As filed with the U.S. Securities and Exchange Commission on July 1, 1996
FILE NO. 811-8928
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2
REPUBLIC PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
Post Office Box 2494, Elizabethan Square,
George Town, Grand Cayman, Cayman Islands, B.W.I.
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (809) 945-1824
Philip W. Coolidge, 6 St. James Avenue, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Copy to: Alan S. Mostoff, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
RF115.EDG
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EXPLANATORY NOTE
This amendment no. 2 (the "Amendment") to the Registrant's registration
statement (the "Registration Statement") on Form N-1A (File no. 811-8928) has
been filed by the Registrant pursuant to Section 8(b) of the Investment Company
Act of 1940. However, beneficial interests in the Registrant are not being
registered under the Securities Act of 1933 (the "1933 Act") because such
interests will be issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the 1933
Act. Investments in the Registrant may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in the Registrant.
This Amendment is being filed solely with respect to Small Cap Equity
Portfolio (the "Portfolio"), a series of beneficial interests in the Registrant,
for the purpose of adding a Part A and Part B to the Registration Statement with
respect to the Portfolio. This Amendment does not otherwise affect any of the
other Parts A or Parts B previously filed as part of the Registration Statement,
each of which is hereby incorporated herein by reference as most recently filed
pursuant to Section 8(b) of the 1940 Act.
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RF113A
PART A
SMALL CAP EQUITY PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instructions F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Republic Portfolios (the "Portfolio Trust") is a diversified, open-end
management investment company which was organized as a trust under the law of
the State of New York on November 1, 1994. Beneficial interests of the Portfolio
Trust are divided into actual and potential series, only one of which, Small Cap
Equity Portfolio (the "Portfolio") is described herein. Additional series may be
established in the future. Beneficial interests in the Portfolio are issued
solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"). Investments in the Portfolio may only be made by
investment companies, insurance separate accounts, common or commingled trust
funds or similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This Registration
Statement does not constitute an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
Republic National Bank of New York ("Republic" or the "Manager") is the
investment manager of the Portfolio. MFS Asset Management, Inc., a wholly-owned
subsidiary of Massachusetts Financial Services Company (the "Sub-Adviser")
continuously manages the investments of the Portfolio.
The investment objective of the Portfolio is to seek long-term growth
of capital by investing primarily in equity securities of small- and
medium-sized companies that are early in their life cycle but which may have
potential to become major enterprises.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Manager, Sub-Adviser and
Administrator of the Portfolio, (iii) portfolio transactions, and (iv) rights
and liabilities of investors.
References in this Part A to "Part B" are to the Part B relating to the
Portfolio.
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INVESTMENT OBJECTIVE
The investment objective of the Portfolio is to seek long-term growth
of capital by investing primarily in equity securities of small- and
medium-sized companies that are early in their life cycle but which may have
potential to become major enterprises ("Emerging Growth Companies").
There can be no assurance that the investment objective of the
Portfolio will be achieved. The investment objective of the Portfolio may be
changed without investor approval. If there is a change in the investment
objective of the Portfolio, investors should consider whether the Portfolio
remains an appropriate investment in light of their then-current financial
position and needs. Investors in the Portfolio shall receive 30 days prior
written notice of any change in the investment objective of the Portfolio.
INVESTMENT POLICIES
The Portfolio seeks to achieve its objective by investing, under normal
market conditions, at least 80% of its assets in equity securities (see
"Investment Techniques Equity Securities" below) of Emerging Growth Companies.
Emerging Growth Companies generally have small (under $1 billion) market
capitalizations and annual gross revenues ranging from $10 million to $1
billion, would be expected to show earnings growth over time that is well above
the growth rate of the overall economy and the rate of inflation, and would have
the products, management and market opportunities which are usually necessary to
become more widely recognized. However, the Portfolio may also invest in more
established companies whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand or basic changes in the economic environment. The
Portfolio may invest up to 20% (and generally expects to invest between 5% and
10%) of its assets in foreign securities (excluding American Depositary
Receipts) (see "Additional Risk Factors - Foreign Securities" below).
While the Portfolio will invest primarily in common stocks, the
Portfolio may, to a limited extent, seek appreciation in other types of
securities such as foreign or convertible securities and warrants when relative
values make such purchases appear attractive either as individual issues or as
types of securities in certain economic environments.
While the Portfolio may engage in certain investment techniques as
described below under the caption "Investment Techniques". The Portfolio's
investments are subject to certain risks, as described in the above-referenced
sections of this Part A and Part B as described below under the caption
"Additional Risk Factors".
INVESTMENT TECHNIQUES
Consistent with the Portfolio's investment objective and policies, the
Portfolio may
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engage in the following investment techniques. See also "Investment Objective
and Policies" in Part B.
EQUITY SECURITIES: The Portfolio may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depositary receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
FIXED INCOME SECURITIES: Fixed income securities in which the Portfolio
may invest include bonds (including zero coupon bonds, deferred interest bonds
and payable in-kind bonds), debentures, mortgage securities, notes, bills,
commercial paper, obligations issued or guaranteed by a government or any of its
political subdivisions, agencies or instrumentalities, and certificates of
deposit, as well as debt obligations which may have a call on common stock by
means of a conversion privilege or attached warrants.
U.S. GOVERNMENT SECURITIES: For temporary defensive reasons, the
Portfolio may invest in Government securities, including: (1) U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance, including: U.S. Treasury bills (maturities of one year or less); U.S.
Treasury notes (maturities of one to ten years); and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are backed by the
full faith and credit of the U.S. Government; and (2) obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities, some
of which are backed by the full faith and credit of the U.S. Treasury, e.g.,
direct pass-through certificates of the Government National Mortgage Association
("GNMA"); some of which are supported by the right of the issuer to borrow from
the U.S. Government, e.g., obligations of Federal Home Loan Banks; and some of
which are backed only by the credit of the issuer itself, e.g., obligations of
the Student Loan Marketing Association (collectively, "U.S. Government
Securities").
REPURCHASE AGREEMENTS: The Portfolio may enter into repurchase
agreements in order to earn income on available cash or as a temporary defensive
measure. Under a repurchase agreement, the Portfolio acquires securities subject
to the seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, the Portfolio's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in Part B, the Portfolio has adopted certain
procedures intended to minimize the risks of investing in repurchase agreements.
LENDING OF PORTFOLIO SECURITIES: The Portfolio may seek to increase its
income by lending portfolio securities to entities deemed creditworthy by the
Adviser. Such loans will usually be made to member firms (and subsidiaries
thereof) of the New York Stock Exchange and to member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, letters of credit or U.S. Government securities
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maintained on a current basis at an amount at least equal to the market value of
the securities loaned. If the Sub-Adviser determines to make securities loans,
it is intended that the value of the securities loaned would not exceed 30% of
the value of the total assets of the Portfolio.
RESTRICTED SECURITIES: The Portfolio may also purchase securities that
are not registered under the Securities Act of 1933 (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Board of Trustees determines, based upon a continuing review
of the trading markets for a specific Rule 144A security, whether such security
is liquid and thus not subject to the Portfolio's limitation on investing not
more than 15% of its net assets in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to the Sub-Adviser the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Portfolio's investment in
Rule 144A securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of decreasing the level of liquidity in the Portfolio to
the extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Portfolio's portfolio. Subject to
the Portfolio's 15% limitation on investments in illiquid investments, the
Portfolio may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Portfolio might not be
able to sell these securities when the Sub-Adviser wishes to do so, or might
have to sell them at less than fair value. In addition, market quotations are
less readily available. Therefore, the judgment of the Sub-Adviser may at times
play a greater role in valuing these securities than in the case of unrestricted
securities.
AMERICAN DEPOSITARY RECEIPTS: The Portfolio may invest in American
Depositary Receipts ("ADRs"), which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Because ADRs
trade on U.S. securities exchanges, the Sub- Adviser does not treat them as
foreign securities. However, they are subject to many of the risks of foreign
securities such as exchange rates and more limited information about foreign
issuers. See "Additional Risk Factors - Foreign Securities" below.
FOREIGN GROWTH SECURITIES: The Portfolio may invest in securities of
foreign growth companies, including established foreign companies, whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Additional Risk Factors -Foreign Securities" below.
It is anticipated that these companies will primarily be in nations with more
developed securities markets, such as Japan, Australia, Canada, New Zealand and
most Western European countries, including Great Britain.
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EMERGING MARKET SECURITIES: The Portfolio may invest in securities of
issuers located in countries or regions with relatively low gross national
product per capita compared to the world's major economies, and in countries or
regions with the potential for rapid economic growth ("Emerging Markets").
Emerging Markets include any country: (i) having and "emerging stock market" as
defined by the International Finance Corporation; (ii) with low- to
middle-income economies according to the International Bank for Reconstruction
and Development (the "World Bank"); (iii) listed in World Bank publications as
developing; or (iv) determined by the Adviser to be an emerging market as
defined above. See "Additional Risk Factors - Emerging Markets" below. In
determining where a company's principal activities are located, the Sub-Adviser
considers such factors as its country of organization, the principal trading
market for its securities and the source of its revenues and assets. The
company's principal activities are deemed to be located in a particular country
if: (a) the company is organized under the laws of, and maintains a principal
office in that country; (b) the company has its principal securities trading
market in that country, (c) the company derives 50% or more of its total
revenues from goods sold or services performed in that country; or (d) the
company has 50% or more of its assets in that country.
OPTIONS ON SECURITIES: The Portfolio may write (sell) covered put and
call options on securities ("Options") and purchase put and call Options that
are traded on foreign or U.S. securities exchanges and over the counter. The
Portfolio will write such Options for the purpose of increasing its return
and/or protecting the value of its portfolio. In particular, where the Portfolio
writes an Option which expires unexercised or is closed out by the Portfolio at
a profit, it will retain the premium paid for the Option, which will increase
its gross income and will offset in part the reduced value of a portfolio
security in connection with which the Option may have been written or the
increased cost of portfolio securities to be acquired. In contrast, however, if
the price of the security underlying the Option moves adversely to the
Portfolio's position, the Option may be exercised and the Portfolio will be
required to purchase or sell the security at a disadvantageous price, resulting
in losses which may only be partially offset by the amount of the premium. The
Portfolio may also write combinations of put and call Options on the same
security, known as "straddles". Such transactions can generate additional
premium income but also present increased risk.
The Portfolio may purchase put or call Options in anticipation of
declines in the value of portfolio securities or increases in the value of
securities to be acquired. In the event that the expected changes occur, the
Portfolio may be able to offset the resulting adverse effect on its portfolio,
in whole or in part, through the Options purchased. The risk assumed by the
Portfolio in connection with such transactions is limited to the amount of the
premium and related transaction costs associated with the Option, although the
Portfolio may be required to forfeit such amounts in the event that the prices
of securities underlying the Options do not move in the direction or to the
extent anticipated.
FUTURES CONTRACTS: The Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed income securities or foreign
currencies or contracts based on indexes of securities as such instruments
become available for trading ("Futures Contracts").
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Such transactions will be entered into for hedging purposes, in order to protect
the Portfolio's current or intended investments from the effects of changes in
interest or exchange rates, or for non-hedging purposes, to the extent permitted
by applicable law. For example, in the event that an anticipated decrease in the
value of portfolio securities occurs as a result of a general increase in
interest rates or a decline in the dollar value of foreign currencies in which
portfolio securities are denominated, the adverse effects of such changes may be
offset, in whole or part, by gains on Futures Contracts sold by the Portfolio.
Conversely, the adverse effects of an increase in the cost of portfolio
securities to be acquired, occurring as a result of a decline in interest rates
or a rise in the dollar value of securities denominated in foreign currencies,
may be offset, in whole or in part, by gains on Futures Contracts purchased by
the Portfolio. The Portfolio will incur brokerage fees when it purchases and
sells Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Portfolio believes that
use of such contracts will benefit the Portfolio, if the Sub-Adviser's
investment judgment about the general direction of interest or exchange rates is
incorrect, the Portfolio's overall performance may be poorer than if it had not
entered into any such contract and the Portfolio may realize a loss.
Transactions entered into for non-hedging purposes involve greater risk,
including the risk of losses which are not offset by gains on other portfolio
assets. The Portfolio will not enter into any Futures Contract if immediately
thereafter the value of securities and other obligations underlying all such
Futures Contracts would exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Portfolio may purchase and write
options on Futures Contracts ("Options on Futures Contracts") for the purpose of
protecting against declines in the value of portfolio securities or against
increases in the costs of securities to be acquired, or for non-hedging
purposes, to the extent permitted by applicable law. Purchases of Options on
Futures Contracts may present less risk in hedging the portfolio of the
Portfolio than the purchase or sale of the underlying Futures Contracts, since
the potential loss is limited to the amount of the premium paid for the option,
plus related transaction costs. The writing of such options, however, does not
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Portfolio may
suffer a loss on the transaction. Transactions entered into for non-hedging
purposes involve greater risk, including the risk of losses which are not offset
by gains on other portfolio assets.
FORWARD CONTRACTS: The Portfolio may enter into forward foreign
currency exchange contracts for the purchase and sale of a fixed quantity of a
foreign currency at a future date ("Forward Contracts"). The Portfolio may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
By entering into transactions in Forward Contracts, however, the Portfolio may
be required to forego the benefits of advantageous changes in exchange rates
and, in the case of Forward Contracts entered into for non- hedging purposes,
the Portfolio may sustain losses which will reduce its gross income. Forward
Contracts are traded over-the-counter and not on organized commodities or
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securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments and their use involves certain risks beyond
those associated with transactions in Futures Contracts or options traded on
exchanges. The Portfolio may also enter into a Forward Contract on one currency
in order to hedge against risk of loss arising from fluctuations in the value of
a second currency (referred to as a "cross hedge") if, in the judgment of the
Sub-Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. The Portfolio has established
procedures consistent with statements of the Securities and Exchange Commission
(the "SEC") and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
OPTIONS ON STOCK INDICES: The Portfolio may write (sell) covered call
and put options and purchase call and put options on domestic or foreign stock
indices ("Options on Stock Indices"). The Portfolio may write such options for
the purpose of increasing its current income and/or to protect its portfolio
against declines in the value of securities it owns or increases in the value of
securities to be acquired. When the Portfolio writes an option on a stock index,
and the value of the index moves adversely to the holder's position, the option
will not be exercised, and the Portfolio will either close out the option at a
profit or allow it to expire unexercised. The Portfolio will thereby retain the
amount of the premium, less related transaction costs, which will increase its
gross income and offset part of the reduced value of portfolio securities or the
increased cost of securities to be acquired. Such transactions, however, will
constitute only partial hedges against adverse price fluctuations, since any
such fluctuations will be offset only to the extent of the premium received by
the Portfolio for the writing of the option, less related transaction costs. In
addition, if the value of an underlying index moves adversely to the Portfolio's
option position, the option may be exercised, and the Portfolio will experience
a loss which may only be partially offset by the amount of the premium received.
The Portfolio may also purchase put or call options on stock indices in
order, respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance. The
Portfolio's possible loss in either case will be limited to the premium paid for
the option, plus related transaction costs.
DEFENSIVE INVESTMENTS: When the Sub-Adviser believes that investing for
temporary defensive reasons is appropriate, such as during times of
international, political or economic uncertainty or turmoil, or in order to meet
anticipated redemption requests, part or all of the Portfolio's assets may be
invested in cash (including foreign currency) or cash equivalent short-term
obligations including, but not limited to, certificates of deposit, commercial
paper, short-term notes and U.S. Government Securities.
PORTFOLIO TURNOVER: The Sub-Adviser manages the Portfolio generally
without regard to restrictions on portfolio turnover, except those imposed by
provisions of the federal tax laws regarding short-term trading. In general, the
Portfolio will not trade for short-term
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profits, but when circumstances warrant, investments may be sold without regard
to the length of time held. It is anticipated that the portfolio turnover rate
for the Portfolio will be 100% during the Portfolio's initial fiscal year.
Because the Portfolio may have a portfolio turnover rate of 100% or more,
transaction costs incurred by the Portfolio and the realized capital gains and
losses of the Portfolio may be greater than those of a fund with a lesser
portfolio turnover rate.
ADDITIONAL RISK FACTORS AND POLICIES
Foreign Securities: Transactions involving foreign equity and debt
securities or foreign currencies, and transactions entered into in foreign
countries, involve considerations and risks not typically associated with
investing in U.S. markets. These include changes in currency rates, exchange
control regulations, governmental administration or economic or monetary policy
(in the U.S. or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different or less stringent accounting standards and
thinner trading markets. Foreign securities markets may also be less liquid,
more volatile and less subject to government supervision than in the U.S.
Investments in foreign countries could be affected by other factors including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
Furthermore, dividends from foreign securities may be withheld at the source.
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Portfolio is uninvested and no return is earned thereon. The inability of the
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result either
in losses to the Portfolio due to subsequent declines in value of the portfolio
security or if the Portfolio has entered into a contract to sell the security,
in possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets the Portfolio bears the risk
that the securities will not be delivered and that the Portfolio's payment will
not be returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets
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may be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Portfolio.
FIXED INCOME SECURITIES: To the extent the Portfolio invests in fixed
income securities, the net asset value of the Portfolio may change as the
general levels of interest rates fluctuate. When interest rates decline, the
value of fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of fixed income securities can be expected to
decline. The Portfolio has no restrictions with respect to the maturities or
duration of the fixed income securities it holds. The Portfolio's investments in
fixed income securities with longer terms to maturity or greater duration are
subject to greater volatility than the Portfolio's shorter-term obligations.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the
Portfolio may enter into transactions in Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts for hedging purposes, such transactions
nevertheless involve certain risks. For example, a lack of correlation between
the instrument underlying an Option or Futures Contract and the assets being
hedged, or unexpected adverse price movements, could render the Portfolio's
hedging strategy unsuccessful and could result in losses. The Portfolios also
may enter into transactions in Options, Futures Contracts, Options on Futures
Contracts and Forward Contracts for other than hedging purposes, which involves
greater risk. In particular, such transactions may result in losses for the
Portfolio which are not offset by gains on other portfolio positions, thereby
reducing gross income. In addition, foreign currency markets may be extremely
volatile from time to time. There also can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, and the
Portfolio may be required to maintain a position until exercise or expiration,
which could result in losses. Part B contains a description of the nature and
trading mechanics of
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Options, Futures Contracts, Options on Futures Contracts and Forward Contracts,
and includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indexes
underlying Options, Futures Contracts and Options on Futures Contracts traded by
the Portfolio will include both domestic and foreign securities.
The policies described above are not fundamental and may be changed
without investor approval.
Part B includes a discussion of investment policies and a listing of
specific investment restrictions which govern the Portfolio's investment
policies. The specific investment restrictions listed in Part B may be changed
without shareholder approval unless otherwise indicated. See Item 13 in Part B.
The Portfolio's investment limitations and policies are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
ITEM 5. MANAGEMENT OF THE PORTFOLIO TRUST.
The business and affairs of the Portfolio Trust are managed under the
direction of its Board of Trustees. The Trustees of the Portfolio Trust are
Frederick C. Chen, Alan S. Parsow, Larry M. Robbins and Michael Seely.
Additional information about the Trustees, as well as the executive officers of
the Portfolio Trust, may be found in Part B under the caption "Management of the
Portfolio Trust -- Trustees and Officers".
A majority of the disinterested Trustees have adopted written
procedures reasonably appropriate to deal with potential conflicts of interest
arising from the fact that the same individuals are Trustees of Republic Funds
and of the Portfolio Trust. Under the conflicts of interest procedures, the
Trustees will review on a quarterly basis any potential conflicts of interests
after consulting with fund counsel, the Manager and the Fund Administrator. If a
potential conflict of interest arises, the Board of Trustees of the entity that
may be adversely affected will take such action as is reasonably appropriate to
resolve the conflict, up to and including establishing a new Board of Trustees
for such entity. See "Management of the Portfolio Trust" in Part B for more
information about the Trustees and the executive officers of the Portfolio
Trust.
INVESTMENT MANAGER
Republic whose address is 452 Fifth Avenue, New York, New York 10018,
serves as investment manager to the Portfolio pursuant to an Investment
Management Contract with the Portfolio Trust. Subject to the general guidance
and the policies set by the Trustees of
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the Portfolio Trust, Republic provides general supervision over the investment
management functions performed by the Sub-Adviser. For its services under the
Investment Management Contract, the Manager receives from the Portfolio Trust a
fee, payable monthly, at the annual rate of 0.25% of the Portfolio's average
daily net assets.
Republic is a wholly owned subsidiary of Republic New York Corporation,
a registered bank holding company. As of December 31, 1995, Republic was the
20th largest commercial bank in the United States measured by deposits and the
19th largest commercial bank measured by shareholder equity.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased.
Based upon the advice of counsel, Republic believes that the
performance of investment advisory and other services for the Portfolio will not
violate the Glass-Steagall Act or other applicable banking laws or regulations.
However, future statutory or regulatory changes, as well as future judicial or
administrative decisions and interpretations of present and future statutes and
regulations, could prevent Republic from continuing to perform such services for
the Portfolio. If Republic were prohibited from acting as investment manager to
the Portfolio, it is expected that the Board of Trustees would recommend to
Portfolio investors approval of a new investment advisory agreement with another
qualified investment adviser selected by the Board of Trustees or that the Board
of Trustees would recommend other appropriate action.
SUB-ADVISER
The Sub-Adviser continuously manages the investment portfolio of the
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, the Sub-Adviser is paid a fee by the Portfolio, computed daily and
based on the Portfolio's average daily net assets, equal on an annual basis to
0.75% of assets up to $50 million and 0.60% of assets in excess of $50 million.
It is the responsibility of the Sub-Adviser not only to make investment
decisions for the Portfolio, but also to place purchase and sale orders for the
portfolio transactions of the Portfolio.
The Sub-Adviser, together with its parent company, Massachusetts
Financial Services Company ("MFS"), is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in the
U.S., Massachusetts Investors Trust. Net assets under the management of the MFS
organization were approximately $39.8 billion on behalf of approximately 1.8
million investor accounts as of October 31, 1995. As of such date, the MFS
organization managed approximately $15.9 billion of assets invested in equity
securities, approximately $19.6 billion of assets invested in fixed income
securities, and $2.9
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billion of assets invested in securities of foreign issuers and non-U.S. dollar
securities. MFS is a wholly owned subsidiary of Sun Life Assurance Company of
Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). Sun Life, a mutual life insurance company, is
one of the largest international life insurance companies and has been operating
in the U.S. since 1895, establishing a headquarters office in the U.S. in 1973.
The executive officers of MFS report to the Chairman of Sun Life.
MFS has established a strategic alliance with Foreign & Colonial
Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of
two of the world's oldest financial services institutions, the London-based
Foreign & Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial will share their views on a variety of investment-related issues, such
as the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS will have access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial will have access to the extensive U.S. equity investment
expertise of MFS. One or more MFS investment analysts are expected to work for
an extended period with Foreign & Colonial's portfolio managers and investment
analysts at their offices in London. In return, one or more Foreign & Colonial
employees are expected to work in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the
Portfolio as well as for portfolios of other clients of the Sub-Adviser or MFS
or clients of Foreign & Colonial. Some simultaneous transactions are inevitable
when several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as the Portfolio is concerned, in other
cases, however, it may produce increased investment opportunities for the
Portfolio.
The portfolio managers of the Portfolio are John W. Ballen and Brian
Stack, Senior Vice President and Vice President respectively, of the
Sub-Adviser. Mr. Ballen has been employed as a portfolio manager by the
Sub-Adviser or MFS since 1986. Mr. Stack has been employed as a portfolio
manager and analyst by the Sub-Adviser or MFS since prior to 1991.
MFS also serves as investment adviser to the MFS Family of Funds and to
MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of
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which is a registered investment company established by Sun Life of Canada
(U.S.) in connection with the sale of various fixed/variable annuity contracts.
MFS and the Sub- Adviser also provide investment advice to substantial private
clients.
PLACEMENT AGENT
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. Signature Financial Group (Grand Cayman) Limited
("Signature (Cayman)"), acting as agent for the Portfolio, serves as the
placement agent of interests in the Portfolio. Signature (Cayman) receives no
compensation for serving as placement agent.
ADMINISTRATOR
Pursuant to an Administrative Services Agreement, Signature (Cayman),
whose address is P.O. Box 2494, Elizabethan Square, 2nd Floor, George Town,
Grand Cayman, Cayman Islands, B.W.I., provides the Portfolio with general office
facilities; and supervises the overall administration of the Portfolio
including, among other responsibilities, the preparation and filing of all
documents required for compliance by the Portfolio with applicable laws and
regulations and arranging for the maintenance of books and records of the
Portfolio. For its services to the Portfolio, Signature (Cayman) receives from
the Portfolio fees payable monthly equal on an annual basis (for the Portfolio's
then-current fiscal year) to 0.05% of the Portfolio's average daily net assets.
Signature (Cayman) provides persons satisfactory to the Board of
Trustees to serve as officers of the Portfolio Trust. Such officers, as well as
certain other employees of the Portfolio Trust, may be directors, officers or
employees of Signature (Cayman) or its affiliates.
Signature (Cayman) and its affiliates also serve as administrator of
other investment companies. Signature (Cayman) is a wholly-owned subsidiary of
Signature Financial Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to a fund accounting agreement, Signature Financial Services,
Inc. ("Signature") serves as fund accounting agent to the Portfolio. For its
services to the Portfolio, Signature receives fees payable monthly equal on an
annual basis to $50,000. The address of Signature is 1 First Canadian Place,
Suite 2800, P.O. Box 231, Toronto, Ontario M5X 1C8.
TRANSFER AGENT AND CUSTODIAN
The Portfolio Trust has entered into a Transfer Agency Agreement with
Investors
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Bank & Trust Company ("IBT") pursuant to which IBT acts as transfer agent (the
"Transfer Agent") for the Portfolio. The Transfer Agent maintains an account for
each investor in the Portfolio. Pursuant to a Custodian Agreement, IBT also acts
as the custodian (the "Custodian") of the assets of the Portfolio. The Portfolio
Trust's Custodian Agreement provides that the Custodian may use the services of
sub-custodians with respect to the Portfolio. The Custodian's responsibilities
include safeguarding and controlling the Portfolio's cash and securities, and
handling the receipt and delivery of securities, determining income and
collecting interest on the Portfolio's investments, maintaining books of
original entry for portfolio accounting and other required books and accounts,
and calculating the daily net asset value of the Portfolio. Securities held for
the Portfolio may be deposited into the Federal Reserve-Treasury Department Book
Entry System or the Depositary Trust Company. The Custodian does not determine
the investment policies of the Portfolio or decide which securities will be
purchased or sold for the Portfolio. Assets of the Portfolio may, however, be
invested in securities of the Custodian and the Portfolio Trust may deal with
the Custodian as principal in securities transactions for the Portfolio. For its
services, IBT receives such compensation as may from time to time be agreed upon
by it and the Portfolio Trust.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio Trust is organized as a master trust fund under the laws
of the State of New York. The Portfolio is a separate series of the Portfolio
Trust, which currently has two other series. Investments in a Portfolio
generally may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. The Portfolio Trust's
Declaration of Trust provides that investors in the Portfolio (e.g., other
investment companies, insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of the Portfolio.
However, the risk of an investor incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance existed
and the Portfolio itself was unable to meet its obligations.
Each investor in the Portfolio is entitled to a vote in proportion to
the amount of its investment in the Portfolio. Investors in the Portfolio will
vote as a separate class, except as to voting of Trustees, as otherwise required
by the 1940 Act, or if determined by the Trustees to be a matter which affects
all series. As to any matter which does not affect a series other than the
Portfolio, only investors in that series are entitled to vote. Investments in
the Portfolio have no preemptive or conversion rights and are fully paid and
nonassessable, except as set forth below. The Portfolio is not required and has
no current intention of holding annual meetings of investors, but the Portfolio
will hold special meetings of investors when in the judgment of the Trustees it
is necessary or desirable to submit matters for an investor vote. Changes in
fundamental policies will be submitted to investors for approval. Investors have
under certain circumstances (E.G., upon application and submission of certain
specified documents to the Trustees by a specified percentage of the outstanding
interests in the Portfolio) the right to communicate with other investors in
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connection with requesting a meeting of investors for the purpose of removing
one or more Trustees. Investors also have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified percentage
of the outstanding interests in the Portfolio. Upon liquidation of the
Portfolio, investors would be entitled to share pro rata in the net assets of
the Portfolio available for distribution to investors.
The value of the Portfolio's assets is determined on the basis of such
assets' market or other fair value. See "Purchase, Redemption and Pricing of
Securities Being Offered" in Part B.
The net income and realized capital gains and losses, if any, of the
Portfolio are determined at 4:00 p.m. New York time on each business day. Net
income for days other than business days is determined as of 4:00 p.m. New York
time on the immediately preceding business day. All the net income, as defined
below, and capital gains and losses, if any, so determined are allocated pro
rata among the investors in the Portfolio at the time of such determination. For
this purpose, the net income of the Portfolio (from the time of the immediately
preceding determination thereof) consists of (i) accrued interest, accretion of
discount and amortization of premium on securities held by the Portfolio, less
(ii) all actual and accrued expenses of the Portfolio (including the fees
payable to the Investment Adviser and Administrator of the Portfolio).
The end of the Portfolio's fiscal year is October 31.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio. See Item 20 in Part B.
Investor inquiries may be directed to Signature (Cayman), P.O. Box
2494, Elizabethan Square, 2nd Floor, George Town, Grand Cayman, Cayman Islands,
B.W.I. ((809) 945-1824).
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
See Item 4 above.
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<PAGE>
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined once on each business day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (I.E., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio and Signature (Cayman) reserve the right to cease
accepting investments at any time or to reject any investment order.
Each investor in the Portfolio, may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At 4:00 p.m., New York time on
each Portfolio Business Day, the value of each investor's beneficial interest in
the Portfolio is determined by multiplying the net asset value of the Portfolio
by the percentage, effective for that day, which represents that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals, which are to be effected on that day, are then effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio is
then recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Portfolio as of 4:00
p.m., New York time on such day plus or minus, as the case may be, the amount of
any additions to or withdrawals from the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m., New York time on such day plus or
minus, as the case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined is then applied to determine the value
of the investor's interest in the Portfolio as of 4:00 p.m., New York time on
the following Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in each Portfolio may withdraw all or any portion of its
investment at the net asset value next determined if a withdrawal request in
proper form is furnished by the investor to the Portfolio Trust by the
designated cutoff time for each accredited investor. The proceeds of a reduction
or withdrawal will be paid by the Portfolio Trust in federal funds normally on
the Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio Trust, on behalf of each Portfolio, reserves the right
to pay redemptions in kind. Investments in the Portfolio may not be transferred.
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The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the New York Stock Exchange ("NYSE") is closed (other
than weekends or holidays) or trading on the NYSE is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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RF114A
PART B
SMALL CAP EQUITY PORTFOLIO
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History....................................B-1
Investment Objective and Policies..................................B-1
Management of the Portfolio Trust.................................B-20
Control Persons and Principal Holders
of Securities.....................................................B-23
Investment Advisory and Other Services............................B-23
Brokerage Allocation and Other Practices..........................B-25
Capital Stock and Other Securities................................B-27
Purchase, Redemption and Pricing of
Securities Being Offered..........................................B-30
Tax Status........................................................B-30
Underwriters......................................................B-34
Calculations of Performance Data..................................B-35
Financial Statements..............................................B-35
References in this Part B to "Part A" are to the Part A relating to
Small Cap Equity Portfolio (the "Portfolio"). Unless the context otherwise
requires, terms defined in the Part A have the same meaning in this Part B as in
the Part A.
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
Part A contains additional information about the investment objectives
and policies and management techniques of the Portfolio. This Part B should only
be read in conjunction with Part A of the registration statement.
The following information supplements the discussion in Part A
concerning the investment objective, policies and techniques of the Portfolio.
<PAGE>
EMERGING MARKETS: The Portfolio may invest in Emerging Market
Securities. Such investments entail significant risks as described in Part A
under the caption "Additional Risk Factors -- Emerging Markets" and as more
fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities
held by the Portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Portfolio's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest when due
in accordance with the terms of such debt. A governmental entity's willingness
or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the governmental entity's policy towards the International Monetary Fund,
and the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest averages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Portfolio) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
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The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and tarnish its trade account surplus, if
any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The
securities markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities markets in
the U.S. Disclosure and regulatory standards are in many respects less stringent
than U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to the
volume of trading in the securities of U.S. issuers could cause prices to be
erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market size may
cause prices to be unduly influenced by traders who control large positions.
Adverse publicity and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of portfolio
securities.
DEFAULT; LEGAL RECOURSE -- The Portfolio may have limited legal
recourse in the event of a default with respect to certain debt obligations it
may hold. If the issuer
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of a fixed-income security owned by the Portfolio defaults, that investor may
incur additional expenses to seek recovery. Debt obligations issued by emerging
market governments differ from debt obligations of private entities; remedies
from defaults on debt obligations issued by emerging market governments, unlike
those on private debt, must be pursued in the courts of the defaulting party
itself. The Portfolio's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may be
limited. Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium
and other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested.
FOREIGN CURRENCIES -- Some emerging market countries also may have
managed currencies, which are not free floating against the U.S. dollar. In
addition, there is risk that certain emerging market countries may restrict the
free conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which the Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
REPURCHASE AGREEMENTS: The Portfolio may enter into repurchase
agreements with sellers who are member firms (or a subsidiary thereof) of the
New York Stock Exchange or members of the Federal Reserve System, recognized
domestic or foreign securities dealers or institutions which the Sub-Adviser has
determined to be of comparable creditworthiness. The securities that the
Portfolio purchases and holds have values that are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price may be
higher than the purchase price, the difference being income to the
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Portfolio, or the purchase and repurchase prices may be the same, with interest
at a standard rate due to the Portfolio together with the repurchase price on
repurchase.
The repurchase agreement provides that in the event the seller fails to
pay the price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Portfolio will have the right to liquidate the securities.
If at the time the Portfolio is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Portfolio's exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Portfolio. The Portfolio has adopted
and follows procedures which are intended to minimize the risks of repurchase
agreements. For example, the Portfolio only enters into repurchase agreements
after the Sub-Adviser has determined that the seller is creditworthy, and the
Sub-Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are marked
to market every business day) is required to be greater than the repurchase
price, and the Portfolio has the right to make margin calls at any time if the
value of the securities falls below the agreed upon margin.
LENDING OF PORTFOLIO SECURITIES: The Portfolio may seek to increase its
income by lending portfolio securities to entities deemed creditworthy by the
Sub-Adviser. The Portfolio would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the
Portfolio would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned and would also receive compensation
based on investment of the collateral. The Portfolio would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material matter affecting the investment. As with other extensions
of credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Sub-Adviser to be of good
standing, and when, in the judgment of the Sub-Adviser, the consideration which
could be earned currently from securities loans of this type justifies the
attendant risk. If the Sub-Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 30% of the
value of the Portfolio's total assets.
FOREIGN SECURITIES: The Portfolio may invest in foreign securities as
discussed in Part A. Investments in foreign issues involve considerations and
possible risks not typically associated with investments in securities issued by
domestic companies or with debt securities issued by foreign governments. There
may be less publicly available information about a foreign company than about a
domestic company, and many foreign companies are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
to which U.S. companies are subject. Foreign securities markets, while growing
in volume, have substantially less volume than U.S markets, and securities of
many
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foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. Fixed brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. There is also less government supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the U.S. Investments
in foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractural
obligation and could be subject to extended settlements periods. Futhermore,
dividends from foreign securities may be withheld at the source.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Portfolio may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Portfolio may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Portfolio's custodian in five days. The Portfolio may also
execute trades on the U.S. markets using existing ADRs. A foreign issuer of the
security underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly the
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the issuer
of the underlying security. ADRs may also be subject to exchange rate risks if
the underlying foreign securities are denominated in foreign currency.
OPTIONS ON SECURITIES: The Portfolio may write (sell) covered call and
put options on securities ("Options") and purchase call and put Options. The
Portfolio may write Options for the purpose of attempting to increase its return
and for hedging purposes. In particular, if the Portfolio writes an Option which
expires unexercised or is closed out by the Portfolio at a profit, the Portfolio
retains the premium paid for the Option less related transaction costs, which
increases its gross income and offsets in part the reduced value of the
portfolio security in connection with which the Option is written, or the
increased cost of portfolio securities to be acquired. In contrast, however, if
the price of the security
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underlying the Option moves adversely to the Portfolio's position, the Option
may be exercised and the Portfolio will then be required to purchase or sell the
security at a disadvantageous price, which might only partially be offset by the
amount of the premium.
The Portfolio may write Options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call Option against that security. The exercise price of the call Option the
Portfolio determines to write depends upon the expected price movement of the
underlying security. The exercise price of a call Option may be below
("in-the-money"), equal to ("at- the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Portfolio in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call Options on
the same security, a practice known as a "straddle." By writing a straddle, the
Portfolio undertakes a simultaneous obligation to sell or purchase the same
security in the event that one of the Options is exercised. If the price of the
security subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be exercised
and the Portfolio will be required to sell the underlying security at a below
market price. This loss may be offset, however, in whole or in part, by the
premiums received on the writing of the two Options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the Options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call Option on a portfolio security, the Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the Option. By writing a put
Option, the Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price above its then current market value,
resulting in a loss unless the security subsequently appreciates in value. The
writing of Options will not be undertaken by the Portfolio solely for hedging
purposes, and may involve certain risks which are not present in the case of
hedging transactions. Moreover, even where Options are written for hedging
purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Portfolio may also purchase put and call Options. Put Options are
purchased to hedge against a decline in the value of securities held in the
Portfolio's portfolio. If such a decline occurs, the put Options will permit the
Portfolio to sell the securities underlying such Options at the exercise price,
or to close out the Options at a profit. The Portfolio will
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purchase call Options to hedge against an increase in the price of securities
that the Portfolio anticipates purchasing in the future. If such an increase
occurs, the call Option will permit the Portfolio to purchase the securities
underlying such Option at the exercise price or to close out the Option at a
profit. The premium paid for a call or put Option plus any transaction costs
will reduce the benefit, if any, realized by the Portfolio upon exercise of the
Option, and, unless the price of the underlying security rises or declines
sufficiently, the Option may expire worthless to the Portfolio. In addition, in
the event that the price of the security in connection with which an Option was
purchased moves in a direction favorable to the Portfolio, the benefits realized
by the Portfolio as a result of such favorable movement will be reduced by the
amount of the premium paid for the Option and related transaction costs.
The staff of the SEC has taken the position that purchased
over-the-counter options and certain assets used to cover written
over-the-counter options are illiquid and, therefore, together with other
illiquid securities, cannot exceed a certain percentage of the Portfolio's
assets (the "SEC illiquidity ceiling"). Although the Sub-Adviser disagrees with
this position, the Sub-Adviser intends to limit the Portfolio's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, the Portfolio intends to write over-the-counter options only
with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Portfolio has in place with
such primary dealers will provide that the Portfolio has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Portfolio for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of- the-money. The Portfolio will treat all
or a portion of the formula as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Portfolio may also write over-the-counter
options with non-primary dealers, including foreign dealers, and will treat the
assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
OPTIONS ON STOCK INDICES: The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices ("Options on
Stock Indices"). The Portfolio may cover call Options on Stock Indices by owning
securities whose price changes, in the opinion of the Sub-Adviser, are expected
to be similar to those of the underlying index, or by having an absolute and
immediate right to acquire such securities without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities in its portfolio.
Where the Portfolio covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index and, in
that event, the
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Portfolio will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. The Portfolio may also cover
call options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian. The Portfolio may cover put options on stock indices by
maintaining cash or cash equivalents with a value equal to the exercise price in
a segregated account with its custodian, or else by holding a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held (a) is equal to or greater than the exercise price of the
put written or (b) is less than the exercise price of the put written if the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The Portfolio will receive a premium from writing a put or call option
on a stock index, which increases the Portfolio's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of an
index on which the Portfolio has written a call option falls or remains the
same, the Portfolio will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises, however,
the Portfolio will realize a loss in its call option position, which will reduce
the benefit of any unrealized appreciation in the Portfolio's stock investment.
By writing a put option, the Portfolio assumes the risk of a decline in the
index. To the extent that the price changes of securities owned by the Portfolio
correlate with changes in the value of the index, writing covered put options on
indexes will increase the Portfolio's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
The Portfolio may also purchase put options on stock indices to hedge
their investments against a decline in value. By purchasing a put option on a
stock index, the Portfolio will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this strategy
will largely depend on the accuracy of the correlation between the changes in
value of the index and the changes in value of the Portfolio's security
holdings.
The purchase of call options on stock indices may be used by the
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid if the value of the index
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does not rise. The purchase of call options on stock indices when the Portfolio
is substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
FUTURES CONTRACTS: The Portfolio may enter into contracts for the
purchase or sale for future delivery of securities or foreign currencies or
contracts based on indexes of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the
Portfolio's portfolio securities or adversely affect the prices of long-term
bonds or other securities which the Portfolio intends to purchase at a later
date. Futures Contracts may also be entered into for non-hedging purposes to the
extent permitted by applicable law. A "sale" of a Futures Contract means a
contractual obligation to deliver the securities or foreign currency called for
by the contract at a fixed price at a specified time in the future. A "purchase"
of a Futures Contract means a contractual obligation to acquire the securities
or foreign currency at a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or
currencies, such deliveries are very seldom made. Generally, a Futures Contract
is terminated by entering into an offsetting transaction. The Portfolio will
incur brokerage fees when it purchases and sells Futures Contracts. At the time
such a purchase or sale is made, the Portfolio must allocate cash or securities
as a margin deposit ("initial deposit"). It is expected that the initial deposit
will vary but may be as low as 5% or less of the value of the contract. The
Futures Contract is valued daily thereafter and the payment of "variation
margin" may be required to be paid or received, so that each day the Portfolio
may provide or receive cash that reflects the decline or increase in the value
of the contract.
The purpose of the purchase or sale of a Futures Contract, for hedging
purposes in the case of a portfolio holding long-term debt securities, is to
protect the Portfolio from fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, if the Portfolio owned
long-term bonds and interest rates were expected to increase, the Portfolio
might enter into Futures Contracts for the sale of debt securities. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Portfolio's Futures Contracts should increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. However, since the futures market
is more liquid than the cash market, the use of Futures Contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities. Transactions entered into for
non-hedging purposes include greater risk, including the risk of losses which
are not offset by gains on other portfolio assets.
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Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Portfolio could take advantage
of the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Portfolio could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Portfolio could have the effect of
diluting dividend earnings. To the extent the Portfolio enters into Futures
Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or short-term money market
instruments from the portfolio of the Portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such Futures Contracts, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar
manner, in order to protect against declines in the dollar value of portfolio
securities denominated in foreign currencies, or increases in the dollar value
of securities to be acquired.
A Futures Contract on an index of securities provides for the making
and acceptance of a cash settlement based on changes in value of the underlying
index. The Portfolio may enter into stock index futures contracts in order to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices and for non-hedging purposes to the extent
permitted by applicable law. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or in whole,
offset increases in the cost of securities that investor intends to purchase. As
such acquisitions are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon the termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities. Futures Contracts on other
securities indexes may be used in a similar manner in order to protect the
portfolio from broad fluctuations in securities prices and for non-hedging
purposes to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Portfolio may write and purchase
options to buy or sell Futures Contracts ("Options on Futures Contracts"). The
writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security or currency underlying the Futures
Contract. If the futures price at expiration
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of the option is below the exercise price, the Portfolio will retain the full
amount of the option premium, less related transaction costs, which provides a
partial hedge against any decline that may have occurred in the Portfolio's
portfolio holdings. The writing of a put Option on a Futures Contract
constitutes a partial hedge against increasing prices of the security or
currency underlying the Futures Contract. If the futures price at expiration of
the option is higher than the exercise price, the Portfolio will retain the full
amount of the option premium, less related transaction costs, which provides a
partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Portfolio's losses from existing Options on
Futures Contracts may to some extent be reduced or increased by changes in the
value of portfolio securities.
The Portfolio may purchase Options on Futures Contracts for hedging
purposes as an alternative to purchasing or selling the underlying Futures
Contracts, or for non-hedging purposes to the extent permitted by applicable
law. For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline, a rise in interest
rates or a decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the Portfolio may, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease in
portfolio value occurs, it may be offset, in whole or part, by a profit on the
option. Conversely, where it is projected that the value of securities to be
acquired by the Portfolio will increase prior to acquisition, due to a market
advance, or a decline in interest rates or a rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, the Portfolio may
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Portfolio to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Portfolio to forego all
or a portion of such benefits up to the amount of the premium paid and related
transaction costs. Transactions entered into for non-hedging purposes include
greater risk, including the risk of losses which are not offset by gains on
other portfolio assets.
FORWARD CONTRACTS: The Portfolio may enter into forward foreign
currency exchange contracts for the purchase or sale of a specific currency at a
future date at a price set at the time of the contract (a "Forward Contract").
The Portfolio may enter into Forward Contracts for hedging purposes as well as
for non-hedging purposes. The Portfolio may also enter into Forward Contracts
for "cross hedging" purposes as noted in Part A. Transactions in Forward
Contracts entered into for hedging purposes will include forward purchases or
sales of foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such securities. By entering into such
transactions, however, the Portfolio may be required to forego the benefits of
advantageous changes in exchange rates.
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The Portfolio may also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also involves
increased risk. For example, if the Sub-Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Portfolio may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Portfolio will realize profits which will increase its gross income.
Where exchange rates do not move in the direction or to the extent anticipated,
however, the Portfolio may sustain losses which will reduce its gross income.
Such transactions, therefore, could be considered speculative.
The Portfolio has established procedures consistent with statements by
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. In those instances in
which the Portfolio satisfies this requirement through segregation of assets, it
will maintain, in a segregated account, cash, cash equivalents or high grade
debt securities, which will be marked to market on a daily basis, in an amount
equal to the value of its commitments under Forward Contracts.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
PORTFOLIO'S PORTFOLIO -- The Portfolio's ability effectively to hedge all or a
portion of its portfolio through transactions in options, Futures Contracts, and
Forward Contracts will depend on the degree to which price movements in the
underlying instruments correlate with price movements in the relevant portion of
that investor's portfolio. If the values of portfolio securities being hedged do
not move in the same amount or direction as the instruments underlying options,
Futures Contracts or Forward Contracts traded, the Portfolio's hedging strategy
may not be successful and the Portfolio could sustain losses on its hedging
strategy which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the instrument
underlying an option, Future Contract or Forward Contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transaction had not
been undertaken. In the case of futures and options based on an index of
securities or individual fixed income securities, the portfolio will not
duplicate the components of the index, and in the case of futures and options on
fixed income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such contract. As a result, the
correlation probably will not be exact. Consequently, the Portfolio bears the
risk that the price of the portfolio securities being hedged will not move in
the same amount or direction as the underlying index or obligation. In addition,
where the Portfolio enters into Forward Contracts as a "cross hedge" (i.e., the
purchase or sale of a Forward Contract on one currency to hedge against risk of
loss arising from changes in value of a second currency), the Portfolio incurs
the risk of imperfect correlation between changes in the values of the two
currencies, which could result in losses.
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The correlation between prices of securities and prices of options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the
Sub-Adviser may still not result in a successful transaction. The trading of
Options on Futures Contracts also entails the risk that changes in the value of
the underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the option, Futures Contract or Forward
Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also
entails the risk that, if the Sub-Adviser's judgment as to the general direction
of interest or exchange rates is incorrect, the Portfolio's overall performance
may be poorer than if it had not entered into any such contract. For example, if
the Portfolio has hedged against the possibility of an increase in interest
rates, and rates instead decline, the Portfolio will lose part or all of the
benefit of the increased value of the securities being hedged, and may be
required to meet ongoing daily variation margin payments.
It should be noted that the Portfolio may purchase and write Options
not only for hedging purposes, but also for the purpose of attempting to
increase its return. As a result, the Portfolio will incur the risk that losses
on such transactions will not be offset by corresponding increases in the value
of portfolio securities or decreases in the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract or Option
on a Futures Contract can only be terminated by entering into a closing purchase
or sale transaction, which requires a secondary market for such instruments on
the exchange on which the initial transaction was entered into. If no such
market exists, it may not be possible to close out a position, and the Portfolio
could be required to purchase or sell the underlying instrument or meet ongoing
variation margin requirements. The inability to close out option or futures
positions also could have an adverse effect on the Portfolio's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract
may be adversely affected by "daily price fluctuation limits," established by
the exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Portfolio from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures
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Contracts is subject to the risk of trading halts, suspensions, exchange or
clearing corporation equipment failures, government intervention, insolvency of
a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of
an Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available
information on which the Portfolio will make trading decisions concerning
transactions related to foreign currencies or foreign securities may not be as
complete as the comparable data on which the Portfolio makes investment and
trading decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, and the markets for foreign
securities as well as markets in foreign countries may be operating during
non-business hours in the United States, events could occur in such markets
which would not be reflected until the following day, thereby rendering it more
difficult for the Portfolio to respond in a timely manner.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position, unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. This could make it difficult or impossible to enter into a desired
transaction or liquidate open positions, and could therefore result in trading
losses. Further, over-the-counter transactions are not subject to the
performance guarantee of an exchange clearing house and the Portfolio will
therefore be subject to the risk of default by, or the bankruptcy of, a
financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be
conducted in the same manner as those entered into on United States exchanges,
and may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may be
present in connection with such transactions. Moreover, the SEC or the
Commodities Futures Trading Commission ("CFTC") has jurisdiction over the
trading in the United States of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Portfolio to enter into the
trading strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Portfolio may
receive interest or dividend payments, or the proceeds of the sale or redemption
of such securities, in
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foreign currencies. The Portfolio may also be required to receive delivery of
the foreign currencies underlying options on foreign currencies or Forward
Contracts it has entered into. This could occur, for example, if an option
written by the Portfolio is exercised or the Portfolio is unable to close out a
Forward Contract it has entered into. In addition, the Portfolio may elect to
take delivery of such currencies. Under such circumstances, the Portfolio may
promptly convert the foreign currencies into dollars at the then current
exchange rate. Alternatively, the Portfolio may hold such currencies for an
indefinite period of time if the Sub-Adviser believes that the exchange rate at
the time of delivery is unfavorable or if, for any other reason, the Sub-Adviser
anticipates favorable movements in such rates.
While the holding of currencies will permit the Portfolio to take
advantage of favorable movements in the applicable exchange rate, it also
exposes the Portfolio to risk of loss if such rates move in a direction adverse
to the Portfolio's position. Such losses could also adversely affect the
Portfolio's hedging strategies. Certain tax requirements may limit the extent to
which the Portfolio will be able to hold currencies.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Portfolio will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Portfolio enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Portfolio's assets. In addition, the Portfolio must comply with the requirements
of various state securities laws in connection with such transactions.
The Portfolio has adopted the additional policy that it will not enter
into a Futures Contract if, immediately thereafter, the value of securities and
other obligations underlying all such Futures Contracts would exceed 50% of the
value of the Portfolio's total assets. Moreover, the Portfolio will not purchase
put and call options if, as a result, more than 5% of its total assets would be
invested in such options.
When the Portfolio purchases a Futures Contract, an amount of cash and
cash equivalents will be deposited in a segregated account with the Portfolio's
custodian so that the amount so segregated will at all times equal the value of
the Futures Contract, thereby insuring that the leveraging effect of such
Futures is minimized.
INVESTMENT RESTRICTIONS
The Portfolio Trust (with respect to the Portfolio) has adopted the
following investment restrictions which may not be changed without approval by
holders of a "majority of the outstanding voting securities" of the Portfolio,
which as used in this Part B means the vote of the lesser of (i) 67% or more of
the outstanding "voting securities" of the Portfolio
B-16
<PAGE>
present at a meeting, if the holders of more than 50% of the outstanding "voting
securities" are present or represented by proxy, or (ii) more than 50% of the
outstanding "voting securities". The term "voting securities" as used in this
paragraph has the same meaning as in the 1940 Act.
As a matter of fundamental policy, the Portfolio will not:
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money (including through reverse
repurchase agreements, forward roll transactions involving mortgage backed
securities or other investment techniques entered into for the purpose of
leverage), and except that it may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "State and Federal Restrictions"
below;
(2) underwrite securities issued by other persons except insofar as the
Portfolios may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed 30%
of the Portfolio's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for the Portfolio's portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Portfolio's investment objective(s), up to 25% of its total assets may be
invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
B-17
<PAGE>
(7) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government securities) of any one
issuer.
The Portfolio is also subject to the following restrictions which may
be changed by the Board of Trustees without investor approval.
As a matter of non-fundamental policy, the Portfolio will not:
(i) borrow money (including through reverse repurchase agreements or
forward roll transactions involving mortgage backed securities or similar
investment techniques entered into for leveraging purposes), except that the
Portfolio may borrow for temporary or emergency purposes up to 10% of its total
assets; provided, however, that no Portfolio may purchase any security while
outstanding borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, and reverse repurchase agreements are
not considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) to be invested in the securities of such
issuers; (b) more than 5% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer to be held
for the Portfolio; provided further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any securities of any open-end
investment company unless the Portfolio (1) waives the
B-18
<PAGE>
investment advisory fee, with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in connection with the
investment;
(vii) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable;
(viii) invest more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) in (a) securities that are restricted as to
resale under the 1933 Act, and (b) securities that are issued by issuers which
(including predecessors) have been in operation less than three years (other
than U.S. Government securities), provided, however, that no more than 5% of the
Portfolio's total assets are invested in securities issued by issuers which
(including predecessors) have been in operation less than three years;
(ix) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not be
subject to this restriction;
(x) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is an officer or partner of
the Advisor, if after the purchase of the securities of such issuer for the
Portfolio one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value;
(xi) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the time of purchase),
but not more than 2% of the Portfolio's net assets may be invested in warrants
not listed on the New York Stock Exchange Inc.
("NYSE") or the American Stock Exchange;
(xii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more than 10% of the
Portfolio's net assets (taken at market value) is represented by such
securities, or securities convertible into or exchangeable for such securities,
at any one time (the Portfolios have no current intention to engage in short
selling);
(xiii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within the
investment policies of the Portfolio and the option is issued by the Options
Clearing Corporation, except for put and
B-19
<PAGE>
call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations underlying the
puts determined as of the date the options are sold shall not exceed 50% of the
Portfolio's net assets; (c) the securities subject to the exercise of the call
written by the Portfolio must be owned by the Portfolio at the time the call is
sold and must continue to be owned by the Portfolio until the call has been
exercised, has lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's obligation to
deliver securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio establishes a segregated account with its custodian
consisting of cash or short-term U.S. Government securities equal in value to
the amount the Portfolio will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the
Portfolio has purchased a closing put, which is a put of the same series as the
one previously written); and
(xiv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the options or
futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net assets; and
(c) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Portfolio's total assets.
PERCENTAGE AND RATING RESTRICTIONS
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in Part A is adhered to at
the time an investment is made or assets are so utilized, a later change in
percentage resulting from changes in the value of the securities held by the
Portfolio or a later change in the rating of a security held by the Portfolio is
not considered a violation of policy; however, the Sub-Adviser will consider
such change in its determination of whether to hold the security.
ITEM 14. MANAGEMENT OF THE PORTFOLIO TRUST.
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the
Portfolio Trust for the past five years are listed below. Asterisks indicate
that those Trustees and officers who are "interested persons" (as defined in the
1940 Act) of the Portfolio Trust. The address of each, unless otherwise
indicated, is 6 St. James Avenue, Boston, Massachusetts 02116.
B-20
<PAGE>
FREDERICK C. CHEN, TRUSTEE, 126 Butternut Hollow Road, Greenwich, Connecticut
06830 - Management Consultant.
ALAN S. PARSOW*, TRUSTEE, 2222 Skyline Drive, Elkhorn, Nebraska 68022 - General
Partner of Parsow Partnership, Ltd. (investments).
LARRY M. ROBBINS, TRUSTEE, Wharton Communication Program, University of
Pennsylvania, 336 Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104
- - Director of the Wharton Communication Program and Adjunct Professor of
Management at the Wharton School of the University of Pennsylvania.
MICHAEL SEELY, TRUSTEE, 405 Lexington Avenue, Suite 909, New York, New York
10174 - President of Investor Access Corporation (investor relations consulting
firm).
PHILIP W. COOLIDGE*, PRESIDENT, Chairman and Chief Executive Officer, Signature
Financial Group, Inc. ("SFG"); Chairman and Chief Executive Officer, Signature
Broker- Dealer Services, Inc. ("SBDS") (since April, 1989); Chairman, Chief
Executive Officer and President, Signature (since May, 1993); Director,
Signature (Cayman) (since March, 1992).
JOHN R. ELDER*, TREASURER, Vice President, SFG (since April, 1995); Treasurer,
Phoenix Family of Mutual Funds (prior to April, 1995).
LINDA T. GIBSON*, ASSISTANT SECRETARY, Legal Counsel and Assistant Secretary,
SFG (since June, 1991); Assistant Secretary, SBDS (since October, 1992);
Assistant Secretary, Signature (since May, 1993); law student, Boston University
School of Law (prior to May, 1992).
JAMES E. HOOLAHAN*, VICE PRESIDENT, Senior Vice President, SFG (since December,
1989).
SUSAN JAKUBOSKI*, ASSISTANT SECRETARY AND ASSISTANT TREASURER, P.O. Box 2494,
Elizabethan Square, George Town, Grand Cayman, Cayman Islands, B.W.I.; Manager
and Senior Fund Administrator, SFG and Signature (Cayman) (since August 1994);
Assistant Treasurer, SBDS (since September 1994); Fund Compliance Administrator,
Concord Financial Group, Inc. (from November 1990 to August 1994).
THOMAS M. LENZ*, SECRETARY, Senior Vice President and Associate General Counsel,
SFG (since November, 1989); Assistant Secretary, SBDS (since February, 1991);
Assistant Secretary, Signature (since May, 1993).
MOLLY S. MUGLER*, ASSISTANT SECRETARY, Legal Counsel and Assistant Secretary,
SFG; Assistant Secretary, SBDS (since April, 1989); Assistant Secretary,
Signature (since May, 1993).
B-21
<PAGE>
BARBARA M. O'DETTE*, ASSISTANT TREASURER, Assistant Treasurer, SFG; Assistant
Treasurer, SBDS (since April, 1989); Assistant Treasurer, Signature (since May,
1993).
ANDRES E. SALDANA*, ASSISTANT SECRETARY, Legal Counsel and Assistant Secretary,
SFG (since November, 1992); Assistant Secretary, SBDS (since September, 1993);
Assistant Secretary, Signature (since May, 1993); Attorney, Ropes & Gray
(September, 1990 to November, 1992).
Messrs. Coolidge, Elder, Lenz and Saldana and Mss. Gibson, Jakuboski, Mugler and
O'Dette are also Trustees and/or officers of certain other investment companies
of which Signature (Cayman) or an affiliate is the administrator.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as Part Annual From Fund
Name of Compensation of Portfolio Benefits Upon Complex** Paid
TRUSTEE FROM PORTFOLIO* EXPENSES RETIREMENT TO TRUSTEES
<S> <C> <C> <C> <C>
Frederick C. Chen $1,950 none none $8,600
Alan S. Parsow $1,950 none none $8,600
Larry M. Robbins $1,950 none none $8,600
Michael Seely $1,950 none none $8,600
</TABLE>
*Estimated for fiscal year ending October 31, 1996. The Trustees who
are not "interested persons" (as defined in the 1940 Act) of Republic Funds,
Republic Advisor Funds Trust and the Portfolio Trust will receive an annual
retainer of $3,600 and a fee of $1,000 for each meeting of the Board of Trustees
or committee thereof attended.
**The Fund Complex consists of Republic Funds, Republic Advisor Funds
Trust and the Portfolio Trust. Total compensation reflects an estimate of the
fees to be received by the Trustees from Republic Funds, Republic Advisor Funds
Trust and the Portfolio Trust for the fiscal year ending October 31, 1996.
B-22
<PAGE>
As of June 28, 1996, the Trustees and officers of the Portfolio Trust,
as a group, owned less than 1% of the outstanding beneficial interests of the
Portfolio.
The Portfolio Trust's Declaration of Trust provides that it will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
officers with the Portfolio Trust, unless, as to liability to the Portfolio
Trust or its investors, it is finally adjudicated that they engaged in wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in their offices, or unless with respect to any other matter it is
finally adjudicated that they did not act in good faith in the reasonable belief
that their actions were in the best interests of the Portfolio Trust. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 28, 1996, there were no holders of beneficial interests in
the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER
Republic is the investment manager to the Portfolio pursuant to an
investment management agreement (the "Investment Management Contract") with the
Portfolio Trust. For its services, the Manager is paid a fee by the Portfolio,
computed daily and paid monthly, equal on an annual basis to 0.25% of the
Portfolio's average daily net assets.
The Investment Management Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved annually (i) by the
holders of a majority of the outstanding voting securities of the Portfolio or
by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Management
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Management Contract may be terminated with respect to the
Portfolio without penalty by either party on 60 days' written notice and will
terminate automatically if assigned.
Republic is a wholly-owned subsidiary of Republic New York Corporation,
a registered bank holding company. No securities or instruments issued by
Republic New York Corporation or Republic will be purchased for the Portfolio.
B-23
<PAGE>
Republic complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. Republic, in accordance with federal banking
laws, may not purchase for its own account securities of any investment company
the investment adviser of which it controls, extend credit to any such
investment company, or accept the securities of any such investment company as
collateral for a loan to purchase such securities. Moreover, Republic, its
officers and employees do not express any opinion with respect to the
advisability of any purchase of such securities.
The investment advisory services of Republic to the Portfolio are not
exclusive under the terms of the Investment Management Contract. Republic is
free to and does render investment advisory services to others.
SUB-ADVISER
MFS Asset Management, Inc., as the Portfolio's Sub-Adviser, is
responsible for the investment management of the Portfolio's assets, including
making investment decisions and placing orders for the purchase and sale of
securities for the Portfolio directly with the issuers or with brokers or
dealers selected by the Sub-Adviser or Republic in its discretion. See
"Portfolio Transactions." The Sub-Adviser also furnishes to the Board of
Trustees of the Portfolio Trust, which has overall responsibility for the
0business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
The Sub-Adviser, together with its parent company, Massachusetts
Financial Services Company ("MFS"), and their predecessor organizations, has a
history of money management dating from 1924. MFS is a wholly owned subsidiary
of Sun Life Assurance Company of Canada (U.S.) which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada. Part A contains information
with respect to the management of the Sub-Adviser and other investment companies
for which the Sub- Adviser of MFS serves as investment adviser.
For its services, the Sub-Adviser receives from the Portfolio a fee,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.75% of assets up to $50 million and 0.60% of assets in
excess of $50 million.
B-24
<PAGE>
The investment advisory services of the Sub-Adviser to the Portfolio
are not exclusive under the terms of the Sub-Advisory Agreement. The Sub-Adviser
is free to and does render investment advisory services to others.
ADMINISTRATOR
The Administrative Services Agreement is terminable with respect to the
Portfolio, without penalty at any time by vote of a majority of the Trustees, or
by Signature (Cayman), upon not less than 60 days' written notice to the
Portfolio Trust. The Agreement provides that neither the Administrator nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the administration of the Portfolio, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Administrative Services Agreement.
FUND ACCOUNTING AGENT
Pursuant to a fund accounting agreement, Signature serves as fund
accounting agent to the Portfolio. For its services to the Portfolio, Signature
receives fees payable monthly equal on an annual basis to $50,000.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT") serves as Custodian and Transfer
Agent for the Portfolio pursuant to a Custodian Agreement and a Transfer Agency
Agreement, respectively. The Custodian may use the services of sub-custodians
with respect to the Portfolio.
INDEPENDENT AUDITORS
The Portfolio Trust has appointed KPMG Peat Marwick as its independent
accountants to audit the Portfolio's financial statements for the fiscal year
ending October 31, 1996.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005,
acts as counsel to the Portfolio Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES
Specific decisions to purchase or sell securities for the Portfolio are
made by employees of the Sub-Adviser who are appointed and supervised by its
senior officers.
B-25
<PAGE>
Changes in the Portfolio's investments are reviewed by its Board of Trustees.
The Portfolio's portfolio manager or management committee may serve other
clients of the Sub-Adviser or any subsidiary of the Sub-Adviser in a similar
capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Sub-Adviser has complete freedom as
to the markets in and broker-dealers through which it seeks this result. In the
United States and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Sub-Adviser normally
seeks to deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject to the
requirement of seeking execution at the best available price, securities may, as
authorized by each Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Sub-Adviser. At present no arrangements for the recapture of commission payments
are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees may determine, the Sub-Adviser may
consider sales of shares of certain investment company clients of MFS Fund
Distributors, Inc. the principal underwriter of certain funds in the MFS Family
of Funds, as a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934, the Sub-Adviser may cause the Portfolio to
pay a broker-dealer which provides brokerage and research services to the
Sub-Adviser an amount of commission for effecting a securities transaction for
the Portfolio in excess of the amount other broker-dealers would have charged
for the transaction if the Sub- Adviser determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or their respective overall responsibilities to
the Portfolio or to their other clients. Not all of such services are useful or
of value in advising the Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
B-26
<PAGE>
Although commissions paid on every transaction will, in the judgment of
the Sub- Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Sub-Adviser's other clients in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided such Research.
In certain instances there may be securities which are suitable for the
Portfolio as well as for the portfolio of one or more of the other clients of
the Sub-Adviser or any parent company or affiliate of the Sub-Adviser.
Investment decisions for the Portfolio and for such other clients are made with
a view to achieving their respective investment objectives. It may develop that
a particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Sub-Adviser to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as the Portfolio is concerned. In other
cases, however, the Sub-Adviser believes that the Portfolio's ability to
participate in volume transactions will produce better executions for the
Portfolio.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a series of Republic Portfolios (the "Portfolio
Trust"), which is organized as a trust under the laws of the State of New York.
Under the Portfolio Trust' Declaration of Trust, the Trustees are authorized to
issue beneficial interests in one or more series (each a "Series"), including
the Portfolio. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), subject,
however, to indemnification by the Portfolio Trust in the event that there is
imposed upon an investor a greater portion of the liabilities and obligations of
the Series than its proportionate beneficial interest in the Series. The
Declaration of
B-27
<PAGE>
Trust also provides that the Portfolio Trust shall maintain appropriate
insurance (for example, a fidelity bond and errors and omissions insurance) for
the protection of the Portfolio Trust, its investors, Trustees, officers,
employees and agents, and covering possible tort and other liabilities. Thus,
the risk of an investor incurring financial loss on account of investor
liability is limited to circumstances in which both inadequate insurance existed
and the Portfolio Trust itself was unable to meet its obligations.
Investors in a Series are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Series only. Upon liquidation or dissolution of a Series, investors are entitled
to share pro rata in that Series' (and no other Series) net assets available for
distribution to its investors. The Portfolio Trust reserves the right to create
and issue additional Series of beneficial interests, in which case the
beneficial interests in each new Series would participate equally in the
earnings, dividends and assets of that particular Series only (and no other
Series). Any property of the Portfolio Trust is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by the Portfolio Trust for the issuance and sale of beneficial interests in a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings and proceeds thereof, and any funds
or payments derived from any reinvestment of such proceeds, is held by the
Trustees in a separate subtrust (a Series) for the benefit of investors in that
Series and irrevocably belongs to that series for all purposes. Neither a Series
nor investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred. Certificates representing an
investor's beneficial interest in a Series are issued only upon the written
request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting of Trustees, as otherwise required by the 1940 Act, or if determined by
the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio Trust is not
required and has no current intention of holding annual meetings of investors,
but the Portfolio Trust will hold special meetings of investors when in the
judgment of the Portfolio Trust' Trustees it is necessary or desirable to submit
matters for an investor vote. The Portfolio Trust' Declaration of Trust may be
amended without the vote of investors, except that investors have the right to
approve by affirmative majority vote any amendment which would affect their
voting rights, alter the procedures to amend the Declaration of Trust of the
Portfolio Trust, or as required by law or by the Portfolio Trust' registration
statement, or as submitted to
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<PAGE>
them by the Trustees. Any amendment submitted to investors which the Trustees
determine would affect the investors of any Series shall be authorized by vote
of the investors of such Series and no vote will be required of investors in a
Series not affected.
The Portfolio Trust or any Series (including the Portfolio) may enter
into a merger or consolidation, or sell all or substantially all of its assets,
if approved (a) at a meeting of investors by investors representing the lesser
of (i) 67% or more of the beneficial interests in the affected Series present of
represented at such meeting, if investors in more than 50% of all such
beneficial interests are present or represented by proxy, or (ii) more than 50%
of all such beneficial interests, or (b) by an instrument in writing without a
meeting, consented to by investors representing not less than a majority of the
beneficial interests in the affected Series. The Portfolio Trust or any Series
(including the Portfolio) may also be terminated (i) upon liquidation and
distribution of its assets if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to the amount of its
investment), (ii) by the Trustees by written notice to its investors, or (iii)
upon the bankruptcy or expulsion of an investor in the affected Series, unless
the investors in such Series, by majority vote, agree to continue the Series.
The Portfolio Trust will be dissolved upon the dissolution of the last remaining
Series.
The Portfolio Trust' Declaration of Trust provides that obligations of
the Portfolio Trust are not binding upon the Trustees individually but only upon
the property of the Portfolio Trust and that the Trustees will not be liable for
any action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of wilful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
The Portfolio Trust' Declaration of Trust further provides that it will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio Trust, unless, as to liability to the Portfolio Trust
or its investors, it is finally adjudicated that they engaged in wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in their offices, or unless with respect to any other matter it is
finally adjudicated that they did not act in good faith in the reasonable belief
that their actions were in the best interests of the Portfolio Trust. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
B-29
<PAGE>
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 in Part A of this
Registration Statement.
The net asset value of the Portfolio is determined on each day on which
the New York Stock Exchange ("NYSE") is open for trading. As of the date of this
Part B, the NYSE is open every weekday except for the days on which the
following holidays are observed: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Sub-Adviser typically completes its trading on behalf of the
Portfolio in various markets before 4:00 p.m., and the value of portfolio
securities is determined when the primary market for those securities closes for
the day. Foreign currency exchange rates are also determined prior to 4:00 p.m.
However, if extraordinary events occur that are expected to affect the value of
a portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolio Trust.
Subject to the Portfolio Trust's compliance with applicable
regulations, the Portfolio Trust on behalf of the Portfolio has reserved the
right to pay the redemption or repurchase price of Shares, either totally or
partially, by a distribution in kind of portfolio securities from the Portfolio
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
Shares being sold. If an investor received a distribution in kind, the investor
could incur brokerage or other charges in converting the securities to cash. The
Portfolio Trust will redeem an investor's shares in kind only if it has received
a redemption in kind from the Portfolio and therefore investors that receive
redemptions in kind will receive securities of the Portfolio. The Portfolio has
advised the Portfolio Trust that the Portfolio will not redeem in kind except in
circumstances in which the investor is permitted to redeem in kind.
ITEM 20. TAX STATUS.
The Portfolio Trust is organized as trust under the laws of the State
of New York. The Portfolio is not subject to any income or franchise tax in the
State of New York or the Commonwealth of Massachusetts. However each investor in
the Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio Trust) of the Portfolio's ordinary income
and capital gain in determining its income tax liability. The determination of
such share will be made in accordance with the Code, and regulations promulgated
thereunder.
B-30
<PAGE>
Each year, in order to qualify as a "regulated investment company"
("RIC") under the Code, the Portfolio must distribute at least 90% of the
Portfolio's investment company taxable income (which includes, among other
items, interest, dividends and the excess of net short-term capital gains over
net long-term capital losses) to investors, and the Portfolio must meet certain
diversification of assets, source of income, and other requirements. If the
Portfolio does not so qualify, an investor will be taxed as an ordinary
corporation.
The Portfolio Trust intends to apply to the Internal Revenue Service
for rulings, including, among others, rulings to the effect that (1) the
Portfolio will be treated for federal income tax purposes as a partnership and
(2) for purposes of determining whether each investor satisfies the income and
diversification requirements to maintain its status as a RIC, each investor in
the Portfolio will be deemed to own a proportionate share of the Portfolio's
income attributable to that share. While the IRS has issued substantially
similar rulings in the past, and Signature (Cayman) anticipates that the
Portfolio Trust will receive the rulings it seeks, the IRS has complete
discretion in granting rulings and complete assurance cannot be given that such
rulings will be obtained. The Portfolio Trust has advised investors that it
intends to conduct the Portfolio's operations so as to enable the investor to
satisfy those requirements.
The Portfolio, since it is taxed as a partnership, is not subject to
federal income taxation. Instead, an investor must take into account, in
computing its federal income tax liability, its share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether it has received any cash distributions from the Portfolio.
Withdrawals by investors from the Portfolio generally will not result
in their recognizing any gain or loss for federal income tax purposes, except
that (1) gain will be recognized to the extent that any cash distributed exceeds
the basis of the investor's interest in the Portfolio prior to the distribution,
(2) income or gain will be realized if the withdrawal is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, and (3) loss will be
recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of an
investor's interest in the Portfolio generally equals the amount of cash and the
basis of any property that the investor invests in the Portfolio, increased by
the investor's share of income from the Portfolio and decreased by the amount of
any cash distributions and the basis of any property distributed from the
Portfolio.
There are certain tax issues that will be relevant to only certain of
the investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to the Portfolio. It is
intended that such segregated asset accounts will be able to satisfy
diversification requirements applicable to them and that such contributions of
assets will not be taxable provided certain requirements are met.
B-31
<PAGE>
Such investors are advised to consult their own tax advisors as to the tax
consequences of an investment in the Portfolio.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (I.E., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, investors may be required to pay dividends based on anticipated
earnings.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
OPTIONS, FUTURES AND FORWARD CONTRACTS
Some of the options, futures contracts and forward contracts entered
into by the Portfolio may be "Section 1256 contracts." Section 1256 contracts
held by the Portfolio at the end of its taxable year (and, for purposes of the
4% excise tax, on certain other dates as prescribed under the Code) are
"marked-to-market" with unrealized gains or losses being treated as though they
were realized. Any gains or losses, including "marked-to-market" gains or
losses, on Section 1256 contracts are generally 60% long-term and 40% short-term
capital gains or losses ("60/40") although all foreign currency gains and losses
from such contracts may be treated as ordinary in character absent a special
election.
Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Portfolio may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gain or loss realized by the Portfolio. In addition, losses
realized by the Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken
B-32
<PAGE>
into account in calculating the taxable income for the taxable year in which
such losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures and forward contracts to the Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
the Portfolio. Short-term gain is taxed as ordinary income when distributed to
investors.
The Portfolio may make one or more of the elections available under the
Code which are applicable to straddles. If the Portfolio makes any of the
elections, the amount, character, and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to investors, and which will be taxed to investors as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The 30% limit on gains from the disposition of certain options, futures
and forward contracts held less than three months, and the qualifying income and
diversification requirements applicable to the Portfolio assets, may limit the
extent to which the Portfolio will be able to engage in these transactions.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
The Portfolio may invest in shares of foreign corporations (through
ADRs) which may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Portfolio receives a
so-called "excess distribution" with respect to PFIC stock, the investor may be
subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed to investors. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Portfolio held the PFIC shares. Investors will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior investor taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
B-33
<PAGE>
An investor may be eligible to elect alternative tax treatment with
respect to PFIC shares held by the Portfolio. Under an election that currently
is available in some circumstances, the Fund generally would be required to
include in its gross income its share of the earnings of a PFIC on a current
basis, regardless of whether distributions are received from the PFIC in a given
year. If this election were made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market the Portfolio's
PFIC shares at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund could, in
limited circumstances, incur nondeductible interest charges. The Fund's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC shares of the Portfolio.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC shares.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or loss. Similarly, in
disposing of debt securities denominated in foreign currencies and certain other
foreign currency contracts, gains or losses attributable to fluctuations in the
value of a foreign currency between the date the security or contract is
acquired and the date it is disposed of are also usually treated as ordinary
income or loss. Under Section 988 of the Code, these gains or losses may
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to shareholders as ordinary income.
The information above is only a summary of some of the tax
considerations affecting the Portfolio and its investors. Income and capital
gain allocated by the Portfolio may also be subject to state, local, foreign or
other taxes not discussed above. A prospective investor may wish to consult a
tax advisor to determine the suitability of an investment in the Portfolio based
on the prospective investor's tax situation.
ITEM 21. UNDERWRITERS.
The exclusive placement agent of the Portfolio Trust is Signature
(Cayman), which receives no additional compensation for serving in this
capacity. Other investment
B-34
<PAGE>
companies, insurance company separate accounts, common and commingled trust
funds and similar organizations and entities may continuously invest in the
Portfolio.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
Not applicable.
RF114
B-35
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are incorporated by reference into Item
23 of Part B:
FIXED INCOME PORTFOLIO
Schedule of Investments, October 31, 1995
Statement of Assets and Liabilities, October 31, 1995
Statement of Operations for the Period January 9, 1995 (commencement of
operations) through October 31, 1995
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements, October 31, 1995
Schedule of Investments, April 30, 1996 (unaudited)
Statement of Assets and Liabilities, April 30, 1996 (unaudited)
Statement of Operations for the Period November 1, 1995 through
April 30, 1996 (unaudited)
Statement of Changes in Net Assets (unaudited)
Financial Highlights (unaudited)
Notes to Financial Statements, April 30, 1996 (unaudited)
INTERNATIONAL EQUITY PORTFOLIO
Schedule of Investments, October 31, 1995
Statement of Assets and Liabilities, October 31, 1995
Statement of Operations for the Period January 9, 1995 (commencement of
operations) through October 31, 1995
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements, October 31, 1995
Schedule of Investments, April 30, 1996 (unaudited)
Statement of Assets and Liabilities, April 30, 1996 (unaudited)
Statement of Operations for the Period November 1, 1995 through
April 30, 1996 (unaudited)
Statement of Changes in Net Assets (unaudited)
Financial Highlights (unaudited)
Notes to Financial Statements, April 30, 1996
(b) Exhibits.
1. Declaration of Trust of the Registrant.1
2. By-Laws of the Registrant.1
5(a). Master Investment Management Contract between Republic Portfolios and
Republic National Bank of New York ("Republic Bank").1
5(b). Subadvisory Agreement between Republic Bank and Miller, Anderson &
Sherrerd with respect to Fixed Income Portfolio.1
5(c). Subadvisory Agreement between Republic Bank and Capital Guardian Trust
Company with respect to International Equity Portfolio.1
5(d). Form of Subadvisory Agreement between Republic Bank and Massachusetts
Financial Services Company with respect to Small Cap Equity Portfolio.3
6. Exclusive Placement Agent Agreement between Republic Portfolios and Signature
Financial Group (Grand Cayman) Limited ("Signature (Cayman)").2
8. Custodian Agreement between Republic Portfolios and Investors Bank & Trust
Company.2
9. Administrative Services Agreement between Republic Portfolios and Signature
(Cayman).2
9(a). Hub and Spoke(R) Processing and Fund Accounting Agreement between Republic
Portfolios and Signature Financial Services, Inc.2
13(a). Initial investor representation letter regarding International Equity
Portfolio.2
13(b). Initial investor representation letter regarding Fixed Income Portfolio.2
17. Financial Data Schedules.3
- ----------------------
1. Incorporated herein by reference from amendment No. 1 to the Registrant's
registration statement (the "Registration Statement") on Form N-1A (File No.
811-8928) as filed with the Securities and Exchange Commission (the "SEC") on
February 26, 1996.
2. Incorporated herein by reference from the Registration Statement as filed
with the SEC on December 21, 1994.
3. Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of June 25, 1996, the number of record holders of each Portfolio
was as follows:
Fixed Income Portfolio: 2
International Equity Portfolio: 2
Small Cap Equity Portfolio: none
ITEM 27. INDEMNIFICATION
Reference is hereby made to Article IV of the Registrant's Declaration
of Trust. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees or officers of the
Registrant by the Registrant pursuant to the Declaration of Trust of otherwise,
the Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Investment Company Act of 1940, as amended (the "1940 Act") and, therefore, is
unenforceable.
A claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees or officers
of the Registrant in connection with the successful defense of any act, suit or
proceeding) is asserted by such trustees or officers in connection with the
shares being registered, the Registrant will, unless in the opinion of its
Counsel, the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1940 Act and will be governed by the
final adjudication of such issues.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Republic National Bank of New York ("Republic") acts as investment
adviser to Fixed Income Portfolio, International Equity Portfolio and Small Cap
Equity Portfolio, and is a subsidiary of Republic New York Corporation ("RNYC"),
452 Fifth Avenue, New York, New York 10018, a registered bank holding company.
Republic's directors and principal executive officers, and their business and
other connections for at least the past two years, are as follows (unless
otherwise noted by footnote, the address of all directors and officers is 452
Fifth Avenue, New York, New York 10018):
NAME -- BUSINESS AND OTHER CONNECTIONS
KURT ANDERSEN
Vice Chairman and a Director of Republic New York Corporation ("RNYC") and
Republic Bank.
ANTHONY G. CHAPPELL
Executive Vice President and Director of Republic Bank.
CYRIL S. DWEK
Vice Chairman of the Board and Director of Republic Bank and RNYC.
ERNEST GINSBERG
Vice Chairman of the Board and Director of RNYC and Republic Bank.
NATHAN HASSON
Vice Chairman of the Board, Director and Treasurer of Republic Bank and
Vice Chairman of the Board and Director of RNYC.
JEFFREY C. KEIL
President and Director of RNYC and Vice Chairman of the Board and
Director of Republic Bank.
PETER KIMMELMAN
A private investor and a Director of RNYC and Republic Bank.(1)
PAUL L. LEE
Executive Vice President and Director of Republic Bank;
Executive Vice President and General Counsel of RNYC.
LEONARD LIEBERMAN
Director of various companies, including Consolidated Cigar Corporation and
Outlet Communications, Inc.; Director of RNYC and Republic Bank.
WILLIAM C. MACMILLEN, JR.
President, William C. MacMillen & Co., Inc. (Investment Banking) and
a Director of RNYC and Republic Bank.(2)
PETER J. MANSBACH
Director and Chairman of the Executive Committee of Republic Bank and RNYC.
MARTIN F. MERTZ
Director of RNYC and Republic Bank.
CHARLES G. MEYER, JR.
President of Cord Meyer Development Co. and Director of Republic Bank.(3)
JAMES L. MORICE
Partner in the management consulting and executive search firm of
Mirtz Morice, Inc. and a Director of RNYC and Republic Bank.(4)
E. DANIEL MORRIS
President, Corsair Capital Corporation and Director of RNYC.
DR. JANET L. NORWOOD
Senior Fellow at The Urban Institute (research organization); Director of RNYC
and Republic Bank.
JOHN A. PANCETTI
Director of RNYC and Republic Bank.
VITO S. PORTERA
Vice Chairman of the Board, and a Director of RNYC and Republic Bank. Also,
Chairman of the Board of Republic International Bank of New York, the Florida
Edge Act subsidiary of Republic Bank.
WILLIAM P. ROGERS
Partner, Rogers & Wells and Director of RNYC and Republic Bank.
SLIAS SAAL
Vice Chairman and Director of Republic Bank and RNYC; Chief Trading Officer of
Republic Bank.
DOV C. SCHLEIN
President and Chief Operating Officer of Republic Bank, and a Director of RNYC
and Republic Bank.
RICHARD C. SPIKERMAN
Executive Vice President and Director of Republic Bank.
JOHN TAMBERLANE
Director of Republic Bank; President of the Consumer Bank Division of Republic
Bank.
WALTER H. WEINER
Chairman of the Board, Director and Chief Executive Officer of Republic Bank
and RNYC.
GEORGE T. WENDLER
Vice Chairman and Director of Republic Bank; Senior Credit Officer of Republic
Bank.
PETER WHITE
Senior Consultant and a Director of RNYC and Republic Bank.
- -----------------------------------
(1) 1270 Avenue of the Americas, Suite 3010, New York 10020.
(2) 254 Victoria Place, Lawrence, New York 11559.
(3) 111-15 Queens Boulevard, 2nd Floor, Forest Hills, New York,
New York 11375.
(4) One Dock Street, Stamford, CT 06902
(b) The name, position with Capital Guardian Trust Company ("CGTC"),
address, principal occupation and type of business are set forth below for the
directors and certain senior executive officers of CGTC, including those who are
engaged in any other business, profession, vocation, or employment of a
substantial nature:(1)
NAME
BUSINESS AND OTHER CONNECTIONS
Richard C. Barker
Chairman of the Board, CGTC and Capital International
Limited; Senior Vice President and Director, Capital
Management Services; Director, The Capital Group, Inc.
("Capital") and Capital Group International, Inc.(2)
Michael D. Beckman
Senior Vice and Treasurer, CGTC; Director, Capital
Guardian Trust Company of Nevada.(3)
Fred R. Betts
Senior Vice President, CGTC.(4)
Larry Paul Clemmensen
Director of CGTC, American Funds Distributors, Inc. and
American Funds Service Company; Executive Vice
President, Director, and Chief Financial Officer, Capital;
Senior Vice President and Director, Capital Research and
Management Company ("CRMC"); Senior Vice President
and Treasurer, Capital Income Builder, Inc. and Capital
World Growth & Income Fund, Inc.
Don Ralph Conlan
Director, CGTC; President and Director, Capital, Capital
Group Research, Inc., and Capital Strategy Research, Inc.;
Senior Vice President and Director, CRMC; Director,
American Funds Distributors, Inc. and American Funds
Service Company.
David I. Fisher
Chairman of the Board, Capital and Capital International S.A.; Vice Chairman of
the Board, CGTC, Capital International Limited, Emerging Markets Growth Fund,
Inc., and Capital International K.K.; President and Director, Capital Group
International, Inc., Capital International, Inc. and Capital International
Limited (Bermuda); President and Principal Executive Officer, New World
Investment Fund; Director, Capital Group Research, Inc., Capital Research
International, Global Capital Management Limited, New Perspective Fund, Inc. and
EuroPacific Growth Fund, Inc. (5)
William H. Hurt
Senior Vice President and Director, CGTC; Chairman of the Board, Capital
Guardian Trust Company of Nevada and Capital Strategy Research, Inc.; Director,
Capital.
Robert G. Kirby
Director, CGTC; Senior Partner, The Capital Group
Partners L.P.; Director, Lockheed Corporation.
Nancy J. Kyle
Senior Vice President-International and Director, CGTC.(6)
Karen L. Larson
Director, CGTC; President, Director, and Director of
Research, Capital Guardian Research Company
("CGRC").(5)
D. James Martin
Director, CGTC; Senior Vice President and Director,
CGRC.
John R. McIlwraith
Senior Vice President-International and Director, CGTC;
Senior Vice President and Director, Capital International
Limited.(2)
James R. Mulally
Senior Vice President - Fixed Income, CGTC; Senior Vice
President, Capital International Limited; Director,
CGRC.(5)
Victor M. Parachini
Senior Vice President, Director and Portfolio Manager,
CGTC.(2)
Robert V. Pennington
Senior Vice President, CGTC; President, Capital Guardian
Trust Company of Nevada.(6)
Jason M. Pilalas
Director, CGTC; Senior Vice President and Director,
CGRC.
Merlin E. Robertson
Senior Vice President, CGTC.
Robert Ronus
President, CGTC; Chairman, Capital Research International and CGRC; Senior Vice
President, Capital International Limited and Capital International S.A.;
Director, Capital Group International, Inc., Capital International, Inc.,
Capital International Fund, and Nomura Capital International Equity Fund.
James Fredric Rothenberg
Vice Chairman, CGTC; President and Director, CRMC;
President and Chief Executive Officer, The Growth Fund
of America, Inc.; Director, Capital and Capital Group
Research, Inc.
John H. Seiter
Executive Vice President - Marketing, CGTC; Senior Vice President, Capital Group
International, Inc.
Robert L. Spare
Senior Vice President, CGTC.
Eugene P. Stein
Executive Vice President and Director, CGTC; Director,
CGRC.
Douglas M. Urban
Senior Vice President, CGTC.(2)
Edus H. Warren, Jr.
Senior Vice President and Director, CGTC.(7)
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(1) Unless otherwise noted by footnote, the address of all directors and
officers is 333 South Hope Street, Los Angeles CA 90071.
(2) Four Embarcadero Center, Suite 1800, San Francisco, CA 94111-4125.
(3) 135 South State College Blvd., Brea, CA 92621-5804.
(4) Promenade Two, 25th Floor, 1230 Peachtree Street, N.E., Atlanta, GA
30309-3575.
(5) 11100 Santa Monica Blvd., 15th Floor, Los Angeles, CA 90025-3302.
(6) 630 Fifth Avenue, 36th Floor, New York, NY 10111-0121.
(7) 25 Bedford Street, London, England WC2E 9HN.
(c) The information required by this Item 28 with respect to each
director, officer or partner of Miller Anderson & Sherrerd ("MAS" or the
"Sub-Adviser") is incorporated by reference to Form ADV filed by MAS with the
Securities and Exchange Commission pursuant to the Investment Advisers Act of
1940, as amended (File No. 801-10437).
ITEM 29. PRINCIPAL UNDERWRITER
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the 1940 Act and the Rules thereunder
will be maintained at the offices of Republic National Bank of New York, 452
Fifth Avenue, New York, New York 10018, Signature Financial Group (Cayman)
Limited, P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman
Islands, B.W.I., Signature Financial Services, Inc., 1 First Canadian Place,
Suite 2800, P.O. Box 231, Toronto, Ontario, M5X 1C8, and Investors Bank & Trust
Company, N.A., 89 South Street, Boston, Massachusetts 02111.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the Registrant
except that the request referred to in the third full paragraph thereof may only
be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value or
values of shares held by such requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereto duly authorized in George
Town, Grand Cayman, Cayman Islands, B.W.I. on the 1st day of July, 1996.
REPUBLIC PORTFOLIOS
By /s/SUSAN JAKUBOSKI
--------------------
Susan Jakuboski
Assistant Secretary and Assistant Treasurer
EX-99.B5(iv) Form of Subadvisory Agreement between Republic Bank and
Massachusetts Financial Services Company with respect to
Small Cap Equity Portfolio.
EX-99.B27.1 -
EX-99.B27.2. Financial Data Schedules.
REPUBLIC PORTFOLIOS
REPUBLIC SMALL CAP EQUITY PORTFOLIO
SUBADVISORY AGREEMENT
AGREEMENT, effective commencing on ____________, 1996, between
Massachusetts Financial Services Company (the "Subadviser") and Republic
National Bank of New York (the "Manager").
WHEREAS, the Manager has been retained by Republic Portfolios (the
"Portfolio Trust"), a New York master trust fund registered as an open-end
diversified investment management company under the Investment Company Act of
1940, as amended (the "1940 Act"), to provide investment advisory services to
Republic Small Cap Equity Portfolio (the "Portfolio") pursuant to an Investment
Management Contract, as supplemented effective ____________, 1996 (the
"Management Agreement");
WHEREAS, the Manager wishes to appoint the Subadviser to perform
advisory services for the Portfolio and the Portfolio Trust's Board of Trustees,
including a majority of the trustees who are not "interested persons" (as
defined in the 1940 Act) of the Portfolio Trust and the Portfolio's shareholders
have approved the appointment of the Subadviser to perform certain investment
advisory services for the Portfolio pursuant to this Subadvisory Agreement and
the Subadviser is willing to perform such services for the Portfolio;
WHEREAS, the Subadviser is registered or exempt from registration as an
investment adviser under the Investment Advisers Act of 1940, as amended
("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Manager and the Subadviser as
follows:
1. APPOINTMENT. The Manager hereby appoints the Subadviser to perform
advisory services for the Portfolio for the periods and on the terms set forth
in this Subadvisory Agreement. The Subadviser accepts such appointment and
agrees to furnish the services herein set forth, for the compensation herein
provided.
2. INVESTMENT ADVISORY DUTIES. Subject to the supervision of the Board
of Trustees of the Portfolio Trust and the Manager, the Subadviser will, in
coordination with the Manager, (a) provide a program of continuous investment
management for the Portfolio in accordance with the Portfolio's investment
objectives, policies and limitations as stated in the Portfolio's Prospectus and
Statement of Additional Information included as part of the Portfolio Trust's
Registration Statement on behalf of
<PAGE>
the Portfolio filed with the Securities and Exchange Commission ("SEC"), as they
may be amended from time to time; (b) make investment decisions for the
Portfolio; and (c) place orders to purchase and sell securities for the
Portfolio. In particular, the Subadviser will be responsible for the market
timing of purchases and sales and for all yield enhancement strategies used in
managing the Portfolio's investment portfolio.
In performing its investment management services for the Portfolio
hereunder, the Subadviser will provide the Portfolio with ongoing investment
guidance and policy direction, including oral and written research, analysis,
advice, statistical and economic data and judgments regarding individual
investments, general economic conditions and trends and long-range investment
policy. The Subadviser will determine the securities, instruments, repurchase
agreements, options and other investments and techniques that the Portfolio will
purchase, sell, enter into or use, and will provide an ongoing evaluation of the
Portfolio's portfolio. The Subadviser will determine what portion of the
Portfolio's portfolio shall be invested in securities and other assets.
The Subadviser further agrees that, in performing its duties hereunder,
it will:
(a) comply with the 1940 Act and all rules and regulations thereunder,
the Advisers Act, applicable sections of the Internal Revenue Code of 1986, as
amended (the "Code"), and all other applicable federal and state laws and
regulations, and with any applicable procedures adopted by the Trustees;
(b) manage the Portfolio so that it will qualify, and continue to
qualify (except where extraordinary circumstances dictate otherwise), as a
regulated investment company under Subchapter M of the Code and regulations
issued thereunder, and conduct periodically Subchapter M compliance reviews in
accordance with such procedures as the Portfolio Trust and Subadviser determine
appropriate;
(c) place orders pursuant to its investment determinations for the
Portfolio directly with the issuer, or with any broker or dealer, in accordance
with applicable policies expressed in the Portfolio's Prospectus and/or
Statement of Additional Information and in accordance with applicable legal
requirements;
(d) furnish to the Portfolio Trust whatever statistical information the
Portfolio Trust may reasonably request with respect to the Portfolio's assets or
contemplated investments. In addition, the Subadviser will keep the Portfolio
Trust, the
-2-
<PAGE>
Trustees and the Manager informed of developments materially affecting the
Portfolio's portfolio and shall, on the Subadviser's own initiative, furnish to
the Portfolio Trust from time to time whatever information the Subadviser
believes appropriate for this purpose;
(e) make available to the Portfolio Trust, promptly upon their request,
such copies of its investment records and ledgers with respect to the Portfolio
as may be required to assist the Portfolio Trust in its compliance with
applicable laws and regulations. The Subadviser will furnish the Trustees with
such periodic and special reports regarding the Portfolio as they may reasonably
request;
(f) immediately notify the Manager and the Portfolio Trust in the event
that the Subadviser or any of its affiliates: (1) becomes aware that it is
subject to a statutory disqualification that prevents the Subadviser from
serving as an investment adviser pursuant to this Subadvisory Agreement; or (2)
becomes aware that it is the subject of an administrative proceeding or
enforcement action by the SEC or other regulatory authority. The Subadviser
further agrees to notify the Portfolio Trust and the Manager immediately of any
material fact known to the Subadviser respecting or relating to the Subadviser
that is not contained in the Portfolio Trust's Registration Statement, or any
amendment or supplement thereto, with respect to the Portfolio but that is
required to be disclosed therein, and of any statement contained therein that
becomes untrue in any material respect.
3. ALLOCATION OF CHARGES AND EXPENSES. Except as otherwise specifically
provided in this Section 3, the Subadviser shall pay the compensation and
expenses of all its directors, officers and employees (if any) who serve as
officers and executive employees of the Portfolio Trust (including the
Portfolio's share of payroll taxes), and the Subadviser shall make available,
without expense to the Portfolio, the service of its directors, officers and
employees (if any) who may be duly elected officers of the Portfolio Trust,
subject to their individual consent to serve and to any limitations imposed by
law.
The Subadviser shall not be required to pay any expenses of the
Portfolio other than those specifically allocated to the Subadviser in this
Section 3. In particular, but without limiting the generality of the foregoing,
the Subadviser shall not be responsible, except to the extent of the reasonable
compensation of such of the Portfolio Trust's employees as are officers or
employees of the Subadviser whose services may be involved, for the following
expenses of the Portfolio: organization and certain offering expenses of the
Portfolio
-3-
<PAGE>
(including out-of-pocket expenses); fees payable to any other Portfolio Trust
advisers or consultants; legal expenses; auditing and accounting expenses;
interest expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; dues and expenses incurred by or with
respect to the Portfolio Trust in connection with membership in investment
company trade organizations; cost of insurance relating to fidelity coverage for
the Portfolio Trust's officers and employees; fees and expenses of any
custodian, subcustodian, transfer agent, registrar, or dividend disbursing agent
of the Portfolio; payments for maintaining the Portfolio's financial books and
records and calculating the daily net asset value of the Portfolio's shares;
other payments for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses relating to
investor and public relations; freight, insurance and other charges in
connection with the shipment of the portfolio securities of the Portfolio;
brokerage commissions or other costs of acquiring or disposing of any portfolio
securities or other assets of the Portfolio, or of entering into other
transactions or engaging in any investment practices with respect to the
Portfolio; expenses of preparing and filing Registration Statements, reports,
and notices to shareholders; costs of stationery; litigation expenses; costs of
shareholders' and other meetings; the compensation and all expenses
(specifically including travel expenses relating to the Portfolio's business) of
officers, trustees and employees of the Portfolio Trust who are not "interested
persons" (as defined in the 1940 Act) of the Subadviser; and travel expenses (or
an appropriate portion thereof) of officers or trustees of the Portfolio Trust
who are officers, directors or employees of the Subadviser to the extent that
such expenses relate to attendance at meetings of the Board of Trustees of the
Portfolio Trust or any committees thereof or advisers thereto.
4. COMPENSATION. As compensation for the services provided and expenses
assumed by the Subadviser under this Agreement, the Portfolio Trust will pay the
Subadviser within 21 calendar days after the end of each calendar quarter an
advisory fee computed daily at an annual rate of _____% of the Portfolio's
average daily net assets. The "average daily net assets" of the Portfolio shall
mean the average of the values placed on the Portfolio's net assets as of 4:00
p.m. (New York time) on each day on which the net asset value of the Portfolio
is determined consistent with the provisions of Rule 22c-1 under the 1940 Act
or, if the Portfolio lawfully determines the value of its net assets as of some
other time on each business day, as of such other time. The value of net assets
of the Portfolio shall always be determined pursuant to the applicable
provisions of the
-4-
<PAGE>
Portfolio Trust's Declaration of Trust and Registration Statement. If, pursuant
to such provisions, the determination of net asset value is suspended for any
particular business day, then for the purposes of this Section 4, the value of
the net assets of the Portfolio as last determined shall be deemed to be the
value of its net assets as of the close of regular trading on the New York Stock
Exchange, or as of such other time as the value of the net assets of the
Portfolio's portfolio may lawfully be determined, on that day. If the
determination of the net asset value of the shares of the Portfolio has been so
suspended for a period including any quarter end when the Subadviser's
compensation is payable pursuant to this Section, then the Subadviser's
compensation payable at the end of such month shall be computed on the basis of
the value of the net assets of the Portfolio as last determined (whether during
or prior to such quarter). If the Portfolio determines the value of the net
assets of its portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this Section 4. In the event that this
Agreement is terminated pursuant to Section 10 hereof, the Subadviser shall be
entitled to a PRO RATA portion of the fee under this Section 4 through and
including the date upon which the Agreement is terminated and the Subadviser
ceases to provide investment advisory services to the Portfolio hereunder.
5. BOOKS AND RECORDS. The Subadviser agrees to maintain such books and
records with respect to its services to the Portfolio as are required by Section
31 under the 1940 Act, and rules adopted thereunder, and by other applicable
legal provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Subadviser
also agrees that records it maintains and preserves pursuant to Rules 31a-1 and
Rule 31a-2 under the 1940 Act and otherwise in connection with its services
hereunder are the property of the Portfolio Trust and will be surrendered
promptly to the Portfolio Trust upon its request. The Subadviser further agrees
that it will furnish to regulatory authorities having the requisite authority
any information or reports in connection with its services hereunder which may
be requested in order to determine whether the operations of the Portfolio are
being conducted in accordance with applicable laws and regulations.
6. STANDARD OF CARE AND LIMITATION OF LIABILITY. The Subadviser shall
exercise its best judgment in rendering the services provided by it under this
Subadvisory Agreement. The Subadviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolio or the
-5-
<PAGE>
holders of the Portfolio's shares in connection with the matters to which this
Subadvisory Agreement relates, provided that nothing in this Subadvisory
Agreement shall be deemed to protect or purport to protect the Subadviser
against any liability to the Portfolio or to holders of the Portfolio's shares
to which the Subadviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties, or by reason of the Subadviser's reckless disregard of its obligations
and duties under this Subadvisory Agreement. As used in this Section 6, the term
"Subadviser" shall include any officers, directors, employees, agents or other
affiliates of the Subadviser performing services for the Portfolio.
7. INDEMNIFICATION.
(a) The Subadviser hereby agrees to indemnify and hold harmless the
Portfolio Trust and the Manager from any controversies, claims, suits, losses,
liabilities, judgments, awards or settlements, and costs or expenses, including
reasonable legal fees, caused by, or in any way related to, the investment
decisions rendered by the Subadviser concerning the Portfolio in a manner
inconsistent with Section 6 hereof, any failure of the Subadviser to fulfill any
of its other obligations under this Subadvisory Agreement, any material
misrepresentation, or omission to disclose material facts, by the Subadviser to
the Portfolio Trust, the Manager, or any shareholder of the Portfolio, or any
violation of applicable law, by the Subadviser. The Subadviser also agrees to
indemnify and hold harmless the Portfolio Trust and the Manager with respect to
any losses incurred as the result of errors made by the Subadviser in
transmitting orders to any broker or dealer for execution.
(b) The Manager hereby agrees to indemnify and hold harmless the
Subadviser from any controversies, claims, suits, losses, liabilities,
judgments, awards or settlements, and costs or expenses, including reasonable
legal fees, caused by, or in any way related to, its failure to fulfill any of
its obligations under this Subadvisory Agreement.
(c) If any party seeks indemnification under this Agreement (an
"indemnified party"), it shall notify the other party (the "indemnifying party")
in writing of the assertion of any third party claim or action and shall deliver
all copies of materials received in connection with the matter to the
indemnifying party. The indemnifying party shall have the right to participate
at its own expense in the defense of any such claim or action with counsel of
its own choosing satisfactory to the indemnified party, and the indemnified
party shall cooperate fully with the
-6-
<PAGE>
indemnifying party in the defense or settlement of any matter that is covered by
paragraphs (a) or (b) above, subject to reimbursement by the indemnifying party
for expenses incurred by the indemnified party in connection with the
indemnifying party's participation in the defense.
8. SERVICES NOT EXCLUSIVE. It is understood that the services of the
Subadviser are not exclusive, and that nothing in this Subadvisory Agreement
shall prevent the Subadviser from providing similar services to other investment
companies (whether or not their investment objectives and policies are similar
to those of the Portfolio) or from engaging in other activities, provided such
other services and activities do not, during the term of this Subadvisory
Agreement, interfere in a material manner with the Subadviser's ability to meet
its obligations to the Manager, the Portfolio Trust and the Portfolio hereunder.
When the Subadviser recommends the purchase or sale of a security for other
investment companies and other clients, and at the same time the Subadviser
recommends the purchase or sale of the same security for the Portfolio, the
Subadviser may, but shall not be obligated to, aggregate the orders for
securities to be purchased or sold. It is understood that in light of its
fiduciary duty to the Portfolio, such transactions will be executed on a basis
that is fair and equitable to the Portfolio. In connection with purchases or
sales of portfolio securities for the account of the Portfolio, neither the
Subadviser nor any of its directors, officers, or employees shall act as a
principal or agent or receive any commission.
9. DOCUMENTATION. The Portfolio shall provide the Subadviser with the
following documents, as requested by the Subadviser:
(a) the Portfolio Trust's registration statement and any
amendments thereto;
(b) the Declaration of Trust and By-laws (and any
amendments thereto) of the Portfolio Trust;
(c) resolutions of the Board of Trustees of the Portfolio
Trust authorizing the appointment of the Subadviser to
serve as Subadviser and approving this Subadvisory
Agreement; and
(d) the Portfolio Trust's Notification of Registration on
Form N-8A.
10. DURATION AND TERMINATION. This Subadvisory Agreement shall continue
for a period of two years from the date hereof, unless sooner terminated as
-7-
<PAGE>
provided herein. Notwithstanding the foregoing, this Subadvisory Agreement may
be terminated: (a) at any time without penalty upon thirty (30) days' written
notice to the Subadviser by the Portfolio upon the vote of a majority of the
Trustees or upon the vote of a majority of the Portfolio's outstanding voting
securities; (b) at any time without penalty upon thirty (30) days' written
notice to the Subadviser by the Manager; or (c) by the Subadviser upon thirty
(30) days' written notice to the Portfolio and Manager, provided that the
Subadviser shall continue to be responsible for managing the assets of the
Portfolio for sixty (60) business days after the end of the notice period unless
the Portfolio shall agree in writing to shorten the period. Anything to the
contrary herein notwithstanding, any termination carried out pursuant to Section
10(c) shall be without penalty and, further, the compensation schedule set forth
in Section 4 hereof shall apply to the service of the Subadviser beyond the end
of the notice period provided in Section 10(c). This Subadvisory Agreement will
also terminate automatically in the event of its "assignment" (as defined in the
1940 Act) or the assignment or termination of the Management Agreement.
11. AMENDMENTS. No provision of this Subadvisory Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Subadvisory
Agreement shall be effective until approved by an affirmative vote of (i) a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio, and (ii) a majority of the Trustees of the Portfolio Trust,
including a majority of Trustees who are not "interested persons" (as defined in
the 1940 Act) of any party to this Subadvisory Agreement, cast in person at a
meeting called for the purpose of voting on such approval, if such approval is
required by applicable law.
12. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be given in writing and mailed, faxed or delivered to
the other party at its address as follows:
IF TO THE MANAGER:
Republic National Bank of New York
452 Fifth Avenue
New York, New York 10018
-8-
<PAGE>
IF TO THE SUBADVISER:
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
Any party may specify a different or additional address for notice by
sending a written notice to the other at the address above, or at that or those
last given hereunder.
13. MISCELLANEOUS.
(a) This Subadvisory Agreement shall be governed by the laws of the
State of New York, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder. Exclusive original jurisdiction to any claim, action or dispute
between the parties arising out of this Agreement shall be solely in state or
federal district courts sitting in the State of New York.
(b) The captions of this Subadvisory Agreement are included for
convenience only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
(c) If any provision of this Subadvisory Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Subadvisory Agreement shall not be affected hereby and, to this extent, the
provisions of this Subadvisory Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Subadviser,
or any of its directors, officers or employees, an agent of the Manager or the
Portfolio, nor the Manager, or any of its directors, officers or employees, an
agent of the Subadviser.
(e) This Subadvisory Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but counterparts
shall, together, constitute only one Subadvisory Agreement.
(f) The undersigned officer of the Portfolio Trust has executed this
Subadvisory Agreement not individually, but as an officer under the Portfolio
Trust's Declaration of Trust, and the obligation of this Subadvisory Agreement
are not binding upon the Portfolio Trust's Trustees, its officers, or
shareholders in the Portfolio individually, but bind only the Portfolio Trust
estate.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of _______________, 1996.
MASSACHUSETTS FINANCIAL SERVICES
COMPANY
By ______________________________
Name:
Title:
REPUBLIC NATIONAL BANK OF
NEW YORK
By ______________________________
Name:
Title:
-10-
RF118
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE SEMI ANNUAL
REPORT DATED APRIL 30, 1996 FOR THE REPUBLIC FIXED INCOME PORTFOLIO AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEMI ANNUAL REPORT.
</LEGEND>
<CIK> 0000934882
<NAME> REPUBLIC PORTFOLIOS
<SERIES>
<NAME> REPUBLIC FIXED INCOME PORTFOLIO
<NUMBER> 010
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 71,380,520
<INVESTMENTS-AT-VALUE> 70,431,540
<RECEIVABLES> 424,876
<ASSETS-OTHER> 152,696
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71,009,112
<PAYABLE-FOR-SECURITIES> 19,045,941
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54,155
<TOTAL-LIABILITIES> 19,100,096
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,909,016
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 51,909,016
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,303,405
<OTHER-INCOME> 0
<EXPENSES-NET> 141,810
<NET-INVESTMENT-INCOME> 1,161,595
<REALIZED-GAINS-CURRENT> 222,756
<APPREC-INCREASE-CURRENT> (1,196,864)
<NET-CHANGE-FROM-OPS> 187,487
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 21,886,489
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 77,821
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 146,810
<AVERAGE-NET-ASSETS> 41,732,610
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE SEMI ANNUAL
REPORT DATED APRIL 30, 1996 FOR THE REPUBLIC INTERNATIONAL EQUITY PORTFOLIO AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEMI ANNUAL REPORT.
</LEGEND>
<CIK> 0000934882
<NAME> REPUBLIC PORTFOLIOS
<SERIES>
<NAME> REPUBLIC INTERNATIONAL EQUITY PORTFOLIO
<NUMBER> 020
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 97,993,884
<INVESTMENTS-AT-VALUE> 106,471,719
<RECEIVABLES> 1,583,102
<ASSETS-OTHER> 50,219
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 108,105,040
<PAYABLE-FOR-SECURITIES> 1,020,579
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 124,622
<TOTAL-LIABILITIES> 1,145,201
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,959,839
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 106,959,839
<DIVIDEND-INCOME> 582,160
<INTEREST-INCOME> 174,583
<OTHER-INCOME> 0
<EXPENSES-NET> 299,211
<NET-INVESTMENT-INCOME> 457,532
<REALIZED-GAINS-CURRENT> 1,079,786
<APPREC-INCREASE-CURRENT> 6,780,659
<NET-CHANGE-FROM-OPS> 8,317,977
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 67,030,931
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 203,677
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 331,513
<AVERAGE-NET-ASSETS> 74,598,575
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
