<PAGE>
As Filed with the Securities and Exchange Commission on April 28, 2000
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. 25 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26 [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
HSBC Asset Management [LOGO]
- --------------------------------------------------------------------------------
Growth and Income Fund
Fixed Income Fund
New York Tax-Free Bond Fund
Managed by HSBC Asset Management (Americas) Inc.
April 28, 2000
- --------------------------------------------------------------------------------
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 criminal
offense.
Questions?
Call 1-800-634-2536 or your
Investment Representative.
HSBC2P0400
<PAGE>
HSBC Mutual Funds Trust Prospectus Table of Contents
[GRAPHIC]
<TABLE>
<CAPTION>
Risk/Return Summary and Fund Expenses
- ---------------------------------------------------------------
<C> <S>
Carefully 4 Growth and Income Fund
review this 8 Fixed Income Fund
important 12 New York Tax-Free Bond Fund
section, which
summarizes
each Fund's
investments,
risks, past
performance,
and fees.
[GRAPHIC]
Investment Objectives, Strategies and Risks
- ---------------------------------------------------------------
Review this 16 Growth and Income Fund
section for 17 Fixed Income Fund
information on 18 New York Tax-Free Bond Fund
investment 19 Other Considerations--All Funds
strategies and
their risks.
[GRAPHIC]
Fund Management
- ---------------------------------------------------------------
Review this 20 The Investment Adviser
section for 20 Portfolio Managers
details on the 20 The Distributor and Administrator
people and
organizations
who oversee
the Funds.
[GRAPHIC]
Shareholder Information
- ---------------------------------------------------------------
Review this 22 Pricing of Fund Shares
section for 23 Purchasing and Adding to Your
details on how Shares
shares are 27 Selling Your Shares
valued, how to 31 Distribution Arrangements/Sales
purchase, sell Charges
and exchange 38 Exchanging Your Shares
shares, 40 Dividends, Distributions and
related Taxes
charges and
payments of
dividends and
distributions.
[GRAPHIC]
Financial Highlights
- ---------------------------------------------------------------
41
</TABLE>
[GRAPHIC]
<TABLE>
<CAPTION>
Back Cover
- -------------------------------------------------------------
<S> <C>
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 each Fund, after
this summary.
Fund offers three different classes of shares; Class A, Class B and Class C.
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.
3
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Growth and Income Fund
Investment The Fund's investment objective is long-term growth of
Objective capital and current income.
Principal The Fund normally invests at least 65% of its total assets
Investment in common stocks, preferred stocks, and convertible
Strategies securities. The Fund may invest the balance of its assets in
various types of fixed income securities and in money market
instruments. These fixed income securities may include U.S.
Government securities, corporate bonds, asset-backed
securities (including mortgage-backed securities),
obligations of savings and loans and U.S. and foreign banks,
commercial paper and related repurchase agreements. The
Adviser selects securities for the portfolio that appear to
be undervalued, some of which will be income-producing. In
selecting securities, the Adviser uses quantitative and
fundamental research to identify stocks meeting either or
both growth and income criteria. Investments will be sold if
they no longer meet the Fund's criteria for income-oriented
or growth-oriented instruments.
Principal The principal risks of investing in the Fund are market
Investment Risks 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 Bar Chart
Information Year-by-Year Total Returns
as of 12/31
<TABLE>
<S> <C>
The bar chart shows for Class A Shares*
changes in the Growth
and Income Fund's [BAR CHART]
annual performance
over ten years to 90 91 92 93 94 95 96 97 98 99
demonstrate that the ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Fund's return varied -4.41% 31.92% 7.74% 11.23% -2.97% 33.11% 17.90% 27.42% 26.97% 18.48%
at different times.
The table below ---------------------------
compares the Fund's The bar chart above does
performance over time not reflect the impact of
to that of the S&P any applicable sales
500(R) Composite charges or account fees
Index, a widely which would reduce
recognized, unmanaged returns. The chart,
index of common however, does include
stocks. Both the chart management fees and
and table assume operating expenses. Of
reinvestment of course, past performance
dividends and does not indicate how the
distributions. Fund will perform in the
future.
If fee waivers or The Fund's returns will
expense reimbursements fluctuate over long and
had not been reflected short periods. For
in both the chart and example, during the ten
table, the Fund's year period shown in the
performance would have bar chart, the Fund's:
been lower.
</TABLE>
<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, 1999)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
--------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and Income Fund 6/23/86 12.55% 23.37% 15.41%
Class A*
(includes maximum 5%
sales charge)
--------------------------------------------------------
S&P 500(R) Composite N/A 21.04% 28.54% 18.20%
Index
--------------------------------------------------------
Lipper Growth and Income N/A 11.86% 20.60% 14.38%
Fund Index**
</TABLE>
- --------------------------------------------------------------------------------
*Returns are for Class A shares only.
**The Lipper Growth and Income Fund Index is a widely recognized unmanaged
index of growth and income funds in the U.S.
5
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Growth and
Income Fund
Fees and Expenses
Shareholder Transaction Expenses
(fees paid by you directly) A Shares B Shares C Shares
<TABLE>
<S> <C>
As an investor in
the Growth and Maximum sales charge (load)
Income Fund, you on purchases 5.00%/1/ None None
will pay the ------------------------------------------------------------
following fees Maximum deferred sales charge (load) None 4.00%/2/ 1.00%/3/
and expenses. ------------------------------------------------------------
Shareholder
transaction fees
are paid from Annual Fund Operating Expenses
your account. (fees paid from Fund assets) A Shares B Shares C Shares
Annual Fund
operating
expenses are paid Management fee .55% .55% .55%
out of Fund -------------------------------------------------------
assets, and are Administrative Services fee/4/ .15% .15% .15%
reflected in the -------------------------------------------------------
share price. Distribution (12b-1) fee/5/ .50% .75% .75%
-------------------------------------------------------
Service Organization fee/6/ .35% .50% .50%
-------------------------------------------------------
Contingent De- Other expenses .23% .23% .23%
ferred Sales -------------------------------------------------------
Charge Total fund operating expenses 1.78% 2.18% 2.18%
-------------------------------------------------------
Fee waivers/4/,/5/,/6/ .65% .30% .30%
Some share -------------------------------------------------------
classes impose a Net expense/7/ 1.13% 1.88% 1.88%
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>
- ------
/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, 2000.
6
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Growth and
Income Fund
Expense Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $609 $972 $1,359 $2,439
---------------------------------------------------
Class B Shares
Assuming redemption $591 $853 $1,142 $2,297
Assuming no redemption $191 $653 $1,142 $2,297
---------------------------------------------------
Class C Shares
Assuming redemption $291 $653 $1,142 $2,490
Assuming no redemption $191 $653 $1,142 $2,490
---------------------------------------------------
</TABLE>
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,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
7
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Fixed Income Fund
Investment The Fund's investment objective is generation of high
Objective current income consistent with appreciation of capital.
Principal
Investment The Fund normally invests at least 65% of its total assets
Strategies in fixed income securities rated at least Baa by Moody's
Investors Service ("Moody's") or BBB by Standard and Poors
Corporation ("S&P") or securities of comparable quality.
These fixed income securities may include U.S. Government
securities, corporate bonds, asset-backed securities
(including mortgage-backed securities), obligations of
savings and loans and U.S. and foreign banks, commercial
paper and related repurchase agreements. The Fund may invest
the balance of its assets in variable and floating rate debt
securities that meet similar standards. The Adviser selects
securities based on various factors, including outlook for
the economy and anticipated changes in interest rates and
inflation. The Adviser will consider selling those
securities which no longer meet the Fund's criteria for
investment.
Principal The principal risks of investing in the Fund are interest
Investment Risks rate risk and credit risk. Interest rate risk is greater for
the Fund's investments in mortgage-related securities
because when interest rates rise, the maturities of these
types 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.
Who may want to
invest? Consider investing in the Fund if you are:
. 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]
<TABLE>
<S> <C>
Fixed Income Fund Bar Chart
Performance Information
Year-by-Year Total Returns
The bar chart shows as of 12/31
changes in the Fixed for Class A Shares*
Income Fund's annual
performance since [BAR CHART]
inception to
demonstrate that the 1994 95 96 97 98 99
Fund's return varied ------ ------ ------ ------ ------ ------
at different times. -1.89% 16.73% 2.11% 8.62% 8.33% -1.86%
The table below
compares the Fund's ----------------------------------------------
performance over time The bar chart above does not reflect the
to that of the Lehman impact of any applicable sales charges or
Brothers Aggregate account fees which would reduce returns. The
Bond Index, an chart, however, does include management fees
unmanaged index and operating expenses. Of course, past
generally performance does not indicate how the Fund
representative of the will perform in the future.
bond market as a
whole. Both the chart The Fund's returns will fluctuate over long
and table assume and short periods. For example, during the
reinvestment of period shown in the bar chart, the Fund's:
dividends and
distributions. Best quarter: Q2 1995 6.03%
Worst quarter: Q1 1996 -2.49%
------------------------------------------------
If fee waivers or
expense reimbursements
had not been reflected
in both the chart and
table, the Fund's
performance would have
been lower.
</TABLE>
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1999)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
---------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income Fund Class A* 1/15/93 -6.55% 5.56% 4.92%
(includes maximum
4.75% sales charge)
---------------------------------------------------------
Lehman Brothers N/A -0.83% 7.73% 6.42%
Aggregate Bond Index**
</TABLE>
- --------------------------------------------------------------------------------
*Returns are for Class A shares only.
**The Lehman Bros. Aggregate Bond Index is a widely recognized unmanaged index
of publicly issued fixed rate U.S. Government and investment grade mortgage-
backed and corporate debt securities.
9
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Fixed Income Fund
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses
(fees paid
by you directly) A Shares B Shares C Shares
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.
<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/
------------------------------------------------------------
</TABLE>
<TABLE>
Contingent <CAPTION>
Deferred Sales Annual Fund Operating
Charge Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called
a Contingent
Deferred Sales
Charge.
<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 .27% .27% .27%
------------------------------------------------------
Total fund operating expenses 1.67% 2.22% 2.22%
------------------------------------------------------
Fee waiver/4/,/5/,/6/ .50% .30% .30%
------------------------------------------------------
Net expenses/7/ 1.17% 1.92% 1.92%
------------------------------------------------------
</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 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, 2000.
10
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Fixed Income Fund
Expense
Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
redemption $589 $930 $1,295 $2,318
---------------------------------------------------
Class B Shares
Assuming redemption $595 $865 $1,162 $2,267
Assuming no redemption $195 $665 $1,162 $2,267
---------------------------------------------------
Class C Shares
Assuming redemption $295 $665 $1,162 $2,531
Assuming no redemption $195 $665 $1,162 $2,531
---------------------------------------------------
</TABLE>
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,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
11
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Bond Fund
Investment The Fund's investment objective is a high level of current
Objective income, exempt from regular Federal, New York State, and New
York City personal income taxes, as is consistent with
preservation of capital.
Principal The Fund invests primarily in municipal bonds, notes,
Investment commercial paper and other debt instruments of New York, its
Strategies 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 Adviser varies the average maturity of its investment
portfolio from time to time in response to actual and
expected interest rate movements as well as other market and
economic conditions. The Adviser monitors the Fund's
portfolio performance and reallocates the Fund's assets in
response to actual and expected market and economic changes.
Principal The principal risks of investing in the Fund are interest
Investment Risks 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 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 Consider investing in the Fund if you are:
invest? .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
12
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
<TABLE>
<S> <C>
New York Tax-Free Bond Fund
Performance Information Bar Chart
Year-by-Year Total Returns
The bar chart shows as of 12/31
changes in the New Class A Shares*
York Tax-Free Bond
Fund's yearly
performance over the 1990 91 92 93 94 95 96 97 98 99
past ten years since ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
inception to 6.13% 12.59% 10.66% 14.27% -8.13% 15.17% 3.99% 8.97% 5.99% -3.58%
demonstrate that the --------------------------
Fund's value varied at The bar chart above does
differing times. The not reflect the impact of
table below compares any applicable sales
the Fund's performance charges or account fees
over time to that of which would reduce
the Lehman Brothers 7- returns. The chart,
year Municipal Bond however, does include
Index, an unmanaged management fees and
index generally operating expenses. Of
representative of the course, past performance
intermediate municipal does not indicate how the
bond market. Both the Fund will perform in the
chart and table assume future.
reinvestment of
dividends and The Fund's returns will
distributions. fluctuate over long and
short periods. For
example, during the period
If fee waivers or shown in the bar chart,
expense reimbursements the Fund's:
had not been reflected
in both the chart and The Fund's returns will
table, the Fund's fluctuate over long and
performance would have short periods. For
been lower. example, during the period
shown in the bar chart,
the Fund's:
</TABLE>
<TABLE>
<S> <C> <C>
Best quarter: Q2 1992 5.15%
Worst quarter: Q1 1994 -6.15%
</TABLE>
--------------------------------------
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1999)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
-------------------------------------------------------
<S> <C> <C> <C> <C>
New York Tax Free Bond 3/21/89 -8.15% 4.90% 5.83%
Fund Class A*
(includes maximum 4.75%
sales charge)
-------------------------------------------------------
Lehman Brothers 7-year N/A -2.06% 6.91% 6.89%
Municipal
Bond Index**
</TABLE>
- --------------------------------------------------------------------------------
*Returns are for Class A shares only.
** The Lehman Brothers 7-year Municipal Bond Index is a widely recognized
unmanaged index of publicly issued fixed rate U.S. Government and investment
grade mortgage-backed and corporate debt securities having an average
maturity of 7-years.
13
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Bond Fund
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
(fees paid by you directly) A Shares B Shares C Shares
As an investor in
the New York Tax-
Free Bond Fund,
you will pay the
following fees
and expenses.
<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
------------------------------------------------------------
</TABLE>
Shareholder
transaction fees
are paid from
your account.
Annual Fund
operating
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
<TABLE>
<CAPTION>
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
Contingent De-
ferred Sales
Charge
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called a
Contingent
Deferred Sales
Charge.
<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 .55% .55% .55%
----------------------------------------------------------
Total fund operating expenses 1.85% 2.40% 2.40%
----------------------------------------------------------
Fee waivers & expense/4/, /5/, /6/ .50% .30% .30%
----------------------------------------------------------
Net expenses/7/ 1.35% 2.10% 2.10%
----------------------------------------------------------
</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 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,
2000.
14
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Bond Fund
Expense Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming Redemption $606 $983 $1,384 $2,502
---------------------------------------------------
Class B Shares
Assuming redemption $613 $920 $1,253 $2,452
Assuming no redemption $213 $720 $1,253 $2,452
---------------------------------------------------
Class C Shares
Assuming redemption $313 $720 $1,253 $2,714
Assuming no redemption $213 $720 $1,253 $2,714
---------------------------------------------------
</TABLE>
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,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
15
<PAGE>
Investment Objectives, Strategies and Risk
[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 at least 65% of
its total assets in common stocks, preferred stocks, and convertible
securities. The Fund may invest up to 35% of its total assets in fixed income
securities and money market instruments. The fixed income securities may
include U.S. Government securities, corporate bonds, asset-backed securities
(including mortgage-backed securities), obligations of savings and loans and
U.S. and foreign banks, commercial paper and related repurchase agreements.
The Fund's criteria for selecting equity securities are the issuer's managerial
strength, competitive position, price to earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value. The
Fund's Adviser uses quantitative and fundamental research to identify stocks
meeting either or both growth and income criteria and selects securities for
the portfolio that appear to be undervalued. The Fund may invest in securities
that appear to be undervalued because the value or potential for growth has
been overlooked by many investors or because recent changes in the economy,
industry or the company have not yet been reflected in the price of the
securities. In order to increase the Fund's portfolio income, the Fund may
invest in securities that provide current dividends or, in the opinion of the
Adviser, have a potential for dividend growth in the future. Investments will
be sold if they no longer meet the Fund's criteria for income-oriented or
growth-oriented instruments.
The Fund will place greater emphasis on capital appreciation as compared to
income, although changes in market conditions and interest rates will cause the
Fund to vary emphasis of these two elements of its investment program in order
to meet its investment objective.
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 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.
16
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
Fixed Income Fund
Ticker Symbol: Class A MFIFX Class B N/A Class C N/A
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 U.S. Government securities,
corporate bonds, asset-backed securities (including mortgage-backed
securities), obligations of savings and loans and U.S. and foreign banks,
commercial paper and related repurchase agreements. The Fund 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 various factors,
including outlook for the economy and anticipated changes in interest rates and
inflation. 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.
17
<PAGE>
Investment Objectives, Strategies and Risk
[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 bonds, notes, commercial
paper and other debt instruments that are exempt from Federal, New York State,
and New York City income tax in the opinion of bond counsel to the issuer. 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.
The Adviser varies the average maturity of its investment portfolio from time
to time in response to actual and expected interest rate movements as well as
other market conditions. The Adviser monitors the Fund's portfolio performance
and reallocates the Fund's assets in response to actual and expected market and
economic changes.
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 bonds, notes,
commercial paper and other debt instruments 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.
18
<PAGE>
Investment Objectives, Strategies and Risk
[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.
19
<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 $6.1
billion of assets of individuals, pension plans, corporations and institutions.
Through its portfolio management team, HSBC makes the day-to-day investment
decisions and continuously reviews, supervises and administers the Funds'
investment programs.
For these advisory services, the Funds paid the Adviser at the rates shown
below during their fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Percentage of
average net assets
as of 12/31/99
- -----------------------------------------------
<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. Edward Merkle is responsible for the day-to-day management of the Fixed
Income Fund's portfolio. Mr. Merkle joined the Adviser in 1984 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.
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.
20
<PAGE>
Fund Management
[GRAPHIC]
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.
Code of Ethics
The Code of Ethics of the Adviser and the Funds prohibits all affiliated
personnel from engaging in personal investment activities which compete with or
attempt to take advantage of a Fund's planned portfolio transactions. Both
organizations maintain careful monitoring with the Code of Ethics. The Code of
Ethics are on public file and are available from the SEC.
21
<PAGE>
Shareholder Information
[GRAPHIC]
Pricing of Fund Shares
- ---------------------
How NAV is
Calculated
Funds
The NAV is Per share net asset value (NAV) is determined and its
calculated by adding shares are priced at the close of regular trading on
the total value of a the New York Stock Exchange, normally at 4:00 p.m.
Fund's investments Eastern time on days the Exchange is open. Fund shares
and other assets, will not be priced on days the New York Stock Exchange
subtracting its is closed for trading.
liabilities and then
dividing that figure Some of the Funds invest in securities that are
by the number of primarily listed on foreign exchanges and trade on
outstanding shares weekends or other days when the Fund does not price its
of the Fund: shares. As a result, the Funds' NAVs may change on days
when shareholders will be unable to purchase or redeem
NAV = the Funds' shares.
Total Assets-
Liabilities Your order for purchase, sale or exchange of shares is
------------- priced at the next NAV calculated after your order is
Number of Shares accepted by the Fund less any applicable sales charge
Outstanding as noted in the section on "Distribution
Arrangements/Sales Charges." This is what is known as
You can find the the offering price.
Fund's NAV daily in
The Wall Street The Funds' securities are generally valued at current
Journal and other market prices. If market quotations are not available,
newspapers. prices will be based on fair value as determined by the
- --------------------- Funds' Trustees.
--------------------------------------------------------
22
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding To Your Shares
You may purchase the
Funds through the Minimum Minimum
Distributor or Initial Subsequent
through banks, Account type Investment Investment
brokers and other
investment Class A, B, or C
representatives, who Regular $1,000 $50
may charge ------------------------------------------------
additional fees and Automatic Investment Plan $50 $50
may require higher ------------------------------------------------
minimum investments
or impose other All purchases must be in U.S. dollars. A fee will be
limitations on charged for any checks that do not clear. Third-party
buying and selling checks are not accepted.
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 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.
- --------------------------------------------------------------------------------
23
<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 Family of Funds HSBC Family of Funds
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.
24
<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.
25
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing And Adding To Your Shares
Automatic Investment Plan Directed Dividend Option
You can make automatic investments in By selecting the appropriate box in
the Funds from your bank account, the Account Application, you can
through payroll deduction or from your elect to receive your distributions
federal employment, Social Security or in cash (check) or have
other regular government checks. distributions (capital gains and
Automatic investments can be as little dividends) reinvested in another
as $50, once you've invested the $1000 HSBC Fund without a sales charge.
minimum required to open the account. You must maintain the minimum
balance in each Fund into which you
To invest regularly from your bank plan to reinvest dividends or the
account: reinvestment will be suspended and
your dividends paid to you. The Fund
. Complete the Automatic Investment may modify or terminate this
Plan portion on your Account reinvestment option without notice.
Application. You can change or terminate your
Make sure you note: participation in the reinvestment
- Your bank name, address and option at any time.
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.
- --------------------------------------------------------------------------------
26
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
You may sell Withdrawing Money From Your Fund Investment
your shares at
any time. Your As a mutual fund shareholder, you are technically selling
sales price will shares when you request a withdrawal in cash. This is also
be the next NAV known as redeeming shares or a redemption of shares.
after your sell
order is -------------------------------------------------------------
received by the Contingent Deferred Sales Charge
Fund, its
transfer agent, When you sell Class B or Class C shares, you will be charged
or your a fee for any shares that have not been held for a
investment sufficient length of time. These fees will be deducted from
representative. the money paid to you. See the section on "Distribution
Normally you Arrangements/Sales Charges" on page 31 for details.
will receive
your proceeds -------------------------------------------------------------
within a week Instructions For Selling Shares
after your
request is If selling your shares through your financial adviser or
received. 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 wish
telephone(unless to receive your funds (mail, wire, electronic transfer).
you have
declined
telephone sales
privileges on
your latest
application)
- --------------------------------------------------------------------------------
By mail 1. Call 1-800-634-2536 to request redemption forms or write
(See "Selling a letter of instruction indicating:
Your Shares-- . your Fund and account number
Redemptions in . amount you wish to redeem
Writing . address where your check should be sent
Required") . account owner signature
2. Mail to:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43216-3850
- --------------------------------------------------------------------------------
By express See instruction 1 above.
delivery service
(See "Selling 2. Send to
Your Shares-- HSBC Family of Funds
Redemptions in co/BISYS Fund Services
Writing Attn: T.A. Operations
Required") 3435 Stelzer Road
Columbus, OH 43219
27
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
Wire transfer Call 1-800-634-2536 to request a wire transfer.
You must
indicate this If you call in your redemption request of $1,000 or more by
option on your 4 p.m. Eastern time, your payment will normally be wired to
application. your bank on the next business day.
Your financial
institution may
charge a wire
transfer fee.
- --------------------------------------------------------------------------------
Electronic Call 1-800-634-2536 to request an electronic redemption.
Redemptions
If you call by 4 p.m. Eastern time, the NAV of your shares
Your bank must will normally be determined on the same day and the proceeds
participate in credited within 7 days.
the Automated
Clearing House
(ACH) and must
be a U.S. 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.
28
<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.
29
<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.
30
<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 sales No front-end sales No front-end sales
charge; reduced sales charge. A contingent charge. A contingent
charges available. deferred sales charge deferred sales charge
(CDSC) may be imposed (CDSC) may be imposed
on shares redeemed on shares redeemed
within four years within one year after
after purchase; purchase.
shares automatically
convert to Class A
shares after 6 years.
- ---------------------------------------------------------------------------------------------
Distribution (12b-1) Fee Subject to annual Subject to annual Subject to annual
distribution fee of distribution fee of distribution fee of
up to .35% (Fixed up to .75% of the up to .75% of the
Income Fund, New York Fund's net assets. Fund's net assets.
Tax-Free Bond Fund)
or .50% (Growth and
Income Fund) of the
Fund's net assets.
- ---------------------------------------------------------------------------------------------
Service Organization Fee Subject to annual fee Subject to annual Subject to annual
of up to .35% of the Service Organization Service Organization
Fund's net assets.* fee of up to .50% of fee of up to .50% of
the Fund's net the Fund's net
assets.* assets.*
- ---------------------------------------------------------------------------------------------
Fund Expenses Lower annual expenses Higher annual Higher annual
than Class B or C expenses than Class A expenses than 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 through
December 31, 2000.
31
<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 Funds 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>
32
<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).
33
<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.
34
<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.
35
<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 Funds' 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.
. 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 fees.
36
<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 will pay the
Service Organization a fee at an annual rate of 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 for Class A and .25% for Class B and C) 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 its customers' accounts
. 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.
37
<PAGE>
Shareholder Information
[GRAPHIC]
Exchanging Your Shares
Instructions For Exchanging Shares
You can exchange Exchanges may be made by sending a written request to
your shares that HSBC Family of Funds, PO Box 163850, Columbus OH 43216-
have been held for 3850, or by calling 1-800-634-2536. Please provide the
at least seven days following information:
in a Fund for shares
of the same class of . Your name and telephone number
another HSBC Fund, . The exact name on your account and account number
usually without . Taxpayer identification number (usually your Social
paying additional Security number)
sales charges (see
"Notes on
Exchanges"). No
transaction fees are
charged for
exchanges.
. Dollar value or number of shares to be exchanged
You must meet the . The name of the Fund from which the exchange is to
minimum investment be made
requirements for the . The name of the Fund into which the exchange is
Fund into which you being made.
are exchanging.
Exchanges from one See "Selling your Shares" for important information
Fund to another are about telephone transactions.
taxable. You should
review the The Funds reserve the right to modify or terminate the
prospectus of the exchange privilege upon 60 days written notice.
HSBC Fund before
making an exchange.
38
<PAGE>
Shareholder Information
[GRAPHIC]
Exchanging Your Shares
Automatic Exchanges Notes On Exchanges
When exchanging from a Fund that has no sales charge or
You can use the a lower sales charge to a Fund with a higher sales
Funds' Automatic charge, you will pay the difference.
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:
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.
. 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.
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.
39
<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 be
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.
40
<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>
Class B*** Class C***
------------ ------------
Period ended Period ended
For the Year Ended December 31, December 31, December 31,
----------------------------------------------- ------------ ------------
1999 1998 1997 1996 1995 1999 1999
-------- -------- ------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 13.86 $ 12.36 $ 16.28 $ 14.77 $ 11.93 $15.32 $15.32
-------- -------- ------- -------- ------- ------ ------
Investment Activities
Net investment income.. 0.02 0.07 0.18 0.18 0.30 (0.03) (0.06)
Net realized and
unrealized gains from
investment
transactions.......... 2.47 3.23 4.28** 2.46 3.64 0.98 1.01
-------- -------- ------- -------- ------- ------ ------
Total from Investment
Activities............ 2.49 3.30 4.46 2.64 3.94 0.95 0.95
-------- -------- ------- -------- ------- ------ ------
Distributions
From net investment
income................ (0.02) (0.08) (0.19) (0.18) (0.30) -- --
From net realized
gains................. (1.41) (1.72) (8.19) (0.95) (0.80) (1.41) (1.41)
-------- -------- ------- -------- ------- ------ ------
Total Distributions.... (1.43) (1.80) (8.38) (1.13) (1.10) (1.41) (1.41)
-------- -------- ------- -------- ------- ------ ------
Net Asset Value, End of
Period................. $ 14.92 $ 13.86 $ 12.36 $ 16.28 $ 14.77 $14.86 $14.86
======== ======== ======= ======== ======= ====== ======
Total Return (excludes
sales or redemption
charges)............... 18.48% 26.97% 27.42% 17.90% 33.11% 6.68%(a) 6.68%(a)
Ratios/Supplemental
Data:
Net Assets at end of
period (000).......... $117,542 $106,267 $55,195 $140,688 $66,062 $3,459 $ 23
Ratio of expenses to
average net assets.... 0.88% 0.89% 0.83% 0.85% 0.94% 1.77%(b) 1.77%(b)
Ratio of net investment
income to average net
assets................ 0.14% 0.58% 0.95% 1.43% 2.06% (0.87)%(b) (0.81)%(b)
Ratio of expenses to
average net assets*... 1.00% 1.01% 0.95% 0.96% 0.97% 2.13%(b) 2.07%(b)
Portfolio Turnover
Rate.................. 94.36% 82.19% 69.07% 61.68% 52.77% 94.36% 94.36%
</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.
*** Class B and C commenced offering on July 1, 1999.
(a) Not annualized.
(b) Annualized.
41
<PAGE>
Financial Highlights
[GRAPHIC]
Fixed Income Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $ 10.37 $ 10.12 $ 9.89 $ 10.28 $ 9.35
------- ------- ------- -------- -------
Investment Activities
Net investment income.......... 0.57 0.57 0.59 0.59 0.59
Net realized and unrealized
gains (losses) from
investments................... (0.76) 0.25 0.23 (0.39) 0.93
------- ------- ------- -------- -------
Total from Investment
Activities.................... (0.19) 0.82 0.82 0.20 1.52
------- ------- ------- -------- -------
Distributions
From net investment income..... (0.57) (0.57) (0.59) (0.59) (0.59)
------- ------- ------- -------- -------
Total Distributions............ (0.57) (0.57) (0.59) (0.59) (0.59)
------- ------- ------- -------- -------
Net Asset Value, End of Year.... $ 9.61 $ 10.37 $ 10.12 $ 9.89 $ 10.28
======= ======= ======= ======== =======
Total Return (excludes sales or
redemption charges)............ (1.86%) 8.33% 8.62% 2.11% 16.73%
Ratios/Supplemental Data:
Net Assets at end of
period (000).................. $42,353 $53,834 $61,402 $104,875 $99,942
Ratio of expenses to average
net assets.................... 0.92% 0.89% 0.88% 0.88% 0.93%
Ratio of net investment income
to average net assets......... 5.70% 5.59% 6.00% 5.94% 6.03%
Ratio of expenses to average
net assets*................... 1.04% 1.01% 1.00% 0.98% 0.96%
Portfolio Turnover Rate........ 75.75% 71.05% 60.98% 156.05% 41.58%
</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.
42
<PAGE>
Financial Highlights
[GRAPHIC]
New York Tax-Free Bond Fund
<TABLE>
<CAPTION>
For the Year Ended December 31, Class B**
------------------------------------------- ------------
Period Ended
Dec. 31,
1999 1998 1997 1996 1995 1999
------ ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $11.64 $ 11.48 $ 11.05 $ 11.17 $ 10.20 $11.21
------ ------- ------- ------- ------- ------
Investment Activities
Net investment income.. 0.51 0.51 0.53 0.55 0.54 0.19
Net realized and
unrealized gains
(losses) from
investments........... (0.91) 0.16 0.43 (0.12) 0.97 (0.49)
------ ------- ------- ------- ------- ------
Total from Investment
Activities............ (0.40) 0.67 0.96 0.43 1.51 (0.30)
------ ------- ------- ------- ------- ------
Distributions
From net investment
income................ (0.51) (0.51) (0.53) (0.55) (0.54) (0.19)
------ ------- ------- ------- ------- ------
Total Distributions.... (0.51) (0.51) (0.53) (0.55) (0.54) (0.19)
------ ------- ------- ------- ------- ------
Net Asset Value, End of
Year................... $10.73 $ 11.64 $ 11.48 $ 11.05 $ 11.17 $10.72
====== ======= ======= ======= ======= ======
Total Return (excludes
sales or redemption
charges)............... (3.58)% 5.99% 8.97% 3.99% 15.17% (2.71)%(a)
Ratios/Supplemental
Data:
Net Assets at end of
period (000).......... 28,075 $33,668 $37,524 $41,975 $50,677 $ 392
Ratio of expenses to
average net assets.... 1.08% 0.96% 0.92% 0.91% 0.99% 2.01%(b)
Ratio of net investment
income to average net
assets................ 4.40% 4.47% 4.79% 5.02% 5.07% 3.37%(b)
Ratio of expenses to
average net assets*... 1.31% 1.28% 1.24% 1.21% 1.20% 2.35%(b)
Portfolio Turnover
Rate.................. 11.85% 56.81% 35.64% 87.40% 24.43% 11.85%
</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.
** Class B commenced operations on July 1, 1999.
(a) Not Annualized
(b) Annualized
43
<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
HSBC Asset Management [LOGO]
- --------------------------------------------------------------------------------
HSBC International Equity Fund
Managed by HSBC Asset Management (Americas) Inc.
April 28, 2000
- --------------------------------------------------------------------------------
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 criminal offense.
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.
Questions?
Call 1-800-634-2536 or your
Investment Representative.
HSBC3P0400
<PAGE>
HSBC Mutual Funds Trust Prospectus Table of Contents
[GRAPHIC]
<TABLE>
<CAPTION>
Risk/Return Summary and Fund Expenses
- ---------------------------------------------------------
Carefully <C> <S>
review this 3
important
section, which
summarizes the
Fund's
investments,
risks, past
performance,
and fees.
[GRAPHIC]
Investment Objectives, Strategies and
Risk
- ---------------------------------------------------------
Review this 8
section for
information on
investment
strategies and
risks.
[GRAPHIC]
Fund Management
- ---------------------------------------------------------
Review this 11 The Investment Adviser
section for 11 The Sub-Adviser
details on the 11 Portfolio Manager
people and 11 The Distributor and Administrator
organizations
who oversee
the Fund.
[GRAPHIC]
Shareholder Information
- ---------------------------------------------------------
Review this 13 Pricing of Fund Shares
section for 14 Purchasing and Adding to Your
details on how Shares
shares are 18 Selling Your Shares
valued, how to 22 Distribution Arrangements/Sales
purchase, sell Charges
and exchange 28 Exchanging Your Shares
shares, 29 Dividends, Distributions and
related Taxes
charges and
payments of
dividends and
distributions.
[GRAPHIC]
Financial Highlights
- ---------------------------------------------------------
30
[GRAPHIC]
Back Cover
- ---------------------------------------------------------
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 The Fund's investment objective is long-term capital
Objective appreciation.
Principal The Fund normally invests at least 65% of its total assets
Investment in equity securities (including American, European and
Strategies Global Depositary Receipts) issued by companies based
outside of the United States. The Fund's equity investments
may include, but are not limited to common stocks, preferred
stocks, convertible securities, depositary receipts and
warrants. 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, employs 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.
Principal Because the value of the Fund's investments will fluctuate
Investment with market conditions, so will the value of your investment
Risks 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.
3
<PAGE>
Risk/Return Summary and Fund Expenses
[LOGO]
. 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.
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
. adverse to investing in international securities
4
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Performance
Information
Bar Chart
The chart and table on this Year-by-Year Total Returns as of 12/31
page show how the for Class A Shares
International Equity Fund
has performed and how its 1995 1996 1997 1998 1999
performance has varied from ---- ---- ---- ---- ----
year to year. The bar chart 4.40% 6.32% -2.05% 11.32% 19.87%
shows changes in the Fund's
yearly performance over the
past five 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 1998. ---------------------------
The bar chart above does
not reflect the impact of
any applicable sales
The returns for Class B, charges which would reduce
Class C and the returns. The chart,
Institutional Class will however, does include
differ from the Class A management fees and
returns shown in the bar operating expenses. Of
chart because of differences course, past performance
in expenses of each class. does not indicate how the
Fund will perform in the
If fee waivers or expense future.
reimbursements had not been
reflected in both the chart
and the table, the Fund's The Fund's returns will
performance would have been fluctuate over long and
lower. 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 -13.74%
</TABLE>
--------------------------------------
Performance Table
Average Annual Total Returns (for the periods ending December 31, 1999)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares (includes 4/25/94 13.86% 6.63% 4.94%
maximum 5% sales charge)
-------------------------------------------------------------
Institutional Class 3/1/95 19.87% N/A 9.81%
-------------------------------------------------------------
MSCI-EAFE Index* N/A 27.30% 8.06% 10.80%
</TABLE>
- --------------------------------------------------------------------------------
* The MSCI EAFE Index is a widely recognized unmanaged index of developed
stock markets in Europe, Australia and Far East.
5
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses (fees Paid by Institutional
you directly) Class A Class B Class C Shares
As an investor in
the International
Equity Fund, you
will pay the
following fees
and expenses.
<S> <C> <C> <C> <C>
Maximum sales charge (load)
on purchases 5.00%/1/ None None None
-------------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/2/ 1.00%/3/ None
-------------------------------------------------------------------
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 <CAPTION>
Annual Fund Operating
Expenses (fees paid from
Fund assets)
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.
<S> <C> <C> <C> <C>
Management fee/4/ .90% .90% .90% .90%
-------------------------------------------------------------------
Administrative services
fee/5/ .15% .15% .15% .15%
-------------------------------------------------------------------
Distribution (12b-1) fee/6/ .35% .75% .75% None
-------------------------------------------------------------------
Service Organization fee/7/ .35% .50% .50% None
-------------------------------------------------------------------
Other expenses .35% .35% .35% .35%
-------------------------------------------------------------------
Total fund operating expenses 2.10% 2.65% 2.65% 1.40%
-------------------------------------------------------------------
Fee waivers and expense
reimbursements/4/,/5/,/6/,/7/ .85% .65% .65% .40%
-------------------------------------------------------------------
Net expense/8/ 1.25% 2.00% 2.00% 1.00%
-------------------------------------------------------------------
</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 on redemptions of Class C shares within the first year.
/4/The Adviser is contractually limiting its Management fee to .55% for each
class of shares.
/5/The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/6/The Distributor is contractually waiving .10% of its Distribution fee for
Class A shares.
/7/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.
/8/The contractual expense limitations and reimbursements are in effect through
December 31, 2000.
6
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Expense Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A
Assuming redemption $621 $1,047 $1,498 $2,746
---------------------------------------------------
Class B
Assuming redemption $603 $962 $1,347 $2,680
Assuming no redemption $203 $762 $1,347 $2,630
---------------------------------------------------
Class C
Assuming redemption $303 $762 $1,347 $2,935
Assuming no redemption $203 $762 $1,347 $2,935
---------------------------------------------------
Institutional Class
Assuming redemption $ 92 $394 $718 $1,636
---------------------------------------------------
</TABLE>
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,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
7
<PAGE>
Investment Objectives, Strategies and Risk
[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 may selectively hedge 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 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.
8
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
. 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.
9
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
Risk Factors
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.
10
<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 $6.1
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 December 31, 1999 but paid the
entire fee to sub-advisers.*
Portfolio Manager
Mr. Frederic Lutcher III, Managing Director, is responsible for the investment
management oversight of 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 $15.9 billion, with over $12.1 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
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.
* HSBC waived a portion of its contractual fees with the Fund for the most
recent fiscal year. Contractual fees (without waivers) are .90%.
11
<PAGE>
Fund Management
[GRAPHIC]
Code of Ethics
The Code of Ethics of the Advisor and the Funds prohibits all affiliated
persons from engaging in personal investment activities which compete with or
attempt to take advantage of a Fund's planned portfolio transactions. Both
organizations maintain careful monitoring with the Code of Ethics. The Code of
Ethics are on public file and are available from the SEC.
12
<PAGE>
Shareholder Information
[GRAPHIC]
Pricing of Fund Shares
- ---------------------
How NAV is Per share net asset value (NAV) is determined and its
Calculated shares are priced at the close of regular trading on
the New York Stock Exchange, normally at 4:15 p.m.
The NAV is Eastern time on days the Fund's custodian is open. Fund
calculated by adding shares will not be priced on days the New York Stock
the total value of Exchange is closed for trading.
the Fund's
investments and
other assets,
subtracting its The Fund invests in Securities that are primarily
liabilities and then listed on foreign exchanges and trade on weekends or
dividing that figure other days when the Fund does not price its shares. As
by the number of a result, the Fund's NAV may change on days when
outstanding shares shareholders will be unable to purchase or redeem the
of the Fund: Fund's shares.
NAV = Your order for purchase, sale or exchange of shares is
Total Assets - priced at the next NAV calculated after your order is
Liabilities accepted by the Fund less any applicable sales charge
------------- as noted in the section on "Distribution
Number of Shares Arrangements/Sales Charges." This is what is known as
Outstanding the offering price.
You can find the The Fund's securities are generally valued at current
Fund's NAV daily in market prices. If market quotations are not available,
The Wall Street prices will be based on fair value as determined by the
Journal and other Fund's Trustees.
newspapers.
- --------------------- 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.
--------------------------------------------------------
13
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding to Your Shares
You may purchase
shares through the Minimum Minimum
Distributor or Initial Subsequent
through banks, Account Type Investment Investment
brokers, service
organizations and Regular $1,000 $50
other investment ------------------------------------------------
representatives, Automatic Investment Plan $ 50 $50
which may charge ------------------------------------------------
additional fees and
may require higher
minimum investments All purchases must be in U.S. dollars. A fee will be
or impose other charged for any checks that do not clear. Third-party
limitations on checks are not accepted.
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.
- --------------------------------------------------------------------------------
14
<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 Family of Funds HSBC Family of Funds
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.
15
<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 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.
16
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding To Your Shares
Automatic Investment Plan Directed Dividend Option
You can make automatic investments in By selecting the appropriate box in
the Fund from your bank account, the Account Application, you can
through payroll deduction or from your elect to receive your distributions
federal employment, Social Security or in cash (check) or have
other regular government checks. distributions (capital gains and
Automatic investments can be as little dividends) reinvested in another
as $50, once you've invested the $1,000 HSBC Fund without a sales charge.
minimum required to open the account. You must maintain the minimum
balance in each Fund into which you
To invest regularly from your bank plan to reinvest dividends or the
account: reinvestment will be suspended and
your dividends paid to you. The Fund
. Complete the Automatic Investment may modify or terminate this
Plan portion on your Account reinvestment option without notice.
Application. You can change or terminate your
Make sure you note: participation in the reinvestment
- Your bank name, address and option at any time.
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.
- --------------------------------------------------------------------------------
17
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
You may sell Withdrawing Money From Your Fund Investment
your shares at
any time. Your As a mutual fund shareholder, you are technically selling
sales price will shares when you request a withdrawal in cash. This is also
be the next NAV known as redeeming shares or a redemption of shares.
after your sell
order is -------------------------------------------------------------
received by the
Fund, its Contingent Deferred Sales Charge
transfer agent,
or your When you sell Class B or Class C shares, you will be charged
investment a fee for any shares that have not been held for a
representative. sufficient length of time. These fees will be deducted from
Normally you the money paid to you. See the section on "Distribution
will receive Arrangements/Sales Charges" on page 22 for details.
your proceeds
within a week -------------------------------------------------------------
after your
request is Instructions for Selling Shares
received.
If selling your shares through your financial adviser or
broker, ask him or her for redemption procedures. Your
adviser and/or broker may have transaction minimums and/or
transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
By telephone 1. Call 1-800-634-2536 with instructions as to how you wish
(unless you have to receive your funds (mail, wire, electronic transfer).
declined
telephone sales
privileges)
- --------------------------------------------------------------------------------
By mail 1. Call 1-800-634-2536 to request redemption forms or write
(See "Selling a letter of instruction indicating:
Your Shares-- .your Fund and account number
Redemptions in .amount you wish to redeem
Writing .address where your check should be sent
Required") .account owner signature
2. Mail to:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43216-3850
- --------------------------------------------------------------------------------
By express See instruction 1 above.
delivery service
(See "Selling 2. Send to
Your Shares-- HSBC Family of Funds
Redemptions in 3435 Stelzer Road
Writing Columbus, OH 43219
Required")
- --------------------------------------------------------------------------------
18
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
Wire transfer Call 1-800-634-2536 to request a wire transfer.
You must If you call in your redemption request of $1,000 or more by
indicate this 12:00 noon Eastern time, your payment will normally be wired
option on your to your bank on the same business day.
application.
Your financial
institution may
charge a wire
transfer fee.
- --------------------------------------------------------------------------------
Electronic Call 1-800-634-2536 to request an electronic redemption.
Redemptions
If you call by 4 p.m. Eastern time, the NAV of your shares
Your bank must will normally be determined on the same day and the proceeds
participate in credited within 8 days.
the Automated
Clearing House
(ACH) and must
be a U.S. 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.
19
<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.
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.
20
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
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.
21
<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, Class C and Institutional Class 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 sales No front-end No front-end None
charge 5.00% sales charge. A sales charge. A
reduced sales contingent contingent
charges deferred sales deferred sales
available. charge (CDSC) charge (CDSC)
may be imposed may be imposed
on shares on shares
redeemed within redeemed within
four years one year after
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 shareholder fee of up to fees of up to
servicing fees .75% of the .75% of the
of up to .35% Fund's net Fund's net
of the Fund's assets. assets.
net assets.
- -------------------------------------------------------------------------------------------
Service Organization Fee Subject to Subject to Subject to None
annual Service annual Service annual 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 annual
expenses than expenses than expenses than expenses than
Institutional Class A shares Class A shares Class A, Class
Class shares. and and B and Class C
Institutional Institutional 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.
22
<PAGE>
Shareholder Information
[GRPAHIC]
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>
- --------------------------------------------------------------------------------
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>
23
<PAGE>
Shareholder Information
[GRAPHIC]
Distribution Arrangements/Sales Charges
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.
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.
24
<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.
25
<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 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 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.
26
<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 Fund will pay the Service
Organization a fee at an annual rate of 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 individual accounts
. acting as the sole shareholder of record for its customers' accounts
. issuing shareholder reports and transaction confirmations
. performing daily "sweep" functions
Investors who purchase, sell or exchange shares for the Fund 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.
27
<PAGE>
Shareholder Information
[GRAPHIC]
Exchanging Your Shares
You can exchange Instructions for Exchanging Shares
your shares that
have been held for Exchanges may be made by sending a written request to
at least seven days HSBC Family of Funds, PO Box 163850, Columbus OH 43216-
in the Fund for 3850, or by calling 1-800-634-2536. Please provide the
shares of the same following information:
class of another
HSBC Fund, usually . Your name and telephone number
without paying
additional sales . The exact name on your account and account number
charges (see "Notes . Taxpayer identification number (usually your Social
on Exchanges"). No Security number)
transaction fees are
charged for
exchanges.
. Dollar value or number of shares to be exchanged
You must meet the . The name of the Fund from which the exchange is to
minimum investment be made
requirements for the . The name of the Fund into which the exchange is
Fund into which you being made.
are exchanging.
Exchanges from the See "Selling your Shares" for important information
Fund to another are about telephone transactions. The Fund reserves the
taxable. You should right to modify or terminate the exchange privilege
review the upon 60 days written notice.
prospectus of the
HSBC Fund before To prevent disruption in the management of the Fund,
making an exchange. 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.
To change the
Automatic Exchange Notes on Exchanges
instructions or to
discontinue the When exchanging from a Fund that has no sales charge or
feature, you must a lower sales charge to a Fund with a higher sales
send a written charge, you will pay the difference.
request to HSBC
Family of Funds, The registration and tax identification numbers of the
P.O. Box 163850, two accounts must be identical.
Columbus, Ohio
43216-3850. 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.
28
<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.
29
<PAGE>
Financial Highlights
[GRAPHIC]
The financial highlights table is intended to help you understand the Fund's
financial performance for the last 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 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 December 31,
---------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $11.38 $10.35 $10.60 $ 9.97 $9.55
------ ------ ------ ------ -----
Investment Activities
Net investment income (loss).... 0.22 0.08 0.06** (0.02) (0.07)
Net realized and unrealized
gains (losses) from
investment and foreign currency
transactions................... 2.01 1.09 (0.28) 0.65 0.49
------ ------ ------ ------ -----
Total from Investment
Activities..................... 2.23 1.17 (0.22) 0.63 0.42
------ ------ ------ ------ -----
Distributions
From net investment income...... (0.20) (0.10) (0.03) -- --
In excess of net investment
income......................... (0.06) -- -- -- --
From net realized gains......... (0.79) (0.04) -- -- --
------ ------ ------ ------ -----
Total Distributions............. (1.05) (0.14) (0.03) -- --
------ ------ ------ ------ -----
Net Asset Value, End of Period... $12.56 $11.38 $10.35 $10.60 $9.97
====== ====== ====== ====== =====
Total Return (excludes sales or
redemption charges)............. 19.87% 11.32% (2.06)% 6.32 % 4.40 %
Ratios/Supplemental Data:
Net Assets at end of period
(000).......................... $ 249 $ 259 $ 309 $ 409 $ 658
Ratio of expenses to average net
assets......................... 1.01% 1.12% 1.17 % 2.10 % 1.98 %
Ratio of net investment income
(loss) to average net assets... 1.84% 0.81% 0.54 % (0.19)% (1.01)%
Ratio of expenses to average net
assets*........................ 1.63% 1.94% 2.19 % 2.94 % 3.66 %
Portfolio turnover rate***...... 22.60% 163.90% 112.54 % 77.91 % 90.31 %
</TABLE>
- ------
* During the period, certain fees were contractually and/or voluntarily
reduced and/or reimbursed. If such 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 offering.
30
<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(c) to
1999 1998 1997 1996 December 31, 1995
------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.38 $ 10.35 $ 10.61 $ 9.98 $ 8.81
------- ------- ------- ------- -------
Investment Activities
Net investment income
(loss)................ 0.22 0.08 0.04** (0.01) (0.03)
Net realized and
unrealized gains
(losses) from
investment and foreign
currency
transactions.......... 2.01 1.09 (0.27) 0.64 1.20
------- ------- ------- ------- -------
Total from Investment
Activities............ 2.23 1.17 (0.23) 0.63 1.17
------- ------- ------- ------- -------
Distributions
From net investment
income................ (0.20) (0.08) (0.02) -- --
In excess of net
investment income..... (0.06) (0.02) (0.01) -- --
From net realized
gains................. (0.79) (0.04) -- -- --
------- ------- ------- ------- -------
Total Distributions.... (1.05) (0.14) (.03) -- --
------- ------- ------- ------- -------
Net Asset Value, End of
Period................. $ 12.56 $ 11.38 $ 10.35 $ 10.61 $ 9.98
======= ======= ======= ======= =======
Total Return (excludes
sales or redemption
charges)............... 19.87% 11.32% (2.15)% 6.31 % 13.28 %(a)
Ratios/Supplemental
Data:
Net Assets at end of
period (000).......... $70,060 $65,139 $67,458 $21,110 $15,253
Ratio of expenses to
average net assets.... 1.00% 1.14% 1.12 % 2.04 % 2.62 %(b)
Ratio of net investment
income (loss) to
average net assets.... 1.83% 0.81% 0.35 % (0.10)% (0.34)%(b)
Ratio of expenses to
average net assets*... 1.47% 1.61% 1.91 % 2.89 % 3.12 %(b)
Portfolio turnover
rate***............... 22.60% 163.90% 112.54 % 77.91 % 90.31 %(a)
</TABLE>
- ------
* During the period, certain fees were contractually and/or voluntarily
reduced and/or reimbursed. If such 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 offering.
31
<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
28, 2000. 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, 1999 which may be obtained, without charge, from the
Trust.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<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>
2
<PAGE>
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 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.
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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.
Depository 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.
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.
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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 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 taxing powers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
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
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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 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
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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 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.
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Options on Stock Index Futures. (Growth and Income Fund and International
Fund) The Funds may purchase and write call and put options on stock index
futures contracts which are traded on a United States or foreign exchange or
board of trade. An option on a futures contract gives the purchaser the right,
in return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the option period. Upon exercise of
the option, the writer of the option is obligated to convey the appropriate
futures position to the holder of the option. If an option is exercised on the
last trading day before the expiration date of the option, a cash settlement
will be made in an amount equal to the difference between the closing price of
the futures contract and the exercise price of the option.
The Funds may use options on stock index futures contracts solely for bona
fide hedging or other appropriate risk management purposes. If a Fund purchases
a call (put) option on a futures contract, it benefits from any increase
(decrease) in the value of the futures contract, but is subject to the risk of
decrease (increase) in value of the futures contract. The benefits received are
reduced by the amount of the premium and transaction costs paid by the Fund for
the option. If market conditions do not favor the exercise of the option, the
Fund's loss is limited to the amount of such premium and transaction costs paid
by the Fund for the option.
If a Fund writes a call (put) option on a stock index futures contract, the
Fund receives a premium but assumes the risk of a rise (decline) in value in the
underlying futures contract. If the option is not exercised, the Fund gains the
amount of the premium, which may partially offset unfavorable changes due to
interest rate or currency exchange rate fluctuations in the value of the
securities held or to be acquired for the Fund's portfolio. If the option is
exercised, the Fund will incur a loss, which will be reduced by the amount of
the premium it receives. However, depending on the degree of correlation between
changes in the value of its portfolio securities (or the currency in which they
are denominated) and changes in the value of futures positions, the Fund's
losses from writing options on futures may be partially offset by favorable
changes in the value of portfolio securities or in the cost of securities to be
acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market. 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.
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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 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
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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.
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
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non-hedging purposes. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
The Fund generally will not enter into forward contracts with a term of
greater than one year. Using forward contracts to protect the value of the
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Fund can achieve at some future point
in time.
While the Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks
and, while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving a complete hedge or
may expose the Fund to risk of foreign exchange loss.
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.
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Mortgage-related Securities. (Growth and Income Fund and Fixed Income Fund)
Each Fund may, consistent with its investment objective and policies, invest in
mortgage-related securities.
Mortgage-related securities, for purposes of the Funds' Prospectus and this
SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government National Mortgage
Association and government-related organizations such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as
by nongovernmental issuers such as commercial banks, savings and loan
institutions, mortgage bankers, and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If a Fund purchases a mortgage-related security at
a premium, that portion may be lost if there is a decline in the market value of
the security whether resulting from changes in interest rates or prepayments in
the underlying mortgage collateral. As with other interest-bearing securities,
the prices of such securities are inversely affected by changes in interest
rates. However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by unscheduled prepayments on the underlying mortgages
and, therefore, it is not possible to predict accurately the security's return
to a Fund. Similarly, because the average life of mortgage related securities
may lengthen with increases in interest rates, the portfolio weighted average
life of the mortgage-related securities in which the Fund invests may at times
lengthen due to this effect. Under these circumstances, the Adviser may, but is
not required to, sell securities in order to maintain an appropriate portfolio
average life.
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 Only Securities" or "POs"). These securities are commonly
referred to as mortgage-backed security strips or
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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 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
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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 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
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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 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
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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 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
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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.
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-
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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 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
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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.
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.
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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
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
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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."
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.
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Risk Factors for the New York Fund
The following information as to certain New York risk factors is given to
investors in view of the New York Fund's policy of concentrating its investments
in New York Municipal Obligation issuers. The factors affecting the financial
conditions of the State of New York (the "State") are complex, and the following
description constitutes only a brief summary; it does not purport to be a
complete description and is based on information from official statements
relating to general obligation bonds issued by the State of New York. The
accuracy and completeness of the information contained in such offering
statements has not been independently verified.
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.
The State's fiscal year begins on April 1st and ends on March 31st. On
March 31, 1999, the State adopted the debt service portion of the State budget
for the 1999-2000 fiscal year; four months later, on August 4, 1999, it enacted
the remainder of the budget. The Governor approved the budget as passed by the
legislature. Prior to passing the budget in its entirety for the 1999-2000
fiscal year, the State enacted appropriations that permitted the State to
continue its operations.
Following enactment of the 1999-2000 budget, the State prepared a
Financial Plan for the 1999-2000 fiscal year (the "1999-2000 Financial Plan")
that sets forth projected receipts and disbursements based on the actions taken
by the Legislature. For fiscal year 1999-2000, General Fund disbursements,
including transfers to support capital projects, debt service and other funds,
are estimated at $37.36 billion, an increase of $868 million or 2.38 % over
1998-99. Projected spending under the 1999-2000 enacted budget is $215 million
above the Governor's Executive Budget recommendations. The increase in General
Fund spending is comprised of $1.1 billion in legislative additions to the
Executive Budget (primarily in education), offset by various actions, including
reestimates of required spending based on year-to-date results and the
identification of certain other resources that offset spending, such as
$250million from commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of the Debt
Reduction Reserve Fund within the General Fund and about $100 million in excess
fund balances. The MMIA was established in 1983 to provide excess liability
insurance to doctors and medical providers. Legislation enacted with the 1999-
2000 budget initiates the process of MMIA privatization and transfers excess
fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed
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to support spending in 1999-2000, but instead is reserved to help offset the
costs of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion in
the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund
(CRF), and $200 million in the Community Projects Fund (CPF), which finances
legislative initiatives. The State expects to close fiscal year 1999-2000 with
cash balances in these funds at their highest levels ever.
Many complex political, social and economic forces influence the State's
economy and finances, which in turn may affect the State 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 also is based upon
forecasts of national and State economic activity. Economic forecasts frequently
have failed to predict accurately the timing and magnitude of changes in the
national and State economies. The Division of Budget (DOB) believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth below, and those projections may be changed materially and
adversely from time to time. 1999-2000
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. The State's fund structure adheres to the accounting standards of
the Governmental Accounting Standards Board.
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 1999-2000 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 47.1 % of All Governmental Funds
disbursements and 69.3 % of total State Funds disbursements. General Fund moneys
also are 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 $39.31
billion in 1999-2000, an increase of $2.57 billion over 1998-99. Total General
Fund disbursements and transfers to other funds are projected to be $37.36
billion, an increase of $868 million over 1998-99.
Projected General Fund Receipts - Total General Fund receipts and transfers
in 1999-2000 are projected to be $39.31 billion, an increase of $2.57 billion
from the $36.74 billion recorded in 1998-99. This total includes $35.93 billion
in tax receipts, $1.36 billion in miscellaneous receipts, and $2.02 billion in
transfers from other funds. The transfer of the $1.82 billion surplus recorded
in 1998-99 to the 1999-2000 fiscal period has the effect of exaggerating the
growth in State receipts from year to year by depressing reported 1998-99
figures and inflating 1999-2000 projections.
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. Net General Fund personal income tax collections are
projected to reach $22.95 billion in 1999-2000, well over half of all General
Fund receipts and nearly $2.87 billion above the reported 1998-99 collection
total. Much of this growth is associated with the $1.82 billion net impact of
the transfer of the surplus from 1998-99 to the current year as partially offset
by the diversion of an additional $661 million in income tax receipts to the
School Tax Relief (STAR) fund. The STAR program was created in 1997 as a State-
funded local property tax
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relief program funded through the use of personal income tax receipts. Adjusted
for these transactions, the growth in net income tax receipts is roughly $1.8
billion, an increase of almost 9 %.
This growth is largely a function of two factors: (i) the 8 % growth in
income tax liability projected for 1999; and (ii) the impact of the 1998 tax
year settlement recorded early in the 1999-2000 fiscal year.
The most significant statutory change made this year provides for an
increase, phased-in over two years, in the earned income tax credit from 20% to
25% of the federal credit.
User taxes and fees are comprised of three-quarters of the State's 4% sales
and use tax, cigarette, alcoholic beverage, container, and auto rental taxes,
and a portion of the motor fuel excise levies. This category also includes
receipts from the motor vehicle registration fees and alcoholic beverage license
fees. Dedicated transportation funds outside of the General Fund receive a
portion of motor fuel tax and motor vehicle registration fees and all of the
highway use taxes.
Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6%. Modest increases in motor fuel and auto rental
tax receipts over 1998-99 levels are also expected. However, receipts from other
user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast, reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes made in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
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% surcharge on these levies began to be phased out and, for most
taxpayers, there is no surcharge liability for taxable period sending in 1997
and thereafter.
Total business tax collections in 1999-2000 are now projected to be $4.63
billion, $230 million below results for the prior fiscal year. The year-over-
year decline in projected receipts in this category is largely attributable to
statutory changes. These include the first year of a scheduled corporation
franchise tax rate reduction, the alternative minimum tax rate reduction, the
fixed dollar minimum rate reduction, and the expansion of the investment tax
credit to financial service companies. Ongoing tax reductions include the second
year of the "Power for Jobs" utility tax credit program, the gross receipts tax
rate reduction, and scheduled additional diversion of General Fund petroleum
business and utility tax receipts to dedicated transportation funds.
Legislation enacted this year affecting receipts in this category includes:
a phased reduction in the net income tax rate applicable to bank and insurance
companies from 9% to 7.5%; reforms to the corporation franchise subsidiary
capital tax; a further reduction in the alternative minimum tax rate from 3% to
2.5%; doubling the economic development zone and zone equivalent area wage tax
credits; and providing further reforms to the apportionment of income for the
airline industry.
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Other taxes include the estate and gift tax, the real property gains tax
and pari-mutuel taxes. Taxes in this category are now projected to total $1
billion, $137 million below last year's amount. The primary factors accounting
for most of the expected decline include: an adverse tax tribunal decision
resulting in significant refunds of the now repealed real property gains tax;
pari-mutuel tax reductions enacted with the 1999-2000 budget; and the effects of
the already enacted reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget affecting
these sources include both the extension of and an increase in certain temporary
tax reductions at the State's race tracks and conformity with new federal estate
tax provisions. 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.
Miscellaneous receipts are expected to total $1.36 billion, down $142
million from the prior year amount. This reflects the loss of non-recurring
receipts received in 1998-99 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, including the 1% sales tax used
to support payments to Local Government Assistance Corporation (LGAC). Transfers
from other funds are expected to total $2.02 billion, or $99 million more than
total receipts from this category during 1998-99. Total transfers of sales taxes
in excess of LGAC debt service requirements are expected to increase by
approximately $93 million, while transfers from all other funds are expected to
increase by $6 million.
Projected General Fund Disbursements - General Fund disbursements, including
transfers to support capital projects, debt service and other funds, are
estimated at $37.36 billion in 1999-2000, an increase of $868 million or 2.38%
over 1998-99.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58% over 1998-99
levels (on a State fiscal year basis). Outside of education, the largest growth
in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183
million);and mental hygiene programs, including funding for a cost of living
increase for care providers ($114 million). These increases were offset, in
part, by spending reductions or actions in health and social welfare ($280
million), and in general State charges ($222 million).
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
largest areas of spending in this category are for aid to elementary and
secondary schools (41%) and for the State's share of Medicaid payments to
providers (22%). Grants to Local Governments are projected at $25.60 billion in
1999-2000, an increase of $910 million or 3.68% over 1998-99.
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Spending for Medicaid in 1999-2000 is projected to total $5.54 billion,
essentially unchanged from 1998-99, due in part to the use of $145 million in
other available funds that lowers disbursements in this area. Disbursements for
all other health and social welfare programs are projected to total $2.70
billion, a decrease of $252 million. Lower welfare spending, driven by State and
federal reforms and a robust economy, accounts for most of the decline.
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The remaining disbursements primarily support community-based mental
hygiene programs, local transportation programs, and revenue sharing payments to
local governments. Revenue sharing and other general purpose aid to local
governments is projected at $825 million.
State operations pays for the costs of operating the Executive,
Legislature, and Judicial branches of government, including the prison system,
mental hygiene institutions, and the State University system (SUNY). Personal
service costs account for approximately 73% of spending in this category.
Spending in State operations is projected to increase by $207 million or
3.1% over the prior year. The growth reflects $100 million in projected spending
for new collective bargaining agreements that the State expects to be ratified
in the current year. Funding for this expense will come from the Collective
Bargaining Reserve. The annualized costs of current collective bargaining
agreements, growth in the Legislative and Judiciary budgets, and staffing costs
for the State's Year 2000 compliance programs also contribute to the year-to-
year growth in spending. The State's overall workforce is expected to remain
stable at around 191,300 employees.
General State charges account for the costs of providing fringe benefits to
State employees and retirees of the Executive, Legislature, and Judiciary. These
payments, many of which are mandated by statute and collective bargaining
agreements, include employer contributions for pensions, social security, health
insurance, workers' compensation, and unemployment insurance. General State
charges also cover State payments-in-lieu-of-taxes to local governments for
certain State-owned lands, and the costs of defending lawsuits against the State
and its public officers. Disbursements in this category are estimated at $2.04
billion, a decrease of $222 million from the prior year. The change primarily
reflects projected growth of $27 million in a variety of programs offset by the
use of proceeds from the privatization of the MMIA, which is expected to offset
certain General Fund fringe benefit costs over the next two fiscal years by
approximately $250 million annually.
This category accounts for debt service on short-term obligations of the
State, i.e., the interest costs of the State's commercial paper program. The
commercial paper program is expected to have an average of approximately $185
million outstanding during 1999-2000. The majority of the State's debt service
is for long-term bonds, and is shown in the Financial Plan as a transfer to the
general Debt Service Fund.
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. Long-term
debt service transfers are projected at $2.27 billion in 1999-2000, an increase
of $183 million from 1998-99. The increase reflects debt service costs from
prior-year bond sales (net of refunding savings), and certain sales planned to
occur during the 1999-2000 fiscal year.
Transfers for capital projects provide General Fund support for projects
that are not financed with bond proceeds, dedicated taxes, other revenues, or
federal grants. Transfers in this category are projected to total $168 million
in 1999-2000. The decline of $78 million from the prior year is due primarily to
the delay of the receipt of payment of certain reimbursements in 1998-99.
Receipts of $50 million transferred to DRRF in 1998-99 will be used in the
Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF. All other
transfers (excluding DRRF), which reflect the remaining transfers from the
General Fund to other funds, are estimated to total $385 million in 1999-2000, a
decline of $84 million from 1998-99, primarily because of certain non-recurring
transfers that occurred last year.
Non-Recurring Resources
The DOB estimates that the 1999-2000 State Financial Plan contains actions
that provide non-recurring resources or savings totaling approximately $500
million, or 1.3% of General Fund resources,
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the largest of which is the first phase of the privatization of MMIA. To the
greatest extent possible, one-time resources are expected to be utilized to
finance one-time costs, including Year 2000 compliance costs and certain capital
spending.
Outyear Projections of Receipt and Disbursements
State law requires the Governor to propose a balanced budget each year.
Preliminary analysis by DOB indicates that the State will have a 2000-01 budget
gap of approximately $1.9 billion, or about $300 million above the 1999-2000
Executive Budget estimate (after adjusting for the projected costs of collective
bargaining). This estimate includes an assumption for the projected costs of new
collective bargaining agreements, $500 million in assumed operating
efficiencies, as well as the planned application of approximately $615 million
of the $1.82 billion tax reduction reserve. In recent years, the State has
closed projected budget gaps which DOB estimates at $5.0 billion (1995-96), $3.9
billion (1996-97), $2.3 billion (1997-98), and less than $1 billion (1998-
99).DOB will formally update its projections of receipts and disbursements for
future years as part of the Governor's 2000-01 Executive Budget submission. The
revised expectations for these years will reflect the cumulative impact of tax
reductions and spending commitments enacted over the last several years as well
as new 2000-01 Executive Budget recommendations.
The State and the United University Professionals (UUP) union have reached
a tentative agreement on a new four-year labor contract. The State is continuing
negotiations with other unions representing State employees, the largest of
which is the Civil Service Employees Association (CSEA). CSEA previously failed
to ratify a tentative agreement on a new four-year contract earlier in 1999. The
1999-2000 Financial Plan has reserved $100 million for possible collective
bargaining agreements, and reserves are contained in the preliminary outyear
projection for 2000-01 to cover the recurring costs of any new agreements. To
the extent these reserves are inadequate to finance such agreements, the costs
of new labor contracts could increase the size of future budget gaps.
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. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
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 help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
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 Total disbursements for programs supported by
Special Revenue Funds are projected at $30.94 billion, an increase of $1.29
billion or 4.35% over the prior year. Special Revenue Funds include federal
grants and State special revenue funds.
Federal grants are projected to comprise 72% of all Special Revenue Funds
spending in 1999-2000, comparable to prior years. Disbursements from federal
funds are estimated at $22.17 billion, an increase of $741 million or
3.46%.Medicaid is the largest program within federal funds, accounting for 56%
of total spending in this category. In 1999-2000, Medicaid spending is projected
at $14.32 billion, an increase of $711 million over 1998-99. The remaining
growth in federal funds is primarily for the Child Health Plus program, which is
estimated at $117 million in 1999-2000. This growth is offset by decreased
spending in certain social services programs resulting from more recent spending
reestimates.
State special revenue spending is projected to be $8.77 billion, an
increase of $550 million or 6.69% from the last fiscal year. The spending growth
is primarily due to $661 million for the next phase
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of the STAR program and $250 million in additional general State charges funded
by proceeds from the MMIA transaction, offset by a decrease of $185 million in
projected educational spending as a result of lower projected Lottery proceeds
and a decline of $112 million in transportation disbursements. The remainder
reflects the net impact of spending reestimates.
Capital Projects Funds - Spending from Capital Projects Funds in 1999-2000
is projected at $4.18 billion, an increase of $114 million or 2.80% from last
fiscal year. Transportation, environmental, education and mental hygiene
programs are the major sources of year-to-year spending growth in this category.
Debt Service Funds - Spending from Debt Service Funds are estimated at
$3.64 billion in 1999-2000, up $370 million or 11.31% from 1998-99.
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, account
for $124 million of the year-to-year growth. Debt service for educational
purposes, including State and City University programs financed through the
Dormitory Authority, will increase by $80 million. The remaining growth is for a
variety of programs in mental health and corrections, and for general obligation
financings.
Special Considerations
General - 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 events that are not
subject to the State's control. The Financial Plan also is 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 State economies.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of
national and State 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 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.
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, potential collective bargaining agreements,
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
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economy of the nation and the State, the policies of the federal government,
collective bargaining negotiations 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.
Additional risks to the Financial Plan arise out of potential actions at
the federal level. Potential changes to federal tax law currently under
discussion as part of the federal government's efforts to enact a multi-year tax
reduction package could alter the federal definitions of income on which certain
State taxes rely. Certain proposals, if enacted, could have a significant impact
on State revenues in the future.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. This law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements. Any
future reduction could have an adverse impact on the State's Financial Plan.
However, the State has been able to demonstrate compliance with TANF work
requirements to date and does not now expect to be subject to associated federal
fiscal penalties.
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 projections. In the past, the State has taken
management actions to address potential Financial Plan shortfalls, and may take
similar actions should adverse 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 could impact projected
budget gaps for the State. These gaps would result from a disparity between
recurring revenues and the costs of increasing the level of support for State
programs. For example, the fiscal effects of tax reductions adopted in the last
several fiscal years are projected to grow more substantially in the forecast
period, continuing to restrain receipts levels and placing pressure on future
spending levels. To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/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. To help guard against these risks, the
State has projected reserves of $2.4 billion in 1999-2000.
Cash-Basis Results for Prior Fiscal Years
General Fund 1996-97 Through 1998-99 - New York State's financial
operations have improved during recent fiscal years. During its last seven
fiscal years, the State has recorded balanced budgets on a cash basis, with
positive year-end fund balances. A description of cash-basis results in the
General Fund for the prior three fiscal years is presented below.
1998-99 Fiscal Year - The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus as reported by
the DOB of $1.82 billion. The cash surplus
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was derived primarily from higher-than-projected tax collections as a result of
continued economic growth, particularly in the financial markets and the
securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 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 $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000 of which $521 million was made available as a result of the
Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000. General Fund
receipts and transfers from other funds (net of tax refund reserve account
activity) for the 1998-99 fiscal year totaled $36.74 billion, an increase of
6.34% from 1997-98 levels. General Fund disbursements and transfers to other
funds totaled $36.49 billion for the 1998-99 fiscal year, an increase of 6.23%
from 1997-98 levels.
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 TSRF closing balance was $400 million,
following a required deposit of $15 million (repaying a transfer made in 1991-
92) and an additional 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 closed the fiscal year with a balance of $170 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
LGAC financing program and was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.55 billion, an
annual increase of 4.57% over 1996-97. General Fund disbursements and transfers
to other funds were $34.35 billion, an annual increase of 4.41%.
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 (repaying a transfer made in 1991-
92) 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 CPF. 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 (net of tax refund reserve account activity) for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7% from the previous fiscal year.
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7% from the 1995-96 fiscal year.
Other Governmental Funds (1996-97 Through 1998-99)
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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 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, the
metropolitan Transportation Authority (MTA) and other transit entities.
In the Special Revenue Funds, disbursements increased from $26.02 billion
to $29.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid and the initial costs of the STAR
program. Other activity reflected dedication of taxes for mass transportation
purposes, new lottery games, and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds increased over the three-year period
from $3.54 billion to $4.06 billion, primarily for education, environment,
public protection and transportation programs. The composition of this fund
type's receipts also has changed as dedicated taxes, federal grants and
reimbursements from public authority bonds increased, while general obligation
bond proceeds declined.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
ongoing costs of the LGAC fiscal reform program. The increases were moderated by
the refunding savings achieved by the State over the last several years using
strict present value savings criteria. Disbursements in this fund type increased
from $2.53 billion to $3.27 billion over the three-year period.
The State Financial Plan is based upon a June 1999 projection by DOB of
national and State economic activity. The information in this section summarizes
the national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1999-2000 Financial Plan.
The national economy has maintained a robust rate of growth during the past
six quarters as the expansion, which is well into its ninth year, continues. The
national expansion, if it continues through February 2000, will be the longest
on record. Since early 1992, approximately 19 million jobs have been added
nationally. Output growth has averaged 3.2% over this period, essentially the
same as the 3.3% average annual growth during the post-World War II period. The
State economy also has continued to expand, with over 600,000 jobs added since
late 1992. Employment growth has been slower than in the nation during this
period, although the State's relative performance has improved in the last two
years. Growth in average wages in New York has generally outperformed the
nation, while growth in personal income per capita has kept pace with the
nation.
DOB expects that national economic growth will be quite robust throughout
calendar year 1999. Growth in real Gross Domestic Product for 1999 is projected
to be 4.0%, with a decline in net exports overwhelmed by continued strong
consumer spending. The projected overall growth rate of the national economy for
calendar year 1999 is nearly identical to the consensus forecast of a widely
followed survey of national economic forecasters. Inflation, as measured by the
Consumer Price Index, is projected to be about 2.1%, a modest increase despite
strong economic growth. Personal income and wages are projected to increase by
5.1% and 6.3% respectively.
The forecast of the State's economy shows continued expansion during The
1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing sector is expected to post a
modest decline. On an average annual basis, the employment growth rate in the
state is expected to be somewhat lower than in 1998 and the unemployment rate is
expected to drop further to 5.1%. Personal income is expected to record moderate
gains in 1999. Wage growth in 1999 is expected to be slower than in the previous
year as the recent robust growth in bonus payments moderates. The forecast for
continued growth, and any resultant impact on the State's 1999-2000 Financial
Plan, contains some uncertainties. Stronger-than-expected gains in employment
and wages or in stock market prices could lead to unanticipated strong growth in
consumer spending. Inventory investment due to Y2K may be significantly
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stronger than expected towards the end of this year possibly followed by
significant weakness early next year. Also, improvements in foreign economies
may be weaker than expected and therefore, may have unanticipated effects on the
domestic economy. The inflation rate may differ significantly from expectations
due to the conflicting impacts of a tight labor market and improved productivity
growth as well as to the future direction and magnitude of fluctuations of oil
prices. In addition, the State economic forecast could over- or underestimate
the level of future bonus payments, financial sector profits or inflation
growth, resulting in unexpected economic impacts. Similarly, the State forecast
could fail to correctly estimate the amount of employment change in the banking,
financial and other business service sectors as well as the direction of
employment change that is likely to accompany telecommunications and energy
deregulation.
The New York Economy
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related services,
such as information processing, law and accounting, is the State's leading
economic sector. The services sector accounts for more than three of every 10
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in importance
in New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this sector accounts
for under one-tenth of all nonagricultural jobs in the State, it contributes
about one-fifth of all nonfarm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions
of the State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total State and local government employment.
Economic and Demographic Trends
In the calendar years 1987 through 1998, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the
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nation as a whole and has been slower to recover. The total employment growth
rate in the State has been below the national average since 1987. The
unemployment rate in the State dipped below the national rate in the second half
of 1981 and remained lower until 1991; since then, it has been higher. According
to data published by the US Bureau of Economic Analysis, personal income in the
State has risen more slowly since 1988 than personal income for the nation as a
whole, although preliminary data suggests that, in 1998, the State personal
income rose more rapidly. Total State nonagricultural employment has declined as
a share of national nonagricultural employment. State per capita personal income
has historically been significantly higher than the national average, although
the ratio has varied substantially. Because New York City is a regional
employment center for a multi-state region, State personal income measured on a
residence basis understates the relative importance of the State to the national
economy and the size of the base to which State taxation applies.
Public Authorities
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 that 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, 1998, there were 17 public
authorities that had outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of these State public authorities
was $94 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. In addition, State
legislation authorizes several financing techniques for public authorities.
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 the 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 (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,
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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.
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% 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% 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. The
1999-2000 enacted budget provides State assistance to the MTA totaling
approximately $1.4 billion, an increase of $55 million over the 1998-99 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 and subsequently
amended it in August 1997 and in March 1999. The MTA plan now totals $12.55
billion. The 1995-99 Capital Program was 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 assumed the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan was projected to be financed with
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that the MTA's capital plan for 2000 through 2004 will
be adequate to finance the MTA's capital needs over the plan period, or that
funding sources identified in the approved plan will not be reduced or
eliminated.
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 2000-04 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 2000-04 Capital Program
accordingly. If the 2000-04 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 also may be affected by the fiscal health of
New York City, which continues to receive significant financial assistance from
the State. State aid contributes to the City's ability to balance its budget and
meet its cash requirements. The State also may 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.
Fiscal 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
(NYCMAC) 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 1986 when certain statutory conditions were
met. State law requires the Control Board to reimpose a control period upon the
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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 or impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the City's 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 its 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 City fiscal year 1997-98, the State constitutional debt limit would have
prevented the City from entering into new capital contracts. Therefore, in 1997,
the State created the New York City Transitional Finance Authority (TFA) in
order to finance a portion of the City's capital program. Despite this
additional financing mechanism, the City currently projects that, if no further
action is taken, it will reach its debt limit in City's current fiscal year
1999-2000. To continue its capital plan without interruption, the City is
proposing an amendment to the State Constitution to change the methodology used
to calculate the debt limit. Since an amendment to the Constitution to raise the
debt limit could not take effect until City fiscal year 2001-02 at the earliest,
the City has decided to securitize a portion of its share of the proceeds from
the settlement with the nation's tobacco companies. However, a number of
potential developments may affect both the availability and level of funding
that the City will receive from the tobacco settlement. City officials have
indicated that, should their efforts to securitize a portion of City tobacco
settlement proceeds fail or not be accomplished in a timely manner, the City
will request that the State increase the borrowing authority of the TFA.
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 its Financial Plan. According to 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 produced a substantial surplus for the City in City fiscal year 1997-98.
Recent staff reports also indicate that the City projects a surplus for City
fiscal year 1998-99. Although several sectors of the City's economy have
expanded over the last several years, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the performance of the
national economy. In addition, the size of recent tax reductions has increased
to over $2 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110. Staff
reports have indicated that recent City budgets have been balanced in part
through the use of nonrecurring resources and that the City's Financial Plan
relies in part on actions outside its direct control. These reports also 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 potential impact on the State of
any future requests by localities for additional oversight or financial
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assistance is not included in the projections of the State's receipts and
disbursements for the State's 1999-2000 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have been
determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to agree
on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged
insubstantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State, other than New York City, was
approximately$21.0 billion. A small portion (approximately $80 million) of that
indebtedness represented borrowing to finance budgetary deficits and was issued
pursuant to enabling State legislation. State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units (other than New York City) authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.
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 also may 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, also may adversely
affect localities and necessitate State assistance.
Litigation
General
The legal proceedings listed below involve State finances and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1999-2000
fiscal year or thereafter.
As of August 24, 1999, except as described below, no current litigation
involves the State's authority, as a matter of law, to contract indebtedness,
issue its obligations, or pay such indebtedness when due, or affects the State's
power or ability, as a matter of law, to impose or collect significant amounts
of taxes and revenues.
The State is party to other claims and litigation which its legal counsel
has advised are not probable of adverse court decisions or are not deemed
adverse and material. Although the amounts of potential losses resulting from
this litigation, if any, are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material and adverse effect on the State's financial position in the 1999-2000
fiscal year or thereafter. The General Purpose Financial Statements for
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the 1998-99 fiscal year report estimated probable awarded and anticipated
unfavorable judgments of $895 million, of which $132 million is expected to be
paid during the 1999-2000 fiscal year. Adverse developments in the proceedings
described below, other proceedings for which there are unanticipated,
unfavorable and material judgments, or the initiation of new proceedings could
affect the ability of the State to maintain a balanced 1999-2000 Financial Plan.
The State believes that the 1999-2000 Financial Plan includes sufficient
reserves to offset the costs associated with the payment of judgments that may
be required during the 1999-2000 fiscal year. These reserves include (but are
not limited to) amounts appropriated for court of claims payments and projected
fund balances in the General Fund. In addition, any amounts ultimately required
to be paid by the State may be subject to settlement or may be paid over a
multi-year period. There can be no assurance, however, that adverse decisions in
legal proceedings against the State would not exceed the amount of all potential
1999-2000 Financial Plan resources available for the payment of judgments, and
could therefore affect the ability of the State to maintain a balanced 1999-2000
Financial Plan.
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. are
seeking 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.
Petitioners' 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. On July 9, 1998, the New York Court of Appeals reversed the order of
the Appellate Division, Third Department, and remanded the matter to the Supreme
court, Albany County, for further proceedings. The Court held that the
petitioners had standing to assert an equal protection claim, but that their
claim did not implicate racial discrimination. The Court remanded the case to
Supreme Court, Albany County, for resolution of the question of whether there
was a rational basis for the Tax Department's policy of non-enforcement of the
sales and excise taxes on reservation sales of cigarettes and motor fuel to non-
Indians. In a footnote, the Court stated that, in view of its disposition of the
case, petitioners' cross-appeal regarding the statewide suspension of the taxes
is "academic." By decision and judgment dated July 9, 1999, the Supreme court,
Albany County, granted judgment dismissing the petition. The time in which to
appeal the July 9, 1999 decision and judgment has not yet expired.
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. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7,
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1999, the Court denied the State's motion to dismiss. On January 27, 1999, the
State appealed that order. On April 27, 1999, the Appellate Division, First
Department, held that the state's automatic stay of litigation pending the
resolution of the appeal would-be vacated unless the State perfected its appeal
for the Court's September 1999 appellate term. The State perfected its appeal on
July 12, 1999.
Medicaid
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April
1, 1995. Included are New York State Health Facilities Association, et al.
v. DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New
York Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry Nursing
Home et al. v. Pataki, et al. Plaintiffs allege that the changes in methodology
have been adopted in violation of procedural and substantive requirements of
State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York
County). In a related case, Rodriguez v. DeBuono, on April 19, 1999, the United
States district Court for the Southern District of New York enjoined the State's
use oft ask based assessment, which is similar to the HARRI, unless the State
assesses safety monitoring as a separate task based assessment, on the grounds
that its use without such additional assessment violated federal Medicaid law
and the Americans with Disabilities Act. The State appealed from the April 19,
1999 order and on July 12, 1999 argued the appeal before the Second Circuit.
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September
5, 1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. In a decision
entered December 15, 1998, the Appellate Division, First Department, dismissed
the remaining cases in accordance with the result in Matter of New York State
Radiological Society v. Wing. By decision dated July 8, 1999, the Court of
Appeals denied leave to appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss.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% and 3.8% assessments on gross receipts imposed pursuant to
Public Health Law ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii), respectively,
are unconstitutional. An order entered August 27, 1997 enforced the terms of the
decision. The State appealed that order. By decision and order dated August
31, 1998, the Appellate Division, Second Department, affirmed that order. On
September 30, 1998, the State moved for re-argument or, in the alternative, fora
certified question for the Court of Appeals to review. By order dated January 7,
1999, the motion was denied. A final order was entered in Supreme Court on
January 26, 1999. On February 23, 1999, the State appealed that order to the
Court of Appeals. The case is scheduled to be argued on October 20, 1999. In
Dental Society, et al. v. Pataki, et al. (United States District Court, Northern
District of New York, commenced February 2, 1999), plaintiffs challenge the
State's reimbursement rates for dental care provided
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under the State's dental Medicaid program. Plaintiffs claim that the State's
Medicaid fee schedule violates Title XIX of the Social Security Act (42 U.S.C.
ss. 1396a et seq.) and the federal and State Constitutions. On June 25, 1999,
the State filed its answer.
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 the State 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 judgment was
entered on July 25, 1997, directing, inter alia, 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 appealed to the Appellate Division, First
Department from each and every provision of this judgment except that portion
directing the continued provision of interim relief. By decision and order dated
May 6, 1999, the Appellate Division, First Department, affirmed the July 25,
1997 judgment. By order dated July 8, 1999, the Appellate Division denied the
State's motion for leave to appeal to the Court of Appeals from the May 6, 1999
decision and order. The State's motion for leave to appeal to the Court of
Appeals is pending in that court.
Real Property Claims
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United States
Court of Appeals for the Second Circuit holding that the Oneida Indians have a
common-law right of action against Madison and Oneida Counties for wrongful
possession of 872 acres of land illegally sold to the State in 1795. At the same
time, however, the Court reversed the Second Circuit by holding that a third-
party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.
In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions were argued March 29, 1999 and are still awaiting
determination. The District Court has not yet rendered a decision. By order
dated February 24, 1999, the District Court appointed a federal settlement
master. A conference scheduled by the District Court for May 26, 1999 to address
the administration of this case has been adjourned indefinitely.
Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York,
et al., both in the United States District Court for the Northern District of
New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions, but may
enhance others. In the Cayuga Indian Nation of New York case, by order dated
March 29, 1999, the United States District Court for the Northern District of
New York appointed a federal settlement master. In June 1999, the federal
government moved to have the State held jointly and severally liable for any
damages owed to the plaintiffs. This motion was argued before the District Court
on July 8, 1999. The damages phase of the trial of this case is scheduled to
begin on December 1, 1999. In the Canadian St. Regis Band of Mohawk Indians
case, the
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United States District Court for the Northern District of New York has directed
the parties to rebrief outstanding motions to dismiss brought by the defendants.
The State filed its brief on July 1, 1999. The motions are scheduled for
argument on September 21, 1999.
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 the 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 United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss.1983 and the
Equal Educational Opportunity Act, 20 U.S.C. ss.ss.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 make available to Yonkers $450,000 to support planning activities to
prepare the EIPII budget for 1998-99 and the accompanying capital facilities
plan. A final judgment to implement EIP II was entered on October 14, 1997. On
November 7, 1997, the State appealed that judgment to the Second Circuit. The
appeal is pending. Additionally, the Court adopted a requirement that the State
pay to Yonkers approximately $9.85 million as its pro rata share of the funding
of EIPI for the 1996-97 school year. The requirement for State funding of EIP I
was reduced to an order on December 2, 1997 and reduced to a judgment on
February 10, 1998. The State appealed that order to the Second Circuit on
December 31, 1997 and amended the notice of appeal after entry of the judgment.
By decision dated June 22, 1999, as discussed below, the Second Circuit affirmed
the District Court's order requiring the State to pay one-half of the cost of
EIP I for the 1996-97 school year and remanded the case to the District Court
for further proceedings consistent with its decision.
On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06. That opinion was
reduced to an order on July 27, 1998. The order directed the State to pay $37.5
million by August 1, 1998 for estimated EIP costs for the 1997-98 school year.
The State made this payment, as directed. On August 24, 1998, the State appealed
that order to the Second Circuit. The city of Yonkers and the Yonkers Board of
Education cross appealed to the Second Circuit from that order. By stipulation
of the parties approved by the Second Circuit on November 19, 1998, the appeals
from the July 27, 1998 order were withdrawn without prejudice to reinstatement
upon determination of the State's appeal of the October 14, 1997 judgment
discussed above.
On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million by
May 1, 1999, as the State's remaining share of EIP costs for the 1997-98 school
year. The second order directed the State to pay to Yonkers $69.1 million as its
share of the estimated EIP costs for the 1998-99 school year. The State made
both payments on April 30, 1999.
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In a decision dated June 22, 1999, the Second Circuit found no basis for
the District Court's findings that vestiges of a dual system continued to exist
in Yonkers and reversed the order directing the implementation of EIP II. The
Second Circuit also affirmed the District Court's order requiring the State to
pay one-half of the cost of EIP I for the 1996-97 school year and remanded the
case to the District Court for further proceedings consistent with its decision.
On July 2, 1999 the NAACP filed a petition for rehearing of the June 22, 1999
decision before the Second Circuit, en banc. The State has joined in the City of
Yonker's motion to stay further implementation of EIP II pending the decision on
the petition for rehearing. By order dated August 5, 1999, the Second Circuit
granted the motion staying further implementation of EIP II pending appeal.
On July 27, 1999, the City of Yonkers moved in the District Court to modify
the July 27, 1998 order to require the State to make payments for EIP expenses
each month from July 1999 through April 2000 of $9.22 million per month instead
of paying $92.2 million by May 1, 2000. By memorandum and order dated July 29,
1999, the District Court denied this motion.
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.
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
41
<PAGE>
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;
(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.
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.
42
<PAGE>
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 61, 405
---------------------------------
Lexington Avenue, New York, NY 10017; Managing Director, Adirondack
Capital Group since 1997; President, Paumgarten and Company 1991 to 1997;
Advisory Managing Director, Lepercq de Neuflize & Co. Incorporated 1993 to
1995; Director, Price Waterhouse AG 1992 to 1993; Chairman of the Board of
Trustees, HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - age 74, 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; Trustee, HSBC Funds Trust.
JEFFREY HASS, Trustee - age 37, 155 East 38th Street, New York, NY 10016;
-------
Associate Professor of Law, New York Law School, 1996-Present; Partner,
Hass & Hass 1993-1996.
RICHARD J. LOOS, Trustee,- age 65, 97 Southport Wood Drive, Southport,
-------
CT 06490. Retired; President, Aspen Capital Management 1995-1996; Managing
Director, HSBC Asset Management Americas Inc. 1972-1994.
CLIFTON MALONEY, Trustee, - age 62, 49 East 92nd Street, New York, NY
--------
10028; President, C.H.W. Maloney & Co. Inc., 1981-Present.
JOHN MEDITZ, Trustee, - age 51, 21 Hamilton Avenue, Weehawken, N.J. 07087;
--------
Portfolio Manager/Vice Chairman, Horizon Asset Management 1994-Present.
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.
43
<PAGE>
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. 1998 - Present; SEI 1997-1998.
NADEEM YOUSAF, Treasurer - Director, Fund Services Division of BISYS Fund
---------
Services, Inc. August 1999 - Present. Director of Canadian Operations with
Investors Bank and Trust 1997 - 1999.
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.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation from Benefits Accrued as Part Benefits Upon from the Fund
the Funds of Fund Expenses Retirement Complex*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee** $8,300 0 N/A $26,500
Richard J. Loos,Trustee $7,700 0 N/A $24,500
Harald Paumgarten, Chairman $9,700 0 N/A $31,000
John Meditz, Trustee $5,700 0 N/A $18,000
Clifton H.W. Maloney, Trustee $5,700 0 N/A $18,000
Jeffrey Hass, Trustee $4,400 0 N/A $14,000
John P. Pfann, Trustee $8,300 0 N/A $26,500
Robert A. Robinson, Trustee $8,300 0 N/A $26,500
</TABLE>
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 1999.
** Wolfe Frankl resigned as a Trustee effective December 31, 1999.
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
44
<PAGE>
(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 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, 1999, Delaware International managed
approximately $12.1 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 $15.9 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.
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.
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.
45
<PAGE>
For the year ended December 31, 1999, BISYS Fund Services earned
administration service fees totaling $97,671, $169,989, $69,546, and $47,907 and
these were fee waivers of $32,558 $56,664, $23,182 and $15,969 for the
International Equity Fund, Growth and Income Fund, Fixed Income Fund and the New
York Fund, respectively.
For the year ended December 31, 1998, BISYS Fund Services earned
administration service fees totaling $98,265, $141,409, $84,516, and $52,902 and
these were fee waivers of $32,756, $47,163, $28,190 and $17,645 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 $68,904, $206,072, $96,213 and $59,039 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.
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%
46
<PAGE>
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,
1999, 1998 and 1997, the Adviser earned $586,022, 589,589 and $89,584 net of fee
waivers of $225,569, $336,751 and $307,447, respectively.
With respect to the Growth and Income Fund for the years ended December 31,
1999, 1998 and 1997, the Adviser earned $623,293, $518,499 and $755,596,
respectively, in advisory fees.
With respect to the Fixed Income Fund, for the years ended December 31,
1999, 1998 and 1997, the Adviser was paid $254,999, $309,890 and $354,982.
With respect to the New York Fund, for the years ended December 31, 1999,
1998 and 1997, the Adviser was paid $108,836, $88,170 and $70,537, net of fee
waivers of $34,885, $0 and $78,720 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 25, 2000.
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 0.75% 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
47
<PAGE>
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 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 25, 2000.
For the fiscal year ended December 31, 1999, the Funds incurred the
following amounts in distribution-related fees under the Rule 12b-1 Distribution
Plan:
<TABLE>
<CAPTION>
Printing of
Prospectuses
Compensation and Retail Postage and
to Broker- Shareholder Marketing Miscellaneous
Fund Dealers Reports Program Expenses Expenses Total
----- ------------ ------------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income
Fund $ 635 $0 $0 $0 $0 $ 635
International Fund
(Service Class) 0 0 0 0 0 0
Fixed Income Fund 28 0 0 0 0 28
New York Fund $51,862 $0 $0 $0 $0 $51,862
</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.
48
<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.
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]
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 Fund as of December 31,
1999, were 7.73% and 4.84%, respectively (excluding the maximum sales of 4.75%
for each Fund). The current yields as of the same
49
<PAGE>
date including the maximum sales charge were 7.27% and 4.73%, 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.
Cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Cumulative total return is calculated by finding the rate
of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the beginning of
the applicable period.
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.
50
<PAGE>
* Forbes, a national business publication that from time to time reports the
------
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
-------
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
---------------
performance of U.S. mutual funds investing internationally.
* Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
-------------------------------------------------------------------
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
-----
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
--------------
financial news.
Personal Investor, a monthly investment advisory publication that includes
-----------------
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on personal
--------------------------------
money management that periodically rates and ranks mutual funds by
performance.
* Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
-------------------
regularly covers financial news.
* Wiesenberger Investment Companies Services, an annual compendium of
------------------------------------------
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
_________________________
* 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.
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 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
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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 other than on an exchange will often be principal transactions. 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 HSBC Bank,
the Adviser, the Funds or BISYS Fund Services are prohibited from dealing with
the Funds as a principal in the purchase and sale of securities except in
accordance with regulations adopted by the Securities and Exchange Commission.
The Funds may purchase Municipal Obligations from underwriting syndicates of
which the Distributor or other affiliate is a member under certain conditions in
accordance with the provisions of a rule adopted under the 1940 Act. Under the
1940 Act, persons affiliated with the Adviser, the Funds or BISYS Fund Services
may act as a broker for the Funds. In order for such persons to effect any
portfolio transactions for the Funds, the commissions, fees or other
remuneration received by such persons must be reasonable and fair compared to
the commissions, fees or other remunerations paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on an exchange during a comparable period of time. This standard would
allow the affiliate to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Trustees of the Trust regularly review the commissions paid by
the Funds to affiliated brokers. 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
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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, 1999, 1998 and 1997 were $70,576, $302,412 and
$330,959, respectively. No brokerage commissions were paid to affiliated brokers
during these periods.
For the years ended December 31, 1999, 1998 and 1997 the Growth and Income
Fund paid an aggregate of $225,979, $167,379 and $288,300 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, 1999, December 31, 1998 and December 31, 1997 was
22.60%, 163.90% and 112.54% respectively. The Growth and Income Fund's portfolio
turnover rate for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997 was 94.36%, 82.19% and 69.07% respectively. The Fixed Income
Fund's portfolio turnover rate for the years ended December 31, 1999, December
31, 1998 and 1997 was 75.75%, 71.05% and 60.98% respectively. The New York
Fund's portfolio turnover rate for the years ended December 31, 1999, December
31, 1998 and 1997 was 11.85%, 56.81% and 35.64% respectively.
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange those shares for shares of the other portfolios of
the Trust and the HSBC Funds Trust which are available for sale in their state.
A shareholder who has paid a sales load in connection with the purchase of
shares of any of the Funds will not be subject to any additional sales loads in
the event such shareholder exchanges shares of one Fund for shares of another
Fund. Shareholders of any of the HSBC Money Market Funds who exchange shares of
any of such Money Market Funds for shares of any of the Funds are charged the
sales loads applicable to the Funds as stated in the Prospectus.
Before effecting an exchange, shareholders should review the prospectuses.
Exercise of the exchange privilege is treated as a redemption for Federal and
New York State and City income tax purposes and, depending on the circumstances,
a gain or loss may be recognized. See the Prospectus discussion of the Federal
tax treatment of load reductions or eliminations in an exchange.
The exchange privilege may be modified or terminated upon sixty (60) days'
notice to shareholders. Although initially there will be no limit on the number
of times a shareholder may exercise the exchange privilege, the Funds reserve
the right to impose such a limitation. Call or write the Funds for further
details.
PURCHASE OF SHARES
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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.
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
HSBC 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 HSBC Bank when authorized by an
officer of HSBC 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
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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 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
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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.
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
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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 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.
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Fund distributions will also be included in individual and corporate
shareholders' income on which the alternative minimum tax may be imposed. Any
loss realized upon the redemption of shares held (or treated as held) for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain dividend received on the redeemed shares. Any loss
realized upon the redemption of shares within six months after receipt of an
exempt-interest dividend will be disallowed. All or a portion of a loss realized
upon the redemption of shares may be disallowed to the extent shares are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption. Exchanges are treated as redemptions for
Federal tax purposes.
Different tax treatment is accorded to accounts maintained as IRAs,
including a penalty on early distributions. Shareholders should consult their
tax advisers for more information.
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.
58
<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.
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.
59
<PAGE>
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 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
60
<PAGE>
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.
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
61
<PAGE>
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.
As of April 28, 2000, 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 Percent of
Holder of Record Shares Held Class
Growth and Income Fund
Class A
HSBC Bank USA
One HSBC Center
Buffalo, NY 14203 6,604,380 90.99%
Total Shares Outstanding 393,435,368
Growth and Income Fund
Class C
Donaldson Lufkin Jenrette
PO Box 2052
Jersey City NJ 07303 7,244 67.84%
Total Shares Outstanding 10,678
International Equity Fund
Class A
Donaldson Lufkin Jenrette
PO Box 2052
Jersey City, NJ 07303 2,617 12.48%
Fiserv Securities Inc.
2005 Market Street
Philadelphia PA 19103 2,086 9.94%
Paul M. Dudney
Tophill Crosskeys
Seven Oaks
Kent, England 2O5 TN13 5,681 27.09%
Total Shares Outstanding 20,973
International Equity Fund
Institutional Class
HSBC Bank USA
One HSBC Center
Buffalo, NY 14203 4,228,170 98.61%
Total Shares Outstanding 4,287,545
Fixed Income Fund
HSBC Bank USA
One HSBC Center
Buffalo, NY 14203 4,365,513 97.50%
Total Shares Outstanding 4,477,041
NY Tax Free Bond Fund
Class A
HSBC Bank USA
PO Box 4203
Buffalo, NY 14240 601,676 24.00%
Total Shares Outstanding 2,506,329
NY Tax Free Bond Fund
Class B
Donaldson Lufkin Jenrette
PO Box 2052
Jersey City, NJ 07303 25,776 89.73%
Total Shares Outstanding 28,726
HSBC Bank USA has informed the Trust that it was not the beneficial owner
of any of the shares it held of record.
62
<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 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
63
<PAGE>
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.
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.
64
<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.(1)
(b) -- By-Laws of Registrant.(1)
(d1) -- Advisory Contract between Registrant and HSBC Asset
Management Americas, Inc.(2)
(c) not applicable
<PAGE>
(d2) -- Sub-Advisory Contract between HSBC Asset Management
Americas Inc. and Delaware International Advisers Ltd
with respect to International Fund.(2)
(d3) -- Amendment to Advisory Contract between HSBC Asset
Management Americas Inc. and the Trust to add Mid Cap
Fund*
(e) -- Distribution Agreement between Registrant and BISYS
Fund Services.(2)
(e1) -- Amendment to Distribution Agreement to add Mid Cap
Fund*
(g1) -- Custodian Agreement between Registrant and The Bank of
New York.(1)
(h1) -- Management and Administrative Agreement between
Registrant and BISYS Fund Services.(1)
(h2) -- Amendment to Management and Administrative Agreement
adding Mid Cap Fund*
(h3) -- Accounting Services Agreement between Registrant and
BISYS Fund Services(1)
(h4) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services(1)
(h5) -- Amendment to Transfer Agency Agreement adding Mid Cap
Fund*
(h9) -- Fund Accounting Agreement between Registrant and BISYS
Fund Services(1)
(i) -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison
counsel to Registrant.*
(j) -- Consent of Ernst & Young LLP, independent
Auditors.*
K -- Not applicable
(m1) -- Revised Rule 12b-l Distribution Plan for Class A
Shares*
<PAGE>
m2 -- Revised Rule 12b-1 Distribution Plan for Class Band C
shares.*
(m3) -- Rule 12b-1 Shareholder Servicing Agreement between
Registrant and BISYS Fund Services, Inc.(1)
(m3) -- Distributor's Selected Dealer Agreement.(2)
(n) -- Rule 18f-3 Plan(2)
Other Exhibits
(p) -- Codes of Ethics
- - -----------------------
(1) Filed with Post-Effective Amendment No. 18 to the Trust's Registration
Statement on April 29, 1997.
(2) Filed with Post-Effective Amendment No. 23 to the Trust's Registration
Statement on April 30, 1999.
(3) Filed herewith
* To be filed by Post-Effective Amendment.
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. 24 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 14, 2000.
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 28, 2000
- ---------------------------
Walter Grimm
/s/ Anthony Fisher Vice President April 28, 2000
- ---------------------------
Anthony Fisher
* John P Fann Trustee April 28, 2000
- ---------------------------
John P Fann
* HARALD PAUMGARTEN Trustee April 28, 2000
- ---------------------------
Harald Paumgarten
* ROBERT A. ROBINSON Trustee April 28, 2000
- ---------------------------
Robert A. Robinson
* Jeffrey Haas Trustee April 28, 2000
- ---------------------------
Jeffrey Haas
* Richard Loos Trustee April 28, 2000
- ---------------------------
Richard Loos
* Clifton H.W. Maloney Trustee April 28, 2000
- ---------------------------
Clifton H.W. Maloney
* John Meditz Trustee April 28, 2000
- ---------------------------
John Meditz
</TABLE>
* Pursuant to Power of Attorney filed herein.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Other Exhibits
(I) Consent of Paul, Weiss, Rifkind Wharton & Garrison
(J) Consent of Independent Auditors
(P1) Code of Ethics
(P2) Bisys Fund Services Code of Ethics
</TABLE>
<PAGE>
Exhibit (i)
April 28, 2000
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: HSBC Mutual Funds Trust (File Nos. 33-33734 as 811-6057)
-------------------------------------------------------
Dear Sir/Madam:
As counsel to HSBC Mutual Funds Trust (the "Trust"), we have reviewed
Post-Effective Amendment No. 25 to the Trust's Registration Statement on Form
N-1A (the "Amendment"). The Amendment is being filed pursuant to Rule 485 of
the 1933 Act and it is proposed that it will become effective immediately upon
filing pursuant to paragraph (b).
Based upon our review, we advise you that the Amendment does not include
disclosure which we believe would render it ineligible to become effective
under paragraph (b) of Rule 485.
It is our opinion that the securities being registered will when sold,
be legally issued, fully paid and non-assessable and we hereby consent to the
reference to our firm as Counsel in Post-Effective Amendment No. 25 to
Registration No. 33-33734.
Sincerely,
PAUL, WEISS, RIFKIND
WHARTON & GARRISON
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information, both included in
Post-Effective Amendment Number 25 to the Registration Statement (Form N-lA,
No. 033-33734) of HSBC Mutual Funds Trust and to the use of our report dated
February 23, 2000, incorporated by reference therein.
ERNST & YOUNG LLP
New York, New York
April 25, 2000
<PAGE>
Exhibit 99.P1
Adopted: June 28, 1996
Revised: October 27, 1999
Each Registered Investment Company or series thereof (each of which is
considered to be a Fund for this purpose) for which HSBC Asset Management
Americas Inc. presently or hereafter provides investment advisory or principal
underwriter services
CODE OF ETHICS
--------------
This Code of Ethics (the "Code") establishes rules of conduct
for persons who are associated with the Funds referred to above. The Code
governs their personal investment and other investment-related activities.
The basic rule is very simple: put the client's interests
first. Officers, Directors and employees owe a fiduciary duty to, among others,
the Shareholders of the Funds, to conduct their personal Securities transactions
in a manner which does not interfere with Fund portfolio transactions or
otherwise take unfair advantage of their relationships with the Funds. Persons
covered by the Code must adhere to these general principles as well as comply
with the Code's specific provisions.
Some of the rules are imposed specifically by law. For
example, the laws that govern investment advisers specifically prohibit
fraudulent activity, making statements that are not true or that are misleading
or omit something that is significant in the context and engaging in
manipulative practices. These are general concepts, of course, and over the
years the courts, the regulators and investment advisers issued interpretations
and established codes of conduct for their employees and others who have access
to their investment decisions and trading activities. Indeed, the rules obligate
investment advisers to adopt written rules that are reasonably designed to
prevent the illegal activities described above and must follow procedures that
will enable them to prevent such activities.
No Covered Person shall, in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to be
acquired by the Funds:
o employ any device, scheme or artifice to defraud the Funds;
<PAGE>
o make to the Funds any untrue statement of a material fact or
omit to the Funds a material fact necessary in order to make
the statement made, in light of the circumstances under which
they are made, not misleading;
o engage in any act, practice or course of business which would
operate as a fraud or deceit upon the Funds;
o engage in any manipulative practice with respect to the Funds;
o trade while in possession of material non-public information
for personal or HSBC Asset Management America Inc. investment
accounts, or disclose such information to others in or outside
HSBC Asset Management Americas Inc. who have no need for this
information.
It is a violation of federal securities laws to buy or sell securities
while in possession of material non-public information and illegal to
communicate such information to a third party who buys or sells.
This Code is intended to assist persons associated with the
Funds in fulfilling their obligations under the law. The first part lays out who
the Code applies to, the second part deals with personal investment activities,
the third part deals with other sensitive business practices, and subsequent
parts deal with reporting and administrative procedures.
The Code is very important to the Funds and persons associated
with the Funds. Violations not only cause persons associated with the Funds
embarrassment, loss of business, legal restrictions, fines and other punishments
but for employees lead to demotion, suspension, firing, ejection from the
securities business and very large fines.
I. Applicability
-------------
(A) The Code applies to each of the following:
1. The Funds referred to at the top of page one of the
Code. A listing of the Funds, which is periodically
updated, is attached as Exhibit A.
2. Any officer, director or Advisory Person (as defined
below) of any Funds or the Fund's investment adviser.
3. Any director, officer or general partner of a
principal underwriter who, in the ordinary course of
business, makes, participates in or obtains
information regarding, the purchase or sale of
Securities by the Fund or whose functions or duties
in the ordinary course of business relate to the
making of any recommendation to the Fund regarding
the purchase or sale of Securities.
4. The Code shall not apply to any director, officer,
general partner or person if such individual is
required to comply with another organization's code
- 2 -
<PAGE>
of ethics pursuant to Rule 17j-1 under the Investment
Company Act of 1940, as amended.
(B) Definitions
-----------
1. Access Persons. The persons described in items (A)2
--------------
and (A)3 above.
2. Access Person Account. Includes all advisory,
---------------------
brokerage, trust or other accounts or forms of direct
beneficial ownership in which one or more Access
Person and/or one or more members of an Access
Person's immediate family have a substantial
proportionate economic interest. Immediate family
includes an Access Person's spouse and minor children
living with the Access Person. A substantial
proportionate economic interest will generally be 10%
of the principal amount in the case of an account in
which only one Access Person has an interest and 25%
of the principal amount in the case of an account in
which more than one Access Person has an interest,
whichever is first applicable. Investment
partnerships and similar indirect means of ownership
are also included.
As an exception, accounts in which one or more Access
Persons and/or their immediate family have a
substantial proportionate interest which are
maintained with persons who have no affiliation with
the Funds or Affiliates of the Funds and with respect
to which no Access Person has, in the judgment of the
Divisional Compliance Officer after reviewing the
terms and circumstances, any direct or indirect
influence or control over the investment or portfolio
execution process are not Access Person Accounts.
3. Advisory Person. Any employee of the Fund or
---------------
investment adviser (or of any company in a control
relationship to the Fund or investment adviser) who,
in connection with his or her regular functions or
duties, makes, participates in, or obtains
information regarding the purchase or sale of
Securities by a Fund, or whose functions relate to
the making of any recommendations with respect to the
purchases or sales; or any natural person in a
control relationship to the Fund or investment
adviser who obtains information concerning
recommendations made to the Fund with regard to the
purchase or sale of Securities by the Fund.
4. Associate Portfolio Managers. Access Persons who are
----------------------------
engaged in securities research and analysis for
designated Funds or are responsible for investment
recommendations for designated Funds but who are not
particularly responsible for investment decisions
with respect to any Funds.
- 3 -
<PAGE>
5. Covered Persons. The Funds and the Access Persons.
---------------
6. Divisional Compliance Officer. The Divisional
Compliance Officer of the Funds identified in (A)1
above shall be ______________, an individual who is
an employee of HSBC Asset Management Americas Inc.
7. Investment Personnel. (i) Any employee of the Fund or
--------------------
investment adviser (or of any company in a control
relationship to the Fund or investment adviser) who,
in connection with his or her regular functions or
duties, makes or participates in making
recommendations regarding the purchase or sale of
securities by the Fund; or (ii) any natural person
who controls the Fund or investment adviser and who
obtains information concerning recommendations made
to the Fund regarding the purchase or sale of
securities by the Fund.
For purposes of the Code, the Compliance Officer of
the Administrator shall only be responsible for a Covered
Person's compliance with this Code, unless such Covered Person
is otherwise excluded under (A) 4 above.
8. Portfolio Managers. Access Persons who are
------------------
principally responsible for investment decisions with
respect to any of the Funds.
9. Security. Any financial instrument treated as a
--------
security for investment purposes and any related
instrument such as futures, forward or swap contract
entered into with respect to one or more securities,
a basket of or an index of securities or components
of securities. However, the term security does not
include securities issued by the Government of the
United States, bankers' acceptances, bank
certificates of deposit, commercial paper and high
quality short-term debt instruments, including
repurchase agreements or shares of registered
open-end investment companies.
II. Restrictions on Personal Investing Activities
---------------------------------------------
(A) Basic Restriction on Investing Activities
-----------------------------------------
If a purchase or sale order is pending or under active
consideration for any Fund, neither the same Security nor any
related Security (such as an option, warrant or convertible
security) may be bought or sold for any Access Person Account.
(B) Initial Public Offerings
------------------------
No Security or related Security may be acquired in an initial
public offering for any Investment Personnel.
- 4 -
<PAGE>
(C) Blackout Period
---------------
No Security or related Security may be bought or sold for the
account of any Portfolio Manager or Associate Portfolio
Manager during the period commencing seven (7) calendar days
prior to and ending seven (7) calendar days after the purchase
or sale (or entry of an order for the purchase or sale) of
that Security or any related Security for the account of any
Fund with respect to which such person has been designated a
Portfolio Manager or Associate Portfolio Manager .
(D) Exempt Transactions
-------------------
Participation on an ongoing basis in an issuer's dividend
reinvestment or stock purchase plan, participation in any
transaction over which no Access Person had any direct or
indirect influence or control and involuntary transactions
(such as mergers, inheritances, gifts, etc.) are exempt from
the restrictions set forth in paragraphs (A) and (C) above
without case by case preclearance under paragraph (F) below.
(E) Permitted Exceptions
--------------------
Purchases and sales of the following Securities are exempt
from the restrictions set forth in paragraphs A and C above if
such purchases and sales comply with the preclearance
requirements of paragraph (F) below (provided that purchases
and sales of Municipal Securities need not comply with the
preclearance requirements of paragraph (F) below):
1. Non-convertible fixed income Securities rated at
least "A";
2. Equity Securities of a class having a market
capitalization in excess of $1 billion;
3. Equity Securities of a class having a market
capitalization in excess of $500 million if the
transaction in question and the aggregate amount of
such Securities and any related Securities purchased
and sold for the Access Person Account in question
during the preceding 60 days does not exceed $10,000
or 100 shares; and
4. Municipal Securities.
In addition, the exercise of rights that were received pro
rata with other securityholders is exempt if the preclearance
procedures are satisfied.
- 5 -
<PAGE>
(F) Pre-Clearance of Personal Securities
------------------------------------
Transactions
------------
No Security may be bought or sold for an Access Person Account
unless (i) the Access Person obtains prior approval from the
Divisional Compliance Officer or, in the absence of the
Divisional Compliance Officer, from a designee of the
Divisional Compliance Officer; (ii) the approved transaction
is completed on the same day approval is received; and (iii)
the Divisional Compliance Officer does not rescind such
approval prior to execution of the transaction (See paragraph
H below for details of the Pre-Clearance Process.)
(G) Private Placements
------------------
The Divisional Compliance Officer will not approve purchases
or sale of Securities that are not publicly traded, unless the
Access Person provides full details of the proposed
transaction (including written certification that the
investment opportunity did not arise by virtue of such
person's activities on behalf of any Fund) and the Divisional
Compliance Officer concludes, after consultation with one or
more of the relevant Portfolio Managers, that the Fund would
have no foreseeable interest in investing in such Security.
(H) Pre-Clearance Process
---------------------
1. No Securities may be purchased or sold for any Access
Person Account unless the particular transaction has
been approved in writing by the Divisional Compliance
Officer. The Divisional Compliance Officer shall
review, not less frequently than biweekly (once every
two weeks), reports from the trading desk (or, if
applicable, confirmations from brokers) to assure
that all transactions effected for Access Person
Accounts are effected in compliance with this Code.
2. No Securities may be purchased or sold for any Access
Person Account other than through the trading desk
designated by the Divisional Compliance Officer,
unless express permission is granted by the
Divisional Compliance Officer. Such permission may be
granted only on the condition that the third party
broker supply the Divisional Compliance Officer, on a
timely basis, duplicate copies of confirmations of
all personal Securities transactions for such Access
Person in the accounts maintained with such third
party broker and copies of periodic statements for
all such accounts.
3. A Trading Approval Form, attached as Exhibit B, must
be completed and submitted to the Divisional
Compliance Officer for approval prior to entry of an
order.
4. After reviewing the proposed trade and the level of
potential investment interest on behalf of the Funds
in the Security in question and the Funds
- 6 -
<PAGE>
restricted lists, the Divisional Compliance Officer
shall approve (or disapprove) a trading order on
behalf of an Access Person as expeditiously as
possible. The Divisional Compliance Officer will
generally approve transactions described in paragraph
(E) above unless the Security in question or a
related security is on the Restricted List or the
Divisional Compliance Officer believes for any other
reason that the Access Person Account should not
trade in such Security at such time.
5. Once an Access Person's Trading Approval Form is
approved, the form must be forwarded to the trading
desk (or, if a third party broker is permitted, to
the Divisional Compliance Officer) for execution on
the same day. If the Access Person's trading order
request is not approved, or is not executed on the
same day it is approved, the clearance lapses
although such trading order request may be
resubmitted at a later date.
6. In the absence of the Divisional Compliance Officer,
an Access Person may submit his or her Trading
Approval Form to a designee of the Divisional
Compliance Officer if the Divisional Compliance
Officer in its sole discretion wishes to appoint one.
Trading Approval for the Divisional Compliance
Officer must be obtained from a designated
supervisory person of the Divisional Compliance
Officer. In no case will the Trading Desk accept an
order for an Access Person Account unless it is
accompanied by a signed Trading Approval Form.
7. The Divisional Compliance Officer shall review all
Trading Approval Forms, all initial, quarterly and
annual disclosure certifications and the trading
activities on behalf of all Funds with a view to
ensuring that all Covered Persons are complying with
the spirit as well as the detailed requirements of
this Code.
The provisions of this Section II shall not apply to any
Access Person who is either a "disinterested" director or an officer of the Fund
who is not employed by the investment adviser, or an affiliate thereof, other
than those where they knew or should have known in the course of their duties as
a director or officer that any Fund of which he is a director or officer has
made or makes a purchase or sale of the same or a related Security within 15
days before or after the purchase or sale of such Security or related Security
by such director or officer.
III. Other Investment-Related Restrictions
-------------------------------------
(A) Gifts
-----
No Advisory Person shall accept any gift or other item of more
than $100 in value from any person or entity that does
business with or on behalf of any Fund.
- 7 -
<PAGE>
(B) Service As a Director
---------------------
No Portfolio Manager or Assistant Portfolio Manager shall
commence service on the Board of Directors of a publicly
traded company or any company in which any Fund has an
interest without prior authorization from the Divisional
Compliance Officer based upon a determination that the Board
service would not be inconsistent with the interests of the
Funds.
IV. Report and Additional Compliance Procedures
-------------------------------------------
(A) Every Covered Person, including disinterested
directors of the Funds, must submit to the Divisional
Compliance Officer reports (forms of which are
appended as Exhibit C) containing the information set
forth in below with respect to transactions in any
Security in which such Covered Person has or by
reason of such transactions acquires, any direct or
indirect beneficial ownership (as defined in Exhibit
D) in the Security; provided, however, that:
-------- -------
(1) a Covered Person who is required to make
reports only because he is a director of one
of the Funds and who is a "disinterested"
director thereof need not make an initial or
annual holdings report, or a quarterly
transaction report with respect to any
transactions other than those where he knew
or should have known in the course of his
duties as a director that any Fund of which
he is a director has purchased or sold same
or a related Security or the Fund or its
investment adviser it considers purchasing
or selling such Security or a related
security within 15 days before or after the
purchase or sale of such Security or related
Security by such director.
(2) a Covered Person need not make a report with
respect to any transaction effected for any
account over which such person does not have
any direct or indirect influence or control;
and
(3) a Covered Person need not make a quarterly
report with respect to any transaction
affected through the trading desk designated
by the Divisional Compliance Officer.
(4) a Covered Person will be deemed to have
complied with the quarterly requirements of
this Article IV insofar as the Divisional
Compliance Officer receives in a timely
fashion duplicate monthly or quarterly
brokerage statements on which all
transactions required to be reported
hereunder are described.
(B) Initial Holdings Reports. No later than 10 calendar
------------------------
days after the person becomes an Access Person, the
following information:
- 8 -
<PAGE>
(i) The title, number of shares and principal amount
of each Covered Security in which the Access Person
had any direct or indirect beneficial ownership when
the person became an Access Person;
(ii) The name of any broker, dealer or bank with whom
the Access Person maintained an account in which any
securities were held for the direct or indirect
benefit of the Access Person as of the date the
person became an Access Person; and
(iii) The date that the report is submitted by the
Access Person
(C) Quarterly Transaction Reports. No later than 10
-----------------------------
calendar days after the end of a calendar quarter,
the following information:
(1) With respect to any transaction during the
quarter in a Covered Security in which the Access
Person had any direct or indirect beneficial
ownership:
(a) The date of the transaction, the
title and number of shares and the
principal amount of each Security
involved;
(b) The nature of the transaction
(i.e., purchase, sale or any other
type of acquisition or
disposition);
(c) The price at which the transaction
was effected;
(d) The name of the broker, dealer or
bank with or through whom the
transaction was effected; and
(e) The date that the report is
submitted by the Access Person.
(2) With respect to any account established by
the Access Person in which any securities
were held during the quarter for the direct
or indirect benefit of the Access Person:
(a) The name of the broker, dealer or
bank with whom the Access Person
established the account;
(b) The date the account was
established; and
(c) The date that the report is
submitted by the Access Person.
(D) Annual Holdings Reports. Annually, the following
-----------------------
information (which information must be current as of
a date no more than 30 calendar days before the
report is submitted):
- 9 -
<PAGE>
(1) The title, number of shares and principal
amount of each Security in which the Access
Person had any direct or indirect beneficial
ownership;
(2) The name of any broker, dealer or bank with
whom the Access Person maintains an account
in which any securities are held for the
direct or indirect benefit of the Access
Person; and
(3) The date that the report is submitted by the
Access Person.
(E) Any report submitted to comply with the requirements
of this Article IV may contain a statement that the
report shall not be construed as admission by the
person making such report that he has any direct or
indirect benefit ownership in the Security to which
the report relates.
(F) Annually each Covered Person must certify on a report
(the form of which is appended as Exhibit E) that he
has read and understood the Code and recognizes that
he is subject to such Code. In addition, annually
each covered Person must certify that he has
disclosed or reported all personal Securities
transactions required to be disclosed or reported
under the Code and that he is not subject to any
regulatory disability.
V. Administration of Code of Ethics
--------------------------------
(A) No less frequently than annually, every Fund and its
investment advisers and principal underwriters must
furnish to the Fund's board of directors, and the
board of directors must consider, a written report
that
(1) Describes any issues arising under the Code
or procedures since the last report to the
board of trustees, including, but not
limited to, information about material
violations of the Code or procedures and
sanctions imposed in response to the
material violations; and
(2) Certifies that the Fund, investment adviser
or principal underwriter, as applicable, has
adopted procedures reasonably necessary to
prevent Access Persons from violating the
Code
VI. Sanctions
---------
Upon discovering that a Covered Person has not complied with the
requirements of this Code, the Board of Directors of the relevant Fund
may impose whatever sanctions within its power the Board deems
appropriate, including, among other things, termination of the Fund's
adviser or recommendations of disgorgement of profit, censure,
suspension or termination of employment. Material violations of
requirements of this Code by employees of Covered Persons and any
sanctions imposed in connection therewith shall be reported not less
frequently than quarterly to the Board of Directors of any relevant
Fund.
- 10 -
<PAGE>
VII. Exceptions
----------
The Board of Trustees reserves the right to decide, on a case by case
---------------------------------------------------------------------
basis, exceptions to any provisions under this Code. Any exceptions
-------------------------------------------------------------------
made hereunder will be maintained in writing by the Board of Trustees
---------------------------------------------------------------------
of any relevant Fund at its next scheduled meeting.
---------------------------------------------------
VIII. Preservation of Documents
-------------------------
This Code, a copy of each report by a Covered Person, any written
report made hereunder by the Funds, Affiliates of the Funds or the
Divisional Compliance Officer, and lists of all persons required to
make or review reports, shall be preserved with the records of the
relevant Fund for a five year period in an easily accessible place.
IX. Other Laws, Rules and Statements of Policy
------------------------------------------
Nothing contained in this Code shall be interpreted as relieving any
Covered Person from acting in accordance with the provision of any
applicable law, rule or regulation or any other statement of policy or
procedure governing the conduct of such person adopted by Funds or
Affiliates of the Funds.
X. Further Information
-------------------
If any person has any question with regard to the applicability of the
provisions of this Code generally or with regard to any Securities
transaction or transactions, he should consult the Divisional
Compliance Officer.
- 11 -
<PAGE>
Exhibit A
---------
List of Registered Investment Companies
---------------------------------------
HSBC Funds Trust
HSBC Mutual Funds Trust
- 12 -
<PAGE>
Exhibit B
---------
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
PRE-CLEARANCE TRADING APPROVAL FORM
-----------------------------------
I, ___________________________________________________ (name), am an Access
Person and seek pre-clearance to engage in the transaction described below:
Acquisition or Disposition (circle one)
- --------------------------
Name of Account: ____________________________________________
Account Number: ____________________________________________
Date of Request: ____________________________________________
Security: ____________________________________________
Amount or # of Shares: ____________________________________________
Broker: ____________________________________________
If the transaction involves a Security that is not publicly traded, a
description of proposed transaction, source of investment opportunity and any
potential conflicts of interest:
I hereby certify that, to the best of my knowledge, the transaction described
herein is not prohibited by the Funds' Code of Ethics dated October 27, 1999 and
that the opportunity to engage in the transaction did not arise by virtue of my
activities on behalf of any Client.
Signature: ______________________________________
Print Name:
Approved or Disapproved (Circle One)
- -----------------------
Date of Approval:
Signature: ______________________________________
Print Name:
If approval is granted, please forward this form to the trading desk (or if a
third party broker is permitted, to the Divisional Compliance Officer) for
immediate execution.
- 13 -
<PAGE>
Exhibit C
---------
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
INITIAL TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
---------------
The following table supplies the information required by
Section IV(B) of the Code of Ethics dated October 27, 1999 for the period
specified below.
Name of the Broker/Dealer
with or through
Securities Price Per whom the Nature of
(Name and Quantity of Share or Transaction Ownership of
Symbol) Securities Other Unit was Effected Securities
- ---------- ------------ ---------- ------------ ----------
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature_________________________ Date_______________________
Position_________________________
<PAGE>
Page 2
HSBC Funds Trust
HSBC Mutual Funds Trust
QUARTERLY TRANSACTION REPORT
----------------------------
Report Submitted by: _____________________________________________________
Print Your Name
---------------
This transaction report (the "Report") is submitted pursuant
to Section IV(B) of the Code of Ethics of the Funds and supplies information
with respect to transactions in any Security in which you may be deemed to have,
or by reason of such transaction acquire, any direct or indirect beneficial
ownership interest for the period specified below. If you were not employed by
us during this entire period, amend the dates specified below to cover your
period of employment.
Unless the context otherwise requires, all terms used in the
Report shall have the same meaning as set forth in the Code of Ethics dated
October 27, 1999.
If you have no reportable transactions, sign and return this
page only. If you have reportable transactions, complete, sign and return page 3
and any attachments.
- --------------------------------------------------------------------------------
I HAD NO REPORTABLE SECURITIES TRANSACTIONS DURING THE PERIOD
__________, 199_ THROUGH _________, 199_. I CERTIFY THAT I AM FULLY FAMILIAR
WITH THE CODE OF ETHICS AND THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION
FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
Signature
- ---------------------------------
Position
- ---------------------------------
Date
- ---------------------------------
- 15 -
<PAGE>
Page 3
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
QUARTERLY TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
---------------
The following table supplies the information required by
Section IV(C) of the Code of Ethics dated October 27, 1999 for the period
specified below. Transactions reported on brokerage statements or duplicate
confirmations actually received by the Divisional Compliance Officer do not have
to be listed although it is your responsibility to make sure that such
statements or confirmations are complete and have been received in a timely
fashion.
<TABLE>
<CAPTION>
Whether Name of the
Purchase, Sale, Broker/Dealer
Short Sale, or with or through
Securities Other Type of Price Per whom the Nature of
(Name and Date of Disposition or Quantity of Share or Transaction Ownership of
Symbol) Transaction Acquisition Securities Other Unit was Effected Securities
- ---------- ----------- --------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature_________________________ Date_______________________
Position_________________________
<PAGE>
Page 4
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
ANNUAL TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
---------------
The following table supplies the information required by
Section IV(D) of the Code of Ethics dated October 27, 1999 for the period
specified below.
<TABLE>
<CAPTION>
Name of the Broker/Dealer
with or through
Securities Price Per whom the Nature of
(Name and Quantity of Share or Transaction Ownership of
Symbol) Securities Other Unit was Effected Securities
- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
</TABLE>
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature_________________________ Date_______________________
Position_________________________
- 17 -
<PAGE>
Exhibit D
---------
BENEFICIAL OWNERSHIP
--------------------
For purposes of the attached Code of Ethics, "beneficial
ownership" shall be interpreted in the same manner as it would be in determining
whether a person is subject to the provisions of Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder, except the
determination of direct or indirect beneficial ownership shall apply to all
securities that a Covered Person has or acquires. The term "beneficial
ownership" of securities would include not only ownership of securities held by
a Covered Person for his own benefit, whether in bearer form or registered in
his name or otherwise, but also ownership of securities held for his benefit by
others (regardless of whether or how they are registered) such as custodians,
brokers, executors, administrators, or trustees (including trusts in which he
has only a remainder interest), and securities held for his account by pledges,
securities owned by a partnership in which he is a member if he may exercise a
controlling influence over the purchase, sale of voting of such securities, and
securities owned by any corporation or similar entry in which he owns securities
if the shareholder is a controlling shareholder of the entity and has or shares
investment control over the entity's portfolio.
Ordinarily, this term would not include securities held by
executors or administrators in estates in which a Covered Person is a legatee or
beneficiary unless there is a specified legacy to such person of such securities
or such person is the sole legatee or beneficiary and there are other assets in
the estate sufficient to pay debts ranking ahead of such legacy, or the
securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by a Covered Person where such person enjoys "financial
benefits substantially equivalent to ownership." The Securities and Exchange
Commission has said that although the final determination of beneficial
ownership is a question to be determined in the light of the facts of the
particular case, generally a person is regarded as the beneficial owner of
securities held in the name of his or her spouse and their minor children.
Absent special circumstances such rela tionship ordinarily results in such
person obtaining financial benefits substantially equivalent to ownership, e.g.,
application of the income derived from such securities to maintain a common
home, or to meet expenses that such person otherwise would meet from other
sources, or the ability to exercises a controlling influence over the purchase,
sale or voting of such securities.
A Covered Person also may be regarded as the beneficial owner
of securities held in the name of another person, if by reason of any contract,
understanding, relationship, agreement, or other agreement, he obtains therefrom
financial benefits substantially equivalent to those of ownership.
A Covered Person also is regarded as the beneficial owner of
securities held in the name of a spouse, minor children or other person, even
though he does not obtain therefrom the aforementioned benefits of ownership, if
he can vest or revest title in himself at once or at some future time.
<PAGE>
Exhibit E
---------
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
ANNUAL CERTIFICATION OF CODE OF ETHICS
--------------------------------------
A. I (a Covered Person) hereby certify that I have read and
understood the Code of Ethics dated October 27, 1999, and
recognize that I am subject to its provisions. In addition, I
hereby certify that I have complied with the requirements of
the Code of Ethics and that I have disclosed or reported all
personal Securities transactions required to be disclosed or
reported under the Code of Ethics;
B. Within the last ten years there have been no complaints or
disciplinary actions filled against me by any regulated
securities or commodities exchange, any self-regulatory
securities or commodities organization, any attorney general,
or any governmental office or agency regulating insurance
securities, commodities or financial transactions in the
United States, in any state of the United States, or in any
other country;
C. I have not within the last ten years been convicted of or
acknowledged commission of any felony or misdemeanor arising
out of my conduct as an employee, salesperson, officer,
director, insurance agent, broker, dealer, underwriter,
investment manager or investment advisor; and
D. I have not been denied permission or otherwise enjoined by
order, judgment or decree of any court of competent
jurisdiction, regulated securities or commodities exchange,
self-regulatory securities or commodities organization or
other federal or state regulatory authority from acting as an
investment advisor, securities or commodities broker or
dealer, commodity pool operator or trading advisor or as an
affiliated person or employee of any investment company, bank,
insurance company or commodity broker, dealer, pool operator
or trading advisor, or from engaging in or continuing any
conduct or practice in connection with any such activity or
the purchase or sale of any security.
Print Name: ______________
Signature: ______________
Date: ______________
<PAGE>
Exhibit 99.P2
BISYS FUND SERVICES
--------------------
CODE OF ETHICS
--------------
I. INTRODUCTION
This Code of Ethics (the "Code") sets forth the basic policies of ethical
conduct for all directors, officers and associates (hereinafter referred to as
"Covered Persons") of the BISYS Fund Services companies listed on Exhibit A
hereto (hereinafter collectively referred to as "BISYS").
Rule 17j-1(b) under the Investment Company Act of 1940, as amended, (the
"1940 Act") makes it unlawful for BISYS companies operating as a principal
underwriter of a registered investment company (hereinafter referred to
individually as a "Fund" or collectively as the "Funds"), or any affiliated
person of such principal underwriter, in connection with the purchase or sale by
such person of a security "held or to be acquired"/1/ by any Fund:
(1) to employ any device, scheme or artifice to defraud the Fund;
(2) to make to the Fund any untrue statement of a material fact or omit to
state to the Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) to engage in any act, practice or course of business that operates or
would operate as a fraud or deceit upon the Fund; or
(4) to engage in any manipulative practice with respect to the Fund.
Any violation of this provision by a Covered Person shall be deemed to be a
violation of this Code.
II. RISKS OF NON-COMPLIANCE
Any violation of this Code may result in the imposition by BISYS of
sanctions against the Covered Person, or may be grounds for the immediate
termination of the Covered Person's position with BISYS. In addition, in some
cases (e.g., the misuse of inside information), a violation of federal and state
civil and criminal statutes may subject the Covered Person to fines,
imprisonment and/or monetary damages.
- -------------------------------
/1/ A security "held or to be acquired" is defined under Rule 17j-l(a)(10) as
any Covered Security which, within the most recent fifteen (15) days: (A) is or
has been held by a Fund, or (B) is being or has been considered by a Fund or the
investment adviser for a Fund for purchase by the Fund. A purchase or sale
includes the writing of an option to purchase or sell and any security that is
convertible into or exchangeable for, any security that is held or to be
acquired by a Fund. "Covered Securities", as defined under Rule 17j-1(a)(4), do
not include: (i) securities issued by the United States Government; (ii)
bankers' acceptances, bank certificates of deposit, commercial paper and high
quality short-term debt instruments, including repurchase agreements; (iii)
shares of open-end investment companies; (iv) transactions which you had no
direct or indirect influence or control; (v) transactions that are not
initiated, or directed, by you; and (vi) securities acquired upon the exercise
of rights issued by the issuer to all shareholders pro rata.
<PAGE>
III. ETHICAL STANDARDS
The foundation of this Code consists of basic standards of conduct
including, but not limited to, the avoidance of conflicts between personal
interests and interests of BISYS or its Fund clients. To this end, Covered
Persons should understand and adhere to the following ethical standards:
(a) The duty at all times to place the interests of Fund shareholders
first;
This duty requires that all Covered Persons avoid serving their own
personal interests ahead of the interests of the shareholders of any
Fund for which BISYS serves as the administrator, distributor,
transfer agent or fund accountant.
(b) The duty to ensure that all personal securities transactions be
conducted in a manner that is consistent with this Code to avoid any
actual or potential conflict of interest or any abuse of such Covered
Person's position of trust and responsibility; and
Covered Persons should study this Code and ensure that they understand
its requirements. Covered Persons should conduct their activities in
a manner that not only achieves technical compliance with this Code
but also abides by its spirit and principles.
(c) The duty to ensure that Covered Persons do not take inappropriate
advantage of their position with BISYS.
Covered Persons engaged in personal securities transactions should not
take inappropriate advantage of their position or of information
obtained during the course of their association with BISYS. Covered
Persons should avoid situations that might compromise their judgment
(e.g., the receipt of perquisites, gifts of more than de minimis value
or unusual investment opportunities from persons doing or seeking to
do business with BISYS or the Funds).
A "personal securities transaction" is considered to be a transaction
in a Covered Security of which the Covered Person is deemed to have
"beneficial ownership."/2/ This includes, but is not limited to,
transactions in accounts of the Covered Person's spouse, minor
children, or other relations residing in the Covered Person's
household, or accounts in which the Covered Person has discretionary
investment control.
- -----------------------------------
/2/ "Beneficial ownership" of a security is defined under Rule 16a-1(a)(2) of
the Securities Exchange Act of 1934, which provides that a Covered Person should
consider himself/herself the beneficial owner of securities held by his/her
spouse, his/her minor children, a relative who shares his/her home, or other
persons, directly or indirectly, if by reason of any contract, understanding,
relationship, agreement or other arrangement, he/she obtains from such
securities benefits substantially equivalent to those of ownership. He/she
should also consider himself/herself the beneficial owner of securities if
he/she can vest or revest title in himself/herself now or in the future.
2
<PAGE>
IV. RESTRICTIONS AND PROCEDURES
This section is divided into two (2) parts. Part A relates to
restrictions and procedures applicable to all Covered Persons in addition to the
aforementioned Rule 17j-1(b) provisions. Part B imposes additional restrictions
and reporting requirements for those Covered Persons who are listed on Exhibit B
hereto (hereinafter referred to as "Access Persons"/3/).
A. Restrictions and Procedures for all Covered Persons:
---------------------------------------------------------
1. Prohibition Against Use of Material Inside Information
------------------------------------------------------
Covered Persons may have access to information about Funds that is
confidential and not available to the general public, such as (but not
limited to) information concerning securities held in, or traded by,
Fund portfolios, information concerning certain underwritings of
broker/dealers affiliated with a Fund that may be deemed to be
"material inside information", and information which involves a merger
or acquisition that has not been disclosed to the public.
"Material inside information" is defined as any information about a
company which has not been disclosed to the general public and which
either a reasonable person would deem to be important in making an
investment decision or the dissemination of which is likely to impact
the market price of the company's securities.
Covered Persons in possession of material inside information must not
trade in or recommend the purchase or sale of the securities concerned
until the information has been properly disclosed and disseminated to
the public.
2. Initial and Annual Certifications
---------------------------------
Within ten (10) days following the commencement of their employment or
otherwise becoming subject to this Code and at least annually
following the end of the calendar year, all Covered Persons shall be
required to sign and submit to the Code Compliance Officer a written
certification, in the form of Exhibit C hereto, affirming that he/she
has read and understands this Code to which he/she is subject. In
addition, the Covered Person must certify annually that he/she has
complied with the requirements of this Code and has disclosed and
reported all personal securities
- --------------------------
/3/ An "Access Person" is defined under Rule 17j-1(a)(1)(ii) to include any
director, officer or general partner of a principal underwriter for a Fund who,
in the ordinary course of business, makes, participates in or obtains
information regarding the purchase or sale of securities for such Fund or whose
functions or duties in the ordinary course of business relate to the making of
any recommendation to such Fund regarding the purchase or sale of securities.
This Code has included BISYS associates that are not directors, officers or
general partners of any BISYS Fund Services company but would otherwise be
deemed Access Persons for purposes of this Code.
3
<PAGE>
transactions that are required to be disclosed and reported by this
Code. The Code Compliance Officer will circulate the Annual
Certifications and Holdings Reports for completion following the end
of each calendar year.
B. Restrictions and Reporting Requirements for all Access Persons:
--------------------------------------------------------------------
Each Access Person must refrain from engaging in a personal securities
transaction when the Access Person knows, or in the ordinary course of
fulfilling his/her duties would have reason to know, that at the time
of the personal securities transaction a Fund has a pending buy or
sell order in the same Covered Security.
1. Initial and Annual Holdings Reports
------------------------------------
All Access Persons must file a completed Initial and Annual Holdings
Report, in the form of Exhibit D hereto, with the Code Compliance
Officer within ten (10) days of commencement of their employment or
otherwise becoming subject to this Code and thereafter on an annual
basis following the end of the calendar year in accordance with
Procedures established by the Code Compliance Officer.
2. Transaction/New Account Reports
-------------------------------
All Access Persons must file a completed Transaction/New Account
Report, in the form of Exhibit E hereto, with the Code Compliance
Officer within ten (10) days after (i) opening an account with a
broker, dealer or bank in which Covered Securities are held; or (ii)
entering into any personal securities transaction in which an Access
Person has any direct or indirect beneficial ownership. Personal
securities transactions are those involving any Covered Security1 in
which the person has, or by reason of such personal securities
transaction acquires, any direct or indirect, "beneficial ownership."2
3. Confirmations and Statements
----------------------------
In order to provide BISYS with information to determine whether the
provisions of this Code are being observed, each Access Person shall
direct his/her broker, dealer or bank to supply to the Code Compliance
Officer, on a timely basis, duplicate copies of confirmations of all
personal securities transactions and copies of monthly statements for
all Covered Securities accounts. The confirmations should match the
Transaction/New Account Reports. These confirmations and statements
should be mailed, on a confidential basis, to the Code Compliance
Officer at the following address:
4
<PAGE>
ATTN: Code Compliance Officer
Regulatory Services
BISYS Fund Services
3435 Stelzer Road, Suite 1000
Columbus, Ohio 43219-8001
C. Review of Reports and Assessment of Code Adequacy:
------------------------------------------------------
The Code Compliance Officer shall review and maintain the Initial and
Annual Certifications, Initial and Annual Holdings Reports and
Transaction/New Account Reports (the "Reports") with the records of
BISYS. Following receipt of the Reports, the Code Compliance Officer
shall consider in accordance with Procedures designed to prevent
Access Persons from violating this Code:
(a) whether any personal securities transaction evidences an apparent
violation of this Code; and
(b) whether any apparent violation of the reporting requirement has
occurred pursuant to Section B above.
Upon making a determination that a violation of this Code, including
its reporting requirements, has occurred, the Code Compliance Officer
shall report such violations to the General Counsel of BISYS Fund
Services who shall determine what sanctions, if any, should be
recommended to be taken by BISYS. The Code Compliance Officer shall
prepare quarterly reports to be presented to the Fund Boards of
Directors/Trustees with respect to any material trading violations
under this Code.
This Code, a copy of all Reports referenced herein, any reports of
violations, and lists of all Covered and Access Persons required to
make Reports, shall be preserved for the period(s) required by Rule
17j-1. BISYS shall review the adequacy of the Code and the operation
of its related Procedures at least once a year.
V. REPORTS TO FUND BOARDS OF DIRECTORS/TRUSTEES
--------------------------------------------
BISYS shall submit the following reports to the Board of Directors/Trustees
for each Fund for which it serves as principal underwriter:
A. BISYS Fund Services Code of Ethics
----------------------------------
A copy of this Code shall be submitted to the Board of each Fund no
later than September 1, 2000 or for new Fund clients, prior to BISYS
commencing operations as principal underwriter, for review and
approval. Thereafter, all material changes to this Code shall be
submitted to each Board for review and approval not later than six (6)
months following the date of implementation of such material changes.
5
<PAGE>
B. Annual Certification of Adequacy
--------------------------------
The Code Compliance Officer shall annually prepare a written report to
be presented to the Board of each Fund detailing the following:
1. Any issues arising under this Code or its related Procedures
since the preceding report, including information about
material violations of this Code or its related Procedures
and sanctions imposed in response to such material violations;
and
2. A Certification to Fund Boards, in the form of Exhibit F hereto,
that BISYS has adopted Procedures designed to be reasonably
necessary to prevent Access Persons from violating this Code.
6
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT A
The following companies are subject to the BISYS Fund Services Code of Ethics1:
Barr Rosenberg Funds Distributor, Inc.
BISYS Fund Services, Inc.
BISYS Fund Services Limited Partnership
BISYS Fund Services Ohio, Inc.
BNY Hamilton Distributors, Inc.
CFD Fund Distributors, Inc.
Centura Funds Distributor, Inc.
Concord Financial Group, Inc.
Kent Funds Distributors, Inc.
Evergreen Distributor, Inc.
IBJ Funds Distributor, Inc..
Mentor Distributors, LLC
The One Group Services Company
Performance Funds Distributor, Inc.
VISTA Fund Distributors, Inc.
_________________________
/1/ The companies listed on this Exhibit A may be amended from time to time, as
required.
As of January 11, 2000
A-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT B
The following Covered Persons are considered Access Persons under the BISYS Fund
Services Code of Ethics/1/:
Client Services - all associates
CFD Fund Distributors, Inc. - all directors, officers and employees
Directors/Officers of each BISYS entity listed on Exhibit A that met the
statutory definition of
Access Person under Rule17j-1
Financial Services (Fund Accounting and Financial Administration) - all
associates
Fund Administration - all associates
Information Systems - all associates
Legal Services - all paralegals and attorneys
The One Group Services Company - all directors, officers and employees
Tax Services - all associates
VISTA Fund Distributors, Inc.- all officers, directors and employees
All wholesalers and telewholesalers employed by the BISYS companies listed on
Exhibit A
_________________________
/1/ The Access Persons listed on this Exhibit B may be amended from time to
time, as required.
As of January 11, 2000
B-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT C
INITIAL AND ANNUAL CERTIFICATIONS
I hereby certify that I have read and thoroughly understand and agree to
abide by the conditions set forth in the BISYS Fund Services Code of Ethics. I
further certify that, during the time of my affiliation with BISYS, I will
comply or have complied with the requirements of this Code and will
disclose/report or have disclosed/reported all personal securities transactions
required to be disclosed/reported by the Code.
If I am deemed to be an Access Person under this Code, I certify that I
will comply or have complied with the Transaction/New Account Report
requirements as detailed in the Code and submit herewith my Initial and Annual
Holdings Report. I further certify that I will direct or have directed each
broker, dealer or bank with whom I have an account or accounts to send to the
BISYS Code Compliance Officer duplicate copies of all confirmations and
statements relating to my account(s).
________________________________
Print or Type Name
________________________________
Signature
________________________________
Date
C-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT D
INITIAL AND ANNUAL HOLDINGS REPORT
Name and Address of Account Number(s) If New Account,
Broker, Dealer or Bank(s) Date Established
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
- ----------------------------- --------------------- --------------
Attached are the Covered Securities beneficially owned by me as of the date of
this Initial and Annual Holdings Report.
________________________________
Print or Type Name
________________________________
Signature
________________________________
Date
D-1
<PAGE>
Security Number of Principal Amount
Description Covered
(Symbol/CUSIP) Securities/
Shares Held
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
- ---------------- ---------------- ----------------
D-2
<PAGE>
BISYS FUND SERVICES CODE OF ETHICS - TRANSACTION/NEW ACCOUNT REPORT
EXHIBIT E
I hereby certify that the Covered Securities described below (or attached
hereto in the annual statement from my broker, dealer or bank) were purchased or
sold on the date(s) indicated. Such Covered Securities were purchased or sold in
reliance upon public information lawfully obtained by me through independent
research. I have also listed below the account number(s) for any new account(s)
opened in which Covered Securities are held. My decision to enter into any
personal securities transaction(s) was not based upon information obtained as a
result of my affiliation with BISYS.
COVERED SECURITIES PURCHASED/ACQUIRED OR SOLD/DISPOSED
<TABLE>
<CAPTION>
Security Trade Number of Per Share Principal Interest Maturity Name of Broker, Bought (B) or
Description Date Shares Price Amount Rate Rate Dealer or Bank Sold (S)
(Symbol/CUSIP) (If Applicable) (If Applicable) (and Account
Number and Date
Established, If New)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
- --------------------- ------ ---------- ---------- ----------- --------------- ---------------- --------------------- --------------
</TABLE>
This Transaction/New Account Report is not an admission that you have or
had any direct or indirect beneficial ownership in the Covered Securities listed
above.
________________________________
Print or Type Name
________________________________ ________________________________
Signature Date
E-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT F
CERTIFICATION TO FUND BOARDS
BISYS Fund Services ("BISYS") requires that all directors, officers and
associates of BISYS ("Covered Persons") certify that they have read and
thoroughly understand and agree to abide by the conditions set forth in the
BISYS Code of Ethics (the "Code"). If such Covered Persons are deemed to be
Access Persons under the Code, they are required to submit Initial and Annual
Holdings Reports, as well as Transaction/New Account Reports, to the Code
Compliance Officer, listing all personal securities transactions in Covered
Securities for all such accounts in which the Access Person has any direct or
indirect beneficial interest within ten (10) days of entering into any such
transactions. Access Persons must direct their broker, dealer or bank(s) to
send duplicate trade confirmations and statements of all such personal
securities transactions directly to the Code Compliance Officer who compares
them to the required Transaction/New Account Reports. Additionally, the Code
Compliance Officer undertakes a quarterly review of all Access Person's personal
securities transactions against the Fund's Investment Adviser for all such Funds
that BISYS serves as principal underwriter.
The undersigned hereby certifies that BISYS has adopted Procedures designed to
be reasonably necessary to prevent Access Persons from violating BISYS' Code and
the required provisions of Rule 17j-1 under the Investment Company Act of 1940,
as amended.
_______________________________ ___________________
Kathleen McGinnis Date
Code Compliance Officer
BISYS Fund Services
F-1
