%
Ratios/Supplemental Data:
Net Assets at end of
period (000).................. $53,834 $61,402 $104,875 $99,942 $84,774
Ratio of expenses to average
net assets.................... 0.89% 0.88% 0.88% 0.93% 0.77%
Ratio of net investment income
to average net assets......... 5.59% 6.00% 5.94% 6.03% 6.10%
Ratio of expenses to average
net assets*................... 1.01% 1.00% 0.98% 0.96% 0.86%
Portfolio Turnover Rate........ 71.05% 60.98% 156.05% 41.58% 63.96%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
44
<PAGE>
Financial Highlights [GRAPHIC]
New York Tax-Free Bond Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 11.48 $ 11.05 $ 11.17 $ 10.20 $ 11.70
------- ------- ------- ------- -------
Investment Activities
Net investment income........... 0.51 0.53 0.55 0.54 0.53
Net realized and unrealized
gains (losses) from
investments.................... 0.16 0.43 (0.12) 0.97 (1.47)
------- ------- ------- ------- -------
Total from Investment
Activities..................... 0.67 0.96 0.43 1.51 (0.94)
------- ------- ------- ------- -------
Distributions
From net investment income...... (0.51) (0.53) (0.55) (0.54) (0.53)
From net realized gains......... -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total Distributions............. (0.51) (0.53) (0.55) (0.54) (0.56)
------- ------- ------- ------- -------
Net Asset Value, End of Year..... $ 11.64 $ 11.48 $ 11.05 $ 11.17 $ 10.20
======= ======= ======= ======= =======
Total Return (excludes sales or
redemption charges)............. 5.99% 8.97% 3.99% 15.17% (8.13)%
Ratios/Supplemental Data:
Net Assets at end of
period (000)................... $33,668 $37,524 $41,975 $50,677 $50,711
Ratio of expenses to average net
assets......................... 0.96% 0.92% 0.91% 0.99% 0.84%
Ratio of net investment income
to average net assets.......... 4.47% 4.79% 5.02% 5.07% 4.93%
Ratio of expenses to average net
assets*........................ 1.28% 1.24% 1.21% 1.20% 1.10%
Portfolio Turnover Rate......... 56.81% 35.64% 87.40% 24.43% 122.43%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
45
<PAGE>
For more information about the Funds, the following documents
are available free upon request:
Annual/Semi-annual Reports (Reports):
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Funds, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of Reports and the SAI, prospectuses of
other Funds in the HSBC Family, or request other information and
discuss your questions about the Funds by contacting a broker or
bank that sells the Funds. Or contact the Funds at:
HSBC Family of Funds
3435 Stelzer Road, Columbus, Ohio 43219
Telephone: 1-800-634-2536
-----------------------------------------------------
You can review and copy the Funds' reports and SAIs at the
Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies:
. For a duplicating fee, by writing the Public Reference
Section of the Commission, Washington, D.C. 20549-6009 or
calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-06057.
<PAGE>
HSBC Mutual Funds Trust Prospectus
[ARTWORK APPEARS HERE]
HSBC International Equity Fund
Managed by HSBC Asset Management Americas, Inc.
April 30, 1999
The Securities and Exchange Commission has not approved or
disapproved the shares described in this Prospectus or
determined whether this Prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
An investment in the Fund is not a deposit in a bank and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Question?
Call 1-800-634-2536 or your
Investment Representative.
<PAGE>
Table of Contents
HSBC Mutual Funds Trust Prospectus
<TABLE>
<CAPTION>
Risk/Return Summary and Fund
Expenses
- -------------------------------------------------
[GRAPHIC]
<S> <C>
Carefully review 3 International Equity Fund
this
important section,
which
summarizes the
Fund's
investments, risks,
past
performance, and
fees.
Investment Objectives,
Strategies and Risks
- -------------------------------------------------
[GRAPHIC]
Review this section 9 International Equity Fund
for
information on in-
vestment
strategies and
risks.
Fund Management
- -------------------------------------------------
[GRAPHIC]
Review this section 12 The Investment Adviser
for
details on the peo- 12 Portfolio Manager
ple and
organizations who 12 The Distributor and
oversee Administrator
the Fund.
Shareholder Information
- -------------------------------------------------
[GRAPHIC]
Review this section 15 Pricing of Fund Shares
for
details on how 16 Purchasing and Adding to
shares are Your
valued, how to pur- Shares
chase,
sell and exchange 20 Selling Your Shares
shares,
related charges and 25 Distribution
payments of divi- Arrangements/Sales
dends and Charges
distributions.
32 Exchanging Your Shares
33 Dividends, Distributions
and Taxes
Financial Highlights
- -------------------------------------------------
[GRAPHIC]
34
Back Cover
- -------------------------------------------------
[GRAPHIC]
Where to learn more about
this Fund
</TABLE>
2
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
The following is a summary of certain key information about the HSBC
International Equity Fund. You will find additional information about the Fund,
including a detailed description of the risks of an investment in the Fund,
after this summary. Please be sure to read the more complete descriptions of
the Fund following this summary BEFORE you invest. The Fund is managed by HSBC
Asset Management Americas, Inc. (the "Adviser") which has retained Delaware
International Advisers Ltd. as Sub-Adviser ("Delaware International" or the
"Sub-Adviser").
The Fund offers four different classes of shares; Class A (formerly known as
Service Class), Class B, Class C and Institutional Class. All classes of shares
are offered in this prospectus.
Investment Objective The Fund's investment objective is long-term capital
appreciation.
Principal Investment
Strategies
The Fund normally invests 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.
A substantial portion of the Fund's assets will be
denominated in foreign currencies. Generally, the Fund
will enter into forward currency contracts only as a
hedge against foreign currency exposure affecting the
Fund. The purpose of hedging a portfolio is to attempt
to protect the value of the Fund's investments or, to
guarantee the price of a security the Fund has agreed to
purchase or sell. The Fund may invest the balance of its
assets in equity and debt securities of companies and
governmental issuers based in the United States and
outside of the United States, including bonds and money
market instruments.
The Fund's Sub-Adviser, Delaware International, employ a
value-oriented approach to international stock
selection. 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 may have the potential for long-term
total return.
3
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Principal Investment
Risks
Because the value of the Fund's investments will
fluctuate with market conditions, so will the value of
your investment in the Fund. You could lose money on
your investment in the Fund, or the Fund could
underperform other investments.
The principal risks that apply to the Fund are:
. Market Risk. This is the risk
that the value of a fund's
investments will fluctuate as
the stock market fluctuates
and that stock prices overall
will decline over short or
longer-term periods.
. Foreign Risk. This is the risk
of investments in issuers
located in foreign countries,
which may have greater price
volatility and less liquidity.
Investments in foreign
securities also are subject to
political, regulatory, and
diplomatic risks.
. Emerging Market Risk. This is
the risk of investments in
issuers of emerging market
nations. Emerging markets are
subject to even greater price
volatility than investments in
foreign securities because
there is a greater risk of
political or social upheaval
in emerging markets.
. Currency Risk. This is the
risk that fluctuations in the
exchange rates between the
U.S. dollar and foreign
currencies may negatively
affect the value of a fund's
investments.
. Interest Rate Risk. This is
the risk that changes in
interest rates will affect the
value of a fund's investments
in income- producing or fixed-
income or debt securities.
Increases in interest rates
may cause the value of a
fund's investments to decline.
. Credit Risk. This is the risk
that the issuer of a security
will be unable or unwilling to
make timely payments of
interest or principal, or to
otherwise honor its
obligations.
4
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Who may want to invest?
Consider investing in the Fund if you are:
. seeking a long-term goal such
as retirement
. looking to add an
international component to
your portfolio
. willing to accept higher risks
of investing in foreign
countries
This Fund will not be appropriate for anyone:
. seeking monthly income
. pursuing a short-term goal or
investing emergency reserves
. seeking safety of principal
5
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Performance Information
The chart and table
on this page show
how the
International Equity
Fund has performed
and how its
performance has
varied from year to
year. The bar chart
shows changes in the
Fund's yearly
performance over the
past four years to
demonstrate that the
Fund's value varied
at different times.
The table below
compares the Fund's
performance over
time to that of the
MSCI-EAFE (Morgan
Stanley Capital
International) Index
which is a widely
recognized,
unmanaged index of
over 900 securities
listed on the Stock
Exchanges of Europe,
Australia and the
Far East. Both the
chart and table
include reinvestment
of dividends and
distributions. The
Adviser has managed
the Fund since its
inception and
Delaware
International
assumed its role as
subadviser in
October 1999.
The returns for
Class B, Class C and
the Institutional
Class will differ
from the Class A
returns shown in the
bar chart because of
differences in
expenses of each
class.
If fee waivers or
expense
reimbursements had
not been reflected
in both the chart
and the table, the
Fund's performance
would have been
lower.
[BAR CHART APPEARS HERE]
Bar Chart
Year-by-Year Total Returns as of 12/31 for Class A
Shares*
1995 4.40%
1996 6.32%
1997 -2.05%
1998 11.32%
- ------------------------------------
The bar chart above does not reflect the impact of any
applicable sales charges which would reduce returns.
The chart, however, does include management fees and
operating expenses. Of course, past performance does
not indicate how the Fund will perform in the future.
The Fund's returns will fluctuate over long and short
periods. For example, during the period shown in the
bar chart, the Fund's:
<TABLE>
<S> <C> <C>
Best quarter: Q1 1998 16.52%
Worst quarter: Q3 1998 -13.71%
-------------------------------
</TABLE>
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Since Inception
----------------------------------------------
<S> <C> <C> <C>
Class A Shares (includes 4/25/94 5.08% 2.01%
maximum 5% sales charge)**
----------------------------------------------
Institutional Class** 3/1/95 11.32% 7.33%
----------------------------------------------
MSCI-EAFE Index N/A 33.35% 18.07%
</TABLE>
- --------------------------------------------------------------------------------
* Service Class shares are referred to as Class A shares effective May, 1999.
** Returns are for Class A shares and Institutional shares only; Class B and
Class C shares had not been offered prior to the date of this prospectus.
6
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Fees and Expenses
As an investor in
the International
Equity Fund, you
will pay the
following fees and
expenses.
Shareholder
transaction fees
are paid from your
account. Annual
Fund operating
expenses are paid
out of Fund assets,
and are reflected
in the share price.
Contingent Deferred Sales Charge
Some Fund share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has lapsed.
this is called a
Contingent Deferred
Sales Charge.
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses (fees Paid by Institutional
you directly) Class A/1/ Class B Class C Shares
<S> <C> <C> <C> <C>
Maximum sales charge (load)
on purchases 5.00%/2/ None None None
--------------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/3/ 1.00%/4/ None
--------------------------------------------------------------------
Annual Fund Operating
Expenses (fees paid from
Fund assets)
Management fee/5/ .90% .90% .90% .90%
--------------------------------------------------------------------
Administrative services
fee/6/ .15% .15% .15% .15%
--------------------------------------------------------------------
Distribution (12b-1) fee/7/ .35% .75% .75% None
--------------------------------------------------------------------
Service Organization fee/8/ .35% .50% .50% None
--------------------------------------------------------------------
Other expenses .53% .53% .53% .53%
--------------------------------------------------------------------
Total fund operating expenses 2.28% 2.83% 2.83% 1.58%
--------------------------------------------------------------------
Fee waivers and expense
reimbursements/5/,/6/,/7/,/8/ .85% .65% .65% .40%
--------------------------------------------------------------------
Net expense/9/ 1.43% 2.18% 2.18% 1.18%
--------------------------------------------------------------------
</TABLE>
- ---------
/1/ Service Class shares are referred to as Class A shares effective April 30,
1999.
/2/ Lower sales charges are available depending upon the amount invested.
/3/ A CDSC on Class B shares declines over four years starting with year one and
ending in year five from: 4%, 3%, 2%, 1% and 0%.
/4/ A CDSC of 1% applies on redemptions of Class C shares within the first year.
/5/ The Adviser is contractually limiting its Management fee to .55% for each
class of shares.
/6/ The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/7/ The Distributor is contractually waiving .10% of its Distribution fee for
Class A shares.
/8/ The Service Organization fee is being contractually waived in its entirety
for Class A shares and contractually limited to .25% for Class B and Class C
shares.
/9/ The contractual expense limitations are in effect through December 31, 1999.
7
<PAGE>
Risk/Return Summary and Fund Expenses [GRAPHIC]
Expense Example
Use the table to
compare fees and
expenses with
those of other
funds. It
illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in
the Fund's
operating
expenses except
the expiration
of the current
contractual fee
waiver on
December 31,
1999.
Because this
example is
hypothetical and
for comparison
only, your actual
costs will be
different.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A
Assuming redemption $605 $997 $1,415 $2,576
------------------------------------------------
Class B
Assuming redemption $596 $941 $1,312 $2,866
Assuming no redemption $196 $741 $1,312 $2,866
------------------------------------------------
Class C
Assuming redemption $296 $741 $1,312 $2,866
Assuming no redemption $196 $741 $1,312 $2,866
------------------------------------------------
Institutional Class
Assuming redemption $120 $460 $823 $1,844
------------------------------------------------
</TABLE>
8
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
Ticker Symbol: Class A HIEIX, Class B N/A, Class C N/A, Institutional Class N/A
This section of the Prospectus provides a more complete description of the
principal investment objectives and policies of the Fund. Of course, there can
be no assurance that the Fund will achieve its investment objective. Additional
descriptions of the Fund's risks, strategies, and investments, as well as other
non-principal strategies and investments not described below, may be found in
the Fund's Statement of Additional Information or SAI.
Investment Objective, Policies and Strategy
The Fund's investment objective is long-term capital appreciation. The Fund
normally invests 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 Fund may invest the balance
of its assets 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 seeks to achieve its investment objective primarily by investing in a
diversified portfolio of equity investments in a variety of non-U.S. markets,
focusing on the potential price appreciation, dividend yields and currency
values. The Fund primarily invests in marketable companies located outside the
U.S., including but not limited to companies in Japan, the United Kingdom,
Germany, France, Switzerland, the Netherlands, Sweden, Australia, Hong Kong and
Singapore. The Fund also may invest up to 20% of its total assets in "emerging
markets," including Mexico, Hong Kong, Indonesia, Malaysia, Thailand, South
Africa and Peru. Emerging market debt carries significant risks of principal
loss. This is due to the low quality of the bonds' issuers which increases the
risk of default, the volatile nature of many of these countries' economies and
markets, and the relatively small number of investors buying these securities
which increases price volatility. A substantial portion of the Fund's assets
will be denominated in foreign currencies. The Fund selectively hedges its
portfolio foreign currency exposure primarily by entering into forward foreign
currency exchange contracts. The purpose of hedging the portfolio in this way
is to attempt to protect the value of the Fund's investments or to "lock in"
the price of a security the Fund has agreed to purchase or sell.
Delaware International's approach in selecting investments is primarily
oriented to individual stock selection and is value driven. Delaware
International also analyzes markets and the value of foreign currencies. In
selecting stocks for the Fund, Delaware International:
. Places emphasis on identifying well-managed companies that are undervalued
in terms of such factors as assets, earnings, dividends and growth
potential.
. Considers whether the future dividends on a stock are expected to increase
faster than, slower than, or in-line with the level of inflation, and
discounts the
9
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
value of future anticipated dividends back to what they would be worth if
they were being paid today in order to compare the value of different
investments.
. Attempts to determine whether a particular currency is overvalued or
undervalued by comparing the amount of goods and services that a dollar
will buy in the United States to the amount of foreign currency required to
buy the same amount of goods and services in another country. When the
dollar buys less, the foreign currency may be considered to be overvalued,
and when the dollar buys more, the foreign currency may be considered to be
undervalued. Securities in an undervalued currency may offer greater
potential return, and may be an attractive investment for the Fund.
. Considers such factors as the economic and political conditions in
different areas of the world, the growth potential of various non-U.S.
securities markets, and the availability of attractively priced securities
within the respective foreign securities markets.
The Fund may hold some investments in debt obligations issued by non-U.S.
issuers, including foreign companies and foreign governments and their
national, regional and local agencies and instrumentalities, generally
denominated in foreign currencies. The Fund invests primarily in high grade
debt obligations (those rated in the top three credit rating categories of a
nationally recognized statistical rating organization or, if unrated, judged by
Delaware International to be of comparable quality). As a general matter, the
Fund only invests in debt securities when Delaware International believes,
considering the risks, that such investments offer better long-term potential
returns with less risk than investments in foreign equity securities.
Portfolio Turnover. The portfolio turnover rate for the Fund is included in the
Financial Highlights section of this Prospectus. The Fund is actively managed
and, in some cases in response to market conditions, the Fund's portfolio
turnover, may exceed 100%. A higher rate of portfolio turnover increases
brokerage and other expenses, which must be borne by the Fund and its
shareholders. High portfolio turnover (over 100%) also may result in the
realization of substantial net short-term capital gains, which when distributed
are taxable to shareholders.
Temporary Defensive Positions. For temporary defensive purposes, the Fund may
invest up to 100% of its assets in fixed income securities, money market
securities, certificates of deposit, bankers' acceptances, commercial paper or
in equity securities which in the Sub-Adviser's opinion are more conservative
than the types of securities that the Fund typically invests in. The Fund may
invest up to 35% of its assets in these conservative securities in order to
meet liquidity needs. To the extent the fund is engaged in temporary or
defensive investments, the Fund will not be pursuing its investment objective.
10
<PAGE>
Investment Objectives, Strategies and Risks [GRAPHIC]
Risk Factors
The principal risks of investing in the Fund are market risk, foreign risk,
interest rate risk, credit risk and currency risk. Because the Fund invests in
foreign securities, its returns may vary, sometimes significantly, from those
of the U.S. stock market. The Fund's investments in foreign securities have
additional risk. Foreign securities issuers are usually not subject to the same
degree of regulation as U.S. issuers. Reporting, accounting, and auditing
standards of foreign countries differ, in some cases, significantly from U.S.
standards. Foreign risk includes changes in currency rates, nationalization,
political changes, and diplomatic developments that could adversely affect the
Fund's investments.
In connection with its purchases and sales of foreign securities, other than
securities denominated in U.S. Dollars, the Fund considers 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.
Investments in emerging market countries have higher risk than those of other
foreign issuers. 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
fluctuations in inflation rates have had and may continue to have a negative
effect on the economies and securities markets of emerging market countries.
11
<PAGE>
Fund Management [GRAPHIC]
The Investment Adviser
HSBC Asset Management Americas Inc. (the "Adviser"), 140 Broadway, New York, NY
10005 is the adviser for the Funds. HSBC manages more than $3.3 billion of
assets of individuals, pension plans, corporations and institutions.
For the advisory services provided and the expenses assumed pursuant to its
investment agreement with the Fund, the Adviser received a fee of .51% of the
Fund's average net assets for the year ended 12/31/98 but paid the entire fee
to sub-advisers.*
Portfolio Manager
Mr. Frederic Lutcher III, Managing Director, is responsible for the investment
management oversight for the International Equity Fund for HSBC in its role as
adviser.
Sub-Adviser
The Adviser has retained Delaware International, Third Floor, 80 Cheapside,
London, England EC2V 6EE to serve as the investment sub-adviser for the
International Equity Fund. Delaware International provides investment services
primarily to institutional accounts and mutual funds in global and
international equity and fixed income markets. Delaware International manages
approximately $12 billion, with over $7 billion in international/global equity.
Delaware International makes the day-to-day investment decisions and
continuously reviews, supervises and administers the Fund's investment
programs.
Portfolio Manager
Mr. Clive A. Gillmore, Senior Portfolio Manager and Director of Delaware
International, is primarily responsible for daily management of the portfolio.
Mr. Gillmore, a graduate of the Warwick University, England, and the London
Business School Investment Program has been with the Sub-Adviser since 1990.
Prior to joining Delaware International, he had eight years of investment
experience. Delaware International and Mr. Gillmore assumed responsibility for
the Fund in October 1998.
The Distributor and Administrator
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Fund's administrator. Management and
administrative services of BISYS include providing office space, equipment and
clerical personnel to the Fund and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend dispersing services.
BISYS also serves as the distributor of the Fund's shares. BISYS may provide
financial assistance in connection with pre-approved seminars, conferences and
* HSBC waived a portion of its contractual fees with the Fund for the most
recent fiscal year. Contractual fees (without waivers) are .90%.
12
<PAGE>
Fund Management [GRAPHIC]
advertising to the extent permitted by applicable state or self-regulatory
agencies, such as the National Association of Securities Dealers.
The Statement of Additional Information has more detailed information about the
Investment Adviser and other service providers.
Year 2000
Like other funds and business organizations around the world, the Fund could be
adversely affected if the computer systems used by the Adviser and the Fund's
other service providers do not properly process and calculate date-related
information for the year 2000 and beyond. In addition, Year 2000 issues may
adversely affect companies in which the Fund may invest including companies in
emerging and other international markets. These companies may experience
troubles if, for example, such companies incur substantial costs to address
Year 2000 issues or suffer losses caused by the failure to adequately or timely
do so.
The Fund has been assured that the Adviser and the Fund's other service
providers (i.e., Sub-Adviser, Administrator, Transfer Agent, Fund Accounting
Agent, Custodian and Distributor) have developed and are implementing clearly
defined and documented plans intended to minimize risks to services critical to
the Fund's operations associated with Year 2000 issues. Internal efforts
include a commitment to dedicate adequate staff and funding to identify and
remedy Year 2000 issues, and specific actions such as inventorying software
systems, determining inventory items that may not function properly after
December 31, 1999, reprogramming or replacing such systems, and retesting for
Year 2000 readiness. The Fund's Adviser and service providers are likewise
seeking assurances from their respective vendors and suppliers that such
entities are addressing any Year 2000 issues, and each provider intends to
engage, where appropriate, in private and industry or "streetwide" interface
testing of systems for Year 2000 readiness.
In the event that any systems upon which the Fund is dependent are not Year
2000 ready by December 31, 1999, administrative errors and account maintenance
failures would likely occur. While the ultimate costs or consequences of
incomplete or untimely resolution of Year 2000 issues by the Adviser or the
Fund's service providers cannot be accurately assessed at this time, the Fund
currently has no reason to believe that the Year 2000 plans of the Adviser and
the Fund's service providers will not be completed by December 31, 1999, or
that the anticipated costs associated with full implementation of their plans
will have a material adverse impact on either their business operations or
financial condition of those of the Fund. The Fund and the Adviser will
continue to closely monitor developments relating to this issue, including
development by the Adviser and the Fund's service providers of contingency
plans for providing back-up computer services in the event of a systems failure
or the inability of any provider to achieve Year 2000 readiness. Separately,
the Adviser will monitor potential investment risk related to Year 2000 issues.
13
<PAGE>
Fund Management [GRAPHIC]
Euro Introduction
The European Monetary Union's introduction of a single European currency, the
Euro, on January 1, 1999 creates certain uncertainties, including whether the
payment and operational systems of banks and other financial institutions are
prepared for the change, the legal treatment of certain outstanding financial
contracts that refer to existing currencies, and the creation of suitable
clearing and settlement payment systems for the new currency. These or other
related factors could cause market disruptions even now, after the introduction
of the Euro. The Funds understand that the Adviser and other key service
providers are taking steps to address Euro-related issues.
14
<PAGE>
Shareholder Information [GRAPHIC]
Pricing of Fund Shares
- ----------------------
How NAV is Calculated Per share net asset value (NAV) is
determined and its shares are
The NAV is priced at the close of regular
calculated by trading on the New York Stock
adding the total Exchange, normally at 4:15 p.m.
value of the Fund's Eastern time on days the Fund's
investments and custodian is open.
other assets,
subtracting its
liabilities and The Fund invests in Securities
then dividing that that are primarily listed on
figure by the foreign exchanges and trade on
number of weekends or other days when the
outstanding shares Fund does not price its shares. As
of the Fund: a result, the Fund's NAV may
change on days when shareholders
will be unable to purchase or
NAV = redeem the Fund's shares.
Total Assets -
Liabilities Your order for purchase, sale or
exchange of shares is priced at
---------------- the next NAV calculated after your
Number of Shares order is accepted by the Fund less
Outstanding any applicable sales charge as
noted in the section on
You can find the "Distribution Arrangements/Sales
Fund's NAV daily in Charges." This is what is known as
The Wall Street the offering price.
Journal and other
newspapers. The Fund's securities are
generally valued at current market
- --------------------- prices. If market quotations are
not available, prices will be
based on fair value as determined
by the Fund's Trustees.
Foreign securities are valued
based on quotations from the
primary market in which they are
traded and are translated from the
local currency into U.S. dollars
using current exchange rates.
After the value of a foreign
security is established and an
event occurs which is likely to
cause that value to change, the
security will be valued at fair
value as determined by the Board
of Trustees.
-----------------------------------
15
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding to Your Shares
You may purchase Minimum Minimum
shares through the Initial Subsequent
HSBC Funds Account Type Investment Investment
Distributor or
through banks, Regular $1,000 $50
brokers, service --------------------------------------
organizations and Automatic Investment Plan $ 50 $50
other investment
representatives, --------------------------------------------------
which may charge
additional fees and All purchases must be in U.S. dollars. A fee will be
may require higher charged for any checks that do not clear. Third-party
minimum investments checks are not accepted.
or impose other
limitations on
buying and selling
shares. If you
purchase shares
through an
investment
representative,
that party is
responsible for
transmitting orders
by close of
business and may
have an earlier
cut-off time for
purchase and sale
requests. Consult
your investment
representative or
institution for
specific
information.
- -------------------------------------------------------------
A Fund may waive its minimum purchase requirement and the Distributor may
reject a purchase order if it considers it in the best interest of the Fund and
its shareholders.
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.
Avoid 31% Tax Withholding
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
16
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding To Your Shares
By Regular Mail
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Fund and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
<TABLE>
<CAPTION>
By Regular Mail: By Express Mail:
<S> <C>
HSBC Mutual Funds
Trust HSBC Mutual Funds Trust
PO Box 163850 3435 Stelzer Road
Columbus, OH 43216-3850 Columbus, OH 43219
</TABLE>
For Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "HSBC Family of Funds"
3. Mail or deliver application and payment to the address above.
For Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
. Fund
. Amount invested
. Account name and number
2. Make check, bank draft or money order payable to "HSBC Family of Funds"
3. Mail or deliver investment slip and payment to the address above.
Electronic Purchases
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call 1-800-
634-2536. Your account can generally be set up for electronic purchases within
15 days.
Call 1-800-634-2536 to arrange a transfer from your bank account.
17
<PAGE>
Shareholder Information [GRAPHIC]
Purchasing and Adding To Your Shares
Electronic vs. Wire Transfer
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to 7 days to clear.
There is generally no fee for ACH transactions.
By Wire Transfer
Telephone the Transfer Agent at 1-800-634-2536 for instructions. Please note
your bank will normally charge you a fee for handling this transaction.
You can add to your account by using the convenient options described below.
The Fund reserves the right to change or eliminate these privileges at any time
with 60 days notice.
18
<PAGE>
Shareholder Information
[LOGO]
Purchasing and Addin g To Your Shares
Automatic Investment Plan Directed Dividend Option
You can make automatic investments By selecting the appropriate box in the
in the Fund from your bank account, Account Application, you can elect to
through payroll deduction or from receive your distributions in cash
your federal employment, Social (check) or have distributions (capital
Security or other regular gains and dividends) reinvested in
government checks. Automatic another HSBC Fund without a sales
investments can be as little as charge. You must maintain the minimum
$50, once you've invested the balance in each Fund into which you plan
$1,000 minimum required to open the to reinvest dividends or the
account. reinvestment will be suspended and your
dividends paid to you. The Fund may
modify or terminate this reinvestment
option without notice. You can change or
terminate your participation in the
reinvestment option at any time.
To invest regularly from your bank
account:
. Complete the Automatic
Investment Plan portion on your ------------------------------------------
Account Application.
Make sure you note:
- Your bank name, address and
account number
- The amount you wish to invest
automatically (minimum $50)
- How often you want to invest
(every month, 4 times a year,
twice a year or once a year)
. Attach a voided personal check.
To invest regularly from your
paycheck or government check:
Call 1-800-634-2536 for an
enrollment form.
- --------------------------------------------------------------------------------
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for the Institutional Class than for Class A, Class B and
Class C shares, because the Institutional Class has lower distribution
expenses. Class A shares have higher distribution expenses than the
Institutional Class, but lower distribution expenses than Class B and Class C
shares, therefore dividends for Class A shares are higher than those of Class B
and Class C. Capital gains are distributed at least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date,
some of your investment will be returned to you in the form of a distribution.
- --------------------------------------------------------------------------------
19
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
You may sell your Withdrawing Money From Your Fund Investment
shares at any
time. Your sales As a mutual fund shareholder, you are technically selling
price will be the shares when you request a withdrawal in cash. This is also
next NAV after known as redeeming shares or a redemption of shares.
your sell order is
received by the -----------------------------------------------------------
Fund, its transfer
agent, or your Contingent Deferred Sales Charge
investment
representative. When you sell Class B or Class C shares, you will be
Normally you will charged a fee for any shares that have not been held for a
receive your sufficient length of time. These fees will be deducted
proceeds within a from the money paid to you. See the section on
week after your "Distribution Arrangements/Sales Charges" on page 24 for
request is details.
received.
-----------------------------------------------------------
Instructions for Selling Shares
If selling your shares through your financial adviser or
broker, ask him or her for redemption procedures. Your
adviser and/or broker may have transaction minimums and/or
transaction times which will affect your redemption. For
all other sales transactions, follow the instructions
below.
<TABLE>
<S> <C>
By telephone 1. Call 1-800-634-2536 with instructions as
(unless you have to how you wish to receive your funds
declined telephone (mail, wire, electronic transfer).
sales privileges)
- ----------------------------------------------------------------
By mail 1. Call 1-800-634-2536 to request
redemption forms or write a letter of
instruction indicating:
(See "Selling .your Fund and account number
Your Shares-- .amount you wish to redeem
Redemptions in .address where your check should be sent
Writing Required") .account owner signature
2. Mail to:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43216-3850
- ----------------------------------------------------------------
By express delivery See instruction 1 above.
service
(See "Selling Your 2. Send to
Shares--Redemptions HSBC Family of Funds
in Writing 3435 Stelzer Road
Required")
Columbus, OH 43219
- ----------------------------------------------------------------
</TABLE>
20
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
<TABLE>
<S> <C>
Wire transfer Call 1-800-634-2536 to request a wire
transfer.
You must indicate If you call in your redemption request of
this option on your $1,000 or more by 12:00 noon Eastern time,
application. your payment will
Your financial normally be wired to your bank on the same
institution may business day.
charge a wire
transfer fee.
- -----------------------------------------------------------------
Electronic Call 1-800-634-2536 to request an
Redemptions electronic
Your bank must redemption.
participate in the
Automated Clearing If you call by 4 p.m. Eastern time, the NAV
House (ACH) and must of your shares will normally be determined
be a U.S. bank. on the same day and the proceeds credited
within 8 days.
Your bank may charge
for this service.
- -----------------------------------------------------------------
</TABLE>
Systematic Withdrawal Plan
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
. Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-634-2536.
. Include a voided personal check.
. Your account must have a value of $10,000 or more to start withdrawals.
. If the value of your account falls below $500, you may be asked to add
sufficient funds to bring the account back to $500, or the Fund may close
your account and mail the proceeds to you.
21
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
Redemptions In Writing Required
You must request redemption in writing in the following situations:
1.Redemption requests requiring a signature guarantee which include each of the
following.
. Redemptions over $5,000
. Your account registration or the name(s) in your account has changed within
the last 30 days
. The check is not being mailed to the address on your account
. The check is not being made payable to the owner of the account
. The redemption proceeds are being transferred to another Fund account with
a different registration.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP (Securities
Transfer Agents Medallion Program), MSP (New York Stock Exchange Medallion
Signature Program) or SEMP (Stock Exchanges Medallion Program). Members are
subject to dollar limitations which must be considered when requesting their
guarantee. The Transfer Agent may reject any signature guarantee if it believes
the transaction would otherwise be improper.
Verifying Telephone Redemptions
The Fund makes every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity. Given
these precautions, unless you have specifically indicated on your application
that you do not want the telephone redemption feature, you may be responsible
for any fraudulent telephone orders. If appropriate precautions have not been
taken, the Transfer Agent may be liable for losses due to unauthorized
transactions. Telephone redemption privileges will be suspended for a 30-day
period following a telephone address change.
Redemptions Within 15 Days of Initial Investment
When you have made your initial investment by check, you cannot redeem any
portion of it until the Transfer Agent is satisfied that the check has cleared
(which may require up to 15 days from purchase date). You can avoid this delay
by purchasing shares with a certified check.
Refusal of Redemption Request
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
22
<PAGE>
Shareholder Information [GRAPHIC]
Selling Your Shares
Redemption in Kind
The Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
Closing of Small Accounts
If your account falls below $500, the Fund may ask you to increase your
balance. If it is still below $500 after 30 days, the Fund may close your
account and send you the proceeds at the current NAV.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be considered void. The check will be
canceled and the money reinvested in the Fund.
23
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
The Fund offers investors a choice among multiple classes of shares with
different sales charges and expenses. In selecting which class of shares to
purchase, you should consider, among other things, (i) the length of time you
expect to hold your investment, (ii) the amount of any applicable sales charge
imposed at the time of redemption and Rule 12b-1 fees, as noted below, (iii)
whether you qualify for any reduction or waiver of any applicable sales charge,
(iv) the various exchange privileges among the different classes of shares and
(v) the fact that Class B shares automatically convert to Class A shares after
six years. The Class A, Class B and Class C shares are offered in this
Prospectus.
This section describes the sales charges and fees you will pay as an investor
in different share classes offered by the Fund and ways to qualify for reduced
sales charges.
<TABLE>
<CAPTION>
Institutional
Class A* Class B Class C Class
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Charge (Load) Front-end No front-end No front-end None
sales charge sales charge. sales charge.
5.00% reduced A contingent A contingent
sales charges deferred deferred
available. sales charge sales charge
(CDSC) may be (CDSC) may be
imposed on imposed on
shares shares
redeemed redeemed
within four within one
years after year after
purchase; purchase.
shares
automatically
convert to
Class A
shares after
6 years.
- ---------------------------------------------------------------------------------
Distribution (12b-1) Fee Subject to Subject to Subject to None
annual annual annual
distribution distribution distribution
and fee of up to fees of up to
shareholder .75% of the .75% of the
servicing Fund's net Fund's net
fees of up to assets. assets.
.35% of the
Fund's net
assets.
- ---------------------------------------------------------------------------------
Service Organization Fee Subject to Subject to Subject to None
annual annual annual
Service Service Service
Organization Organization Organization
fee of up to fee of up to fee of up to
.35% of the .50% of the .50% of the
Fund's net Fund's net Fund's net
assets.** assets.** assets.**
- ---------------------------------------------------------------------------------
Fund Expenses Higher annual Higher annual Higher annual Lower
expenses than expenses than expenses than annual
Institutional Class A Class A expenses
Class shares. shares and shares and than
Institutional Institutional Class A,
shares. shares. Class B
and Class
C shares.
- ---------------------------------------------------------------------------------
</TABLE>
* Service Class shares are referred to as Class A shares
effective April 30, 1999.
** The Service Organization fee is currently being
contractually waived in its entirety for Class A shares
and contractually limited to .25% for Class B and Class
C shares.
24
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Calculation of Sales Charges
Class A Shares
Class A shares (formerly Service Class) are sold at their public offering
price. This price includes the net asset value plus the initial sales charge.
Therefore, part of the money you invest will be used to pay the sales charge.
The remainder is invested in Fund shares. The sales charge decreases with
larger purchases. There is no sales charge on reinvested dividends and
distributions.
The current sales charge rates are as follows:
International Equity Fund (Class A Only)
<TABLE>
<CAPTION>
Sales Charge Sales Charge
as a % of as a % of
Your Investment Offering Price Your Investment
- -------------------------------------------------------
<S> <C> <C>
Up to $49,999 5.00% 5.26%
- -------------------------------------------------------
$50,000 up to $99,999 4.50% 4.71%
- -------------------------------------------------------
$100,000 up to $249,999 3.75% 3.90%
- -------------------------------------------------------
$250,000 up to $499,999 2.50% 2.56%
- -------------------------------------------------------
$500,000 up to $999,999 2.00% 2.04%
- -------------------------------------------------------
$1,000,000 and above 1.00% 1.01%
</TABLE>
- ------------------------------------------------------------
25
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Class B and C shares are offered at NAV, without any up-front sales charge.
Therefore, all the money you invest is used to purchase Fund shares. However,
if you sell your Class B shares of the Fund before the fourth anniversary of
purchase, you will have to pay a contingent deferred sales charge at the time
of redemption. If you sell your Class C shares before the first anniversary of
purchase, you will pay a 1% CDSC at the time of redemption. The CDSC will be
based upon the lower of the NAV at the time of purchase or the NAV at the time
of redemption according to the schedule below. There is no CDSC on reinvested
dividends or distributions.
Class B Shares
<TABLE>
<CAPTION>
Years Since CDSC as a % of Dollar
Purchase Amount Subject to Charge
- ----------------------------------------
<S> <C>
0-1 4.00%
- ----------------------------------------
1-2 3.00%
- ----------------------------------------
2-3 2.00%
- ----------------------------------------
3-4 1.00%
- ----------------------------------------
more than 4 None
- ----------------------------------------
</TABLE>
If you sell some but not all of your Class B or C shares, certain shares not
subject to the CDSC (i.e., shares purchased with reinvested dividends) will be
redeemed first, followed by shares subject to the lowest CDSC (typically shares
held for the longest time).
The Class B CDSC is paid to the Distributor to reimburse expenses incurred in
providing distribution-related services to the Fund in connection with the sale
of Class B shares. Although Class B shares are sold without an initial sales
charge, the Distributor normally pays a sales commission of the purchase price
of Class B shares to the dealer from its own resources at the time of the sale.
The Distributor and its agents may assign their right to receive any Class B
CDSC, certain distribution and service organization fees, to an entity that
provides funding for up-front sales commission payments.
26
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Class C Shares
There is no sales charge imposed upon purchases of Class C shares, but
investors may be subject to a CDSC. Specifically, if you redeem Class C shares
of the Funds, your redemption may be subject to a 1.00% CDSC if the shares are
redeemed less than one year after the original purchase of the Class C shares.
The CDSC will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Unlike Class B shares,
Class C shares do not convert to Class A shares.
Conversion Feature--Class B Shares
. Class B shares automatically convert to Class A shares of the same Fund
after six years from the end of the month of purchase.
. After conversion, your shares will be subject to the lower distribution
and shareholder servicing fees charged on Class A shares which will
increase your investment return compared to the Class B shares.
. You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
. If you purchased Class B shares of one Fund which you exchanged for Class
B shares of another Fund, your holding period will be calculated from the
time of your original purchase of Class B shares. The dollar value of
Class A shares you receive will equal the dollar value of the Class B
shares converted.
27
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Sales Charge Reductions
Class A Shares
Reduced sales charges are available to shareholders with investments of $50,000
or more. In addition, you may qualify for reduced sales charges under the
following circumstances.
. By initially investing a minimum of $1,000 and informing the Fund in
writing that you intend to purchase enough shares over a 13-month period
to qualify for a reduced sales charge.
. Rights of Accumulation. When the value of shares you already own plus
the amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the
reduced sales charge.
Sales Charge Waivers
Class A Shares
The following qualify for waivers of sales charges:
. Shares purchased by investment representatives through fee-based
investment products or accounts.
. Proceeds from redemptions from another mutual fund complex within 90
days after redemption, if you paid a front end sales charge for those
shares.
. Reinvestment of distributions from a deferred compensation plan, agency,
trust, or custody account that was maintained by the Adviser or its
affiliates or invested in any HSBC Fund.
. Shares purchased for trust or other advisory accounts established with
the Adviser or its affiliates.
. Shares purchased by directors, trustees, employees, and family members
of the Adviser and its affiliates and any organization that provides
services to the Funds; retired Fund trustees; dealers who have an
agreement with the Distributor; and any trade organization to which the
Adviser or the Administrator belongs.
28
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Class B Shares and Class C Shares
The CDSC will be waived under certain circumstances, including the following:
. Distributions from retirement plans if the distributions are made
following the death or disability of shareholders or plan participants.
. Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder.
. Returns of excess contributions to retirement plans.
. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan.
. Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
Reinstatement Privilege
If you have sold shares and decide to reinvest in the Fund within a 60 day
period, you will not be charged the applicable sales load on amounts up to the
value of the shares you sold. You must provide a written reinstatement request
and payment within 60 days of the date your instructions to sell were
processed.
Distribution (12b-1) Fees
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of the Fund's shares and/or for providing shareholder services. 12b-1 fees are
paid from Fund assets on an ongoing basis, and will increase the cost of your
investment. The 12b-1 fees vary by share class as follows:
. Class A shares pay a 12b-1 fee of up to .35% of the average daily net
assets of a Fund.
. Class B and Class C shares pay a 12b-1 fee of up to .75% of the average
daily net assets of the Fund.
. The higher 12b-1 fee on Class B and Class C shares, together with
the CDSC, help the Distributor sell Class B and Class C shares
without an "up-front" sales charge. In particular, those fees help
to defray the Distributor's costs of advancing brokerage commissions
to investment representatives.
. Institutional Class shares do not pay a 12b-1 fee. This will cause
expenses for Class A, Class B and Class C shares to be higher and
dividends to be lower than for Institutional Class shares.
Long-term shareholders may pay indirectly more than the equivalent of the
maximum permitted front-end sales charge due to the recurring nature of 12b-1
distribution fees.
29
<PAGE>
Shareholder Information [GRAPHIC]
Distribution Arrangements/ Sales Charges
Service Organizations
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organizations") may provide certain
administrative services for its customers who invest in the Funds through
accounts maintained at that Service Organization. The Funds, under servicing
agreements with the Service Organization, will pay a Service Organization fee
an annual rate up to .35% for Class A shares and up to .50% for Class B and
Class C shares (with contractual waivers, the fees are zero and .25%,
respectively) of the average daily net asset value of shares for which the
Service Organization from time to time performs these services, which include:
.receiving and processing shareholder orders
.performing the accounting for the customers sub-accounts
.maintaining retirement plan accounts
.answering questions and handling correspondence for an individual accounts
.acting as the sole shareholder of record for individual
.issuing shareholder reports and transaction confirmations
.performing daily "sweep" functions
Investors who purchase, sell or exchange shares for the Funds through a
customer account maintained at a Service Organization may be charged extra for
other services which are not specified in the servicing agreement with the
Funds but are covered under separate fee schedules provided by the Service
Organization to their customers. Customers with accounts at Service
Organizations should consult their Service Organization for information
concerning their sub-accounts. The Adviser or Administrator also may pay
Service Organizations for rendering services to shareholders sub-accounts.
Questions?
Call 1-800-634-2536 or your investment representative.
30
<PAGE>
Shareholder Information [GRAPHIC]
Exchanging Your Shares
You can exchange your shares that have been held for at least seven days in the
Fund for shares of the same class of another HSBC Fund, usually without paying
additional sales charges (see "Notes on Exchanges"). No transaction fees are
charged for exchanges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from the Fund to another are taxable. You should
review the prospectus of the HSBC Fund before making an exchange.
Instructions for Exchanging Shares
Exchanges may be made by sending a written request to HSBC Family of Funds, PO
Box 163850, Columbus OH 43216-3850, or by calling 1-800-634-2536. Please
provide the following information:
. Your name and telephone number
. The exact name on your account and account number
. Taxpayer identification number (usually your Social Security number)
. Dollar value or number of shares to be exchanged
. The name of the Fund from which the exchange is to be made
. The name of the Fund into which the exchange is being made.
See "Selling your Shares" for important information about telephone
transactions. The Fund reserves the right to modify or terminate the exchange
privilege upon 60 days written notice.
To prevent disruption in the management of the Fund, due to market timing
strategies, exchange activity may be limited to 4 exchanges within a 12 month
period.
You can use the Fund's Automatic Exchange feature to purchase shares of the
Fund at regular intervals through regular, automatic redemptions from the Money
Market Fund. To participate in the Automatic Exchange:
. Complete the appropriate section of the Account Application.
. Keep a minimum of $10,000 in the Money Market Fund and $1,000 in the
Fund whose shares you are buying.
31
<PAGE>
Shareholder Information [GRAPHIC]
Exchanging Your Shares
To change the Automatic Exchange instructions or to discontinue the feature,
you must send a written request to HSBC Family of Funds, P.O. Box 163850,
Columbus, Ohio 43216-3850.
Notes on Exchanges
When exchanging from a Fund that has no sales charge or a lower sales charge to
a Fund with a higher sales charge, you will pay the difference.
The registration and tax identification numbers of the two accounts must be
identical.
The Exchange Privilege (including automatic exchanges) may be changed or
eliminated at any time upon a 60-day notice to shareholders.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
32
<PAGE>
Shareholder Information [GRAPHIC]
Dividends, Distributions and Taxes
Any income the Fund receives in the form of interest or dividends is paid out,
less expenses, to its shareholders as dividends. The Fund pays dividends and
distributes capital gains at least annually.
An exchange of shares is considered a sale, and any related gains may be
subject to applicable taxes.
Taxes on capital gains by the Fund will vary with the length of time the Fund
has held the security--not how long you have invested in the Fund.
Dividends are taxable in the year in which they are paid, even if they appear
on your account statement the following year. Dividends and distributions are
treated in the same manner for federal income tax purposes whether you receive
them in cash or in additional shares.
You will be notified in January each year about the federal tax status of
distributions made by the Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a penalty on certain pre-retirement distributions from retirement accounts.
Consult your tax adviser about the federal, state and local tax consequences in
your particular circumstances.
33
<PAGE>
Financial Highlights [GRAPHIC]
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by Ernst & Young LLP, whose report, along with the Fund's
financial statements, are incorporated by reference in the SAI or annual
report, which is available upon request.
HSBC International Equity Fund
<TABLE>
<CAPTION>
Class A Shares (formerly Service Class
Shares)
----------------------------------------------------
For the Year ended For the Period
December 31, April 25, 1994(c)
------------------------------- to December 31,
1998 1997 1996 1995 1994
------ ------ ------ ----- ------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $10.35 $10.60 $ 9.97 $9.55 $ 10.00
------ ------ ------ ----- -------
Investment Activities
Net investment income
(loss).................. 0.08 0.06** (0.02) (0.07) --
Net realized and
unrealized gains
(losses) from investment
and foreign currency
transactions............ 1.09 (0.28) 0.65 0.49 (0.43)
------ ------ ------ ----- -------
Total from Investment
Activities.............. 1.17 (0.22) 0.63 0.42 (0.43)
------ ------ ------ ----- -------
Distributions
From net investment
income.................. (0.10) (0.03) -- -- --
In excess of net
investment income....... -- -- -- -- (0.02)
From net realized gains.. (0.04) -- -- -- --
------ ------ ------ ----- -------
Total Distributions...... (0.14) (0.03) -- -- (0.02)
------ ------ ------ ----- -------
Net Asset Value, End of
Period................... $11.38 $10.35 $10.60 $9.97 $ 9.55
====== ====== ====== ===== =======
Total Return (excludes
sales or redemption
charges)................. 11.32% (2.06)% 6.32 % 4.40 % (4.30)%(a)
Ratios/Supplemental Data:
Net Assets at end of
period (000)............ $ 259 $ 309 $ 409 $ 658 $16,819
Ratio of expenses to
average net assets...... 1.12% 1.17 % 2.10 % 1.98 % 2.16 %(b)
Ratio of net investment
income (loss) to average
net assets.............. 0.81% 0.54 % (0.19)% (1.01)% (0.04)%(b)
Ratio of expenses to
average net assets*..... 1.94% 2.19 % 2.94 % 3.66 % 2.50 %(b)
Portfolio turnover
rate***................. 163.90% 112.54 % 77.91 % 90.31 % 29.37 %(a)
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
**Based on average shares outstanding.
*** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a)Not annualized
(b)Annualized
(c)Commencement of operations.
(d)Commencement of offering.
34
<PAGE>
Financial Highlights [GRAPHIC]
HSBC International Equity Fund
<TABLE>
<CAPTION>
Institutional Class Shares
------------------------------------------------
For the Year ended
December 31, For the Period
-------------------------- March 1, 1995(d) to
1998 1997 1996 December 31, 1995
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 10.35 $ 10.61 $ 9.98 $ 8.81
------- ------- ------- -------
Investment Activities
Net investment income
(loss)...................... 0.08 0.04** (0.01) (0.03)
Net realized and unrealized
gains (losses) from
investment and foreign
currency transactions....... 1.09 (0.27) 0.64 1.20
------- ------- ------- -------
Total from Investment
Activities.................. 1.17 (0.23) 0.63 1.17
------- ------- ------- -------
Distributions
From net investment income... (0.08) (0.02) -- --
In excess of net investment
income...................... (0.02) (0.01) -- --
From net realized gains...... (0.04) -- -- --
------- ------- ------- -------
Total Distributions.......... (0.14) (.03) -- --
------- ------- ------- -------
Net Asset Value, End of
Period....................... $ 11.38 $ 10.35 $ 10.61 $ 9.98
======= ======= ======= =======
Total Return (excludes sales
or redemption charges)....... 11.32% (2.15)% 6.31 % 13.28 %(a)
Ratios/Supplemental Data:
Net Assets at end of period
(000)....................... $65,139 $67,458 $21,110 $15,253
Ratio of expenses to average
net assets.................. 1.14% 1.12 % 2.04 % 2.62 %(b)
Ratio of net investment
income (loss) to average net
assets...................... 0.81% 0.35 % (0.10)% (0.34)%(b)
Ratio of expenses to average
net assets*................. 1.58% 1.91 % 2.89 % 3.12 %(b)
Portfolio turnover rate***... 163.90% 112.54 % 77.91 % 90.31 %(a)
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
**Based on average shares outstanding.
*** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a)Not annualized
(b)Annualized
(c)Commencement of operations.
(d)Commencement of offering.
35
<PAGE>
For more information about the Fund, the following documents
are available free upon request:
Annual/Semi-annual Reports (Reports):
The Fund's annual and semi-annual reports to shareholders contain
additional information on the Fund's investments. In the annual
report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund,
including its operations and investment policies. It is
incorporated by reference and is legally considered a part of
this prospectus.
You can get free copies of Reports and the SAI, prospectuses of
other Funds in the HSBC Family, or request other information and
discuss your questions about the International Equity Fund by
contacting a broker or bank that sells the Fund or contact the
Fund at:
HSBC Family of Funds
3435 Stelzer Road, Columbus, Ohio 43219
Telephone: 1-800-634-2536
-----------------------------------------------------
You can review and copy the Fund's reports and SAIs at the
Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies:
. For a duplicating fee, by writing the Public Reference
Section of the Commission, Washington, D.C. 20549-6009 or
calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-06057.
<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 organized in Massachusetts on November 1, 1989, 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".
Each Fund offers Class A, Class B and Class C shares. The International Fund
also offers Institutional Class shares. Class A shares are subject to a
front-end sales load. Class B shares and Class C shares are not subject to a
front-end sales load but may be subject to contingent deferred sales charge.
Class A, Class B, and Class C shares are all subject to shareholder servicing
and Rule 12b-1 fees. 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 benefit plan
for such customers or employees. The 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.
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'
Prospectuses dated April 30, 1999. This Statement of Additional Information
("SAI") contains additional and more detailed information than that set forth in
the Funds' Prospectuses and should be read in conjunction with the Funds'
Prospectuses, additional copies of which may be obtained without charge from the
Trust. Information regarding the investment performance of each Fund is
contained in the respective Fund's Annual Report dated December 31, 1998 which
may be obtained, without charge, from the Trust.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page No.
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<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS............ 3
INVESTMENT RESTRICTIONS..................................... 47
MANAGEMENT.................................................. 49
COMPENSATION TABLE.......................................... 50
SERVICE ORGANIZATIONS....................................... 56
CALCULATION OF YIELDS AND PERFORMANCE INFORMATION........... 58
DETERMINATION OF NET ASSET VALUE............................ 61
PORTFOLIO TRANSACTIONS...................................... 62
PORTFOLIO TURNOVER.......................................... 63
EXCHANGE PRIVILEGE.......................................... 64
PURCHASE OF SHARES.......................................... 64
REDEMPTIONS................................................. 66
INCOME TAXES................................................ 67
SHARES OF BENEFICIAL INTEREST............................... 72
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT......... 75
INDEPENDENT AUDITORS........................................ 76
COUNSEL..................................................... 76
FINANCIAL STATEMENTS........................................ 76
</TABLE>
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INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of the GROWTH AND INCOME FUND is to provide
investors with long-term growth of capital and current income. The Fund seeks to
achieve its objective by investing, under ordinary market conditions, primarily
in common stocks, preferred stocks and securities convertible into or with
rights to purchase common stocks ("equity securities"). As a matter of
fundamental policy, during normal market conditions, at least 65% of the value
of the Fund's total assets will be invested in equity securities. The balance of
the Fund's assets may be invested in various types of fixed income securities
and in money market instruments. Most of the Fund's investments will be
securities listed on the New York or American Stock Exchanges or on NASDAQ and
may also consist of American Depository Receipts ("ADRs") and investment company
securities (see "Other Investment Practices of the Funds" in this Prospectus for
further information on these investments). The Adviser expects that the Fund's
investments will consist of companies which will be of various sizes and in
various industries and may in many cases be leaders in their fields. In
addition, the Fund may, within certain limitations as set forth below, lend
portfolio securities, enter into repurchase agreements, invest in when-issued
and delayed delivery securities and write covered call options. The Fund may use
stock index futures, related options and options on stock indices for the sole
purpose of hedging the portfolio. The Growth and Income Fund's investments in
fixed income securities will primarily consist of securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, and
investment grade debt obligations issued or guaranteed by domestic corporations
or commercial banks. From time to time, the Fund may also invest up to 5% of its
total assets in the debt obligations of foreign issuers. The types of debt
obligations in which the Growth and Income Fund will invest include, among
others, bonds, notes, debentures, commercial paper, variable and floating rate
demand and master demand notes, zero coupon securities and asset-backed and
mortgage-related securities.
The Fund intends to stay invested in the equity securities described above
to the extent practicable in light of its investment objective and long-term
investment perspective. Under ordinary market conditions, therefore, no more
than 35% of the Fund's total assets will be invested in fixed income securities
and money market instruments for purposes of meeting the Fund's investment
objective of current income. However, for temporary defensive purposes, e.g.,
during periods in which adverse market changes or other adverse economic
conditions warrant as determined by the Adviser, the Fund may invest up to 100%
of its total assets in money market instruments as described below.
The investment objective of the INTERNATIONAL FUND is to seek to provide
investors with long-term capital appreciation. The Fund seeks to achieve its
objective by investing, under ordinary market conditions, at least 65% of its
total assets in equity securities (including American, Global and European
Depositary Receipts) issued by companies based outside of the United States. The
balance of the Fund's assets will generally be invested in equity securities of
companies based in and debt securities of companies and governments issued in
the United States and outside 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.
The investment objective of the FIXED INCOME FUND is generation of high
current income consistent with appreciation of capital. The Fund seeks to
achieve its objective by investing, under ordinary market conditions, 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 as well as taxable municipal securities and
money market securities. The Fixed
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Income Fund will base its investment selection upon analysis of prevailing
market and economic conditions. Although the Fund has no present intention of
doing so, the Fund may utilize options on securities, interest rate futures
contracts and options thereon to reduce certain risks to its investments and to
attempt to enhance income, but not for speculation.
The investment objective 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.
SHORT-TERM TRADING. Although the Funds will not make a practice of short- term
trading, purchases and sales of securities will be made whenever necessary or
desirable 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.
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 Depository Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") and other depositary receipts. The Growth
and Income Fund may invest in ADRs 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
arrangements. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe and GDRs are designed for trading in non-U.S. securities
markets. The International Equity Fund may invest in ADRS, EDRs, CDRs and GDRs
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without participation
by the issuer of the deposited security. Holders of unsponsored depositary
receipts generally bear all the costs of such facilities and the depositary of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or
to pass through voting rights to holders of such receipts in respect of the
deposited securities. The 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 depositary
programs. Because the non-U.S. company does not actively participate in the
creation of the depositary program, the underlying agreement for service and
payment will be between the depositary and the shareholder. The company issuing
the stock underlying the depositary receipts pays nothing to establish the
unsponsored facility, as fees for depositary receipt issuance and cancellation
are paid by brokers. Investors directly bear the expenses associated with
certificate transfer, custody and dividend payment.
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<PAGE>
In an unsponsored depositary program, there also may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
In addition, with respect to all depositary receipts, there is always the risk
of loss due to currency fluctuations.
FOREIGN SECURITIES. (International Fund and Growth and Income Fund)
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.
SECURITIES OF FOREIGN GOVERNMENTS AND SUPRANATIONAL ORGANIZATIONS.
(International Fund and Fixed Income Fund) The Funds may invest in U.S. dollar-
denominated debt securities issued by foreign governments, their political
subdivisions, governmental authorities, agencies and instrumentalities and
supranational organizations. The International Fund can also invest in such
obligations denominated in foreign currencies. A supranational organization is
an entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of
supranational organizations include, among others, the International Bank for
Reconstruction and Development (World Bank), the European Economic Community,
the European Coal and Steel Community, the European Investment Bank, the Inter-
American Development Bank, the Asian
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<PAGE>
Development Bank, and the African Development Bank. The Funds may also invest in
"quasi-government securities" which are debt obligations issued by entities
owned by either a national, state or equivalent government or are obligations of
such a government jurisdiction which are not backed by its full faith and credit
and general taxingpowers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
WRITING COVERED CALLS. (Growth and Income Fund and International Fund) The
Funds may seek to earn premiums by writing covered call options against some of
the securities in its portfolio provided the options are listed on a national
securities exchange. A call option is "covered" if a Fund owns the underlying
securities covered by the call. The purchaser of the call option obtains the
right to acquire these securities at a fixed price (which may be less than, the
same as, or greater than the current market price of such securities) during a
specified period of time. 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.
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.
The aggregate value of the securities subject to options written by a Fund may
not exceed 25% of the value of the Fund's net assets.
To the extent permitted below, 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.
OPTIONS ON SECURITIES. (International Fund and Fixed Income Fund) Each 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 Funds will engage in options
trading principally for hedging purposes. The Funds may write call options on a
covered basis only, and will not engage in option
writing strategies for speculative purposes.
Each 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. Each 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 a 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. A 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.
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
6
<PAGE>
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 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
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the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock index
futures contract, and the purchaser will realize a loss in that amount. Stock
index futures contracts expire on a fixed date, currently one to seven months
from the date of the contract, and are settled upon expiration of the contract.
The Funds 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.
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
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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. The Funds will sell options
on futures and on stock indices only to close out existing hedge positions.
Writing of options involves the risk that there will be no market in which to
effect a closing transaction. An exchange-traded option may be closed out only
on an exchange that provides a secondary market for an option of the same
series. Over-the-counter ("OTC") options are not generally terminable at the
option of the writer and may be closed out only by negotiation with the holder.
There is also no assurance that a liquid secondary market on an exchange will
exist. In addition, because OTC options are issued in privately negotiated
transactions exempt from registration under the Securities Act of 1933, there is
no assurance that 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.
Each Fund's successful use of stock index futures contracts, options on such
contracts and options on indices depends upon the Adviser's ability to predict
the direction of the market and is subject to various additional risks. The
correlation between movements in the price of the futures contract and the price
of the securities being hedged is imperfect and the risk from imperfect
correlation increases in the case of stock index futures as the composition of a
Fund's portfolio diverges from the composition of the relevant index. Such
imperfect correlation may prevent a Fund from achieving the intended hedge or
may expose a Fund to risk of loss. In addition, if a Fund purchases futures to
hedge against market advances before it can invest in common stock in an
advantageous manner and the market declines, a Fund might create a loss on the
futures contract. Particularly in the case of options on stock index futures
and on stock indices, a Fund's ability to establish and maintain positions will
depend on market liquidity. The successful utilization of hedging and risk
management transactions requires skills different form those needed in the
selection of the Fund's portfolio securities. The Funds believe that the
Adviser possesses the skills necessary for the successful utilization of hedging
and risk management transactions.
Positions in options, futures and options on futures may be closed out only on
an exchange which provides a secondary market for such purposes. There can be
no assurance that a liquid secondary market will exist for any particular
option, futures contract or related option at any specific time. Thus, it may
not be possible to close such an option or futures position which could have an
adverse impact on a
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Fund's ability to effectively hedge its securities. A 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) each 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 Funds will not enter into futures and related
transactions if, immediately thereafter, the sum of the margin deposits on a
Fund's existing futures and related options positions and the premiums paid for
related options would exceed 5% of the market value of such Fund's total assets
after taking into account unrealized profits and unrealized losses on any such
contract; (iii) the Funds will not market, and are not marketing, themselves as
commodity pools or otherwise as vehicles for trading in commodity futures and
related options; and (iv) the Funds will segregate assets to cover the futures
and options.
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.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. (International Equity Fund and
Fixed Income Fund) Each Fund may purchase put and call options on interest rate
futures contracts. Each Fund may also write (sell) put and call options on such
futures contracts. As with futures contracts, the Funds will purchase or sell
options on interest rate futures contracts solely for bona fide hedging purposes
and not as a means of speculative trading. 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.
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FORWARD FOREIGN EXCHANGE CONTRACTS. (International Fund) 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 by entering into
forward foreign exchange contracts. A forward foreign exchange contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and its customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract, the Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Fund may enter into forward foreign exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund anticipates
the receipt in a foreign currency of dividend or interest payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, a Fund will attempt to protect
itself against an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. The Fund's
custodian will place cash or readily marketable securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign exchange contracts requiring
the Fund to purchase foreign currencies or forward contracts entered into for
non-hedging purposes. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
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.
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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.
OPTIONS ON CURRENCIES. (International Fund) 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.
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.
U.S. GOVERNMENT SECURITIES. (Growth and Income Fund and Fixed Income Fund) The
Funds may invest in all types of securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies, authorities or
instrumentalities, including U.S. Treasury obligations with varying interest
rates, maturities and dates of issuance, such as U.S. Treasury bills (maturities
of one year or less) U.S. Treasury notes (generally maturities of one to ten
years) and U.S. Treasury bonds (generally maturities of greater than ten years)
and obligations issued or guaranteed by U.S. Government agencies or which are
supported by the full faith and credit pledge of the U.S. Government. In the
case of U.S. Government obligations which are not backed by the full faith and
credit pledge of the United States, the Funds must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States in the event the agency or
instrumentality is unable to meet its commitments. Such securities may also
include securities for which the payment of principal and interest is backed by
an irrevocable letter of credit issued by the U.S. Government, its agencies,
authorities or instrumentalities and participations in loans made to foreign
governments or their agencies that are substantially guaranteed by the U.S.
Government (such as Government Trust Certificates). See "Mortgage-Related
Securities" and "Asset-Backed Securities" below.
MORTGAGE-RELATED SECURITIES. (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
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National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers, and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If a Fund purchases a mortgage-related
security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from changes in interest rates or
prepayments in the underlying mortgage collateral. As with other interest-
bearing securities, the prices of such securities are inversely affected by
changes in interest rates. However, though the value of a mortgage-related
security may decline when interest rates rise, the converse is not necessarily
true since in periods of declining interest rates the mortgages underlying the
securities are prone to prepayment. For this and other reasons, a mortgage-
related security's stated maturity may be shortened by unscheduled prepayments
on the underlying mortgages and, therefore, it is not possible to predict
accurately the security's return to a Fund. Similarly, because the average life
of mortgage related securities may lengthen with increases in interest rates,
the portfolio weighted average life of the mortgage-related securities in which
the Fund invests may at times lengthen due to this effect. Under these
circumstances, the Adviser may, but is not required to, sell securities in order
to maintain an appropriate portfolio average life.
Regular payments received in respect of mortgage-related securities include
both interest and principal. No assurance can be given as to the yield and total
return a Fund will receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities,
and among the securities that they issue. Mortgage-related securities created by
the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as
to the timely payment of principal and interest and such guarantee is backed by
the full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Government to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a government-
sponsored organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA. Mortgage-
related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
currently guarantees timely payment of interest and either timely payment of
principal or eventual payment of principal depending upon the date of issue.
When the FHLMC does not guarantee timely payment of principal, FHLMC may remit
the amount due based on its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
In addition to GNMA, FNMA or FHLMC certificates, through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Funds also may invest in mortgage pass-through
securities, where all interest payments go to one class of holders ("Interest
Only Securities" or "IOs") and all principal payments go to a second class of
holders ("Principal
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Only Securities" or "POs"). These securities are commonly referred to as
mortgage-backed security strips or MBS strips. The yields to maturity on IOs and
POs are particularly sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and principal payments
may have a material effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the return on POs could be adversely affected. Each Fund will treat
IOs and POs as illiquid securities except for IOs and POs issued by U.S.
Government agencies and instrumentalities backed by fixed-rate mortgages, whose
liquidity is monitored by the Adviser subject to the supervision of the Board of
Trustees.
The Funds may also invest in certain Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs") which are
hybrid instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Interest and prepaid principal on a CMO or
REMIC are paid monthly or semi-annually. CMOs and REMICs may be collateralized
by whole mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs and
REMICs are structured into multiple classes, with each class bearing a different
expected maturity. Payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes generally receive principal only after the earlier
classes have been retired. To the extent a particular CMO or REMIC is issued by
an investment company, the Fund's ability to invest in such CMOs or REMICs will
be limited. The Funds will not invest in the residual interests of REMICs.
The Adviser expects that new types of mortgage-related securities may be
developed and offered to investors. The Adviser will, consistent with each
Funds' investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
The yield characteristics of mortgage-related securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Fund purchases a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.
Like other bond investments, the value of mortgage-backed securities will tend
to rise when interest rates fall and to fall when interest rates rise. Their
value may also be affected by changes in the market's perception of the
creditworthiness of the entity issuing or guaranteeing them or by changes in
government regulations and tax policies. The magnitude of these fluctuations
generally will be greater when the average maturity of a Fund's portfolio
securities is longer.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different than the stated maturity of the security.
ASSET-BACKED SECURITIES. (Growth and Income Fund and Fixed Income Fund)
Through the use of trusts and special purpose subsidiaries, various types of
assets, primarily home equity loans and automobile and credit card receivables,
are being securitized in pass-through structures similar to the mortgage pass-
through structures described above or in a pay-through structure similar to the
collateralized mortgage structure. Consistent with the Fund's investment
objectives, policies and quality
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standards, each Fund may invest in these and other types of asset-backed
securities which may be developed in the future.
Asset-backed securities involve certain risks that are not posed by mortgage-
related securities, resulting mainly from the fact that asset-backed securities
do not usually contain the complete benefit of a security interest in the
related collateral. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and Federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities. The risks associated with
asset-backed securities are often reduced by the addition of credit enhancements
as a letter of credit from a bank, excess collateral or a third-party guarantee.
ZERO COUPON SECURITIES. (Growth and Income Fund and Fixed Income Fund) The
Funds may invest in zero coupon securities. A zero coupon security pays no
interest to its holder during its life and is sold at a discount to its face
value at maturity. The market prices of zero coupon securities generally are
more volatile than the market prices of securities that pay interest
periodically and are more sensitive to changes in interest rates than non-zero
coupon securities having similar maturities and credit qualities.
The Funds may invest in separately traded principal and interest components of
securities guaranteed or issued by the U.S. Treasury if such components are
traded independently. Under the STRIPS (Separate Trading of Registered Interest
and Principal of Securities) program, the principal and interest components are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
independently.
Current Federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue discount
on such security that accrues that year, even though the holder receives no cash
payments of interest during the year.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES. (Growth and Income
Fund and Fixed Income Fund) Each Fund may, from time to time, buy variable or
floating rate demand notes issued by corporations, bank holding companies and
financial institutions and similar taxable and tax-exempt instruments issued by
government agencies and instrumentalities. These securities will typically have
a maturity over one year but carry with them the right of the holder to put the
securities to a remarketing agent or other entity at designated time intervals
and on specified notice. The obligation of the issuer of the put to repurchase
the securities may be backed by a letter of credit or other obligation issued by
a financial institution. The purchase price is ordinarily par plus accrued and
unpaid interest. Generally, the remarketing agent will adjust the interest rate
every seven days (or at other specified intervals) in order to maintain the
interest rate at the prevailing rate for securities with a seven-day or other
designated maturity. Each Fund's investment in demand instruments which provide
that the Fund will not receive the principal note amount within seven days'
notice, in combination with the Fund's other investments which are not readily
marketable, will be limited to an aggregate total of 15% of the Fund's net
assets.
Each Fund may also buy variable rate master demand notes. The terms of the
obligations permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between a Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. Each Fund has the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or to
decrease the amount and the borrower may repay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
Because the notes are direct lending arrangements between a Fund and the
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they
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are redeemable (and, thus, immediately repayable by the borrower) at principal
amount, plus accrued interest, at any time. In connection with any such purchase
and on an ongoing basis, the Adviser will consider the earning power, cash flow
and other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, each Fund may, under its minimum
rating standards, invest in them only if, at the time of an investment, the
issuer meets the criteria set forth in this Prospectus for investment in money
market instruments.
LOANS OF PORTFOLIO SECURITIES. (All Funds) Each Fund may, subject to the
restrictions set forth under "Investment Restrictions," make loans of portfolio
securities to brokers, dealers and financial institutions if cash or cash
equivalent collateral, including letters of credit, equal to at least 102% of
the current market value of the securities loaned (including accrued dividends
and interest thereon) plus the interest payable with respect to the loan is
maintained by the borrower with the lending Fund in a segregated account. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. In determining whether to lend a security to
a particular broker, dealer or financial institution, the Adviser will consider
all relevant facts and circumstances, including the creditworthiness of the
broker, dealer or financial institution and whether the income to be earned from
the loan justifies the attendant risks. The 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 an aggregate value which exceeds 33
1/3% of the current value of the Fund's total assets. Loans of securities will
be subject to termination at the lender's or the borrower's option. The Fund may
pay reasonable administrative and custodial fees in connection with a securities
loan and may pay a negotiated portion of the interest or fee earned with respect
to the collateral to the borrower or the placing broker. Borrowers and placing
brokers may not be affiliated, directly or indirectly, with the Fund, its
investment adviser or subadviser.
REPURCHASE AGREEMENTS. (All Funds) Each Fund may invest in securities pursuant
to repurchase agreements, whereby the seller agrees to repurchase such
securities at the Fund's cost plus interest within a specified time (generally
one day). While repurchase agreements involve certain risks not associated with
direct investments in the underlying securities, the Funds will follow
procedures designed to minimize such risks. These procedures include effecting
repurchase transactions only with large, well-capitalized banks and registered
broker-dealers having creditworthiness determined by the Adviser to be
substantially equivalent to that of issuers of debt securities rated investment
grade. In addition, the Funds' repurchase agreements will provide that the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement, and that the Fund's custodian will take possession of such
collateral. In the event of a default or bankruptcy by the seller, the Fund will
seek to liquidate such collateral. The Adviser will continually monitor the
value of the underlying securities to ensure that their value always equals or
exceeds the repurchase price plus accrued interest. However, the exercise of the
Funds' right to liquidate such collateral could involve certain costs or delays
and, to the extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a loss.
Repurchase agreements are considered to be loans by an investment company under
the 1940 Act. It is the current policy of the Funds (except the International
Fund) not to enter into repurchase agreements
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exceeding in the aggregate 10% (15% in the case of the Fixed Income Fund) of the
market value of the Fund's total assets.
Repurchase agreements may involve certain risks. If the seller in the
transaction becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code, recent amendments to the Bankruptcy Code permit the Funds
to exercise a contractual right to liquidate the underlying securities. However,
if the seller is a stockbroker or other entity not afforded protection under the
Bankruptcy Code, an agency having jurisdiction over the insolvent entity may
determine that a Fund does not have the immediate right to liquidate the
underlying securities. If the seller defaults, a Fund might incur a loss if the
value of the underlying securities declines. A Fund may also incur disposition
costs in connection with the liquidation of the securities. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through selection criteria established by the Board of Trustees and monitoring
procedures.
ILLIQUID SECURITIES. (All Funds) A Fund will not invest in illiquid securities
if immediately after such investment more than 15% of such Fund's net assets
(taken at market value) would be invested in such securities. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended ("Securities Act"), securities that are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
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
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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 will monitor the liquidity of restricted securities in each Fund's
portfolio under the supervision of the Trustees. In reaching liquidity
decisions, the Adviser will consider, among other things, the following factors:
(1) the frequency of trades and quotes for the security over the course of six
months or as determined in the discretion of the Adviser; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers over the course of six months or as determined in the
discretion of the Adviser; (3) dealer undertakings to make a market in the
security; (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer); and (5) other factors, if
any, which the Adviser deems relevant. The Adviser will also monitor the
purchase of Rule 144A securities to assure that the total of all Rule 144A
securities held by a Fund does not exceed 15% of the respective Fund's average
daily net assets. Rule 144A securities which are determined to be liquid based
upon their trading markets will not, however, be required to be included among
the securities considered to be illiquid for purposes of Investment Restriction
No. 9.
INVESTMENT COMPANY SECURITIES. (All Funds) Each Fund may invest up to 10% of
its total assets in securities issued by other investment companies. Such
securities will be acquired by the Fund within the limits prescribed by the
Investment Company Act of 1940, as amended (the "1940 Act"), which include a
prohibition against a Fund investing more than 10% of the value of its total
assets in such securities. Investors should recognize that the purchase of
securities of other investment companies results in duplication of expenses such
that investors indirectly bear a proportionate share of the expenses of such
companies including operating costs, and investment advisory and administrative
services fees. Each Fund may not invest more than 5% of its total assets in the
securities of any one investment company.
LONG-TERM AND SHORT-TERM CORPORATE DEBT OBLIGATIONS. (International Fund,
Growth and Income Fund and Fixed Income Funds) The Funds 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 each Fund
may invest are certificates of deposit, bankers' acceptances, and fixed time
deposits. The Adviser, in choosing corporate debt securities on behalf of the
Fund will evaluate each issuer based on (i) general economic and financial
conditions; (ii) the specific issuer's (a) business and management, (b) cash
flow, (c) earnings coverage of interest and dividends, (d) ability to operate
under adverse economic conditions, (e) fair market value of assets, and (f) in
the case of foreign issuers, unique political, economic or social conditions
applicable to such issuer's country; and, (iii) other considerations the Adviser
deems appropriate. Except for temporary defensive purposes, the International
Fund is limited to 20% of its total assets in these types of securities and the
Growth and Income Fund is limited to 5% of its total assets.
The Funds will not purchase corporate debt securities rated below Baa by
Moody's Investors Service ("Moody's") or BBB by Standard & Poor's Corporation
("S&P") or to the extent certain U.S. or foreign debt obligations are unrated or
rated by other rating agencies, result in comparable quality. While "Baa"/"BBB"
and comparable unrated securities may produce a higher return than higher rated
securities, they are subject to a greater degree of market fluctuation and
credit risk than the higher quality securities in which the Fund may invest and
may be regarded as having speculative characteristics as well.
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After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. A security which has had its rating downgraded or revoked may
be subject to greater risk of principal and income, and often involve greater
volatility of price, than securities in the higher rating categories. Such
securities are also subject to greater credit risks (including, without
limitation, the possibility of default by or bankruptcy of the issuers of such
securities) than securities in higher rating categories. To the extent the
ratings given by a rating agency may change as a result of changes in such
organization or its rating systems, the Fixed Income Fund will attempt to
conform its ratings systems to such changes as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
Investment in obligations of foreign issuers may present a greater degree of
risk than investment in domestic securities because of less publicly available
financial and other information, less securities regulation, potential
imposition of foreign withholding and other taxes, war, expropriation or other
adverse governmental actions.
CONVERTIBLE SECURITIES. (Growth and Income Fund and International Fund) 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.
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 New York Fund will only make commitments
to purchase municipal obligations on a when-issued basis with the intention of
actually acquiring the securities but may sell them before the settlement date
if it is deemed advisable. The when-issued securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
on a when-issued basis is a form of leveraging and can involve a risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself in which case there could
be an unrealized loss at the time of delivery.
Each Fund will maintain liquid assets in segregated accounts with its
custodian in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
It is the current policy of the International Equity Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
INVESTMENTS IN MUNICIPAL SECURITIES (the Fixed Income Fund). The Fixed Income
Fund may, when deemed appropriate by the Adviser and consistent with the
investment objective of the Fund, invest in obligations of state and local
governmental issuers which carry taxable yields that are comparable to yields of
other fixed-income instruments of comparable quality or, which the Adviser
believes possess the possibility of capital appreciation. Municipal obligations
may include bonds which may be categorized as
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either "general obligation" or "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are secured by the net
revenue derived from a particular facility or group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source, but
not by the general taxing power.
The Fund may also invest in municipal notes rated at least MIG-1 by Moody's or
SP-1 by S&P. Municipal notes will consist of tax anticipation notes, bond
anticipation notes, revenue anticipation notes and construction loan notes.
Notes sold as interim financing in anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the issuer.
The Fund may also invest in municipal commercial paper, provided such
commercial paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if
unrated, is of comparable investment quality as determined by the Adviser.
MONEY MARKET SECURITIES. (Fixed Income Fund and International Fund) 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, each Fund may
invest 100% of its total assets in such money market instruments subject to
certain restrictions. All money market instruments will be limited to those
which carry a rating of MIG-1 or P-1 by Moody's or SP-1 or A-1 by S&P, or which
are comparably rated by another rating agency or, if unrated, are of comparable
quality as determined by the Adviser pursuant to guidelines established and
regularly reviewed by the Board of Trustees. During times when the Fund is
maintaining a temporary defensive posture, it may be unable to achieve fully its
investment objective.
(Growth and Income Fund) The Fund's investments in money market instruments
will consist of (i) short-term obligations of the U.S. Government, its agencies
and instrumentalities; (ii) other short-term debt securities rated A or higher
by Moody's or S&P or, if unrated, of comparable quality in the opinion of the
Adviser; (iii) commercial paper, including master demand notes; (iv) bank
obligations, including certificates of deposit, bankers' acceptances and time
deposits; and (v) repurchase agreements. At the time the Growth and Income Fund
invests for temporary defensive purposes in any commercial paper, bank
obligation or repurchase agreement, the issuer must have outstanding debt rated
A or higher by Moody's or S&P, or the issuer's parent corporation must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by S&P or, if no
such ratings are available, the investment must be of comparable quality in the
opinion of the Adviser. During times when the Fund is maintaining a temporary
defensive posture, it may be unable to achieve fully its investment objective.
MUNICIPAL OBLIGATIONS. (New York 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.
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Municipal bonds may be categorized as "general obligation" or "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit and general taxing power for the payment of principal and interest.
Revenue bonds are secured by the net revenue derived from a particular facility
or group of facilities or, in some cases, the proceeds of a special excise or
other specific revenue source, but not by the general taxing power. Industrial
development and pollution control bonds (now generally referred to as "private
activity bonds") are, in most cases, revenue bonds and do not generally carry
the pledge of the credit of the issuing municipality or public authority.
MUNICIPAL NOTES. Municipal notes include, but are not limited to, tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and project notes. Notes sold as interim financing in
anticipation of collection of taxes, a bond sale or receipt of other revenues
are usually general obligations of the issuer. Project notes are issued by local
housing authorities to finance urban renewal and public housing projects and are
secured by the full faith and credit of the United States Government.
Investments in municipal notes are limited to notes which are rated at the date
of purchase "MIG-2" or better ("VMIG-2" or better in the case of variable rate
notes) by Moody's or "SP-2" or better by S&P or comparably rated by other
NRSROs, or, if not rated, are in the opinion of the New York Fund's investment
adviser, of comparable investment quality. (See Appendix for description of
ratings.)
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.
Investments in municipal commercial paper are limited to issues rated "Prime-2"
or better by Moody's or "A-2" or better by S&P or comparably rated by other
NRSROs, or, if not rated, are in the opinion of the Fund's Adviser of comparable
investment quality.
After purchase by the New York Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Adviser will consider such event in its determination of whether the New York
Fund should continue to hold the security. To the extent the ratings given by a
NRSRO may change as a result of changes in such organizations or their rating
systems, the New York Fund will attempt to conform its rating systems to such
changes as standards for investments in accordance with the investment policies
contained in this Prospectus and in the Statement of Additional Information.
Although an investment in the New York Fund is not insured, certain of the
municipal obligations purchased by the New York Fund may be insured as to
principal and interest by companies that provide insurance for municipal
obligations. These obligations are identified as such in the New York Fund's
financial statements.
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.
NEW YORK OBLIGATIONS
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The New York Fund's assets will be invested primarily in municipal obligations
that are exempt from Federal, New York State and New York City income tax in the
opinion of bond counsel to the issuer and in participation certificates in such
obligations purchased from banks, insurance companies and other financial
institutions. Dividends paid by the New York Fund which are attributable to
interest income on tax-exempt obligations of the State of New York and its
political subdivisions, and of Puerto Rico, other U.S. territories or
possessions and their political subdivisions will be exempt from Federal, New
York State and New York City personal and corporate income taxes. The New York
Fund may purchase municipal obligations issued by other states, their agencies
and instrumentalities, the interest income on which will be exempt from Federal
income tax but will be subject to New York State and New York City personal and
corporate income taxes. As a matter of fundamental policy, the New York Fund
will invest no less than 80% of its net assets in New York obligations.
Opinions relating to the validity of municipal obligations (including New York
Obligations) and to the exemption of interest thereon from Federal income tax
are rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Trust nor the Adviser will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.
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 New York Fund may elect to invest up to 20% of the current value of its
total assets in securities subject to the Federal alternative minimum tax. In
addition, the Fund may invest up to 100% of its total assets in these and other
taxable securities to maintain a temporary "defensive" posture when, in the
opinion of the Fund's investment adviser, it is advisable to do so. During times
when the Fund is maintaining a temporary defensive posture, it may be unable to
fully achieve its investment objective.
The types of taxable securities (in addition to "alternative minimum tax"
securities) in which the Fund may invest are limited to the following money
market instruments which have remaining maturities not exceeding one year: (i)
obligations of the United States Government, its agencies or instrumentalities;
(ii) negotiable certificates of deposit and bankers' acceptances of United
States banks which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation; (iii) domestic commercial paper rated "P-1" by Moody's or
"A-1" or "A-1+" by S&P or comparably rated by another nationally recognized
statistical rating organization; and (iv) repurchase agreements. The Fund also
has the right to hold cash equivalents of up to 100% of its total assets when
the Fund's investment adviser deems it necessary for temporary defensive
purposes.
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. These transactions are also known as "stand-by commitments."
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The amount payable to the Fund by the seller upon its exercise of a put will
normally be (i) the Fund's acquisition cost of the securities (excluding any
accrued interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during the period the securities
were owned by the Fund. Absent unusual circumstances, the Fund values the
underlying securities at their amortized cost. Accordingly, the amount payable
by a broker-dealer or bank during the time a put is exercisable will be
substantially the same as the value of the underlying securities.
The Fund's right to exercise a put is unconditional and unqualified. A put is
not transferable by the Fund, although the Fund may sell the underlying
securities to a third party at any time. The Fund expects that puts will
generally be available without the payment of any direct or indirect
consideration. However, if necessary and advisable, the Fund may pay for
certain puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such a put (thus reducing the yield to
maturity otherwise available for the same securities).
The Fund may enter into put transactions only with broker-dealers and banks
which, in the opinion of the Fund's Adviser, present minimal credit risks. The
Fund's ability to exercise a put will depend on the ability of the broker-dealer
or bank to pay for the underlying securities at the time the put is exercised.
In the event that a broker-dealer or bank should default on its obligation to
repurchase an underlying security, the Fund might be unable to recover all or a
portion of any loss sustained from having to sell the security elsewhere.
The Fund intends to enter into put transactions solely to maintain portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a put will not affect the valuation of the
underlying security which will continue to be valued in accordance with the
amortized cost method. The actual put will be valued at zero in determining net
asset value. Where the Fund pays directly or indirectly for a put, its cost
will be reflected as an unrealized loss for the period during which the put is
held by the Fund and will be reflected in realized 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.
FLOATING RATE INSTRUMENTS. Certain municipal obligations which the New York
Tax Free Fund may purchase have a floating or variable rate of interest. Such
obligations bear interest at rates which are not fixed, but which vary with
changes in specified market rates or indices, such as a Federal Reserve
composite index. Such obligations may carry a demand or "put" feature which
would permit the holder to tender them back to the issuer (or to a third party)
at par value prior to maturity. The Fund's investment adviser will monitor on an
ongoing basis the earning power, cash flow and other liquidity ratios of the
issuers of such obligations, and will similarly monitor the ability of an issuer
of a demand instrument to pay principal and interest on demand. The Fund's right
to obtain payment at par on a demand instrument could be affected by events
occurring between the date the Fund elects to demand payment and the date
payment is due, which may affect the ability of the issuer of the instrument to
make payment when due.
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
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State of New York. The accuracy and completeness of the information contained in
such offering statements has not been independently verified.
Since the New York Fund invests primarily in obligations of New York issuers,
the marketability and market value of these obligations may be affected by long-
term economic problems which face New York City and New York State. In
particular, the ability of the State and the City to finance independently has
been adversely affected in the past by their inability to achieve or maintain
favorable credit ratings. There can also be an effect on the market price of
securities of other New York issuers if the City receives less favorable credit
ratings and if certain of its economic problems continue. If these problems are
not resolved, or if new ones develop, they could adversely affect the various
New York issuers' ability to meet their financial obligations. There can be no
assurance that New York City or the local entities, or the State, will not face
budget gaps in future years. The ability of the New York Fund to meet its
objective is affected by the ability of issuers to meet their payment
obligations. A default by an issuer of an obligation held by the New York Fund
could result in a substantial loss of principal with respect to that obligation
and a potential decline in the New York Fund's net asset value.
The New York Fund is permitted to invest up to 25% of the value of its total
assets in the securities of any one issuer without adhering to the 5% issuer
limitation described under "Investment Restrictions". To the extent that the New
York Fund invests up to 25% of its total assets in the securities of any one
issuer, there may be an increased risk of loss to the New York Fund.
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.
National economic growth during both 1998 and 1999 is expected to be
slower thanit was during 1997. The financial and economic turmoil which started
in Asia and has spread to other parts of the world is expected to continue to
negatively affect U.S. trade balances throughout most of 1999. In addition,
growth in domestic consumption, which has been a major driving force behind the
nation's strong economic performance in recent years, is expected to slow in
1999 as consumer confidence retreats from historic highs and the stock market
ceases to provide large amounts of extra discretionary income. However, the
lower short-term interest rates which are expected to be in force during 1999
should help prevent a recession. The revised forecast projects real GDP growth
of 3.4 percent in 1998, moderately below the 1997 growth rate. In 1999, real GDP
growth is expected to fall further, to 1.6 percent. The growth of nominal GDP is
projected to decline from 5.9 percent in 1997 to 4.6 percent in 1998 and 3.7
percent in 1999. The inflation rate is expected to drop to 1.7 percent in 1998
before rising to 2.7 percent in 1999. The annual rate of job growth is expected
to be 2.5 percent in 1998, almost equaling the strong growth rate experienced in
1997. In 1999, however, employment growth is forecast to slow markedly, to 1.9
percent. Growth in personal income and wages is expected to slow in 1998 and
again in 1999.
Continued growth is projected for New York State in 1998 and 1999 for
employment, wages, and personal income, although, for 1999, a significant
slowdown in the growth rates of personal income and wages are expected. The
growth of personal income is projected to rise from 4.7 percent in 1997 to 5.0
percent in 1998, but then drop to 3.4 percent in 1999, in part because growth in
bonus payments is expected to moderate significantly, a distinct shift from the
unusually high increases of the last few years. Overall employment growth is
expected to be 2.0 percent in 1998, the strongest in a decade, but is expected
to drop to 1.0 percent in 1999, reflecting the slowing growth of the national
economy, continued spending restraint in government, less robust profitability
in the financial sector and continued restructuring in the manufacturing, health
care, and banking sectors.
THE STATE BUDGET PROCESS. The requirements of the State budget process are
set forth in Article VII of the State Constitution and the State Finance law.
The process begins with the Governor's submission of the Executive Budget to the
Legislature each January, in preparation for the start of the fiscal year on
April 1. (The submission date is February 1 following a gubernatorial
election.) The budget must contain a complete plan of available receipts and
projected disbursements for the ensuing fiscal year ("State Financial Plan").
That proposed State Financial Plan must be balanced on a cash basis, and must be
accompanied by bills which: (i) set forth all proposed appropriations and
reappropriations, (ii) provide for any new or modified revenue measures, and
(iii) make any other changes to existing law necessary to implement the budget
recommended by the Governor.
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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'
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.
1998-99 Fiscal Year - The Legislature adopted the debt service component of the
State budget for the 1998-99 fiscal year on March 30, 1998 and the remainder of
the budget on April 18, 1998. In the period prior to adoption of the budget for
the current fiscal year, the Legislature also enacted appropriations to permit
the State to continue its operations and provide for other purposes. On April
25, 1998, the Governor vetoed certain items that the Legislature added to the
Executive Budget. The Legislature had not overridden any of the Governor's
vetoes as of the start of the legislative recess on June 19, 1998 (under the
State Constitution, the Legislature can override one or more of the Governor's
vetoes with the approval of two-thirds of the members of each house).
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General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the School Tax Relief Program (STAR),
expansion of the child care income-tax credit for middle- income families, a
phased-in reduction of the general business tax, and reduction of several other
taxes and fees, including an accelerated phase-out of assessments on medical
providers. The enacted budget also provides for significant increases in
spending for public schools, special education programs, and for the State and
City university systems. It also allocates $50 million for a new Debt Reduction
Reserve Fund (DRRF) that may eventually be used to pay debt service costs on or
to prepay outstanding State- supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund (TSRF), a balance of $158 million in the Community Projects Fund (CPF), and
a balance of $100 million in the Contingency Reserve Fund (CRF). The TSRF can be
used in the event of an unanticipated General Fund cash operating deficit, as
provided under the State Constitution and State Finance Law. The CPF is used to
finance various legislative and executive initiatives. The CRF provides
resources to help finance any extraordinary litigation costs during the fiscal
year.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of Budget believes that
its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth herein, and those projections may be changed materially
and adversely from time to time. See "Special Considerations" below for a
discussion of risks and uncertainties faced by the State.
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Second Update (current fiscal year) - On October 30, 1998, the State
issued the second of its three quarterly updates to the 1998-99 Financial Plan.
In the Mid-Year Update, the State continues to project that the State Financial
Plan for 1998-99 will remain in balance. The State now projects total receipts
in 1998-99 of $37.84 billion, an increase of $29 million over the amount
projected in the First Quarterly Update. The State has made no changes to its
July disbursement projections, with total disbursements of $36.78 billion
expected for the current fiscal year. The additional receipts increase the
State's projected surplus (reserve for future needs) by $29 million over the
July estimate, to $1.04 billion.
The Financial Plan now projects a closing balance in the General Fund of
$1.7 billion. The balance is comprised of the $1.04 billion reserve for future
needs, $400 million in the Tax Stabilization Reserve Fund, $100 million in the
Contingency Reserve Fund (after a planned deposit of $32 million in 1998-99),
and $158 million in the Community Projects Fund.
The State ended the first six months of 1998-99 fiscal year with a General
Fund cash balance of $5.02 billion, roughly $143 million higher than projected
in the cash flow accompanying the July Update to the Financial Plan. Total
receipts, including transfers from other funds, were approximately $52 million
higher than expected, with the increase comprised of additional tax revenues
($22 million) and transfers from other funds ($30 million). Total spending
through the first six months of the fiscal year was $16.28 billion, or $91
million lower than projected in July. This variance resulted primarily from
higher spending in Grants to Local Governments ($27 million), offset by lower
spending in State Operations ($124 million). These variances are timing-related
and should not affect total disbursements for the fiscal year.
Outyear Projections Of Receipts And Disbursements - State law requires
the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999- 00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. However,
the State's projections in 1999-00 currently assume actions to achieve $600
million in lower disbursements and $250 million in additional receipts from the
settlement of State claims against the tobacco industry. Consistent with past
practice, the projections do not include any costs associated with new
collective bargaining agreements after the expiration of the current round of
contracts at the end of the 1998-99 fiscal year. The State expects that the
1999-00 Financial Plan will achieve savings from initiatives by State agencies
to deliver services more efficiently, workforce management efforts, maximization
of federal and non-General Fund spending offsets, and other actions necessary to
bring projected disbursements and receipts into balance.
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The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999- 00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
personal income tax receipts to fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law. See "Special Considerations"
below for a description of other risks and uncertainties associated with the
State Financial Plan process.
Special Considerations - The economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. These 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. Because of the
uncertainty and unpredictability of these factors, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
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Projections of total State receipts in the Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth herein. In the past, the
State has taken management actions to address potential Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government have helped to create
projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year. There can be no assurance, however, that
the Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow more substantially beyond the 1998-99
fiscal year, with the incremental annual cost of all currently enacted tax
reductions estimated at over $4 billion by the time they are fully effective in
State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.
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1998-99 State Financial Plan - Four governmental fund types comprise the State
Financial Plan: the General Fund, the Special Revenue Funds, the Capital
Projects Funds, and the Debt Service Funds.
General Fund
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1998-99 fiscal year, the General Fund is expected to account for
approximately 47.6 percent of all Governmental Funds disbursements and 70.1
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types. Total receipts and transfers from
other funds are projected to be $37.56 billion, an increase of $3.01 billion
from the 1997-98 fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $36.78 billion, an increase of $2.43 billion
from the 1997-98 fiscal year.
Projected General Fund Receipts
Total General Fund receipts in 1998-99 are projected to be $37.56 billion,
an increase of over $3 billion from the $34.55 billion recorded in 1997-98. This
total includes $34.36 billion in tax receipts, $1.40 billion in miscellaneous
receipts, and $1.80 billion in transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998- 99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted basis, State tax revenues in the 1998-99 fiscal
year are projected to grow at approximately 7.5 percent, following an adjusted
growth of roughly nine percent in the 1997-98 fiscal year. The discussion below
summarizes the State's projections of General Fund taxes and other revenues for
the 1998-99 Fiscal year.
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The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based with certain modifications on federal definitions of
income and deductions. This tax continues to account for over half of the
State's General Fund receipts base. Net personal income tax collections are
projected to reach $21.24 billion, nearly $3.5 billion above the reported
1997-98 collection total. Since 1997 represented the completion of the 20
percent income tax reduction program enacted in 1995, growth from 1997 to 1998
will be unaffected by major income tax reductions. Adding to the projected
annual growth is the net impact of the transfer of the surplus from 1997-98 to
the current year which affects reported collections by over $2.4 billion on a
year-over-year basis, as partially offset by the diversion of slightly over $700
million in income tax receipts to the STAR fund to finance the initial year of
the school tax reduction program. The STAR program was enacted in 1997 to
increase the State share of school funding and reduce residential school taxes.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.7 billion, an increase of over 9 percent. This growth is largely a
function of over 8 percent growth in income tax liability projected for 1998 as
well as the impact of the 1997 tax year settlement on 1998-99 net collections.
User taxes and fees are comprised of three-quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation (LGAC) debt service requirements), cigarette,
alcoholic beverage, container, and auto rental taxes, and a portion of the motor
fuel excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts from user taxes and fees are projected to total $7.14 billion, an
increase of $107 million from reported collections in the prior year. The sales
tax component of this category accounts for all of the 1998-99 growth, as
receipts from all other sources decline $100 million. The growth in yield of the
sales tax in 1998-99, after adjusting for tax law and other changes, is
projected at 4.7 percent. The yields of most of the excise taxes in this
category show a long-term declining trend, particularly cigarette and alcoholic
beverage taxes. These General Fund declines are exacerbated in 1998-99 by
revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross-receipts-
based taxes on utilities and gallonage-based petroleum business taxes. Beginning
in 1994, a 15 percent surcharge on these levies began to be phased out and, for
most taxpayers, there is no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
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Other taxes include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. They are now projected to total
$1.02 billion -- $75 million below last year's amount. Two factors account for a
significant part of the expected decline in collections from this category.
First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-99, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government. Projected General Fund Disbursements
General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service.
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
1998-99 Financial Plan projects spending of $25.14 billion in this category, an
increase of $1.88 billion or 8.1 percent over the prior year. The largest annual
increases are for educational programs, Medicaid, other health and social
welfare programs, and community projects grants.
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The 1998-99 budget provides $9.65 billion in support of public schools. The
year-to-year increase of $769 million is comprised of partial funding for a
1998-99 school year increase of $847 million as well as the remainder of the
1997-98 school year increase that occurs in State fiscal year 1998- 99. Spending
for all other educational programs, which includes the State and City university
systems, the Tuition Assistance Programs, and handicapped programs, is estimated
at $3.00 billion, an increase of $270 million over 1997-98 levels.
Medicaid costs are estimated at $5.60 billion, an increase of $144 million
from the prior year. After adjusting 1997-98 for the $116 million prepayment of
an additional Medicaid cycle, Medicaid spending is projected to increase $260
million or 4.9 percent. Disbursements for all other health and social welfare
programs are projected to total $3.63 billion, an increase of $131 million from
1997-98. This includes an increase in support for children and families and
local public health programs, offset by a decline in welfare spending of $75
million that reflects continuing State and local efforts to reduce welfare
fraud, declining caseloads, and the impact of State and federal welfare reform
legislation.
Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing payments to local governments. Revenue sharing and other
general purpose aid to local governments are projected at $837 million, an
increase of approximately $37 million from 1997-98.
State operations spending reflects the administrative costs of operating
the State's agencies, including the prison system, mental hygiene institutions,
the State University system (SUNY), the Legislature, and the court system.
Personal service costs account for approximately 73 percent of spending in this
category. Since January 1995, the State's workforce has been reduced by about 10
percent and is projected to remain at its current level of approximately 191,000
persons in 1998-99.
State operations spending is projected at $6.70 billion, an increase of
$511 million of 8.3 percent from the prior year. This increase is primarily due
to an additional payroll cycle in 1998-99, a 3.5 percent general salary increase
on October 1, 1998 for most State employees, the loss of federal receipts that
would otherwise lower General Fund spending in mental hygiene programs, and a
projected 15.6 percent increase in the Judiciary's budget.
General State charges account primarily for the costs of providing
fringe benefits for State employees, including contributions to pension systems,
the employer's share of social security contributions, employer contributions
toward the cost of health insurance, and the costs of providing worker's
compensation and unemployment insurance benefits. This category also reflects
certain fixed costs such as payments in lieu of taxes, and payments of judgments
against the State or its public officers.
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Disbursements in this category are estimated at $2.22 billion, a
decrease of $50 million from the prior year. This annual decline reflects
projected decreases in pension costs and Court of Claims payments, offset by
modest projected increases for health insurance contributions, social security
costs, and the loss of reimbursements due to a reduction in the fringe benefit
rate charged to positions financed by non-General Fundsources.
Debt service paid from the General Fund reflects debt service on short-term
obligations of the State, and includes only interest costs on the State's
commercial paper program. The 1998-99 debt service estimate is $11 million,
reflecting relative stability in short-term interest rates. The State's
short-term TRAN borrowing program was eliminated in 1995.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Transfers in support of debt service are projected at $2.13 billion in
1998-99, an increase of $110 million from 1997-98. The increase reflects the
impact of certain prior year bond sales (net of refunding savings), and certain
bond sales planned to occur during the 1998-99 fiscal year. The State Financial
Plan also establishes a transfer of $50 million to the new Debt Reduction
Reserve Fund. The Fund may be used, subject to enactment of new appropriations,
to pay the debt service costs on or to prepay State- supported bonds.
Transfers in support of capital projects provide General Fund support for
projects not otherwise financed through bond proceeds, dedicated taxes and other
revenues, or federal grants. These transfers are projected at $200 million for
1998-99, comparable to last year.
Remaining transfers from the General Fund to other funds are estimated to
decline $59 million in 1998-99 to $327 million. This decline is primarily the
net impact of one-time transfers in 1997-98 to the State University Tuition
Stabilization Fund and to the Lottery Fund to support school aid, offset by a
1998-99 increase in the State subsidy to the Roswell Park Cancer Research
Institute.
Non-recurring Resources
The Division of the Budget estimates that the 1998-99 State Financial Plan
contains actions that provide non-recurring resources or savings totaling
approximately $64 million, the largest of which is a retroactive reimbursement
of federal welfare claims.
The 1998-99 Financial Plan projects a closing fund balance in the General
Fund of $1.42 billion. This fund balance is composed of a reserve of $761
million available for future needs, a $400 million balance in the TSRF, a $158
million balance in the CPF, and a balance of $100 million in the CRF, after a
projected deposit of $32 million in 1998-99.
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Other Governmental Funds
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds which are discussed
below. Amounts below do not include other sources and uses of funds transferred
to or from other fund types.
Special Revenue Funds
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise approximately 41
percent of total governmental funds receipts in the 1998-99 fiscal year,
three-quarters of that activity relates to federally-funded programs.
Total disbursements for programs supported by Special Revenue Funds are
projected at $29.97 billion, an increase of $2.32 billion or 8.4 percent from
1997-98. Federal grants account for approximately three-quarters of all spending
in the Special Revenue fund type. Disbursements from federal funds are estimated
at $21.78 billion, an increase of $1.12 billion or 5.4 percent. The single
largest program in this fund group is Medicaid, which is projected at $13.65
billion, an increase of $465 million or 3.5 percent above last year. Federal
support for welfare programs is projected at $2.53 billion, similar to 1997-98.
The remaining growth in federal funds is primarily due to the new Child Health
Plus program, estimated at $197 million in 1998-99. This program will expand
health insurance coverage to children of indigent families.
State special revenue spending is projected to be $8.19 billion, an
increase of $1.20 billion or 17.2 percent from last year's levels. Most of this
projected increase in spending is due to the $704 million cost of the first
phase of the STAR program, as well as $231 million in additional operating
assistance for mass transportation, and $113 million for the State share of the
new Child Health Plus program.
Capital Projects Funds
Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1998-99 fiscal year, activity in these funds
is expected to comprise 5.5 percent of total governmental receipts.
Capital Projects Funds spending in fiscal year 1998-99 is projected at
$4.14 billion, an increase of $575 million or 16.1 percent from last year. The
major components of this expected growth are transportation and environmental
programs, including continued increased spending for 1996 Clean Water/Clean Air
Bond Act projects and higher projected disbursements from the Environmental
Protection Fund (EPF). Another significant component of this projected increase
is in the area of public protection, primarily for facility rehabilitation and
construction of additional prison capacity.
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Debt Service Funds
Debt Service Funds are used to account for the payment of principal and
interest on long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund type is expected to comprise 3.8 percent of total governmental fund
receipts in the 1998-99 fiscal year. Receipts in these funds in excess of debt
service requirements may be transferred to the General Fund, Capital Projects
Funds and Special Revenue Funds, pursuant to law.
Total disbursements form the Debt Service Fund type are estimated at $3.36
billion in 1998-99, an increase of $275 million or 8.9 percent from 1997-98
levels. Of the increase, $102 million is for transportation purposes, including
debt service on bonds issued for State and local highway and bridge programs
financed through the New York State Thruway Authority and supported by the
Dedicated Highway and Bridge Trust Fund. Another $45 million is for education
purposes, including State and City University programs financed through the
Dormitory Authority of the State of New York (DASNY). The remainder is for a
variety of programs in such areas as mental health and corrections, and for
general obligation financings.
Year 2000 Compliance
New York State is currently addressing "Year 2000" data processing
compliance issues. The Year 2000 compliance issue ("Y2K") arises because most
computer software programs allocate two digits to the data field for "year" on
the assumption that the first two digits will be "19." Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly processdata.
In 1996, the State created the Office for Technology (OFT) to help
address statewide technology issues, including the Year 2000 issue. OFT has
estimated that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose.
Mission-critical computer applications are those which impact the health, safety
and welfare of the State and its citizens, and for which failure to be in Y2K
compliance could have a material and adverse impact upon State operations.
High-priority computer applications are those that are critical for a State
agency to fulfill its mission and deliver services, but for which they are
manual alternatives. Work has been completed on roughly 20 percent of these
systems. All remaining unfinished mission-critical and high-priority systems
have at least 40 percent or more of the work completed. Contingency planning is
underway for those systems which may be non-compliant prior to failure dates.
The enacted budget also continues funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and finance and
welfare management systems, for which Year 2000 compliance is included as a part
of theproject.
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OFT is monitoring compliance on a quarterly basis and is providing
assistance and assigning resources to accelerate compliance for mission-
critical systems, with most compliance testing expected to be completed by
mid-1999. There can be no guarantee, however, that all of the State's mission-
critical and high-priority computer systems will be Year 2000 compliant and that
there will not be an adverse impact upon State operations or State finances as a
result.
Cash-Basis Results for Prior Fiscal Years
The State reports its financial results on two bases of accounting: the
cash basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by Generally Accepted Accounting Principles ("GAAP"), showing
revenues and expenditures.
General Fund 1995-96 through 1997-98
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives most
State taxes and other resources not dedicated to particular purposes. General
Fund moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types. A narrative
description of cash-basis results in the General Fund is presented below.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes ("TRANs"). A national recession, followed by the
lingering economic slowdown in New York and the regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last six fiscal years, however, the State has recorded balanced
budgets on a cash basis, with positive fund balances as described below.
1997-98 Fiscal Year
The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by DOB of approximately $2.04 billion. The
cash surplus was derived primarily from higher-than- anticipated receipts and
lower spending on welfare, Medicaid, and other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The balance is held in three accounts within
the General Fund: the Tax Stabilization Reserve Fund (TSRF), the Contingency
Reserve Fund (CRF) and the Community Projects Fund (CPF). The TSRF closing
balance was $400 million, following a required deposit of $15 million (repaying
a transfer made in 1991-92) and an extraordinary deposit of $68 million made
from the 1997-98 surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the surplus. The CPF, which finances legislative
initiatives, closed the fiscal year with a balance of $170 million, an increase
of $95 million. The General Fund closing balance did not include $2.39 billion
in the tax refund reserve account, of which $521 million was made available as a
result of the Local Government Assistance Corporation (LGAC) financing program
and was required to be on deposit on March 31, 1998.
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General Fund receipts and transfers from other funds for the 1997-98 fiscal
year (including net tax refund reserve account activity) totaled $34.55 billion,
an annual increase of $1.51 billion, or 4.57 percent over 1996-97. General Fund
disbursements and transfers to other funds were $34.35 billion, an annual
increase of $1.45 billion or 4.41 percent.
1996-97 Fiscal Year
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$1.42 billion. The cash surplus was derived primarily from higher-than-expected
receipts and lower-than-expected spending for social services programs.
The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing balance did not include $1.86 billion in
the tax refund reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit as of
March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal
year (including net tax refund reserve account activity). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal
year.
Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two new dedicated funds
in the Special Revenue and Capital Projects fund types. These revenues are used
to support the capital programs of the Department of Transportation and the
Metropolitan Transportation Authority (MTA).
In the Special Revenue Funds, disbursements increased from $26.26 billion
to $27.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds declined over the three year
period from $3.97 billion to $3.56 billion as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased.
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LitigationState Finance Policies
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 fiscal years 1986-87 through
1996-97 (New York State Health Maintenance Organization Conference, Inc., et al.
v. Muhl, et al. ["HMO"], and New York State 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. The petitioners did not cross appeal. In Blue
Cross II, by amended judgment dated April 2, 1998, the Supreme Court annulled
the regulation setting the 1996-97 premium rate and directed that all 1996-97
excess malpractice premiums be returned to the payors. The State will not be
obligated in either case to pay moneys to any petitioner. Adverse determinations
would result in refunds from the affected insurers.
Tax Law
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 consumers on Indian reservations. In orders
dated August 13, 1996 and August 24, 1996, the Supreme Court, Albany County,
ordered, inter alia, 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 onto Indian reservations
other than for Indian consumption or, alternately, 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, inter alia, 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. The case was argued before the Court of Appeals on March
24, 1998.
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Clean Water/Clean Air Bond Act of 1996
In Robert L. Schulz, et al. v. The New York State Executive, et al.
(Supreme Court, Albany County, commenced October 16, 1996), plaintiffs challenge
the enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes byreference.
In an opinion dated June 9, 1998, the Court of Appeals affirmed the
July 17, 1997 order of the Appellate Division, Third Department, affirming the
lower court dismissal of this case.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.
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.
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SHELTER ALLOWANCE. In an action commenced in March 1987 against State and New
York City officials (Jiggetts, et al. v. Bane, et al., 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 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.
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Public Authorities
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this summary, public
authorities refer to public benefit corporations created pursuant to State law,
other than local authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts and restrictions set
forth in legislative authorization. The State's access to the public credit
markets could be impaired and the market price of its outstanding debt may be
materially and adversely affected if any of its public authorities were to
default on their respective obligations. As of December 31, 1997, there were 17
public authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State authorities
was $84 billion, only a portion of which constitutes State-supported or State-
related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electric and gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities. Also, there are
statutory arrangements providing for State local assistance payments otherwise
payable to localities to be made under certain circumstances to public
authorities. Although the State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
public authorities under these arrangements, the affected localities may seek
additional State assistance if local assistance payments are diverted. Some
authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to provide transit and commuter
services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $5 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State- supported or
State-related debt.
Metropolitan Transportation Authority - The MTA oversees the operation of subway
and bus lines in New York City by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus
services in the New York Metropolitan area through MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad Company, and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and
tunnels. Because fare revenues are not sufficient to finance the mass transit
portion of these operations, the MTA has depended on, and will continue to
depend on, operating support from the State, local governments and TBTA,
including loans, grants and subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
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Since 1980, the State has enacted several taxes-including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax--that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987, State law also has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. For the 1998- 99 fiscal year, State assistance to the MTA is projected
to total approximately $1.3 billion, an increase of $133 million over the 1997-
98 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program (subsequently
amended in August 1997), which supersedes the overlapping portion of the MTA's
1992-96 Capital Program. The 1995-99 Capital Program is the fourth capital plan
since the Legislature authorized procedures for the adoption, approval and
amendment of MTA capital programs and is designed to upgrade the performance of
the MTA's transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 Capital Program, or
parts thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995- 99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.
The City of New York
The fiscal health of the State may also be affected by the fiscal health of
New York City (the "City"), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
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The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan ("Financial Plan") annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October.
The City of New YorkFiscal Oversight
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York to
provide financing assistance to the City; the New York State Financial Control
Board (the "Control Board") to oversee the City's financial affairs; and the
Office of the State Deputy Comptroller for the City of New York ("OSDC") to
assist the Control Board in exercising its powers and responsibilities. A
"control period" existed from 1975 to 1986 during which the City was subject to
certain statutorily-prescribed fiscal controls. The Control Board terminated the
Control Period in 1986 when certain statutory conditions were met. State law
requires the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million of impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those which
received or may receive moneys from the City directly, indirectly or
contingently) operate under the Financial Plan. The City's Financial Plan
summarizes its capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and 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.
To successfully implement its Financial Plan, the City and certain entities
issuing debt for the benefit of the city must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In 1997, the State created the New York City Transitional Finance Authority
("TFA") to finance a portion of the City's capital program because the City was
approaching its State Constitutional general debt limit. Without the additional
financing capacity of the TFA, projected contracts for City capital projects
would have exceeded the City's debt limit during City fiscal year 1997-98.
Despite this additional financing mechanism, the City currently projects that,
if no further action is taken, it will reach its debt limit in City fiscal year
1999-2000. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the TFA to be unconstitutional.
On November 25, 1997 the State Supreme Court found the legislation establishing
the TFA to be constitutional and granted the defendants' motion for summary
judgment. The plaintiffs have appealed the decision. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
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Monitoring Agencies
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1996-97.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy. These reports have also indicated that recent City budgets have been
balanced in part through the use of non-recurring resources and that the City's
Financial Plan tends to rely on actions outside its direct control. These
reports have indicated that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth and that the City is
likely to continue to face substantial gaps between forecast revenues and
expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ("IBO") has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City.
Other Localities
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1998-99 fiscal year.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998- 99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998-99.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
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The appropriation and allocation of general purpose local government
aid among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
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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);
(2) with respect to 75% of its total assets (taken at market value),
purchase a security if as a result (1) more than 5% of its total
assets (taken at market value) would be invested in the securities
(including securities subject to repurchase agreements), of any one
issuer, other than obligations which are issued or guaranteed by the
United States Government, its agencies or instrumentalities or (2)
the Fund would own more than 10% of the outstanding voting
securities of such issuer.
(3) engage in the underwriting of securities of other issuers,
except to the extent that 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;
(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 where such
borrowings would not exceed 33-1/3% of its total assets (including the
amount borrowed) taken at market value; or pledge, mortgage or
hypothecate its assets, except to secure indebtedness permitted by
this paragraph and then only if such pledging, mortgaging or
hypothecating does not exceed 33-1/3% of each Fund's total assets
taken at market value;
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(6) invest for the purpose of exercising control over management of
any company;
(7) invest more than 10% of its total assets in the securities of
other investment companies;
(8) invest in any security, including repurchase agreements maturing
in over seven days or other illiquid investments which are subject
to legal or contractual delays on resale or which are not readily
marketable, if as a result more than 15% of the market value of the
respective Fund's total assets would be so invested;
(9) purchase interests in oil, gas, or other mineral exploration
programs of real estate and real estate mortgage loans except as
provided in the Prospectus of the 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;
(10) 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;
(11) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of 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 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); (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;
(12) make loans, except that each Fund may make loans or lend its
portfolio securities if, as a result, the aggregate of such loans
does not exceed 33-1/3% of the value of a Fund's total assets.
In addition, the Fixed Income Fund and New York Fund may not:
(13) purchase equity securities or other securities convertible into
equity securities.
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In addition, the New York Fund may not
(14) invest less than 80% of its net assets in New York Obligations except
when, in the opinion of the Fund's investment adviser, it is advisable for the
Fund to invest temporarily up to 100% of its total assets in taxable
securities to maintain a "defensive" posture because of unusual market
conditions. For instance, a "defensive" posture is warranted when the Fund's
assets exceed the available amount of municipal obligations that meet the
Fund's investment objective and policies.
It is the intention of the Funds, unless otherwise indicated, that with
respect to the Fund's policies that are the result of the application of law,
the Funds will take advantage of the flexibility provided by rules or
interpretations of the SEC currently in existence or promulgated in the future
or changes to such laws.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in the market value of an investment, in the net or total assets of
the Funds, in the securities rating of the investment, or any other later
change.
MANAGEMENT
TRUSTEES AND OFFICERS
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 Funds and the execution of policies
formulated by the Trustees.
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 60, 405
Lexington Avenue, New York, NY 10017; Managing Director, Adirondack
Capital Group since 1997; President, Paumgarten and Company 1991to
1997; Advisory Managing Director, Lepercq de Neuflize & Co.
Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to
1993; Chairman of the Board of Trustees, HSBC Funds Trust.
WOLFE J. FRANKL, Trustee - age 78, 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 73, 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 69, 43 Captains Walk, Marina Cove, Palm
Coast, Florida 32137. Chairman and President, JPP Equities, Inc.
1982 to 1995;
49
<PAGE>
Trustee, HSBC Funds Trust.
RICHARD J. LOOS/1*/, 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.
Anthony J. Fischer, Vice President - Client Services, Fund Services
Division of BISYS Fund Services, Inc. from 1998 to present. SEI,
1997-1998 Paul T. Kane, Assistant Treasurer - Vice President and
Assistant Treasurer, Fund Services Division of BISYS Fund Services,
Inc., December 1997 to present; Director Shareholder Reporting,
September 1989 to December 1996, Fidelity Accounting and Custody
Services, 1985-1997.
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 appointment
to be effective May 5, 1998. Mr. Loos is not a voting member of the
Board of Trustees.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation from Benefits Accrued as Benefits Upon from the Fund
the Funds Part of Fund Expenses Retirement Complex*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee $12,830 0 N/A $28,000
Richard J. Loos, Vice Chairman $11,027 0 N/A $24,000
Emeritus
Harald Paumgarten, Trustee $13,960 0 N/A $31,000
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
John P. Pfann, Trustee $ 4,499 0 N/A $14,000
Robert A. Robinson, Trustee $13,638 0 N/A $30,000
</TABLE>
*Represents the total compensation paid to such persons during the calendar year
ended December 31, 1998. 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 HSBC Bank USA and is located at 140 Broadway, New York,
New York 10005.
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.
SUB-ADVISER
The Advisor 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, England EC2V 6EE.
Delaware International 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
51
<PAGE>
and provides investment advisory services primarily to institutional accounts
and mutual funds in the global and international equity and fixed income
markets. As of December 31, 1998, Delaware International managed approximately
$11.8 billion in global and foreign stock and bond portfolios for separate
account and investment company clients. As of that date, advisory affiliated
within Delaware Investments had total assets under management of approximately
$45.2 billion, including assets managed by Delaware International.
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, Delaware International
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.,
affiliated of the Adviser, served as sub-advisers to the International
Fund.
Under its Sub-Advisory contract with the Adviser, Delaware International
provides at its own expense the personnel and equipment necessary to carry out
its duties. Delaware International 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 Funds 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 Funds.
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 Funds'
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board.
52
<PAGE>
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, 1998, BISYS Fund Services earned
administration service fees totaling $98,265, $141,409, $52,902, and $84,516 net
of fee waivers of $94,246, $65,509, $35,257 and $56,326 for the International
Equity Fund, Growth and Income Fund, Fixed Income Fund and the New York Fund,
respectively.
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.
53
<PAGE>
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.
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 Equity 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
the Growth and Income Fund and Fixed Income Fund Advisory
- - ------------------------------------------------ ------------
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
the New York Tax-Free Fund Advisory
- - ------------------------------------------------ ------------
Not exceeding $300 million...................... 0.450%
In excess of $300 million but
not exceeding $600 million.................... 0.420
In excess of $600 million but
not exceeding $1 billion...................... 0.385
In excess of $1 billion but
not exceeding $1.5 billion.................... 0.350
In excess of $1.5 billion but
not exceeding $2 billion...................... 0.315
In excess of $2 billion......................... 0.280
With respect to the International Fund for the years ended December 31, 1998,
1997 and 1996, the Adviser earned $336,751, $89,584 and $20,367 net of fee
waivers of $336,751, $307,447, and $140,552, respectively.
With respect to the Growth and Income Fund for the years ended December 31,
1998, 1997 and 1996, the Adviser earned $518,499, $755,596, and $597,497 ,
respectively, in advisory fees.
With respect to the Fixed Income Fund, for the years ended December 31, 1998,
1997 and 1996, the Adviser was paid $88,170, $354,982 and $562,307.
54
<PAGE>
With respect to the New York Fund, for the years ended December 31, 1998, 1997
and 1996, the Adviser was paid $309,890, $98,398 and $112,830, net of fee
waivers of $0, $78,720 and $89,511, respectively.
Except for the expenses paid by the Adviser under the Advisory Contract and by
BISYS Fund Services, Inc. under the Management and Administration Agreement, the
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 26, 1999.
DISTRIBUTION PLANS AND EXPENSES
The Board of Trustees of the Trust has adopted Distribution Plans (the "Plan")
on behalf of each class of shares of each Fund, except the Institutional class
of shares of the International Equity Fund, 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 not to exceed an annual rate of 0.35%
(0.50% in the case of the Growth and Income Fund) of the average daily net
assets of the Class A shares of all the Funds. Class B and Class C shares pay a
fee not to exceed an annual rate of 1.00% of the average daily net assets of
each share class of each Fund.
BISYS Fund Services will use all amounts received under the Plan for
payments to broker-dealers or financial institutions for their assistance in
distributing shares of each Fund including rendering distribution-related asset
introduction and asset retention services and otherwise promoting the sale of
the Funds' shares. BISYS Fund Services may also use all or any portions of such
fee to pay expenses such as the printing and distribution of prospectuses sent
to prospective investors, the preparation, printing and distribution of sales
literature and expenses associated with media advertisements and telephone
services.
The Plan provides 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 the outstanding shares
of each class 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.
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
55
<PAGE>
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 26, 1999.
For the fiscal year ended December 31, 1998, the Funds incurred the following
amounts in distribution-related fees under the Rule 12b-1 Distribution
Plan:
<TABLE>
<CAPTION>
Printing of
Compensation to Prospectuses and Retail Postage and
Broker- Shareholder Marketing Miscellaneous
Fund Dealers Advertising Reports Program Expenses Total
---- ------- ----------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
International Fund 0 0 0 0 0 0
(Service Class)
Fixed Income Fund 0 0 0 0 0 0
New York Fund $ 55,834 $ 0 $ 0 $ 0 $ 0 $55,834
</TABLE>
SERVICE ORGANIZATIONS
The Trust also contracts with banks (including HSBC Bank USA), 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% for Class A
shares and 0.50% for Class B and Class C shares. 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.
56
<PAGE>
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.
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% (0.50% for Class B and Class C) 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 payment may be more or less than the fees
payable to BISYS Fund Services, Inc. for the services it provides pursuant to
the Transfer Agency Agreement for similar services.
The payments will be made by the Funds to the Participating Organizations
pursuant to the Servicing Agreements. BISYS Fund Services, Inc. will not
receive any compensation as transfer or dividend disbursing agent with respect
to the subaccounts maintained by Participating Organizations. The Board of
Trustees will review, at least quarterly, the amounts paid and the purposes for
which such expenditures were made pursuant to the Servicing Agreements.
Under separate agreements, the Adviser (not the funds) may make supplementary
payments from its own revenues to a Participating Organization that agrees to
perform services such as advising customers about the status of their
subaccounts, the current yield and dividends declared to date and providing
related services a shareholder may request. Such payments will vary depending
upon such factors as the services provided and the cost incurred by each
Participating Organization.
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
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.
57
<PAGE>
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
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.
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<PAGE>
The average annual total return information for Class A shares of each of the
Funds, and the Institutional Class of the International Fund, for the periods
indicated below is as follows:
<TABLE>
<CAPTION>
Shares Charge* NAV
---------------- -------
<S> <C> <C>
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%
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%
Class A
One year ended December 31, 1997 (6.97%) (2.06%)
Inception (April 25, 1994) to December 31, 1997 (0.42%) 1.07%
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%
</TABLE>
* Includes maximum sales charge. Performance data for Class B and Class C shares
is not yet available because these classes of shares were not offered prior to
May, 1999. Past Performance is not predictive of future performance.
Cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Cumulative total return is calculated by finding the rate
of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
59
<PAGE>
C = (ERV/P) - 1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
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.
60
<PAGE>
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on personal
money management that periodically rates and ranks mutual funds by
performance.
* Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
* Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
* 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. The 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 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 (and in the case of the
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International Fund, securities for which market quotations are available but the
Adviser determines that a given quotation is not representative of a security's
current 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. 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.
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 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
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period of time. This standard would allow the affiliate to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arms-length transaction. The Trustees of the Trust
regularly review the commissions paid by the Funds to affiliated brokers. The
Funds will not do business with nor pay commissions to affiliates of the Adviser
in any portfolio transactions where they act as principal.
As permitted by Section 28(e) of the "Securities Exchange Act of 1934 (the
"1934 Act") the Adviser may cause the 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 may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the view and information of securities firms.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds. 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.
The aggregate brokerage commissions paid by the International Fund for the
years ended December 31, 1998, 1997 and 1996 were $___, $330,959 and $113,445,
respectively. No brokerage commissions were paid to affiliated brokers during
these periods.
For the years ended December 31, 1998, 1997 and 1996 the Growth and Income
Fund paid an aggregate of $____, $288,300 and $113,241 respectively, in
brokerage commissions.
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, 1998, December 31, 1997 and December 31, 1996 was
163.90%, 112.54% and 77.91% respectively. The Growth and Income Fund's portfolio
turnover rate for the years ended December 31, 1998, December 31, 1997 and
December 31, 1996 was 82.19%, 69.1% and 61.7% respectively. The Fixed Income
Fund's portfolio turnover rate for the years ended December 31, 1998, December
31, 1997 and 1996 was 71.05%, 61% and 156%, respectively (the relatively higher
1996 turnover was due to market volatility). The New York Fund's portfolio
turnover rate for the years ended December 31, 1998, December 31, 1997 and 1996
was 56.81%, 35.6% and 87.4%, respectively.
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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.
PURCHASE OF SHARES
The following information supplements and should be read in conjunction with
the sections in the Funds' Prospectus entitled "Purchasing and Adding to Your
Shares." The Prospectus contains a general description of how investors may buy
shares of the Funds and states whether the Funds offer more than one class of
shares. Class A shares are generally sold with a sales charge payable at the
time of purchase. The prospectus contains a table of applicable sales charges.
Certain purchases of Class A shares may be exempt from a sales charge. Class B
and C shares may be subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The prospectus
contains a table of applicable CDSCs. After being held for six years, Class B
shares will automatically convert into Class A shares which are not subject to
sales charges or a CDSC. Class B and C shares are offered without an initial
sales charge. The Funds may sell shares without a sales charge or CDSC pursuant
to special purchase plans the Trust signs.
When purchasing Fund shares, you must specify which Class is being purchased.
The decision as to which Class of shares is most beneficial to you depends on
the amount and the intended length of your investment. You should consider
whether, during the anticipated life of your investment in the Fund, the
accumulated distribution fee, service fee and CDSC, if any, on Class B shares or
Class C shares would be less than the accumulated distribution fee and initial
sales charge on Class A shares purchased at the same time, and to what extent,
if any, such differential would be offset by the return on Class A shares
respectively. Additionally, investors qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution and service fees on Class B or Class C shares exceed the
accumulated distribution fee and initial sales charge on Class A shares during
the life of the investment. Finally, you should consider the effect of the CDSC
period and any conversion rights of the Classes in the context of your own
investment time frame. For example, while Class C shares have a shorter CDSC
period than Class B shares, Class C shares do not have a conversion feature and,
therefore, are subject to ongoing distribution and service fees. Thus, Class B
shares may be more attractive than Class C shares to investors with longer term
investment outlooks. Generally, Class A shares will be most appropriate for
investors who invest $1,000,000 or more in Fund shares, and Class A shares will
not be appropriate for investors who invest less than $50,000 in Fund
shares.
A broker-dealer may receive different levels of compensation depending on
which class of shares is sold. The Distributor may also provide different
additional compensation to dealers in connection with selling shares of the
Funds or for their own company-sponsored sales programs. Additional
compensation or assistance may be provided to dealers and includes, but is not
limited to, payment or reimbursement for educational, training and sales
conferences or programs for their employees. In some cases, this compensation
may only be available to dealers whose representatives have sold or are expected
to sell significant amounts of shares. The Distributor will make these payments
from its own resources and none of the aforementioned additional compensation is
paid for by the applicable Fund or its shareholders.
Shares of the Funds are offered on a continuous basis at net asset value, plus
any applicable sales charge, by the Distributor as an investment vehicle for
institutions, corporations, fiduciaries and individuals.
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The sales charge applicable to the purchase of Fund shares will be waived on
the following purchases: (1) by Trustees and officers of the Trust and of HSBC
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 a Fund at the time of the individual's purchase), (8) by
corporations, their officers or directors, partnerships, and their partners
which are customers or prospective customers of Marine Midland Bank when
authorized by an officer of Marine Midland Bank, and (9) by individuals who, as
determined by an officer of the Fund in accordance with guidelines established
by the Fund's Trustees, have purchased shares under special circumstances not
involving sales expenses to dealers or the Distributor. Eligible investors
should contact the Adviser for details.
The sales load does not apply in any instance to reinvested dividends.
From time to time dealers who receive dealer discounts and broker commissions
from the Distributor may reallow all or a portion of such dealer discounts and
broker commissions to other dealers or brokers. The Distributor, at its expense,
may also provide additional compensation to dealers in connection with sales of
shares of the Funds. Such compensation may include financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Trust, and/or other dealer- sponsored special events. In some
instances, this compensation 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 a Fund's Shares to qualify for the compensation to the extent
such may be prohibited by the laws of any state or any self- regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by any Fund or its shareholders.
Stock certificates will not be issued with respect to the shares. The Transfer
Agent shall keep accounts upon the book of the Trust for recordholders of such
shares.
RIGHT OF ACCUMULATION
The Funds offer to all shareholders a right of accumulation under which any
shareholder may purchase shares of a Fund at the offering price applicable to
the total of (a) the dollar amount then being purchased plus (b) an amount equal
to the offering price of the shareholder's combined holdings of the shares of
the 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
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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 a Fund and other
eligible HSBC Funds (other than Money Market Funds) during a 13-month period at
the reduced sales charge rates applying to the aggregate amount of the intended
purchases stated in the Letter of Intent. The Letter of Intent may apply to
purchases made up to 90 days before the date of submission of the Letter.
Dividends and distributions of capital gains paid in shares of a 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. Each Fund reserves the right to amend, suspend or cease
offering this program at any time.
REDEMPTIONS
The proceeds of a redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for Federal and New York
State and City income tax purposes. Any loss realized on the redemption of Fund
shares held, or treated as held, for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain dividends
received on the redeemed shares.
A shareholder's account with a Fund remains open for at least one year
following complete redemption and all costs during the period will be borne by
the Fund. This permits an investor to resume investments in such Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive shareholder expense burdens, each
Fund reserves the right to adopt a policy pursuant to which it may redeem, upon
not less than 30 days' notice, shares of the Fund in an account which has a
value below a designated amount. However, any shareholder affected by the
exercise of this right will be allowed to make additional investments prior to
the date fixed for redemption to avoid liquidation of the account.
The Funds may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is closed,
other than customary weekend and holiday closings, (ii) the Securities and
Exchange Commission has by order permitted such suspension or (iii) an emergency
exists making disposal of portfolio securities or determination of the value of
the net assets of the Funds not reasonably practicable.
Although it would not normally do so, the Trust has the right to pay the
redemption price in whole or in part in securities of a Fund's portfolio as
prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the 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.
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SYSTEMATIC WITHDRAWAL PLAN
An owner of $10,000 or more worth of shares of a Fund may elect to have
periodic redemptions from his account to be paid on a monthly basis. The minimum
periodic payment is $50. A sufficient number of shares to make the scheduled
redemption will be redeemed on the first or 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 a Fund who has redeemed shares may reinvest, without a sales
charge, up to the full amount of such redemption at the net asset value
determined at the time of the reinvestment within 60 days of the original
redemption. This privilege must be effected within 60 days of the redemption and
the investor at the time of purchase must provide the number of shares redeemed
within the 60 day period. The shareholder must reinvest in the same Fund and
account from which the shares were redeemed. A redemption is a taxable
transaction and gain or loss may be recognized for Federal income tax purposes
even if the reinstatement privilege is exercised. Any loss realized upon the
redemption will not be recognized as to the number of shares acquired by
reinstatement, except through an adjustment in the tax basis of the shares so
acquired.
INCOME TAXES
The Funds intend to distribute annually substantially all of their net
investment income in the form of dividends. Shares purchased will begin earning
dividends on the day of settlement and shares redeemed will earn dividends
through the date of redemption. Net investment income for a Saturday, Sunday or
holiday will be declared as a dividend on the previous business day. Dividends
declared in, and attributable to, the preceding month will be paid within five
business days after the end of such month.
In order to satisfy certain annual distribution requirements of the Internal
Revenue Code of 1986 (the "Code"), the Funds may declare special dividend and
capital gains distributions during October, November or December as of a record
date in such a month. Such distributions, if paid to shareholders in the
following January, are deemed for Federal income tax purposes to have been paid
by the Fund and received by shareholders on December 31 of the prior year.
Each Fund will be treated as a separate entity for Federal income tax
purposes, notwithstanding that it is one of multiple series of the Trust. Each
Fund has elected to be treated, and has qualified and intends to continue to
qualify to be treated as a regulated investment company 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.
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
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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 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.
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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.
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 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.
69
<PAGE>
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.
Foreign exchange gains and losses realized by a 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 a 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 a
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.
70
<PAGE>
In the event a Fund makes the election described above to pass through non-
U.S. taxes to shareholders, shareholders will be required to include in income
(in addition to any distributions received) their proportionate portion of the
amount of non-U.S. taxes paid by the Fund and will be entitled to claim either a
credit or deduction for their portion of such taxes in computing their U.S.
Federal income tax liability. Availability of such a credit or deduction is
subject to certain limitations. Shareholders will be informed each year in which
the Fund makes the election regarding the amount and nature of foreign taxes to
be included in their income for U.S. Federal income tax purposes.
Each year each 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.
Exempt-interest dividends and other distributions paid by the New York Fund
are includable in the tax base for determining the taxibility of social security
or railroad retirement benefits.
Depending on the residence of the New York Fund's shareholders for tax
purposes, distributions may also be subject to state and local taxes.
Shareholders are required to report the amount of tax-exempt interest received
each year, including exempt-interest dividends, on their Federal tax returns.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of the New York Fund shares in their
particular circumstances. 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.
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
71
<PAGE>
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 four series representing four portfolios of the
Trust. Each portfolio, except the International Fund, is comprised of three
different classes of shares - Class A, Class B and Class C shares. The
International Fund is comprised of four different classes of shares - Class A,
Class B, Class C and Institutional Class 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. 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.
72
<PAGE>
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.
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 any 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.
At February, 1999 no person owned of record or, to the knowledge of management
beneficially owned more than 5% of the outstanding shares of any Fund except as
set forth below:
Shares Held & Percent of Class
Name and Address of Shares Held Percent of Class
73
<PAGE>
<TABLE>
<CAPTION>
Holder of Record
------------------------------- --------------------------------------
<S> <C> <C>
GROWTH AND INCOME FUND 6,315,394 91.958%
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 6,867,661
INTERNATIONAL EQUITY FUND
Service 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
FIXED INCOME FUND 5,364,126 97.215%
Marine Midland Bank
Buffalo, NY 14240
Total Shares Outstanding 5,517,778
</TABLE>
<TABLE>
<CAPTION>
Name and Address of
Holder of Record Shares Held Percent of Class
- ---------------- ----------- -----------------
<S> <C> <C>
NEW YORK TAX-FREE FUND
Marine Midland Bank 682,199 21.779%
Buffalo, NY 14240
Total Shares Outstanding 3,132,261
</TABLE>
Marine Midland Bank has informed the Trust that it was not the beneficial
owner of any of the shares it held of record.
74
<PAGE>
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.
The Bank of New York received a fee of $20,111 for custody services for the
Growth and Income Fund for the year ended December 31, 1998. 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, the Bank of New York received fees of $14,270 and $963 from the Growth and
Income Fund for custody services. For the year ended December 31, 1998, the New
York Fund paid $6,797 in custody fees and the Fixed Income Fund paid $7,098.
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.
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.
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.
75
<PAGE>
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.
COUNSEL
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel for the Trust and
from time to time provides advice to the Advisers.
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.
76
<PAGE>
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
Exhibit
Number Description
------ -----------
*(a) -- Amended and Restated Declaration of Trust.
*(b) -- By-Laws of Registrant.
(d1) -- Advisory Contract between Registrant and HSBC Asset
Management Americas, Inc.
(c) not applicable
<PAGE>
(d2) -- Sub-Advisory Contract between HSBC Asset Management
Americas Inc. and Delaware International Advisers Ltd
with respect to International Fund.
(e) -- Distribution Agreement between Registrant and BISYS
Fund Services.
*(g1) -- Custodian Agreement between Registrant and The Bank of
New York.
*(h1) -- Management and Administrative Agreement between
Registrant and BISYS Fund Services.
*(h2) -- Accounting Services Agreement between Registrant and
BISYS Fund Services
*(h4) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services
*(h9) -- Fund Accounting Agreement between Registrant and BISYS
Fund Services
(i) -- Consent of Hale & Dorr counsel to Registrant.
(j) -- Consent of Ernst & Young LLP, independent
Auditors.
K -- Not applicable
(m1) -- Rule l2b-l Distribution Plan for Class A Shares
<PAGE>
m2 -- Rule 12b-1 Distribution Plan for Class Band C shares.
(m3)* -- Rule 12b-1 Shareholder Servicing Agreement between
Registrant and BISYS Fund Services, Inc.
(m3) -- Distributor's Selected Dealer Agreement.
(n) -- Financial Data Schedules
(o) -- Rule 18f-3 Plan
- -----------------------
*Filed with Post-Effective Amendment No. 18 to the Trust's Registration
Statement on April 29, 1997.
Item 24. Persons Controlled by or under Common Control with Registrant.
-------------------------------------------------------------
None.
Item 25. Indemnification.
----------------
Reference is made to Article IV of Registrants By-Laws and paragraphs
9 and 10 of the Distribution Contract.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
trustees, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant understands
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred
<PAGE>
or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant has in force a National Union Fire Insurance Company
Directors and Officers Liability Policy which covers all present and
future directors and officers of Registrant against loss arising from
any civil claim or claims by reason of "any breach of duty, neglect,
error, misstatement, misleading statement, omission or act done or
wrongfully attempted" while acting as trustees or officers of the
Registrant. The period of insurance under the present policy is for
the one-year period ending August 1, 1999. The policy covers 100% of
the excess of $100,000 up to an annual aggregate limit of $10,000,000
of any losses including legal and other expenses in connection with
any claim.
Item 26. Business and Other Connections
of Investment Adviser
-------------------------------------
HSBC Asset Management Americas Inc. also serves as the investment
adviser to HSBC Funds Trust.
Item 27. Principal Underwriter
---------------------
(a) BISYS Fund Services is Sponsor and Distributor for HSBC Funds
Trust and HSBC Mutual Funds Trust ("HSBC Trusts"). BISYS also
acts as Distributor to a number of other registered investment
companies not affiliated with HSBC Trusts.
(b) Officers and Directors
Name and Positions and Positions and
Principal Business Offices with Offices with
Address Registrant Underwriter
--------------------------- -------------- ---------------------
BISYS Fund Service, Inc. None Sole General Partner
3435 Stelzer Road
Columbus, OH 43219
WC Subsidiary Corporation None Sole Limited Partner
150 Clove Road
Little Falls, New Jersey 07424
<PAGE>
(c) Not applicable.
Item 28. Location of Accounts and Records
--------------------------------
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder are maintained at the offices of:
(1) Records relating to management and advisory functions:
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, NY 10177
Delaware International Advisers Ltd
One Commerce Square
Philadelphia, PA 19103
(International Equity Fund Only)
(2) Records relating to administration and distribution functions:
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
(3) Records relating to fund accounting and transfer agency functions:
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
(4) Records relating to custodial functions:
Bank of New York
90 Washington Street
New York, NY 10286
Item 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the removal of a Trustee if requested to
do so by the holders of at least 10% of the Registrant's
outstanding shares.
(b) Registrant undertakes to provide the support to shareholders
specified in Section 16(c) of the 1940 Act as though that Section
applied to the Registrant.
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report
to Shareholders upon request without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 22 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 30, 1999.
HSBC MUTUAL FUNDS TRUST
(Registrant)
By: /s/
------------------------------------
Walter Grimm, President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Walter Grimm President April 30, 1999
- --------------------------
Walter Grimm
/s/ Anthony Fisher Vice President April 30, 1999
- --------------------------
Anthony Fisher
* WOLFE J. FRANKL Trustee April 30, 1999
- --------------------------
Wolfe J. Frankl
* HARALD PAUMGARTEN Trustee April 30, 1999
- --------------------------
Harald Paumgarten
* JOHN P. PFANN Trustee April 30, 1999
- --------------------------
John P. Pfann
* ROBERT A. ROBINSON Trustee April 30, 1999
- --------------------------
Robert A. Robinson
</TABLE>
* Pursuant to Power of Attorney filed with Post-Effective Amendment No. 18 to
Registration Statement Nos. 33-33734 and 811-6057.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit d1 - Advisory Contract
Exhibit d2 - Sub-Advisory Contract
Exhibit e - Distribution Agreement
Exhibit i - Consent of Hale & Dorr
Exhibit j - Consent of Ernst and Young LLP
Exhibit m1 - Rule 12b-1 Distribution Plan for Class A
Exhibit m2 - Rule 12b-1 Distribution Plan for Class B and C
Exhibit m3 - Distribution's Selected Dealer Agreement
Exhibit n - Financial Data Schedule
Exhibit n3 - Growth and Income Fund
Exhibit n2 - New York Tax-Free Bond Fund
Exhibit n1 - Fixed Income Fund
Exhibit n4 - International Equity Fund (Service Class)
Exhibit n5 - International Equity Fund (Institutional Class)
Exhibit o - Revised Rule 18f-3 Plan
</TABLE>
<PAGE>
EXHIBIT 99D(1)
AMENDED AND RESTATED
ADVISORY CONTRACT
HSBC Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
May 1, 1998
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
Master Advisory Contract
------------------------
Dear Sirs:
WHEREAS, the Master Investment Advisory Contract dated May 1, 1990 has
been amended and restated to reflect the name change of the Trust and the
Trust's Adviser, as well as a change in law that no longer limits expenses paid
by the Funds;
WITNESSETH
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between HSBC Mutual Funds Trust (the "Trust") and
HSBC Asset Management Americas, Inc. (the "Adviser") as follows:
1. Definitions and Delivery of Documents. The Trust has been
-------------------------------------
organized as a business trust under the laws of the Commonwealth of
Massachusetts and is an open-end management investment company. The Trust's
shares of beneficial interest may be classified into series in which each series
represents the entire undivided interests of a separate portfolio of assets.
For all purposes of this Contract, a "Fund" shall mean a separate portfolio of
assets of the Trust which has entered into an Advisory Contract Supplement, and
a "Series" shall mean the series of shares of beneficial interest representing
undivided interests in a Fund. All references herein to this Contract shall be
deemed to be references to this Contract as it may from time to time be
supplemented by Advisory Contract Supplements. The Trust engages in the
business of investing and reinvesting the assets of each Fund in the manner and
in accordance with the investment objective and restrictions specified in the
Trust's Declaration of Trust, dated
<PAGE>
November 1, 1989 (the "Declaration of Trust"), and the currently effective
Prospectus (the "Prospectus") relating to the Trust and the Funds included in
the Trust's Registration Statement, as amended from time to time (the
"Registration Statement"), filed by the Trust under the Investment Company Act
of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies
of the documents referred to in the preceding sentence have been furnished to
the Adviser. Any amendments to those documents shall be furnished to the Advisor
promptly.
2. Administrative Services and Distribution Contracts. Pursuant to
--------------------------------------------------
a Distribution Contract (the "Distribution Contract") and an Administrative
Services Contract (the "Administrative Services Contract") between the Trust and
the Distributor and Administrator, respectively (as those terms are defined in
the Prospectus) the Trust has employed the Distributor and the Administrator to
act as principal underwriter for each Series and to provide management and other
services.
3. Expenses. (a) the Adviser shall, at its expense, (i) employ or
--------
associate with itself such persons as it believes appropriate to assist in
performing its obligations under this Contract and (ii) provide all advisory,
administrative, management services and shareholder services, equipment,
facilities and personnel necessary to perform its obligations under this
Contract. The Trust recognizes that in those cases where the Adviser makes
arrangements with its correspondent banks to maintain subaccounts for certain of
their customers who invest in shares of a Series, such correspondent banks may
also agree to provide services to subaccount holders of the type provided by the
Adviser to shareholders of record.
(b) Except as provided in subparagraph (a) and in the
Administrative Services Contract, the Trust shall be responsible for all of its
expenses and liabilities, including compensation of its directors who are not
affiliated with the Distributor, Administrator or the Adviser or any of their
affiliates; taxes and governmental fees; interest charges; fees and expenses of
the Trust's independent accountants and legal counsel; trade association
membership dues; fees and expenses of any custodian (including for keeping books
and accounts and calculating the net asset value of shares of each Series),
transfer agent, registrar and dividend disbursing agent of the Trust; expenses
of issuing, selling, redeeming, registering and qualifying for sale the Trust's
shares of beneficial interest; expenses of preparing and printing share
certificates, prospectuses, shareholders' reports, notices, proxy statements and
reports to regulatory agencies; the cost of office supplies; travel expenses of
all officers, directors and employees; insurance premiums; brokerage and other
expenses of executing portfolio transactions; expenses of shareholders'
meetings; organizational expenses; and extraordinary expenses.
4. Investment Advisory and Management Services. (a) The Adviser
-------------------------------------------
shall provide to the Trust investment guidance and policy direction in
connection with the management of the portfolio of each Fund, including oral and
written money market research, analysis, advice, statistical and economic data
and information and judgments, of both a macroeconomic and microeconomic
character, concerning, among other things, interest rate
-2-
<PAGE>
trends, money market portfolio composition, credit conditions of both a general
and specific nature and the average maturity of the portfolio of each Fund.
(b) The Adviser shall also provide to the Trust's officers
administrative assistance in connection with the operation of the Trust and each
of the Funds. Administrative services provided by the Adviser shall include (i)
data processing, clerical bookkeeping services required in connection with
maintaining the financial accounts and records for the Trust and each of the
Funds, (ii) the compilation of statistical and research data required for the
preparation of periodic reports and statements of each of the Funds which are
distributed to the Trust's officers and Board of Trustees, (iii) handling, or
causing to be handled, 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,
(iv) the compilation of information required in connection with the Trust's
filings with the Securities and Exchange Commission and (v) such other services
as the Adviser shall from time to time determine, upon consultation with the
Sponsor, to be necessary or useful to the administration of the Trust and each
of the Funds.
(c) As a manager of the assets of each Fund, the Adviser shall
make investments for the account of each Fund in accordance with the Adviser's
best judgment and within the investment objective and restrictions of each such
Fund set forth in the Trust's Declaration of Trust, the Prospectus of each such
Fund, the 1940 Act and the provisions of the Internal Revenue Code relating to
regulated investment companies, subject to policy decisions adopted by the
Trust's Board of Trustees. The Adviser shall advise the Trust's Officers and
Board of Trustees, at such times as the Board of Trustees may specify, of
investments made for each of the Funds and shall, when requested by the Trust's
Officers or Board of Trustees, supply the reasons for making particular
investments.
(d) The Adviser shall furnish to the Board of Trustees periodic
reports on the investment performance of each Fund and on the performance of its
obligations under this Contract and shall supply such additional reports and
information as the Trust's Officers or Board of Trustees shall reasonably
request.
5. Limitation of Liability of Adviser. The Adviser shall give the
----------------------------------
Trust the benefit of the Adviser's best judgment and efforts in rendering
services under this Contract. As an inducement to the Adviser's undertaking to
render these services, the Trust agrees that the Adviser shall not be liable
under this Contract for any mistake in judgment or in any other event whatsoever
except for lack of good faith, provided that nothing in this Contract shall be
--------
deemed to protect or purport to protect the Adviser against any liability to the
Trust or its shareholders to which the Adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of the Adviser's duties under this Contract or by reason of the Adviser's
reckless disregard of its obligations and duties hereunder.
6. Compensation of the Adviser. In consideration of the services to
---------------------------
be rendered, facilities furnished and expenses paid or assumed by the Adviser
under this Contract,
-3-
<PAGE>
the Trust shall pay the Adviser a fee with respect to each Fund in accordance
with the applicable Advisory Contract Supplement.
If the fees payable to the Adviser pursuant to this paragraph 6 and
the applicable Advisory Contract Supplement begin to accrue before the end of
any month or if this Contract terminates before the end of any month, the fees
for the period from that date to the end of that month or from the beginning of
that month to the date of termination, as the case may be, shall be prorated
according to the proportion which the period bears to the full month in which
the effectiveness or termination occurs. For purposes of calculating the
monthly fees, the value of the net assets of each Fund shall be computed in the
manner specified in the Prospectus for the computation of net asset value. For
purposes of this Contract, a "business day" is any day the New York Stock
Exchange is open for trading.
7. Duration and Termination of this Contract. This Contract shall
-----------------------------------------
become effective upon May 1, 1998 and shall thereafter continue in the effect;
provided, that this Contract shall continue in effect for a period of more than
- --------
one year with respect to a Fund only so long as the continuance is specifically
approved at least annually (a) by the vote of a majority of the outstanding
voting securities of that Fund (as defined in the 1940 Act) or by the Trust's
Board of Trustees and (b) by the vote, cast in person at a meeting called for
the purpose, of a majority of the Trust's Trustees who are not parties to this
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
This Contract may be terminated with respect to a Fund at any time, without the
payment of any penalty, by a vote of a majority of the outstanding voting
securities of that Fund (as defined in the 1940 Act) or by a vote of a majority
of the Trust's Board of Trustees on 60 days' written notice to the Adviser or by
the Adviser on 60 days' written notice to the Trust. If this Contract is
terminated with respect to any Fund, it shall nonetheless remain in effect with
respect to any remaining Funds. This Contract shall terminate automatically in
the event of its assignment (as defined in the 1940 Act).
8. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought and no amendment, transfer, assignment, sale,
hypothecation or pledge of this Contract shall be effective until approved by
(a) the vote, cast in person at a meeting called for the purpose, of a majority
of the Trustees who are not parties to this Contract or "interested persons" (as
defined in the 1940 Act) of any such party, and (b) with respect to any Fund
affected by such change, waiver, discharge or termination, by the vote of a
majority of the outstanding voting securities of the Series relating to such
Fund, provided that no approval shall be required pursuant to this clause (b) in
--------
respect of an Advisory Contract Supplement entered into to add a Fund to those
covered by this Contract (or any amendment or termination of such Supplement) by
the holders of the outstanding voting securities of any Series other than that
of such Fund.
9. Other Activities of the Adviser. Except to the extent necessary
-------------------------------
to perform the Adviser's obligations under this Contract, nothing herein shall
be deemed to limit or restrict the right of the Adviser, or any affiliate of the
Adviser, or any employee of the Adviser, to
-4-
<PAGE>
engage in any other business or to devote time and attention to the management
of other aspects of any other business, whether of a similar or dissimilar
nature, or to render services of any kind to any other corporation, firm,
individual or association.
10. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Contract may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The Declaration of Trust has been filed with the
Secretary of State of the Commonwealth of Massachusetts. The obligations of the
Trust are not personally binding upon, nor shall resort be had to the private
property of, any of the Trustees, shareholders, officers, employees or agents of
the Trust, but only the Trust's property shall be bound.
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
HSBC MUTUAL FUNDS TRUST
By: __________________________
Title: President
ACCEPTED:
HSBC Asset Management Americas Inc.
By: _______________________________
Title:
-5-
<PAGE>
NEW YORK TAX-FREE BOND FUND
A Fund of HSBC Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
May 1, 1998
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
Amended and Restated Advisory Contract Supplement
-------------------------------------------------
Dear Sirs:
This will confirm the agreement between HSBC Mutual Funds Trust (the
"Trust") and HSBC Asset Management Americas Inc. (the "Adviser") as follows:
The New York Tax-Free Bond Fund (the "Fund") is a series portfolio of
the Trust which has been organized as a business trust under the laws of the
Commonwealth of Massachusetts and is an open-end management investment company.
The Trust and the Adviser have entered into an Amended and Restated Master
Advisory Contract, dated May 1, 1998 (as from time to time amended and
supplemented, the "Master Advisory Contract"), pursuant to which the Adviser has
undertaken to provide or make provision for the Trust for the certain investment
advisory and management services identified therein and to provide certain other
services, as more fully set forth therein. Certain capitalized terms used
without definition in this Advisory Contract Supplement have the meaning
specified in the Master Advisory Contract.
The Trust agrees with the Adviser as follows:
1. Adoption of Master Advisory Contract. The Master Advisory
------------------------------------
Contract is hereby adopted for the Fund. The Fund shall be one of the "Funds"
referred to in the Master Advisory Contract; and its shares shall be a "Series"
of shares as referred to therein.
2. Payment of Fees. For all services to be rendered, facilities
---------------
furnished and expenses paid or assumed by the Adviser as provided in the Master
Advisory Contract and herein, the Fund shall pay a monthly fee on the first
business day of each month, based upon the average daily value (as determined on
each business day at the time set forth in the Prospectus
-6-
<PAGE>
for determining net asset value per share) of the net assets of the Fund during
the preceding month, at the following annual rates:
Portion of average daily value
of net assets of the Fund Fee Rate
-------------------------------- --------
Not exceeding $300 million.................... 0.450%
In excess of $300 million but
not exceeding $600 million.................. 0.420%
In excess of $600 million but
not exceeding $1 billion.................... 0.385%
In excess of $1 billion but
not exceeding $1.5 billion.................. 0.350%
In excess of $1.5 billion but
not exceeding $2 billion.................... 0.315%
In excess of $2 billion....................... 0.280%
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
NEW YORK TAX-FREE BOND FUND,
A FUND OF HSBC MUTUAL FUNDS TRUST
By:_________________________________
Title:______________________
The foregoing Contract is hereby
agreed to as of the date hereof:
HSBC ASSET MANAGEMENT AMERICAS INC.
By:____________________________
Title:_______________
-7-
<PAGE>
FIXED INCOME FUND
A Fund of HSBC Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
May 1, 1998
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
Amended and Restated Advisory Contract Supplement
-------------------------------------------------
Dear Sirs:
This will confirm the agreement between HSBC Mutual Funds Trust (the
"Trust") and HSBC Asset Management Americas Inc. (the "Adviser") as follows:
The Fixed Income Fund (the "Fund") is a series portfolio of the Trust
which has been organized as a business trust under the laws of the Commonwealth
of Massachusetts and is an open-end management investment company. The Trust
and the Adviser have entered into an Amended and Restated Master Advisory
Contract, dated May 1, 1998 (as from time to time amended and supplemented, the
"Master Advisory Contract"), pursuant to which the Adviser has undertaken to
provide or make provision for the Trust for the certain investment advisory and
management services identified therein and to provide certain other services, as
more fully set forth therein. Certain capitalized terms used without definition
in this Advisory Contract Supplement have the meaning specified in the Master
Advisory Contract.
The Trust agrees with the Adviser as follows:
1. Adoption of Master Advisory Contract. The Master Advisory
------------------------------------
Contract is hereby adopted for the Fund. The Fund shall be one of the "Funds"
referred to in the Master Advisory Contract; and its shares shall be a "Series"
of shares as referred to therein.
2. Payment of Fees. For all services to be rendered, facilities
---------------
furnished and expenses paid or assumed by the Adviser as provided in the Master
Advisory Contract and herein, the Fund shall pay a monthly fee on the first
business day of each month, based upon the average daily value (as determined on
each business day at the time set forth in the Prospectus
-8-
<PAGE>
for determining net asset value per share) of the net assets of the Fund during
the preceding month, at the following annual rates:
Portion of average daily value
of net assets of the Fund Fee Rate
------------------------------ --------
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%
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
FIXED INCOME FUND,
A FUND OF HSBC MUTUAL FUNDS TRUST
By:_________________________________
Title:______________________
The foregoing Contract is hereby
agreed to as of the date hereof:
HSBC ASSET MANAGEMENT AMERICAS INC.
By:____________________________
Title:_______________
-9-
<PAGE>
GROWTH AND INCOME FUND
A Fund of HSBC Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
May 1, 1998
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
Amended and Restated Advisory Contract Supplement
-------------------------------------------------
Dear Sirs:
This will confirm the agreement between HSBC Mutual Funds Trust (the
"Trust") and HSBC Asset Management Americas Inc. (the "Adviser") as follows:
The Growth and Income Fund (the "Fund") is a series portfolio of the
Trust which has been organized as a business trust under the laws of the
Commonwealth of Massachusetts and is an open-end management investment company.
The Trust and the Adviser have entered into an Amended and Restated Master
Advisory Contract, dated May 1, 1998 (as from time to time amended and
supplemented, the "Master Advisory Contract"), pursuant to which the Adviser has
undertaken to provide or make provision for the Trust for the certain investment
advisory and management services identified therein and to provide certain other
services, as more fully set forth therein. Certain capitalized terms used
without definition in this Advisory Contract Supplement have the meaning
specified in the Master Advisory Contract.
The Trust agrees with the Adviser as follows:
1. Adoption of Master Advisory Contract. The Master Advisory
------------------------------------
Contract is hereby adopted for the Fund. The Fund shall be one of the "Funds"
referred to in the Master Advisory Contract; and its shares shall be a "Series"
of shares as referred to therein.
2. Payment of Fees. For all services to be rendered, facilities
---------------
furnished and expenses paid or assumed by the Adviser as provided in the Master
Advisory Contract and herein, the Fund shall pay a monthly fee on the first
business day of each month, based upon the average daily value (as determined on
each business day at the time set forth in the Prospectus for determining net
asset value per share) of the net assets of the Fund during the preceding month,
at the following annual rates:
-10-
<PAGE>
Portion of average daily value
of net assets of the Fund Fee Rate
- ------------------------------ --------
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%
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
GROWTH AND INCOME FUND,
A FUND OF HSBC MUTUAL FUNDS TRUST
By:___________________________________
Title:______________________
The foregoing Contract is hereby
agreed to as of the date hereof:
HSBC ASSET MANAGEMENT AMERICAS INC.
By:____________________________
Title:_______________
-11-
<PAGE>
INTERNATIONAL EQUITY FUND
A Fund of HSBC Mutual Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
May 1, 1998
HSBC Asset Management Americas Inc.
140 Broadway
New York, New York 10005
Amended and Restated Advisory Contract Supplement
-------------------------------------------------
Dear Sirs:
This will confirm the agreement between HSBC Funds Trust (the "Trust")
and HSBC Asset Management Americas Inc. (the "Adviser") as follows:
The International Equity Fund (the "Fund") is a series portfolio of the
Trust which has been organized as a business trust under the laws of the
Commonwealth of Massachusetts and is an open-end management investment company.
The Trust and the Adviser have entered into an Amended and Restated Master
Advisory Contract, dated May 1, 1998 (as from time to time amended and
supplemented, the "Master Advisory Contract"), pursuant to which the Adviser has
undertaken to provide or make provision for the Trust for the certain investment
advisory and management services identified therein and to provide certain other
services, as more fully set forth therein. Certain capitalized terms used
without definition in this Advisory Contract Supplement have the meaning
specified in the Master Advisory Contract.
The Trust agrees with the Adviser as follows:
1. Adoption of Master Advisory Contract. The Master Advisory
------------------------------------
Contract is hereby adopted for the Fund. The Fund shall be one of the "Funds"
referred to in the Master Advisory Contract; and its shares shall be a "Series"
of shares as referred to therein.
2. Payment of Fees. For all services to be rendered, facilities
---------------
furnished and expenses paid or assumed by the Adviser as provided in the Master
Advisory Contract and herein, the Fund shall pay a monthly fee on the first
business day of each month, based upon the average daily value (as determined on
each business day at the time set forth in the Prospectus for determining net
asset value per share) of the net assets of the Fund during the preceding month,
at an annual rate of 0.90% of the Fund's average daily net assets.
-12-
<PAGE>
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
INTERNATIONAL EQUITY FUND,
A FUND OF HSBC MUTUAL FUNDS TRUST
By:_______________________________
Title:______________________
The foregoing Contract is hereby
agreed to as of the date hereof:
HSBC ASSET MANAGEMENT AMERICAS INC.
By:____________________________
Title:_______________
-13-
<PAGE>
EXHIBIT 99D(2)
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1998 by and between HSBC ASSET
MANAGEMENT AMERICAS INC, (the "CLIENT") and DELAWARE INTERNATIONAL ADVISERS
LIMITED of Third Floor, 80 Cheapside, London EC2V 6EE England ("DELAWARE").
1. The CLIENT hereby appoints DELAWARE to manage funds in the
International Equity Fund series (the "Fund") of HSBC Mutual Funds Trust (the
"Trust") under the terms set forth below and represents that the CLIENT is duly
authorized to enter into this Agreement and to delegate discretionary investment
management with respect to the Fund to DELAWARE. DELAWARE hereby accepts such
appointment.
2. This Agreement shall take effect when a copy of this Agreement
has been returned to DELAWARE duly signed on the CLIENT's behalf. Following
commencement, this Agreement shall replace any agreement relating to the
management of the Fund which may have been previously entered into between
DELAWARE and the CLIENT. This Agreement shall continue in effect for a period
of two years from the date of its execution and may be renewed thereafter only
so long as such renewal and continuance are specifically approved by the Board
of Trustees of the Trust or by a vote of a majority of the outstanding voting
securities of the Fund, and only if the terms and renewal hereof have been
approved by the vote of a majority of the Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
3. The CLIENT shall notify the Fund's custodian bank as to the
appointment of DELAWARE as sub-adviser of the CLIENT with respect to the Fund.
The CLIENT shall instruct the Fund's custodian bank to comply with instructions
from DELAWARE given under the terms of this Agreement.
4. DELAWARE shall have sole discretion with respect to investments
of assets in the Fund and may purchase and sell any type of investment in any
amount or proportion and on any market, all without prior consultation. DELAWARE
shall, however, be bound by the investment policies and restrictions of the Fund
as are set forth from time to time in the Fund's prospectus (the "Prospectus"),
a copy of which shall be provided to DELAWARE by the CLIENT initially and upon
each update, supplement or amendment thereto. Unless indicated in the
Prospectus, and subject to Rule 17f-5 under the Investment Company Act of 1940,
as amended (the "1940 Act"), there shall be no restrictions on the markets on
which transactions may be made on the Fund's behalf. DELAWARE may, but shall
not be obligated to, participate on behalf of the Fund in any class action,
formal or informal reorganization or restructuring proposal, merger,
combination, indenture revision, consolidation, bankruptcy, liquidation or
similar plan, agreement or arrangement with respect to securities in the Fund
and, upon prior written notice or notice by telephone
<PAGE>
from DELAWARE to the CLIENT of DELAWARE's intention to participate in such
matters, DELAWARE shall automatically and without further action by the CLIENT
or the Fund be appointed as the FUND's attorney-in-fact for any such purpose,
including without limitation causing the Fund to be bound to any such plan,
agreement or arrangement. Under the terms of the Investment Management Agreement
between the CLIENT and the Trust, with respect to the Fund, the Trust shall
conduct its own business and affairs and shall bear the expenses and salaries
necessary and incidental thereto.
5. DELAWARE shall have the authority to select the brokerage firms
through which orders shall be placed. DELAWARE may combine orders for the Fund
with orders for other accounts or funds under management. DELAWARE may, subject
to its duty to secure best execution for the Fund (which for these purposes
shall disregard any benefit which might enure directly or indirectly to the Fund
as a result of the arrangement hereinafter described), effect transactions with
or through the agency of another person with whom DELAWARE has an arrangement
under which that person will from time to time provide to or procure for
DELAWARE services of other benefits the nature of which are such that their
provision results, or is designed to result, in an improvement in DELAWARE's
performance in providing services for its clients and for which DELAWARE makes
no direct payment but instead undertakes to place business with that person.
When orders are placed, DELAWARE shall issue suitable instructions to the Fund's
custodian bank with respect to deliveries and payments.
6. DELAWARE shall under no circumstances act as custodian for the
Fund or have possession of any assets of the Fund. Accordingly, arrangements
for the registration and identification of ownership and safe custody of
documents of title must be made by the CLIENT or the Fund with a custodian bank
which is selected by the Fund.
7. DELAWARE shall provide periodic statements to the CLIENT at
quarterly or such other intervals as DELAWARE and CLIENT shall agree but in any
event not less frequently than every six months. Such statements will show all
investments in the Fund and will contain details of the measure of portfolio
performance. If the CLIENT provides instructions to DELAWARE as to the format
of the periodic statements, such format may vary from the periodic statement
format set forth in the rules of IMRO (as defined below). For purposes of such
reports, securities in the Fund will normally be valued at mid-market prices as
of the close of business on the last business day of the applicable period.
8. It is understood that DELAWARE may perform similar services for
other clients or funds and that the investment action taken for each client or
fund may differ.
2
<PAGE>
9. DELAWARE shall not be liable for any loss incurred with respect
to the Fund due to errors of judgment when it has acted in good faith and has
not been grossly negligent; nor shall DELAWARE be responsible for any loss
incurred by reason of any act or omission of the CLIENT, any bank, broker, the
Fund's custodian bank, any administrator, transfer agent or distributor, or any
director, officer, or trustee of the Trust, whether appointed by or on behalf of
DELAWARE, the CLIENT or the Fund. Nothing contained herein shall be deemed to
waive any liability which cannot be waived under applicable law, including
applicable U.S. state and federal securities laws and the Financial Services Act
1986 of the United Kingdom ("FSA"), or any rules or regulations adopted under
any of those laws.
10. As compensation for its services hereunder, the CLIENT shall pay
to DELAWARE a monthly fee, within 15 business days following the end of each
month, based upon the average daily net assets of the Fund during the month.
The following annual fee rates, exclusive of Value Added Tax, if applicable,
shall apply:
Annual Fee Rate
Market Value as a Percentage
of the Account of Market Value
- -------------- ---------------
First $20 Million 0.75%
Next $30 Million 0.50%
Next $50 Million 0.40%
Thereafter 0.35%
Subject to a minimum account size of $20 Million (or fees equivalent
thereto).
If this Agreement is terminated prior to the end of any calendar month, the fee
shall be prorated for the portion of any month in which this Agreement is in
effect according to the proportion which the number of calendar days during
which this Agreement is in effect bears to the number of calendar days in the
month, and shall be payable within 10 days after the date of effectiveness of
the termination.
11. The CLIENT shall cause all proxies received by it or the Fund or
on its or the Fund's behalf by the Fund's custodian bank to be delivered to
DELAWARE on a timely basis. DELAWARE shall be authorized to vote on behalf of
the Fund proxies relating to securities held in the Fund's portfolio, provided,
however, that DELAWARE will comply with any written instructions received from
the CLIENT as to the voting of proxies.
3
<PAGE>
12. Notwithstanding Section 2 hereof, this Agreement may be
terminated by the CLIENT of the Fund at any time, without the payment of a
penalty, on sixty days' written notice to DELAWARE of the CLIENT's or the Fund's
intention to do so, in the case of the Fund pursuant to action by the Board of
Trustees of the Trust or pursuant to vote of a majority of the outstanding
voting securities of the Fund. DELAWARE may terminate this Agreement at any
time, without the payment of a penalty on sixty days' written notice to the
CLIENT and the Fund of its intention to do so. Termination will be without
prejudice to the completion of transactions already initiated, which shall be
completed in accordance with DELAWARE's usual practice. Upon termination of
this Agreement, the obligations of all the parties hereunder shall cease and
terminate as of the date of effectiveness of such termination, except for the
obligation of the CLIENT to pay DELAWARE the fee provided in Section 10 hereof,
prorated to the date of effectiveness of the termination. This Agreement shall
automatically terminate in the event of its assignment.
13. DELAWARE represents that it is duly registered with the
Securities and Exchange Commission pursuant to the Investment Advisers Act of
1940, as amended. The CLIENT acknowledges receipt of a copy of Part II of
DELAWARE's current Form ADV, at least 48 hours prior to the signing of this
Agreement.
14. DELAWARE is a member of, and is regulated in the conduct of its
investment business by, the Investment Management Regulatory Organization
Limited ("IMRO") and is bound by the Conduct of Business Rules of IMRO. Based
on information that the CLIENT has furnished to DELAWARE, DELAWARE believes that
the CLIENT is a "Non-Private Customer" as defined by IMRO and proposes to treat
the CLIENT as such. In accordance with IMRO's rules, DELAWARE hereby notifies
the CLIENT as follows:
(a) Unless otherwise expressly stated in the Prospectus, DELAWARE
may advise on or effect transactions in units in collective investment schemes
which are Unregulated Collective Investment Schemes.
(b) Unless otherwise expressly stated in the Prospectus, DELAWARE
may effect transactions in derivatives (meaning options, futures, contracts for
differences) on the Fund's behalf only for the purposes of defensive currency
hedging and/or interest rate hedging transactions, whether or not those
transactions are under the rules of a Recognized or Designated Investment
Exchange and whether or not those transactions are executed using a standard
contract of such an Exchange. Such transactions may be "Contingent Liability
Transactions" (i.e., transactions under which there is a liability to make
further payments, other than charges and whether or not secured by margin, when
the transaction is due to be completed or upon the earlier closing out of the
position). The amount of funds which may be committed by way of margin may not
exceed 20% of the value of the
4
<PAGE>
Fund when the investment is made. In the event that the margin required at any
time exceeds 20% of the value of the Fund as a result of further margin calls at
any time, DELAWARE may at its discretion close out the Fund's position.
(c) The CLIENT acknowledges that, solely with respect to
temporary overdrafts resulting from settlement delays, the Fund's account with
its custodian bank may be overdrawn from time to time.
(d) To the extent not prohibited by applicable law or the
Prospectus, DELAWARE shall be entitled, without prior reference to the CLIENT,
to effect transactions for the Fund in which DELAWARE has directly or indirectly
a material interest (other than an interest arising solely from its
participation in the transaction) or a relationship with another party which may
involve a conflict with its duty to the CLIENT or the Fund. Such transactions
may include, among other things, the following:
(i) Buying an investment from or selling an investment to
the Fund when acting as a principal or as an agent for an Associate of DELAWARE
or a client thereof;
(ii) Acting in the same transaction as both an agent for
the Fund and also as an agent for the counterparty;
(iii) Purchasing, holding or selling for the benefit of the
Fund securities issued or guaranteed by companies in which DELAWARE or an
Associate of DELAWARE, or any of their directors or employees, has an interest,
through holding or dealing in its securities, serving as a director or
otherwise; and
(iv) Purchasing, holding or selling for the benefit of the
Fund securities issued by an Associate of DELAWARE or by a client of DELAWARE or
any of its Associates.
(e) DELAWARE has provided the CLIENT with a list of its current
Soft Commission Agreements and the CLIENT acknowledges receipt of that list.
DELAWARE's Soft Commission policies are described in Section 5 of this Agreement
and in Part II of DELAWARE's Form ADV.
15. Except as expressly otherwise provided herein any notice provided
for or required hereunder shall be in writing and sent to the person and place
indicated below or to such other person or place as the respective party may
designate by notice hereunder.
16. Any complaint hereunder should be referred to Mr. John Emberson,
DELAWARE's Compliance Officer. If within two months after the complaint is made
it has not been resolved to the CLIENT's satisfaction the complaint
5
<PAGE>
will be notified to IMRO. The CLIENT may make its complaint directly to the
office of the Investment Ombudsman appointed by IMRO. If DELAWARE is unable to
meet any liabilities to the CLIENT, the CLIENT will have such rights to
compensation as may be prescribed form time to time by the Securities and
Investments Board of the United Kingdom. A statement describing those rights is
available from Mr. John Emberson.
17. For purposes of this Agreement, the terms "vote of a majority of
the outstanding voting securities; "interested person;" and "assignment" shall
have the meanings defined in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed on their behalf by their duly authorized representatives as of the
date and the year first above written.
HSBC ASSET MANAGEMENT DELAWARE INTERNATIONAL
AMERICAS INC. ADVISERS LIMITED
By:__________________________ By:____________________________
Name: Name:
Title: Title:
Attest:______________________ Attest:________________________
Name: Name:
Title: Title:
Employer Identification Employer Identification
Number:______________________ Number: 98-0117968
----------
Designee for Notice: Designee for Notice:
[__________________________] David G. Tilles
HSBC Asset Management Americas, Inc. Managing Director
140 Broadway DELAWARE International Advisers
New York, NY 10005 Ltd.
USA
Third Floor
80 Cheapside
London, EC2V 6EE
England
6
<PAGE>
DELAWARE International Advisers Ltd.'s Policy relating to Soft Commission
Agreements
1. (a) We pay commissions to brokers because we regard commissions as a
necessary incentive to secure the best performance and service from
our brokers.
(b) Our policy in relation to soft commission agreements is as follows:
we use customers' commissions to secure services such as advice,
information and research from brokers, for example, Reuters screens
and various stock exchanges quotation services. It is our policy to
use our customers' commissions to secure those services, however
sourced, for the benefit of our customers.
(c) We have soft dollar agreements in place with the brokers detailed
in paragraph 2, whereby we may use your commission in executing
agency transactions with those brokers, and those brokers may
provide to us various permitted goods or services (such as payment
of our invoices for quotation services), which can reasonably be
expected to assist us in the provision of investment services to
our customers and which are in fact used for the benefit of our
customers.
(d) From time to time, we may receive additional services from other
counterparties. We are satisfied that these investment related
services assist us in the performance of our advisory duties and
allow us to provide a cost effective service.
2. The brokers with whom we currently have soft commission agreements
are:
Hoenig & Company Limited
Instinet Investment Services Ltd.
Brockhouse & Cooper Inc.
JB Were & Co. Ltd.
<PAGE>
EXHIBIT 99.(e)
DISTRIBUTION AGREEMENT
----------------------
AGREEMENT made this _____ day of __________________, 1999, between HSBC
MUTUAL FUNDS TRUST (the "Trust"), a Massachusetts business trust having its
principal place of business at 3435 Stelzer Rd, Columbus, Ohio 43219,
and BISYS FUND SERVICES LIMITED PARTNERSHIP d/b/a BISYS FUND SERVICES
("Distributor"), having its principal place of business at 3435 Stelzer Road,
Columbus, Ohio 43219.
WHEREAS, the Trust is an open-end management investment company, organized
as a Massachusetts business trust and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Trust (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor.
------------------------
1.1 Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust then in effect
under the Securities Act of 1933, as amended (the "Securities Act"). As used in
this Agreement, the term "registration statement" shall mean Parts A (the
prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term
"prospectus" shall mean each form of prospectus and Statement of Additional
Information used by the Funds for delivery to shareholders and prospective
shareholders after the effective dates of the above referenced registration
statements, together with any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Trust
understands that Distributor is now and may in the future be the distributor of
the shares of several investment companies or series (together, "Companies")
including Companies having investment objectives similar to those of the Trust.
The Trust further understands that investors and potential investors in the
Trust may invest in shares of such other Companies. The Trust agrees that
Distributor's duties to such Companies shall not be deemed in conflict with its
duties to the Trust under this paragraph 1.2.
<PAGE>
Distributor shall, at its own expense, finance appropriate
activities which it deems reasonable, which are primarily intended to result in
the sale of the Shares, including, but not limited to, advertising, compensation
of underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Trust.
1.5 Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8 The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9 The Trust shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Trust shall also furnish Distributor
upon request with: (a) unaudited semi-annual statements of the Funds' books and
accounts prepared by the Trust, (b) a monthly itemized list of the securities in
the Funds, (c) monthly balance sheets as soon as practicable after the end of
each month, and (d) from time to time such additional information regarding the
financial condition of the Funds as Distributor may reasonably request.
<PAGE>
1.10 The Trust represents to Distributor that, with respect to the
Shares, all registration statements and prospectuses filed by the Trust with the
Commission under the Securities Act have been carefully prepared in conformity
with requirements of said Act and rules and regulations of the Commission
thereunder. The registration statement and prospectus contain all statements
required to be stated therein in conformity with said Act and the rules and
regulations of said Commission and all statements of fact contained in any such
registration statement and prospectus are true and correct. Furthermore,
neither any registration statement nor any prospectus includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading to a
purchaser of the Shares. The Trust may, but shall not be obligated to, propose
from time to time such amendment or amendments to any registration statement and
such supplement or supplements to any prospectus as, in the light of future
developments, may, in the opinion of the Trust's counsel, be necessary or
advisable. If the Trust shall not propose such amendment or amendments and/or
supplement or supplements within fifteen days after receipt by the Trust of a
written request from Distributor to do so, Distributor may, at its option,
terminate this Agreement. The Trust shall not file any amendment to any
registration statement or supplement to any prospectus without giving
Distributor reasonable notice thereof in advance; provided, however, that
nothing contained in this Agreement shall in any way limit the Trust's right to
file at any time such amendments to any registration statement and/or
supplements to any prospectus, of whatever character, as the Trust may deem
advisable, such right being in all respects absolute and unconditional.
1.11 The Trust authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Trust shall indemnify, defend and hold harmless Distributor,
its partners and employees and any person who controls Distributor within the
meaning of the Securities Act, from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which Distributor, its partners and employees or any such
controlling person, may incur under the Securities Act, the 1940 Act, the common
law or otherwise arising out of or based upon any alleged untrue statement of a
material fact contained in the registration statement or any prospectus or
arising out of or based upon any alleged omission by the Trust to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, information furnished in writing to the Trust by
or on behalf of Distributor for use in the preparation of the registration
statement or the prospectuses. Notwithstanding the foregoing, this indemnity
agreement, to the extent that it might require indemnity of any person who is a
partner or employee of Distributor and who is also a Trustee of the Trust, shall
not inure to the benefit of such partner or employee unless a court of competent
jurisdiction shall determine, or it shall have been determined by controlling
precedent, that such result would not be against public policy as expressed in
the Securities Act or the 1940 Act. This Agreement shall not be construed to
protect Distributor against any liability to the Trust or its shareholders to
which Distributor would otherwise be subject by reason
<PAGE>
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of it obligations and duties under
this Agreement. This indemnity agreement shall not inure to the benefit of
Distributor, its partners or employees or any controlling person as aforesaid if
any untrue statement or omission made in any prospectus delivered to a purchaser
of shares is corrected in any amendment or supplement to such prospectus and
such amended or supplemented prospectus shall not have been delivered or sent to
such purchaser within the time required by the Securities Act and the rules
promulgated thereunder, provided that the Trust has delivered such amended or
supplemented prospectus to Distributor in requisite quantity on a timely basis
to permit such delivery or sending. This indemnity agreement is expressly
conditioned upon the Trust's being notified of any action brought against
Distributor, its partners or employees or any such controlling person, which
notification shall be given by letter or by telegram addressed to the Trust at
its principal office in New York, New York and sent to the Trust by the person
against whom such action is brought within 10 days after the summons or other
first legal process shall have been served. The failure to notify the Trust of
any such action shall not relieve the Trust from any liability which it may have
to the person against whom such action is brought by reason of any such alleged
untrue statement or omission otherwise than on account of the indemnity
agreement contained in this paragraph. The Trust shall be entitled to assume the
defense of any suit brought to enforce any such claims, demand or liability,
but, in such case, the defense shall be conducted by counsel chosen by the Trust
and reasonably approved by Distributor. If the Trust elects to assume the
defense of any such suit and retain counsel approved by Distributor,
Distributor, its partners and employees and controlling persons named as the
defendant, or defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them, but in case the Trust does not elect
to assume the defense of any such suit, or in case Distributor does not approve
of counsel chosen by the Trust, the Trust will reimburse such person or persons
named as defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by Distributor or such other persons. In
addition, Distributor shall have the right to employ counsel to represent it,
its partners and employees and any such controlling person who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by Distributor against the Trust hereunder if any such indemnified party shall
have been advised by its counsel that representation of such indemnified party
and the Trust by the same counsel would be inapprpriate under applicable
standards of professional conduct due to actual or potential differing interests
between them, in which event the reasonable fees and expenses of such separate
counsel shall be borne by the Trust. Notwithstanding the preceding two
sentences, the Trust shall, in connection with any such suit and any separate
but substantially similar or related suits, actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all persons
entitled to indemnity under this paragraph. The Trust shall not be liable to
indemnify any person for any settlement of any suit or claim effected without
the Trust's written consent. This indemnity agreement and the Trust's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless
<PAGE>
of any investigation made by or on behalf of Distributor, its partners and
employees or any such controlling person. This indemnity agreement shall inure
exclusively to the benefit of Distributor, its partners and employees and any
such controlling persons and their respective successors and estates. The Trust
shall promptly notify Distributor of the commencement of any litigation or
proceedings against it in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold harmless the Trust,
its officers and Trustees and any person who controls the Trust within the
meaning of the Securities Act, from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which the Trust, its officers or Trustees or any such
controlling person may incur under the Securities Act, the 1940 Act, the common
law or otherwise, but only to the extent that such liability or expense incurred
by the Trust, its officers or Trustees or such controlling person results from
such claims or demands as shall arise out of or be based upon (a) any alleged
untrue statement of a material fact contained in information furnished in
writing by Distributor to the Trust specifically for use in the registration
statement or any prospectus or shall arise out of or be based upon any alleged
omission to state a material fact required to be stated therein or necessary to
make such statement therein not misleading and (b) any alleged act or omission
on Distributor's part as the Trust's agent that has not been expressly
authorized by the Trust in writing. This indemnity agreement is expressly
conditioned upon Distributor's being notified of any action brought against the
Trust, its officers or Trustees or any such controlling person, which
notification shall be given by letter or telegram addressed to Distributor at
its principal office in Columbus, Ohio, and sent to Distributor by the person
against whom such action is brought, within 10 days after the summons or other
first legal process shall have been served. The failure to notify Distributor of
any such action shall not relieve Distributor from any liability which it may
have to the Trust, its officers or Trustees or such controlling person by reason
of any such alleged misstatement, act or omission on Distributor's part
otherwise than on account of the indemnity agreement contained in this
paragraph. Distributor shall have a right to control the defense of such action
with counsel of its own choosing and reasonably approved by the Trust if such
action is based solely upon such alleged misstatement, act or omission on
Distributor's part, in which event (except as stated below) the Trust, its
officers and Trustees or such controlling person shall each have the right to
participate in the preparation of the defense of such action at their own
expense. If the Trust does not approve of counsel chosen by Distributor, and
therefore Distributor does not control the defense of such action, Distributor
will reimburse the Trust, its officers and Trustees and controlling person named
as defendant or defendants in such action, for the reasonable fees and expenses
of any counsel retained by the Trust or such other persons. In addition, the
Trust shall have the right to employ counsel to represent it, its officers and
Trustees and any such controlling person who may be the subject of liability
arising out of any claim in respect of which indemnity may be sought by the
Trust or any such other person against Distributor hereunder if any such
indemnified party shall have been advised by its counsel that representation of
such indemnified party
<PAGE>
and Distributor by the same counsel would be inappropriate under applicable
standards of professional conduct due to actual or potential differing interests
between them, in which event the reasonable fees and expenses of such separate
counsel shall be borne by Distributor. Notwithstanding the preceding two
sentences, Distributor shall, in connection with any such action and any
separate but substantially similar or related suits, actions or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all persons entitled to indemnity under this paragraph. This indemnity agreement
and Distributor's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Trust, its officers and Trustees or any such controlling
person. This indemnity agreement shall inure exclusively to the benefit of the
Trust, its officers and Trustees and any such controlling persons and their
respective successors and estates. Distributor shall promptly notify the Trust
of the commencement of any litigation or proceedings against it in connection
with the issue and sale of any shares.
1.13 No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the Commission; provided, however, that
nothing contained in this paragraph 1.13 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any Shareholder in accordance with the provisions of the Trust's prospectus,
Agreement and Declaration of Trust, or Bylaws.
1.14 The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by
service of process on the Trust of any proceeding for that
purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
<PAGE>
prospectus in order to make the statements therein not
misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus
which may from time to time be filed with the
Commission.
For purposes of this section, informal requests by or acts
of the Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
1.16 This Agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
2. Appointment of Agent.
--------------------
Distributor may enter into a written agreement with another party
qualified to perform distribution services to carry out some or all of its
responsibilities under this Agreement, provided, however, that the Trust agrees
in writing to the retention of the party chosen and the written agreement
related thereto; and provided further, that the party chosen shall be the agent
of Distributor and not the agent of the Trust, and that Distributor shall be
fully responsible for the acts of such party and shall not be relieved of any of
its responsibilities hereunder.
3. Fee.
----
Distributor shall receive from the Funds identified in the Rule 12b-1
Distribution Plans attached as Schedule A hereto (the "Distribution Plan Funds")
a distribution fee at the rate and upon the terms and conditions set forth in
such Plan. The distribution fee shall be accrued daily and shall be paid on the
first business day of each month, or at such time(s) as the Distributor shall
reasonably request.
<PAGE>
4. Public Offering Price.
----------------------
The public offering price of Shares shall be the net asset value of
such Shares. The net asset value of Shares shall be determined in accordance
with the provisions of the Agreement and Declaration of Trust and Bylaws of the
Trust and the then-current prospectus for each Fund.
5. Issuance of Shares.
-------------------
The Trust reserves the right to issue, transfer or sell Load Shares at
net asset value (a) in connection with the merger or consolidation of the Trust
or the Load Fund(s) with any other investment company or the acquisition by the
Trust or the Load Fund(s) of all or substantially all of the assets or of the
outstanding shares of any other
<PAGE>
investment company; (b) in connection with a pro rata distribution directly to
the holders of Shares in the nature of a stock dividend or split; (c) upon the
exercise of subscription rights granted to the holders of Shares on a pro rata
basis; (d) in connection with the issuance of Load Shares pursuant to any
exchange and reinvestment privileges described in any then-current prospectus of
the Load Fund; and (e) otherwise in accordance with any then-current prospectus
of the Load Fund.
6. Term, Duration and Termination.
-------------------------------
This Agreement shall become effective with respect to each Fund as of
the date first written above and, unless sooner terminated as provided herein,
shall continue with respect to a particular Fund automatically for successive
one-year terms, provided that such continuance is specifically approved at least
annually by (a) by the vote of a majority of those members of the Trust's Board
of Trustees who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting for the purpose of voting on such
approval and (b) by the vote of the Trust's Board of Trustees or the vote of a
majority of the outstanding voting securities of such Fund. This Agreement is
terminable without penalty, on not less than sixty days' prior written notice,
by the Trust's Board of Trustees, by vote of a majority of the outstanding
voting securities of the Trust or by the Distributor. This Agreement will also
terminate automatically in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meanings as ascribed
to such terms in the 1940 Act.)
7. Limitation of Liability of the Trustees and Shareholders.
---------------------------------------------------------
It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust personally, but shall bind only the trust
property of the Trust. The execution and delivery of this Agreement have been
authorized by the Trustees, and this Agreement has been signed and delivered by
an authorized officer of the Trust, acting as such, and neither such
authorization by the Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Trust as provided in the Trust's Agreement and Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first written
above.
HSBC MUTUAL FUNDS TRUST BISYS FUND SERVICES
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
<PAGE>
General Partner
By: ________________________ By:_____________________
Title: _____________________ Title: _______________________
Date: ______________________ Date: _______________________
<PAGE>
Dated: _______________________
SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN
HSBC MUTUAL FUNDS TRUST
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
<PAGE>
EXHIBIT 99.(i)
HALE AND DORR LLP
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 . fax 617-526-5000
April 28, 1999
HSBC Mutual Funds Trust
3435 Stelzer Road
Suite 1000
Columbus, Ohio 43219-8001
Ladies and Gentlemen:
The HSBC Mutual Funds Trust (formerly, Mariner Mutual Funds Trust) (the
"Trust"), is a Massachusetts business trust created under a Declaration of Trust
dated November 1, 1989, as amended and restated on April 3, 1996 and as further
amended from time to time (as so amended and restated, the "Declaration of
Trust"). The beneficial interests thereunder are represented by transferable
shares of beneficial interest, $0.001 par value per share.
The Trustees have the powers set forth in the Declaration of Trust,
subject to the terms, provisions and conditions therein provided. Pursuant to
Article V, Section 5.1 of the Declaration of Trust, the number of shares of
beneficial interest authorized to be issued under the Declaration of Trust is
unlimited and the Trustees are authorized to divide the shares into one or more
series of shares as they deem necessary or desirable. Pursuant to Article V,
Section 5.4 of the Declaration of Trust, the Trustees are empowered in their
discretion to issue shares of any series without action or approval of the
shareholders. As of the date of this opinion, the Trustees have established four
series of shares designated "Growth and Income Fund", "International Equity
Fund", "Fixed Income Fund" and "New York Tax-Free Bond Fund".
The Trustees have voted to authorize the officers of the Trust to
determine the appropriate number of shares to be registered, to register with
the Securities and Exchange Commission, and to issue and sell to the public,
such shares.
<PAGE>
We have examined the Declaration of Trust and By-Laws of the Trust,
resolutions of the Board of Trustees relating to the authorization and issuance
of shares of beneficial interest of the Trust, a certificate of the Trust's
secretary and such other documents as we have deemed necessary or appropriate
for the purposes of this opinion, including, but not limited to, originals, or
copies certified or otherwise identified to our satisfaction, of such documents,
Trust records and other instruments. In our examination of the above documents,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
For purposes of this opinion letter, we have not made an independent
review of the laws of any state or jurisdiction other than The Commonwealth of
Massachusetts and express no opinion with respect to the laws of any
jurisdiction other than the laws of The Commonwealth of Massachusetts. Further,
we express no opinion as to compliance with any state or federal securities
laws, including the securities laws of The Commonwealth of Massachusetts.
Our opinion below, as it relates to the non-assessability of the shares of
the Trust, is qualified to the extent that under Massachusetts law, shareholders
of a Massachusetts business trust may be held personally liable for the
obligations of the Trust. In this regard, however, please be advised that the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires notice of such disclaimer to be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or any officers of the Trust. Also, the Declaration of Trust provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust.
We are of the opinion that all necessary Trust action precedent to the
issuance of the shares of beneficial interest of the Trust has been duly taken,
and that all such shares may legally and validly be issued for among other
things, cash, and when sold will be fully paid and non-assessable by the Trust
upon receipt by the Trust or its agent of consideration therefor in accordance
with terms described in the Declaration of Trust, subject to compliance with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and the applicable state laws regulating the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an exhibit to any amendment to the Trust's registration statement
with the Commission. Except as provided in this paragraph, this opinion may not
be relied upon by, or filed with, any other parties or for any other purpose.
Very truly yours,
/s/ Hale and Dorr LLP
Hale and Dorr LLP
<PAGE>
EXHIBIT 99.(j)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Independent Auditors" and "Financial Statements" and to the
incorporation by reference of our reports dated February 12, 1999, in this
Registration Statement (Form N-1A 33-33734) of HSBC Mutual Funds Trust.
ERNST & YOUNG LLP
New York, New York
April 28, 1999
<PAGE>
EXHIBIT 99.M1
HSBC MUTUAL FUNDS TRUST
HSBC FUNDS TRUST
(together, the "Trust")
RULE 12b-1 DISTRIBUTION PLAN
CLASS A SHARES
1. Definitions.
------------
(a) The Trust is an open-end management investment company organized
under the laws of the Commonwealth of Massachusetts. The Trust is registered
under the Investment Company Act of 1940, as amended (the "Act"). The Trust's
shares of beneficial interest may be classified into series in which each series
represents the entire undivided interests of a separate portfolio of assets.
For all purposes of this Agreement, a "Fund" shall mean a separate portfolio of
assets of the Trust and a "Series" shall mean the series of shares of beneficial
interest representing undivided interests in a Fund.
(b) As permitted by Rule 12b-1 (the "Rule") under the Act, the Trust
has adopted a Distribution Plan (the "Plan") for each Fund pursuant to which the
Trust may make certain payments to the Distributor for expenses incurred in
connection with the distribution of shares of the Funds. The Trust's Board of
Trustees has determined that there is a reasonable likelihood that the Plan will
benefit each Fund and its shareholders.
2. Adoption of Plan. The Trust hereby adopts this Plan, and the parties
-----------------
hereto enter into this Plan, on the terms and conditions specified herein.
3. Distribution-Related Fee.
-------------------------
(a) The Trust shall pay the Distributor a monthly distribution-related
fee on the first business day of each month in such an amount as the Distributor
may request, provided that each such payment shall be based upon the average
daily value of a Fund's net assets (as determined on each business day at the
time set forth in the Trust's currently effective prospectus for determining net
asset value per share) during the preceding month and shall be calculated at an
annual rate not in excess of 0.35% (0.50% for Growth and Income Fund and 0.20%
for the Money Market Funds).
(b) For purposes of calculating each such monthly fee, the value of a
Fund's net assets shall be computed in the manner specified in the Trust's
currently effective Prospectus and Restated and Amended Declaration of Trust.
All expenses incurred by the Trust hereunder shall be charged against such
Fund's assets. For purposes of this Plan, a "business day" is any day the Trust
is open for business.
4. Purposes of Payments. The Distributor shall be obligated to use all
---------------------
amounts received under this Plan for (i) payments to broker/dealers and other
financial intermediaries including the Distributor for their assistance in the
distribution of Fund shares, and (ii) payments to broker/dealers and other
financial intermediaries including the Distributor for promoting the sale of
such Fund shares, such as by paying for the printing and distribution of
prospectuses sent to prospective investors, the preparation, printing and
distribution of sales literature and the expenses associated with media
advertisements and telephone correspondents. The services rendered by the
Distributor hereunder are in addition to the administrative services reasonably
necessary for the operation of the Trust and the Funds pursuant to the
Administrative Services Contract between the Trust and BISYS Fund Services
Limited
<PAGE>
Partnership, dated as of March 9, 1996.
5. Related Agreements. All other agreements relating to the
-------------------
implementation of this Plan (the "related agreements") shall be in writing, and
such related agreements shall be subject to termination, without penalty, on not
more than sixty days' written notice to any other party to the agreement, in
accordance with the provisions of clauses (a) and (b) of paragraph 9 hereof.
6. Approvals by Trustees and Shareholders. This Plan shall become
---------------------------------------
effective upon approval by (a) a majority of the Board of Trustees of the Trust
for each Fund, including a majority of the Trustees who are not "interested
persons" (as defined in the Act) of the Trust and who have not direct or
indirect financial interest in the operation of the plan or in any related
agreements (the "Plan Trustees"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the Plan, and (b) the holders of a majority
of the outstanding securities of a Fund (as defined in the Act). Related
agreements shall be subject to approval by the Trustees in the manner provided
in clause (a) of the preceding sentence.
7. Duration and Annual Approval by Trustees. This Plan and any related
-----------------------------------------
agreements shall continue in effect for a period of more than one year from the
date of their adoption by a majority of the Board of Trustees, including a
majority of the Plan Trustees, pursuant to a vote cast in person at a meeting
called for the purpose of voting on the continuance of this Plan or any related
agreement.
8. Amendments. This Plan may be amended at any time with the approval
-----------
of a majority of the Board of Trustees, provided that (a) any material amendment
of this Plan must be approved by the Trustees, and (b) any amendment to increase
materially the amount to be expended by the Fund pursuant to this Plan must also
be approved by the vote of the holders of a majority of the outstanding voting
securities of the Fund (as defined in the Act).
9. Termination. This Plan may be terminated at any time, without the
------------
payment of any penalty, by (a) the vote of a majority of the Plan Trustees, or
(b) the vote of the holders of a majority of the outstanding voting securities
of a Fund (as defined in the Act). If this plan is terminated with respect to
any Funds, it shall nonetheless remain in effect with respect to any remaining
Funds.
10. Selection and Nomination of Trustees. While this Plan is in effect,
-------------------------------------
the selection and nomination of the Trustees who are not "interested persons" of
the Trust (as defined in the Act) shall be committed to the discretion of the
Trustees then in office who are not "interested persons" of the Trust.
11. Effects of Assignment. To the extent that this Plan constitutes a
----------------------
plan of distribution adopted pursuant to the Rule, it shall remain in effect as
such so as to authorize the use of the Fund's assets in the amounts and for the
purposes set forth herein, notwithstanding the occurrence of an assignment (as
defined in the Act). To the extent this Plan concurrently constitutes an
agreement relating to implementation of the plan of distribution, it shall
terminate automatically in the event of its assignment, and the Trust may
continue to make payments pursuant to this Plan only (a) upon the approval of
the Board of Trustees, and (b) if the obligations of the Distributor under this
Plan are to be performed by any organization other than the Distributor, upon
such organization's adoption and assumption in writing of all provisions of this
Plan as party hereto.
12. Quarterly Reports to Trustees. The Distributor shall prepare and
------------------------------
furnish to the Board of Trustees, at least quarterly, a written report setting
forth all amounts expended pursuant to this Plan and any related agreements and
the purposes for which such expenditures were made. The written report shall
<PAGE>
include a detailed description of the continuing services provided by
broker/dealers and other financial intermediaries pursuant to paragraph 4 of
this Plan.
13. Preservation of Records. The Trust shall preserve copies of this
------------------------
Plan, any related agreements and any reports made pursuant to this Plan for a
period of not less than six years from the date of this Plan or any such related
agreement or report. For the first two years, copies of such documents shall be
preserved in an easily accessible place.
14. Limitations on Liability of Distributor. The Distributor shall give
----------------------------------------
the Trust the benefit of the Distributor's best judgment and efforts in
rendering services under this Plan. As an inducement to the Distributor's
undertaking to render these services, the Trust agrees that the Distributor
shall not be liable under this Plan for any mistake in judgment or in any other
event whatsoever except for lack of good faith, provided that nothing in this
Plan shall be deemed to protect or purport to protect the Distributor against
any liability to the Trust or its shareholders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Distributor's duties under this Plan, or by
reason of the Distributor's reckless disregard of its obligations and duties
hereunder.
15. Other Distribution-Related Expenditures. Nothing in this Plan shall
----------------------------------------
operate or be construed to limit the extent to which the Distributor or any
other person other than the Trust may incur costs and pay expenses associated
with the distribution of Fund shares.
16. Miscellaneous. The Trust's Amended and Restated Declaration of Trust
--------------
is on file with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Trust are not personally binding upon, nor shall resort
be had to the private property of, any of the Trustees, shareholders, officers,
employees or agents of the Trust, but only the Trust's property shall be bound.
<PAGE>
EXHIBIT 99.M2
HSBC MUTUAL FUNDS TRUST
HSBC FUNDS TRUST
(together, the "Trust")
RULE 12b-1 DISTRIBUTION PLAN
CLASS B AND CLASS C SHARES
1. Definitions.
------------
(a) The Trust is an open-end management investment company organized
under the laws of the Commonwealth of Massachusetts. The Trust is registered
under the Investment Company Act of 1940, as amended (the "Act"). The Trust's
shares of beneficial interest may be classified into series in which each series
represents the entire undivided interests of a separate portfolio of assets.
For all purposes of this Agreement, a "Fund" shall mean a separate portfolio of
assets of the Trust and a "Series" shall mean the series of shares of beneficial
interest representing undivided interests in a Fund.
(b) As permitted by Rule 12b-1 (the "Rule") under the Act, the Trust
has adopted a Distribution Plan (the "Plan") for each Fund pursuant to which the
Trust may make certain payments to the Distributor for expenses incurred in
connection with the distribution of shares of the Funds. The Trust's Board of
Trustees has determined that there is a reasonable likelihood that the Plan will
benefit each Fund and its shareholders.
2. Adoption of Plan. The Trust hereby adopts this Plan, and the parties
-----------------
hereto enter into this Plan, on the terms and conditions specified herein.
3. Distribution-Related Fee.
-------------------------
(a) The Trust shall pay the Distributor a monthly distribution-related
fee on the first business day of each month in such an amount as the Distributor
may request, provided that each such payment shall be based upon the average
daily value of a Fund's net assets (as determined on each business day at the
time set forth in the Trust's currently effective prospectus for determining net
asset value per share) during the preceding month and shall be calculated at an
annual rate not in excess of 0.75%.
(b) For purposes of calculating each such monthly fee, the value of a
Fund's net assets shall be computed in the manner specified in the Trust's
currently effective Prospectus and Restated and Amended Declaration of Trust.
All expenses incurred by the Trust hereunder shall be charged against such
Fund's assets. For purposes of this Plan, a "business day" is any day the Trust
is open for business.
4. Purposes of Payments. The Distributor shall be obligated to use all
---------------------
amounts received under this Plan for (i) payments to broker/dealers and other
financial intermediaries including the Distributor for their assistance in the
distribution of Fund shares, and (ii) payments to broker/dealers and other
financial intermediaries including the Distributor for promoting the sale of
such Fund shares, such as by paying for the printing and distribution of
prospectuses sent to prospective investors, the preparation, printing and
distribution of sales literature and the expenses associated with media
advertisements and telephone correspondents. The services rendered by the
Distributor hereunder are in addition to the administrative services reasonably
necessary for the operation of the Trust and the Funds pursuant to the
Administrative Services Contract between the Trust and BISYS Fund Services
Limited
<PAGE>
Partnership, dated as of March 9, 1996.
5. Related Agreements. All other agreements relating to the
-------------------
implementation of this Plan (the "related agreements") shall be in writing, and
such related agreements shall be subject to termination, without penalty, on not
more than sixty days' written notice to any other party to the agreement, in
accordance with the provisions of clauses (a) and (b) of paragraph 9 hereof.
6. Approvals by Trustees and Shareholders. This Plan shall become
---------------------------------------
effective upon approval by (a) a majority of the Board of Trustees of the Trust
for each Fund, including a majority of the Trustees who are not "interested
persons" (as defined in the Act) of the Trust and who have not direct or
indirect financial interest in the operation of the plan or in any related
agreements (the "Plan Trustees"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the Plan, and (b) the holders of a majority
of the outstanding securities of a Fund (as defined in the Act). Related
agreements shall be subject to approval by the Trustees in the manner provided
in clause (a) of the preceding sentence.
7. Duration and Annual Approval by Trustees. This Plan and any related
-----------------------------------------
agreements shall continue in effect for a period of more than one year from the
date of their adoption by a majority of the Board of Trustees, including a
majority of the Plan Trustees, pursuant to a vote cast in person at a meeting
called for the purpose of voting on the continuance of this Plan or any related
agreement.
8. Amendments. This Plan may be amended at any time with the approval
-----------
of a majority of the Board of Trustees, provided that (a) any material amendment
of this Plan must be approved by the Trustees, and (b) any amendment to increase
materially the amount to be expended by the Fund pursuant to this Plan must also
be approved by the vote of the holders of a majority of the outstanding voting
securities of the Fund (as defined in the Act).
9. Termination. This Plan may be terminated at any time, without the
------------
payment of any penalty, by (a) the vote of a majority of the Plan Trustees, or
(b) the vote of the holders of a majority of the outstanding voting securities
of a Fund (as defined in the Act). If this plan is terminated with respect to
any Funds, it shall nonetheless remain in effect with respect to any remaining
Funds.
10. Selection and Nomination of Trustees. While this Plan is in effect,
-------------------------------------
the selection and nomination of the Trustees who are not "interested persons" of
the Trust (as defined in the Act) shall be committed to the discretion of the
Trustees then in office who are not "interested persons" of the Trust.
11. Effects of Assignment. To the extent that this Plan constitutes a
----------------------
plan of distribution adopted pursuant to the Rule, it shall remain in effect as
such so as to authorize the use of the Fund's assets in the amounts and for the
purposes set forth herein, notwithstanding the occurrence of an assignment (as
defined in the Act). To the extent this Plan concurrently constitutes an
agreement relating to implementation of the plan of distribution, it shall
terminate automatically in the event of its assignment, and the Trust may
continue to make payments pursuant to this Plan only (a) upon the approval of
the Board of Trustees, and (b) if the obligations of the Distributor under this
Plan are to be performed by any organization other than the Distributor, upon
such organization's adoption and assumption in writing of all provisions of this
Plan as party hereto.
12. Quarterly Reports to Trustees. The Distributor shall prepare and
------------------------------
furnish to the Board of Trustees, at least quarterly, a written report setting
forth all amounts expended pursuant to this Plan and any related agreements and
the purposes for which such expenditures were made. The written report shall
<PAGE>
include a detailed description of the continuing services provided by
broker/dealers and other financial intermediaries pursuant to paragraph 4 of
this Plan.
13. Preservation of Records. The Trust shall preserve copies of this
------------------------
Plan, any related agreements and any reports made pursuant to this Plan for a
period of not less than six years from the date of this Plan or any such related
agreement or report. For the first two years, copies of such documents shall be
preserved in an easily accessible place.
14. Limitations on Liability of Distributor. The Distributor shall give
----------------------------------------
the Trust the benefit of the Distributor's best judgment and efforts in
rendering services under this Plan. As an inducement to the Distributor's
undertaking to render these services, the Trust agrees that the Distributor
shall not be liable under this Plan for any mistake in judgment or in any other
event whatsoever except for lack of good faith, provided that nothing in this
Plan shall be deemed to protect or purport to protect the Distributor against
any liability to the Trust or its shareholders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Distributor's duties under this Plan, or by
reason of the Distributor's reckless disregard of its obligations and duties
hereunder.
15. Other Distribution-Related Expenditures. Nothing in this Plan shall
----------------------------------------
operate or be construed to limit the extent to which the Distributor or any
other person other than the Trust may incur costs and pay expenses associated
with the distribution of Fund shares.
16. Miscellaneous. The Trust's Amended and Restated Declaration of Trust
--------------
is on file with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Trust are not personally binding upon, nor shall resort
be had to the private property of, any of the Trustees, shareholders, officers,
employees or agents of the Trust, but only the Trust's property shall be bound.
<PAGE>
EXHBIT 99(m)(3)
BISYS FUND SERVICES LIMITED PARTNERSHIP, DISTRIBUTOR
3435 Stelzer Road
Columbus, Ohio 43219-3035
DEALER AGREEMENT
Ladies and Gentlemen:
As the principal underwriter of the shares ("Shares") of each investment company
portfolio ("Fund") listed in Exhibit A attached hereto, which may be amended
from time to time, BISYS Fund Services Limited Partnership ("BISYS") hereby
agrees with you as follows:
1. You hereby represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD") and that you are a broker-
dealer properly registered and qualified under all applicable federal,
state and local laws to engage in the business and transactions described
in this Agreement. You also represent that you are a member in good
standing of the Securities Investor Protection Corporation ("SIPC"). We
both agree to abide by the Rules of Fair Practice of the NASD and all
applicable laws, rules and regulations, including applicable federal and
state securities laws, rules and regulations that are now or may become
applicable to transactions hereunder. You agree that it is your
responsibility to determine the suitability of any Fund Shares as
investments for your customers, and that BISYS has no responsibility for
such determination. You further agree to maintain all records required by
applicable law or otherwise reasonably requested by BISYS relating to Fund
transactions that you have executed. In addition, you agree to notify us
immediately in the event your status as a SIPC member changes.
2. We have furnished you with a list of the states or other jurisdictions in
which Fund Shares have been registered for sale or are otherwise qualified
for sale. Such list appears in Exhibit B attached hereto. Shares of the
Funds may from time to time be registered or otherwise qualified for sale
in states or jurisdictions other than those listed in Exhibit B. Those
states or jurisdictions are incorporated into Exhibit B by reference. You
agree to indemnify us and/or the Funds for any claim, liability, expense or
loss in any way arising out of a sale of Shares in any state or
jurisdiction in which such Shares are not so registered or qualified for
sale.
<PAGE>
3. In all sales of Fund Shares, you shall act as agent for your customers or
as principal for your own bona fide investment. In no transaction shall
you act as our agent or as agent for any Fund or the Funds' Transfer Agent.
As agent for your customers, you are hereby authorized to: (i) place orders
directly with the investment company (the "Company") for the purchase of
Shares and (ii) tender Shares to the Company for redemption, in each case
subject to the terms and conditions set forth in the applicable prospectus
("Prospectus") and the operating procedures and policies established by us.
The minimum dollar purchase of Shares shall be the applicable minimum
amount set forth in the applicable Prospectus, and no order for less than
such amount shall be accepted by you. The procedures relating to the
handling of orders shall be subject to instructions which we shall forward
to you from time to time. All orders are subject to acceptance or
rejection by BISYS in its sole discretion. No person is authorized to make
any representations concerning Shares of any Fund except such
representations contained in the relevant then-current Prospectus and
statement of additional information ("Statement of Additional Information")
and in such supplemental information that may be supplied to you by us for
a Fund. If you should make such an unauthorized representation, you agree
to indemnify the Funds and us from and against any and all claims,
liability, expense or loss in any way arising out of or in any way
connected with such representation. You are specifically authorized to
distribute the Prospectus and Statement of Additional Information and sales
material received from us. No person is authorized to distribute any other
sales material relating to a Fund without our prior written approval. You
further agree to deliver, upon our request, copies of any relevant amended
Prospectus and Statement of Additional Information to shareholders of the
Fund to whom you have sold Shares. As agent for your customers, you shall
not withhold placing customers' orders for any Shares so as to profit
yourself as a result of such withholding and shall not purchase any Shares
from us except for the purpose of covering purchase orders already
received.
If any Shares purchased by you are repurchased by a Fund or by us for the
account of a Fund, or are tendered for redemption within seven business
days after confirmation by us of the original purchase order for such
Shares, (i) you agree forthwith to refund to us the full concession allowed
to you on the original sale and (ii) we shall forthwith pay to such Fund
that part of the discount retained by us on the original sale. Notice will
be given to you of any such repurchase or redemption within ten days of the
date on which the tender of Shares for redemption is delivered to us or to
the Fund. Neither party to this Agreement shall purchase any Shares from a
record holder at a price lower than the net asset value next computed by or
for the issuer thereof. Nothing in this subparagraph shall prevent you from
selling Shares for the account of a record holder to us or the issuer and
charging the investor a fair commission for handling the transaction. Any
order placed by you for the repurchase of Shares of a Fund is subject to
the timely receipt by the Company of all required documents in good order.
If such documents are not received within a reasonable time after the order
is placed, the order is subject to cancellation, in which case you agree to
be responsible for any loss resulting to the Fund or to us from such
cancellation.
4. We will furnish you, upon request, with offering prices for the Shares in
accordance with the then-current Prospectuses for the Funds, and you agree
to quote such prices subject to confirmation by us on any Shares offered to
you for sale. The public offering price shall equal the net asset value
per Share of a Fund plus a front-end sales load, if applicable. For Funds
with a front-end sales load, you will receive a discount from the public
offering price as outlined in the current Prospectus. For Funds with a
contingent deferred sales load, you will receive from us, or a paying agent
appointed by us, a commission in the amount shown in Exhibit C. We reserve
the right to waive sales charges. Each price is always subject to
confirmation,
<PAGE>
and will be based upon the net asset value next computed after receipt by
us of an order that is in good form. You acknowledge that it is your
responsibility to date and time stamp all orders received by you and to
transmit such orders promptly to us. You further acknowledge that any
failure to promptly transmit such orders to us that causes a purchaser of
Shares to be disadvantaged, based upon the pricing requirements of Rule
22c-1 under the 1940 Act, shall be your sole responsibility. We reserve the
right to cancel this Agreement at any time without notice if any Shares
shall be offered for sale by you at less than the then-current offering
price determined by or for the applicable Fund.
5. Your customer will be entitled to a front-end sales load reduction with
respect to purchases made under a letter of intent ("Letter of Intent") or
right of accumulation ("Right of Accumulation") described in the
Prospectuses. In such case, your dealer's concession will be based upon
such reduced sales load; however, in the case of a Letter of Intent signed
by your customer, an adjustment to a higher dealer's concession will
thereafter be made to reflect actual purchases by your customer if he or
she should fail to fulfill the Letter of Intent. Your customer will be
entitled to an additional front-end sales load reduction in those instances
in which the customer makes purchases that exceed the dollar amount
indicated in the Letter of Intent and qualifies for an additional front-end
sales load reduction pursuant to the appropriate Prospectus. In such case,
your dealer's concession will be reduced to reflect such additional sales
load reduction. When placing wire trades, you agree to advise us of any
Letter of Intent signed by your customer or of any Right of Accumulation
available to such customer of which he or she has made you aware. If you
fail to so advise us, you will be liable for the return of any commissions
plus interest thereon.
6. With respect to orders that are placed for the purchase of Fund Shares,
unless otherwise agreed, settlement shall be made with the Company within
three (3) business days after our acceptance of the order. If payment is
not so received or made, we reserve the right to cancel the sale, or, at
our option, to sell the Shares to the Funds at the then prevailing net
asset value. In this event or in the event that you cancel the trade for
any reason, you agree to be responsible for any loss resulting to the Funds
or to us from your failure to make payments as aforesaid. You shall not be
entitled to any gains generated thereby.
7. You shall be responsible for the accuracy, timeliness and completeness of
any orders transmitted by you on behalf of your customers by wire or
telephone for purchases, exchanges or redemptions, and shall indemnify us
against any claims by your customers as a result of your failure to
properly transmit their instructions. In addition, you agree to guarantee
the signatures of your customers when such guarantee is required by the
Prospectus of a Fund. In that connection, you agree to indemnify and hold
harmless all persons, including us and the Funds' Transfer Agent, against
any and all loss, cost, damage or expense suffered or incurred in reliance
upon such signature guarantee.
8. No advertisement or sales literature with respect to a Fund (as such terms
are defined in the NASD's Rules of Fair Practice) shall be used by you
without first having obtained our approval.
9. Neither of us shall be liable to the other except for (1) acts or failures
to act which constitute a lack of good faith or negligence and (2)
obligations expressly assumed under this Agreement. In addition, you agree
to indemnify us and hold us harmless from any claims or assertions relating
to the lawfulness of your participation in this Agreement and the
transactions contemplated hereby or relating to any activities of any
<PAGE>
persons or entities affiliated with your organization which are performed
in connection with the discharge of your responsibilities under this
Agreement. If such claims are asserted, we shall have the right to manage
our own defense, including the selection and engagement of legal counsel,
and all costs of such defense shall be borne by you.
10. This Agreement will automatically terminate in the event of its assignment.
This Agreement may be terminated by either of us, without penalty, upon ten
days' prior written notice to the other party. This Agreement may also be
terminated at any time without penalty by the vote of a majority of the
members of a Fund's Board of Trustees who are not "interested persons" (as
such term is defined in the 1940 Act), or (with respect to a Fund) by a
vote of a majority of the outstanding voting securities of that Fund on
ten days' written notice.
11. All communications to us shall be sent to the address set forth on page 1
hereof or at such other address as we may designate in writing. Any notice
to you shall be duly given if mailed or telecopied to you at the address
set forth below or at such other address as you may provide in writing.
-------------------------------------------
-------------------------------------------
-------------------------------------------
12. You hereby represent that all requisite corporate proceedings have been
undertaken to authorize you to enter into this Agreement and to perform the
services contemplated herein. You further represent that the individual
that has signed this Agreement below is a duly elected officer that has
been empowered to act for and on behalf of your organization with respect
to the execution of this Agreement.
13. This Agreement supersedes any other agreement between us with respect to
the offer and sale of Shares and relating to any other matters discussed
herein. All covenants, agreements, representations and warranties made
herein shall be deemed to have been material and relied on by each party.
The invalidity or unenforceability of any term or provision hereof shall
not affect the validity or enforceability of any other term or provision
thereof. This Agreement may be executed in any number of counterparts,
which together shall constitute one instrument, and shall be governed by
and construed in accordance with the laws (other than the conflict of laws
rules) of the State of Ohio and shall bind and insure to the benefit of the
parties hereto and their respective successors and assigns.
If the foregoing corresponds with your understanding of our agreement, please
sign this document and the accompanying copies thereof in the appropriate space
below and return the same to us, whereupon this Agreement shall be binding upon
each of us, effective as of the date of execution.
<PAGE>
BISYS FUND SERVICES LIMITED PARTNERSHIP The foregoing Agreement is hereby
/By: /BISYS FUND SERVICES, INC. accepted:
--------------------------------
By By
----------------------------- ------------------------------
Date Date
Authorized Officer Title:
<PAGE>
BISYS FUND SERVICES LIMITED PARTNERSHIP
3435 Stelzer Road
Columbus, Ohio 43219
EXHIBIT A
INVESTMENT PORTFOLIOS OF
HSBC FUNDS
FUND NAME TYPE CUSIP QUOTRON
- --------- ---- ----- -------
Cash Management Fund Money Market 56845L302 MHMXX
Government Money Market Fund Money Market 56845L401 MGFXX
U.S. Treasury Money Market Fund Money Market 56845L500 MUSXX
New York Tax-Free Money Market Fund Money Market 56845L708 MNFXX
Growth & Income Fund Stock 404282105 MTREX
New York Tax-Free Bond Fund Bond 404282303 MNYBX
Fixed Income Fund Bond 404282402 MFIFX
Small Cap Fund Stock 404282204 MSCFX
International Equity Fund (Retail) Stock 404282600
<PAGE>
EXHIBIT 99.O
HSBC MUTUAL FUNDS TRUST
Rule 18f-3 Plan
Rule 18f-3
- ----------
Pursuant to Rule 18f-3 ("Rule 18f-3") of the Investment Company Act of
1940, as amended (the "Act"), HSBC Mutual Funds Trust (the "Trust"), a
registered open-end investment company whose shares are registered on Form N-1A,
consisting of the Growth and Income Fund, Fixed Income Fund, International
Equity Fund and the New York Tax-Free Bond Fund and any future fund or series
created by the Trust (collectively, the "Funds"), hereby adopts this plan
setting forth the separate arrangements and expense allocations of each class of
shares. This plan is deemed to include other operational details of the class
structure as they appear in the Trust's prospectus.
Class A Shares
- --------------
Class A shares of all funds are sold subject to an initial sales charge
(sales charges are calculated as a percentage of the offering price) as follows:
Growth and Fixed New York
Income Income Tax-Free International
Amount of Sale Fund Fund Bond Fund Equity Fund
- -------------- ---- ---- --------- -----------
Less than $50,000 5.00% 4.75% 4.75% 5.00%
$50,000 to $99,999 4.50% 4.25% 4.25% 4.50%
$100,000 to $249,999 3.75% 3.50% 3.50% 3.75%
$250,000 to $499,999 2.50% 2.50% 2.50% 2.50%
$500,000 to $999,999 2.00% 2.00% 2.00% 2.00%
$1,000,000 or more 1.00% 1.00% 1.00% 1.00%
<PAGE>
Class A shares are subject to a distribution fee under the Rule 12b-1 Plan
payable at a maximum annual rate of up to 0.35% (0.50% in the case of the Growth
and Income Fund) of the average daily net assets of that Class. Class A Shares
are also subject to fees of up to 0.35% (subject to NASD rules) pursuant to a
Servicing Organization Agreement.
Class B Shares
- --------------
Class B Shares are not subject to an initial sales charge but all
Funds are subject to a contingent deferred sales charge which will be imposed on
redemptions as follows:
4% in year 1
3% in year 2
2% in year 3
1% in year 4
0% in year 5 and thereafter
Class B shares are also subject to a distribution fee pursuant to Rule
12b-1 payable at the annual rate of up to 0.75% of the average daily net assets
of the class. Class B Shares are also subject to fees of up to 0.50% (subject to
NASD rules) pursuant to a Servicing Organization Agreement. Class B Shares
automatically convert to Class A shares on the first business day of the month
following the sixth anniversary of the issuance of such Class B shares.
Class C Shares
- --------------
Class C Shares are not subject to an initial sales charge but all
Funds are subject to a contingent deferred sales charge which will be imposed on
redemptions. Class C Shares are subject to a lower contingent deferred sales
charge (1.00%) and do not have to be held as long as Class B Shares (one year)
to avoid paying a contingent deferred sales charge.
Class C Shares will not automatically convert to Class A shares.
Class C Shares are also subject to a distribution fee pursuant to Rule 12b-1
payable at the annual rate of up to .75% of the average daily net assets of the
class. Class C Shares are also subject to fees of up to 0.50% (subject to NASD
rules) pursuant to a Servicing Organization Agreement.
Institutional Class
- -------------------
The International Fund also has Institutional Class Shares.
Institutional Class Shares are not subject to an initial sales charge or a
contingent deferred sales charge. Institutional Class Shares are not subject to
any distribution fee, but may be subject to fees of up to 0.35% (subject to NASD
rules) pursuant to a Servicing Organization Agreement
- 2 -
<PAGE>
Class Voting Rights and Obligations and Class Expenses
- ------------------------------------------------------
The Classes of shares issued by any Fund will be identical in all
respects except for Class designation, allocation of certain expenses directly
related to the distribution or service arrangement, or both, for a Class, and
voting rights--each Class votes separately with respect to issues affecting only
that Class. Shares of all Classes will represent interests in the same
investment fund; therefore each Class is subject to the same investment
objectives, policies and limitations.
Each Class of shares shall bear expenses, not including advisory or
custodial fees or other expenses related to the management of the Fund's assets,
that are directly attributable to the kind or degree of services rendered to
that Class ("Class Expenses"). Class Expenses, including the management fee or
the fee of other service providers, may be waived or reimbursed by the Funds'
investment adviser, underwriter or any other provider of services to the Funds
with respect to each Class of a Fund on a Class by Class basis.
Exchanges and Conversion Privileges
- -----------------------------------
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 or any of the portfolios in 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. Class B Shares will convert automatically to Class A shares on the
first business day of the month following the sixth anniversary of the issuance
of such Class B Shares. Class B Shares will be converted at the net asset value
of Class A Shares, without the imposition of any sales load, fee or charge.
- 3 -
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<PAGE>
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<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
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<NAME> FIXED INCOME FUND
<S> <C>
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<OVERDISTRIBUTION-GAINS> 1740769
<ACCUM-APPREC-OR-DEPREC> 2171130
<NET-ASSETS> 53833558
<DIVIDEND-INCOME> 48520
<INTEREST-INCOME> 3598511
<OTHER-INCOME> 0
<EXPENSES-NET> 500513
<NET-INVESTMENT-INCOME> 3146518
<REALIZED-GAINS-CURRENT> 1275186
<APPREC-INCREASE-CURRENT> 91117
<NET-CHANGE-FROM-OPS> 4512821
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3146518
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<NUMBER-OF-SHARES-SOLD> 902978
<NUMBER-OF-SHARES-REDEEMED> 1784806
<SHARES-REINVESTED> 5316
<NET-CHANGE-IN-ASSETS> (7568720)
<ACCUMULATED-NII-PRIOR> 14033
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<PER-SHARE-NAV-BEGIN> 10.12
<PER-SHARE-NII> .57
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<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 020
<NAME> NEW YORK TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1998
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<INVESTMENTS-AT-VALUE> 33266094
<RECEIVABLES> 565319
<ASSETS-OTHER> 2660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 33834073
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166034
<TOTAL-LIABILITIES> 166034
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31937817
<SHARES-COMMON-STOCK> 2891274
<SHARES-COMMON-PRIOR> 3269573
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 491816
<ACCUM-APPREC-OR-DEPREC> 2222038
<NET-ASSETS> 33668039
<DIVIDEND-INCOME> 16200
<INTEREST-INCOME> 1887968
<OTHER-INCOME> 0
<EXPENSES-NET> 336144
<NET-INVESTMENT-INCOME> 1568024
<REALIZED-GAINS-CURRENT> 805303
<APPREC-INCREASE-CURRENT> (300037)
<NET-CHANGE-FROM-OPS> 2073290
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1568024
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 144518
<NUMBER-OF-SHARES-REDEEMED> 601146
<SHARES-REINVESTED> 78329
<NET-CHANGE-IN-ASSETS> (3855935)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1297119
<GROSS-ADVISORY-FEES> 158707
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 449014
<AVERAGE-NET-ASSETS> 35043973
<PER-SHARE-NAV-BEGIN> 11.48
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .16
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.64
<EXPENSE-RATIO> .96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 010
<NAME> GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 77937903
<INVESTMENTS-AT-VALUE> 106441678
<RECEIVABLES> 95598
<ASSETS-OTHER> 8082
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106545358
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 278418
<TOTAL-LIABILITIES> 278418
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75862099
<SHARES-COMMON-STOCK> 7664450
<SHARES-COMMON-PRIOR> 4465516
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1925776
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 28479065
<NET-ASSETS> 106266940
<DIVIDEND-INCOME> 1352588
<INTEREST-INCOME> 21952
<OTHER-INCOME> 0
<EXPENSES-NET> 844079
<NET-INVESTMENT-INCOME> 530461
<REALIZED-GAINS-CURRENT> 9102892
<APPREC-INCREASE-CURRENT> 13103132
<NET-CHANGE-FROM-OPS> 22736485
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 531024
<DISTRIBUTIONS-OF-GAINS> 12216636
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<NUMBER-OF-SHARES-SOLD> 3357173
<NUMBER-OF-SHARES-REDEEMED> 1168181
<SHARES-REINVESTED> 1009942
<NET-CHANGE-IN-ASSETS> 51072196
<ACCUMULATED-NII-PRIOR> 36028
<ACCUMULATED-GAINS-PRIOR> 5004055
<OVERDISTRIB-NII-PRIOR> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 091
<NAME> INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<INVESTMENTS-AT-VALUE> 65148056
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<TOTAL-ASSETS> 65629937
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<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 232275
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<PAID-IN-CAPITAL-COMMON> 58802471
<SHARES-COMMON-STOCK> 22754<F1>
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<OVERDISTRIBUTION-NII> 68928
<ACCUMULATED-NET-GAINS> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 746966
<NET-INVESTMENT-INCOME> 531914
<REALIZED-GAINS-CURRENT> 1450203
<APPREC-INCREASE-CURRENT> 3340139<F1>
<NET-CHANGE-FROM-OPS> 5322256<F1>
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2400
<DISTRIBUTIONS-OF-GAINS> 951
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 333<F1>
<NUMBER-OF-SHARES-REDEEMED> 7824<F1>
<SHARES-REINVESTED> 377<F1>
<NET-CHANGE-IN-ASSETS> (2369708)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 422475
<OVERDIST-NET-GAINS-PRIOR> 1180096
<GROSS-ADVISORY-FEES> 589589
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1053334
<AVERAGE-NET-ASSETS> 287328<F1>
<PER-SHARE-NAV-BEGIN> 10.35<F1>
<PER-SHARE-NII> .08<F1>
<PER-SHARE-GAIN-APPREC> 1.09<F1>
<PER-SHARE-DIVIDEND> .10<F1>
<PER-SHARE-DISTRIBUTIONS> .04<F1>
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.38<F1>
<EXPENSE-RATIO> 1.12<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Service Class
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000861106
<NAME> HSBC MUTUAL FUNDS TRUST
<SERIES>
<NUMBER> 092
<NAME> INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 58176013
<INVESTMENTS-AT-VALUE> 65148056
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<TOTAL-ASSETS> 65629937
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 232275
<TOTAL-LIABILITIES> 232275
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58802471
<SHARES-COMMON-STOCK> 5722439<F1>
<SHARES-COMMON-PRIOR> 6520055<F1>
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 68928
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 370807
<ACCUM-APPREC-OR-DEPREC> 7034926
<NET-ASSETS> 65397662
<DIVIDEND-INCOME> 1193860
<INTEREST-INCOME> 85020
<OTHER-INCOME> 0
<EXPENSES-NET> 746966
<NET-INVESTMENT-INCOME> 531914
<REALIZED-GAINS-CURRENT> 1450203
<APPREC-INCREASE-CURRENT> 3340139
<NET-CHANGE-FROM-OPS> 5322256
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 601970<F1>
<DISTRIBUTIONS-OF-GAINS> 239229<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1642226<F1>
<NUMBER-OF-SHARES-REDEEMED> 2460775<F1>
<SHARES-REINVESTED> 20933<F1>
<NET-CHANGE-IN-ASSETS> (2369708)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 422475
<OVERDIST-NET-GAINS-PRIOR> 1180096
<GROSS-ADVISORY-FEES> 589589
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1053334
<AVERAGE-NET-ASSETS> 65216143<F1>
<PER-SHARE-NAV-BEGIN> 10.35<F1>
<PER-SHARE-NII> .08<F1>
<PER-SHARE-GAIN-APPREC> 1.09<F1>
<PER-SHARE-DIVIDEND> .10<F1>
<PER-SHARE-DISTRIBUTIONS> .04<F1>
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.38<F1>
<EXPENSE-RATIO> 1.14<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
</TABLE>
