As filed with the Securities and Exchange Commission on February 25, 1998
FILE NO. 811-8928
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
REPUBLIC PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
Floor 2, Block 2,
Harcourt Centre
Dublin 2, Ireland
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (011-3531) 790-3700
George O. Martinez, 3435 Stelzer Road, Columbus, Ohio 43219-3035
(Name and Address of Agent for Service)
Copy to: Allan S. Mostoff, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
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EXPLANATORY NOTE
This Amendment No. 4 (the "Amendment") to the Registration Statement has
been filed by Republic Portfolios (the "Registrant") pursuant to Section 8(b) of
the Investment Company Act of 1940, as amended. 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. The 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 to update the disclosure with respect to the Fixed Income Portfolio,
International Equity Portfolio and Small Cap Equity Portfolio, each of which is
a series of beneficial interests in the Registrant.
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PART A
FIXED INCOME 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, Fixed
Income 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. Miller Anderson & Sherrerd ("MAS" or the
"Sub-Adviser") continuously manages the investments of the Portfolio.
The investment objective of the Portfolio is to seek to realize
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, through investment primarily in a diversified
portfolio of U.S. Government securities, corporate bonds, mortgage-backed
securities and other fixed-income securities. The Portfolio's average weighted
maturity will ordinarily exceed five years.
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 to realize
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, through investment in a diversified portfolio
of U.S. Government securities, corporate bonds (including bonds rated below
investment grade commonly referred to as junk bonds), foreign fixed income
securities, mortgage-backed securities of domestic issuers and other
fixed-income securities. The Portfolio's average weighted maturity will
ordinarily exceed five years.
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 will normally invest at least 65% of its assets in fixed
income securities. The Portfolio may invest in the following securities, which
may be issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies: securities issued, sponsored or guaranteed by the U.S.
government, its agencies or instrumentalities (U.S. Government securities);
corporate debt securities; corporate commercial paper; mortgage pass-throughs,
mortgage-backed bonds, collateralized mortgage obligations ("CMOs"), other
asset-backed securities; variable and floating rate debt securities; obligations
of foreign governments or their subdivisions, agencies and instrumentalities;
obligations of international agencies or supranational entities; and foreign
currency exchange-related securities.
The Sub-Adviser will seek to achieve the Portfolio's objective by investing
at least 80% of the Portfolio's assets in investment grade debt or fixed income
securities. Investment grade debt securities are those rated by one or more
nationally recognized statistical rating organizations ("NRSROs") within one of
the four highest quality grades at the time of purchase (e.g., AAA, AA, A or BBB
by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch") or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")),
or in the case of unrated securities, determined by the Sub-Adviser to be of
comparable quality. Securities rated by a NRSRO in the fourth highest rating
category have speculative characteristics and are subject to greater credit and
market risks than higher-rated bonds. See the Appendix to this Part A for a
description of the ratings assigned by Moody's, S&P,
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and Fitch.
Up to 20% of the Portfolio's assets may be invested in preferred stock,
convertible securities, and in fixed income securities that at the time of
purchase are rated Ba or B by Moody's or BB or B by S&P or rated comparably by
another NRSRO (or, if unrated, are deemed by the Sub-Adviser to be of comparable
quality). Securities rated below "investment grade," i.e., rated below Baa by
Moody's or BBB by S&P, are described as "speculative" by both Moody's and S&P.
Such securities are sometimes referred to as "junk bonds," and may be subject to
greater market fluctuations, less liquidity and greater risk. For a complete
discussion of the special risks associated with investments in lower rated
securities, see "Additional Risk Factors and Policies: High Yield/High Risk
Securities."
From time to time, the Sub-Adviser may invest more than 50% of the
Portfolio's assets in mortgage-backed securities including mortgage pass-through
securities and CMOs, that carry a guarantee from a U.S. government agency or a
private issuer of the timely payment of principal and interest. For a
description of the risks associated with mortgage-backed securities, see
"Additional Risk Factors and Policies: Mortgage Related Securities." When
investing in mortgage-backed securities, it is expected that the Portfolio's
primary emphasis will be in mortgage-backed securities issued by governmental
and government-related organizations such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Association ("FHLMC"). However, the Portfolio may
invest without limit in mortgage-backed securities of private issuers when the
Sub-Adviser determines that the quality of the investment, the quality of the
issuer, and market conditions warrant such investments. Mortgage-backed
securities issued by private issuers will be rated investment grade by Moody's
or S&P or, if unrated, deemed by the Sub-Adviser to be of comparable quality.
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A mortgage-backed bond is a collateralized debt security issued by a thrift
or financial institution. The bondholder has a first priority perfected security
interest in collateral consisting usually of agency mortgage pass-through
securities, although other assets including U.S. treasuries (including zero
coupon Treasury bonds), agencies, cash equivalent securities, whole loans and
corporate bonds may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type. For a
complete discussion of mortgage-backed securities, see "Additional Risk Factors
and Policies: Mortgage-Backed Securities."
A portion of the Portfolio's portfolio may be invested in bonds and other
fixed income securities denominated in foreign currencies if, in the opinion of
the Sub-Adviser, the combination of current yield and currency value offer
attractive expected returns. These holdings may be in as few as one foreign
currency bond market (such as the United Kingdom gilt market), or be spread
across several foreign bond markets; however, the Portfolio does not intend to
invest in the securities of Eastern European countries. When the total return
opportunities in a foreign bond market appear attractive in local currency
terms, but where, in the Sub-Adviser's judgment, unacceptable currency risk
exists, currency futures, forwards and options and swaps may be used to hedge
the currency risk. See "Additional Risk Factors and Policies: Foreign
Securities."
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. See "Additional Risk Factors and Policies: Eurodollar and Yankee
Bank Obligations" below. The Portfolio may also invest in Brady Bonds, which are
issued as a result of a restructuring of a country's debt obligations to
commercial banks under the "Brady Plan." See "Additional Risk Factors and
Policies: Brady Bonds" below. The Portfolio may also invest in the following
instruments on a temporary basis when economic or market conditions are such
that the Sub-Adviser deems a temporary defensive position to be appropriate:
time deposits, certificates of deposit and bankers' acceptances issued by a
commercial bank or savings and loan association; commercial paper rated at the
time of purchase by one or more NRSROs in one of the two highest categories or,
if not rated, issued by a corporation having an outstanding unsecured debt issue
rated high-grade by a NRSRO; short-term corporate obligations rated high-grade
by a NRSRO; U.S. Government obligations; Government agency securities issued or
guaranteed by U.S. Government sponsored instrumentalities and federal agencies;
and repurchase agreements
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collateralized by the securities listed above. The Portfolio may also
purchase securities on a when-issued basis, lend its securities to brokers,
dealers, and other financial institutions to earn income and borrow money for
temporary or emergency purposes.
ADDITIONAL RISK FACTORS AND POLICIES
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile or
less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There are a
range of risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Portfolio may use derivatives for hedging purposes, cash management purposes, as
a substitute for investing directly in fixed income instruments, and to enhance
return when the Sub-Adviser believes the investment will assist the Portfolio in
achieving its investment objective. A description of the derivatives that the
Portfolio may use and some of their associated risks follows.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may invest in financial futures contracts, options on futures
contracts and options (collectively, "futures and options"). In addition, the
Portfolio may invest in foreign currency futures contracts and options on
foreign currencies and foreign currency futures. Futures contracts provide for
the sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and price. An option is a legal
contract that gives the holder the right to buy or sell a specified amount of
the underlying security or futures contract at a fixed or determinable price
upon the exercise of the option. A call option conveys the right to buy and a
put option conveys the right to sell a specified quantity of the underlying
security.
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The Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 35% of its total assets. The Portfolio will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission, or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such non-hedging positions only to the extent that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Portfolio's net assets. The Portfolio
will segregate assets or "cover" its positions consistent with requirements
under the Investment Company Act of 1940, as amended ("1940 Act").
There are several risks associated with the use of futures and options for
hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the portfolio and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Portfolio seeks to
close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position and the Portfolio would remain obligated to meet margin
requirements until the position is closed.
FOREIGN SECURITIES
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
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expropriation or confiscatory taxation, other taxes imposed by the foreign
country on the Portfolio's earnings, assets, or transactions, limitation on the
removal of cash or other assets of the Portfolio, political or financial
instability, or diplomatic and other developments which could affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Additional costs associated
with an investment in foreign securities may include higher custodial fees than
apply to domestic custodial arrangements, and transaction costs of foreign
currency conversions.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. The Portfolio has no
specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except that
the Portfolio will not enter into a forward contract if the amount of assets set
aside to cover the contract would impede portfolio management.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract may
be used, for example, when the Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security. The Portfolio may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
The Portfolio may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, the Portfolio may
purchase a U.S. dollar-denominated security and at the same time enter into a
forward contract to exchange U.S. dollars for the contract's underlying currency
at a future date. By matching the amount of U.S. dollars to be exchanged with
the anticipated value of the U.S. dollar-denominated security, the Portfolio may
be able
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to lock in the foreign currency value of the security and adopt a synthetic
investment position reflecting the credit quality of the U.S. dollar-denominated
security.
There is a risk in adopting a synthetic investment position to the extent
that the value of a security denominated in U.S. dollars or other foreign
currency is not exactly matched with the Portfolio's obligation under the
forward contract. On the date of maturity the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Sub-Adviser will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Sub-Adviser will be able to do so. When the Portfolio enters into a forward
contract for purposes of creating a synthetic security, it will generally be
required to hold high-grade, liquid securities or cash in a segregated account
with a daily value at least equal to its obligation under the forward contract.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated debt securities. High
yield securities may be regarded as predominately speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were investing
in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield securities
defaults, the Portfolio may incur additional expenses to seek recovery. In the
case of high yield securities structured as zero coupon or payment-in-kind
securities, the market prices of such securities are affected to a greater
extent by interest rate
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changes and, therefore, tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Sub-Adviser does not rely solely on credit ratings when selecting securities for
the Portfolio, and develops its own independent analysis of issuer credit
quality. If a credit rating agency changes the rating of a portfolio security
held by the Portfolio, the Portfolio may retain the security if the Sub-Adviser
deems it in the best interest of the Portfolio's investors.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon obligations, which are fixed-income
securities that do not make regular interest payments. Instead, zero coupon
obligations are sold at substantial discounts from their face value. The
difference between a zero coupon obligation's issue or purchase price and its
face value represents the imputed interest an investor will earn if the
obligation is held until maturity. Zero coupon obligations may offer investors
the opportunity to earn higher yields that those available on ordinary
interest-paying obligations of similar credit quality and maturity. However,
zero coupon obligation prices may also exhibit greater price volatility than
ordinary fixed-income securities because of the manner in which their principal
and interest are returned to the investor.
MORTGAGE-RELATED SECURITIES
MORTGAGE-BACKED SECURITIES. The Portfolio may invest in mortgage-backed
certificates and other securities representing ownership interests in mortgage
pools, including CMOs. Interest and principal payments on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities,
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes
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in prepayment rates. Generally, prepayment rates increase if interest rates
fall and decrease if interest rates rise. For many types of mortgage-backed
securities, this can result in unfavorable changes in price and yield
characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the
Portfolio's mortgage-backed securities may have less potential for capital
appreciation during periods of declining interest rates than other fixed income
securities of comparable maturities, although such obligations may have a
comparable risk of decline in market value during periods of rising interest
rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly sensitive
to prevailing interest rates, the length of time the security is expected to be
outstanding, and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of mortgage-backed
securities, and a Portfolio invested in such securities wishing to sell them may
find it difficult to find a buyer, which may in turn decrease the price at which
they may be sold.
Credit risk reflects the risk that the Portfolio may not
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receive all or part of its principal because the issuer or credit enhancer
has defaulted on its obligations. Obligations issued by U.S. government-related
entities are guaranteed as to the payment of principal and interest, but are not
backed by the full faith and credit of the U.S. government. The performance of
private label mortgage-backed securities, issued by private institutions, is
based on the financial health of those institutions.
For further information, see Part B.
STRIPPED MORTGAGE-BACKED SECURITIES. The Portfolio may invest in Stripped
Mortgage-Backed Securities ("SMBS") which are derivative multi-class mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
Government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. The Portfolio's
investments in SMBS will be limited to 10% of net assets.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest (the interest-only or IO class),
while the other class will receive all of the principal (the principal-only or
PO class). The cash flows and yields on IO and PO classes can be extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the yield to maturity
of IOs or POs, respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor may fail to
recoup fully its initial investment in an IO class of a stipped mortgage-backed
security. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the yield on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to the Portfolio's limitations on investment in illiquid
securities. For further information on these securities, see Part B.
OTHER ASSET-BACKED SECURITIES. The Portfolio may invest in securities
representing interests in other types of financial assets, such as
automobile-finance receivables or credit-card receivables. Such securities are
subject to many of the same risks as are mortgage-backed securities, including
prepayment risks and
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risks of foreclosure. They may or may not be secured by the receivables
themselves or may be unsecured obligations of their issuers. For further
information on these securities, see Part B.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee bank obligations are
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent Yankee bank) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from freely
flowing across its borders. Other risks include: adverse political and economic
developments, the extent and qualify of government regulation of financial
markets and institutions, the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers' acceptances.
Repurchase agreements are transactions by which the Portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. The Sub-Adviser will
continually monitor the value of the underlying securities to ensure that their
value, including accrued interest, always equals or exceeds the repurchase
price. Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized.
The use of repurchase agreements involves certain risks. For example, if
the seller of an agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio may incur a loss upon disposition of those securities. If the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. While the Portfolio Trust's management
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities (i) eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial
paper issued pursuant to Section 4(2) under the Securities Act of 1933 that are
determined to be liquid in accordance with guidelines established by the
Portfolio Trust's Board of Trustees. There may be delays in selling these
securities and sales may be made at less favorable prices.
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Factors that the Portfolio must consider in determining whether a
particular Rule 144A security is liquid include the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, dealer undertakings to
make a market in the security, and the nature of the security and the nature of
the market for the security (i.e., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Investing in
Rule 144A securities could have the effect of increasing the level of the
Portfolio's illiquidity to the extent that qualified institutions might become,
for a time, uninterested in purchasing these securities.
The Portfolio has a separate policy that no more than 25% of its assets may
be invested in securities which are restricted as to re-sale, including Rule
144A and Section 4(2) securities.
BRADY BONDS
A portion of the Portfolio's portfolio may be invested in certain debt
obligations customarily referred to as Brady Bonds, which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds have
been issued only recently and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated) and are actively traded in the
over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light of
the risk characteristics of Brady Bonds (including uncollateralized repayment of
principal at maturity for some instruments) and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds should be
viewed as speculative. For further information on these securities, see Part B.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Portfolio may purchase may have a floating or
variable rate of interest, i.e., the rate of interest varies with changes in
specified market rates or indices, such as the prime rates, and at specified
intervals. Certain floating or variable rate obligations that may be purchased
by the Portfolio may carry a demand feature that would permit the holder to
tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. The demand features of certain floating
or variable rate obligations may permit the holder to tender the obligations to
foreign banks, in which case the ability to receive payment under the demand
feature will be subject to certain risks, as described under "Foreign
Securities," above.
INVERSE FLOATING RATE OBLIGATIONS
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate, such as
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LIBOR (London Inter-Bank Offered Rate). Any rise in the reference rate of
an inverse floater (as a consequence of an increase in interest rates) causes a
drop in the coupon rate while any drop in the reference rate of an inverse
floater causes an increase in the coupon rate. In addition, like most other
fixed-income securities, the value of inverse floaters will generally decrease
as interest rates increase. Inverse floaters may exhibit substantially greater
price volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and inverse floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some inverse floater CMOs exhibit extreme sensitivity to changes in
prepayments. As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Portfolio may invest in certificates
of deposit, time deposits, bankers' acceptances, and other short-term debt
obligations issued by commercial banks and savings and loan associations
("S&Ls"). Certificates of deposit are receipts from a bank or S&L for funds
deposited for a specified period of time at a specified rate of return. Time
deposits in banks or S&Ls are generally similar to certificates of deposit but
are uncertificated. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international commercial
transactions. The Portfolio may not invest in time deposits maturing in more
than seven days. The Portfolio will limit its investment in time deposits
maturing from two business days through seven calendar days to 15% of its total
assets.
The Portfolio will not invest in any obligation of a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank is
limited to $100,000 and the principal amount of such investment is insured in
full by the Federal Deposit Insurance Corporation (the "FDIC"), (ii) in the case
of U.S. banks, it is a member of the FDIC, and (iii) in the case of foreign
branches of U.S. banks, the security is deemed by the Sub-Adviser to be of an
investment quality comparable with other debt securities which may be purchased
by the Portfolio.
The Portfolio may also invest in obligations of U.S. banks, foreign
branches of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee
dollars) as a temporary defensive measure. Euro and Yankee dollar investments
will involve some of the same risks as investing in foreign securities, as
described above and in
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Part B.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its securities to qualified brokers, dealers, banks
and other financial institutions for the purpose of realizing additional income.
Loans of securities will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not loan its portfolio securities to
the extent that greater than one-third of its total assets, at fair market
value, would be committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or
firm-commitment basis, in which a security's price and yield are fixed on the
date of the commitment but payment and delivery are scheduled for a future date.
On the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid, high grade debt securities equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
securities on a when-issued basis.
SWAPS, CAPS, FLOORS AND COLLARS
The Portfolio may enter into swap contracts and other similar instruments
in accordance with its policies. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
payment streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes currencies, fixed interest
rates, prices and total return on interest rate indices, fixed-income indices,
stock indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, the Portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the Portfolio may enter will
generally involve an agreement to pay interest streams calculated by reference
to interest income linked to a specified index in one currency in exchange for a
specified index in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
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The swaps in which the Portfolio may engage also include rate caps, floors
and collars under which one party pays a single or periodic fixed amount(s) (or
premium) and the other party pays periodic amounts based on the movement of a
specified index.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. The Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging. The Portfolio will not enter into any swap
agreement unless the unsecured commercial paper, senior debt or the
claims-paying ability of the counterparty is rated AA or A-1 or better by S&P or
Aa or P-1 or better by Moody's, rated comparably by another NRSRO or determined
by the Sub-Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been if
this investment technique were not used.
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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 profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. The Portfolio's annual
turnover rate may exceed 100% due to changes in portfolio duration, yield curve
strategy or commitments to forward delivery mortgage-backed securities. For the
fiscal year ended October 31, 1997, the portfolio turnover rate was 349%.
However, it is expected that in subsequent fiscal years the annual turnover rate
for the Portfolio will not exceed 250%.
INVESTMENT RESTRICTIONS
The Portfolio has adopted certain investment restrictions designed to
reduce exposure to specific situations. Some of these investment restrictions
are:
(1) with respect to 75% of its assets, the Portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the Portfolio's total
assets taken at market value would be invested in the securities of any single
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(2) with respect to 75% of its assets, the Portfolio will not purchase
a security if, as a result, the Portfolio would hold more than 10% of the
outstanding voting securities of any issuer;
(3) the Portfolio will not invest more than 5% of its total assets in
the securities of issuers (other than securities issued or guaranteed by U.S. or
foreign governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years of continuous operation;
(4) the Portfolio will not acquire any securities of companies within
one industry if, as a result of such acquisition, more than 25% of the value of
the Portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no limitation on
the purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or instruments issued by U.S. banks when the
Portfolio adopts a temporary defensive position;
(5) the Portfolio will not make loans except (i) by purchasing debt
securities in accordance with its investment objective and policies, or entering
into repurchase agreements, and (ii) by lending its portfolio securities;
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(6) the Portfolio will not 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;
(7) the Portfolio will not pledge, mortgage, or hypothecate any of its
assets to an extent greater than 33 1/3% of its total assets at fair market
value; and
(8) the Portfolio will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions of
assets or consolidations and except as may otherwise be permitted by the 1940
Act; provided, however, that the Portfolio shall not invest in the shares of any
open-end investment company unless (1) the Portfolio's Adviser waives any
investment advisory fees with respect to such assets and (2) the Portfolio pays
no sales charge in connection with the investment.
Limitations (1), (2), (4) and (5) and certain other limitations described
in Part B are fundamental and may be changed only with the approval of the
holders of a "majority of the outstanding voting securities" (as defined in the
1940 Act) of the Portfolio. The other investment restrictions described here and
in Part B are not fundamental policies, meaning that the Board of Trustees of
the Portfolio Trust may change them without investor approval. If a percentage
limitation on investment or utilization of assets as set forth above is adhered
to at the time an investment is made, a later change in percentage resulting
from changes in the value or total cost of the Portfolio's assets will not be
considered a violation of the restriction, and the sale of securities will not
be required.
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,
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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, up to and including creating a separate Board of Trustees. 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. For its services, under the
Investment Management Contract, the Manager is entitled to receive from the
Portfolio a fee, payable monthly, equal on an annual basis to 0.20% 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 June 30, 1997, Republic was the 16th
largest commercial bank in the United States measured by deposits.
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
MAS 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
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assets, equal to 0.375% of net assets up to $50 million, 0.25% of net
assets over $50 million up to $95 million, $300,000 of net assets over $95
million up to $150 million, 0.20% of net assets over $150 million up to $250
million, and 0.15% of net assets over $250 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. See "Portfolio Transactions."
MAS, whose address is One Tower Bridge, West Conshohocken, Pennsylvania
19428, is a Pennsylvania limited partnership founded in 1969. MAS provides
investment services to employee benefit plans, endowment funds, foundations and
other institutional investors. As of September 30, 1997, MAS had in excess of
$55.7 billion in assets under management.
On January 3, 1996, Morgan Stanley Group Inc. acquired MAS in a transaction
in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly owned
subsidiary of Morgan Stanley Group Inc., became the sole general partner of MAS.
Morgan Stanley Asset Management Holdings Inc. and two other wholly owned
subsidiaries of Morgan Stanley Group Inc. became the limited partners of MAS.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries are engaged in a wide range of financial services.
Kenneth B. Dunn, whose business experience for the past five years is
provided below, is the individual portfolio manager responsible for management
of the Portfolio.
Partner, MAS, since prior to 1991. Portfolio Manager, MAS
Fixed Income and MAS Domestic Fixed Income Portfolios, since
1987; MAS Fixed Income II Portfolios, since 1990; MAS
Mortgage-Backed Securities and Special Purpose Fixed Income
Portfolios, since 1992; and, MAS Municipal and PA Municipal
Portfolios, since 1994.
To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of portfolio investments
for the Portfolio with Republic New York Securities Corporation ("Securities
Corporation"), subject to obtaining best price and execution for a particular
transaction. See Part B.
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. BISYS Fund Services (Ireland), Limited ("BISYS"),
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acting as agent for the Portfolio, serves as the placement agent of
interests in the Portfolio. BISYS receives no compensation for serving as
placement agent.
ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS, whose address is Floor 2,
Block 2, Harcourt Centre, Dublin 2, Ireland, 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, BISYS 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 up to $1
billion; 0.04% of the next $1 billion of such assets; and 0.035% of such assets
in excess of $2 billion.
BISYS 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
BISYS or its affiliates.
BISYS and its affiliates also serve as administrator of other investment
companies. BISYS is an indirect wholly-owned subsidiary of The BISYS Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to a fund accounting agreement, IBT Fund Services (Canada) Inc.
("IBT (Canada)") serves as fund accounting agent to the Portfolio. For its
services to the Portfolio, IBT Canada receives fees payable monthly equal on an
annual basis to $40,000.
TRANSFER AGENT
The Portfolio Trust has entered into a Transfer Agency Agreement with
Investors Fund Services (Ireland) Limited ("IFS") pursuant to which IFS acts as
transfer agent (the "Transfer Agent") for the Portfolio. The Transfer Agent
maintains an account for each investor in the Portfolio.
CUSTODIAN
Pursuant to respective Custodian Agreements, Investors Bank & Trust Company
("IBT") acts as the custodian of the foreign assets of the Portfolio and
Republic acts as custodian of the domestic assets of the Portfolio (the
"Custodians"). The Portfolio Trust's Custodian Agreements provide that the
Custodians may use the services of sub-custodians with respect to the Portfolio.
The Custodians' responsibilities include safeguarding and controlling the
Portfolio's cash and securities, 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
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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 Custodians do not determine the investment policies of the
Portfolio or decide which securities will be purchased or sold for the
Portfolio. For their services, IBT and Republic each receives such compensation
as may from time to time be agreed upon by either of them and the Portfolio
Trust.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio Trust is organized as a series trust under the law 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 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., 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 in the
Portfolio 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
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
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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.
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Investor inquiries may be directed to BISYS Fund Services (Ireland)
Limited, Floor 2, Block 2, Harcourt Centre, Dublin 2, Ireland, (011-3531-790-
3700).
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.
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 BISYS 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.
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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.
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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APPENDIX
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements. The
future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment.
CAA -- Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded as
having extremely poor prospects.
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The characteristics of corporate debt obligations rated by S&P are
generally as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB is predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with terms of the obligation.
BB indicates the lowest degree of speculation; CC indicates the highest degree
of speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest.
A bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider reliable.
The ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are
generally as follows:
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
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principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short term debt of these issuers
is generally rated "- +".
A -- Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payments of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used
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in the DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer's long-term
debt is rated A or better; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowances made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial paper
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and consumer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determine how the issuer's commercial paper is
rated within various categories.
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PART A
INTERNATIONAL 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,
International 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. Capital Guardian Trust Company ("CGTC" or
the "Sub-Adviser") continuously manages the investments of the Portfolio.
The investment objective of the Portfolio is to seek long-term growth of
capital and future income through investment primarily in securities of non-U.S.
issuers (including American Depositary Receipts ("ADRs") and U.S. registered
securities) and securities whose principal markets are outside of the United
States. The principal investments of the Portfolio will be in equity securities
of companies in developed nations, including Europe, Canada, Australia and the
Far East. The Portfolio may also invest in emerging market equity securities.
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 and future income through investment primarily in securities of non-U.S.
issuers (including American Depositary Receipts ("ADRs") and U.S. registered
securities) and securities whose principal markets are outside of the United
States.
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 will normally invest at least 80% of its total assets in
equity securities of foreign corporations, consisting of common stocks, and
other securities with equity characteristics, including preferred stock,
warrants, rights, securities convertible into common stock ("convertible
securities"), trust certificates, limited partnership interests and equity
participations. The common stock in which the Portfolio may invest includes the
common stock of any class or series or any similar equity interest, such as
trust or limited partnership interests. These equity investments may or may not
pay dividends and may or may not carry voting rights. The principal investments
of the Portfolio will be in equity securities of companies organized and
domiciled in developed nations outside the United States or for which the
principal trading market is outside the United States, including Europe, Canada,
Australia and the Far East, although the Portfolio may invest up to 20% of its
assets in equity securities of companies in emerging markets. See "Additional
Risk Factors and Policies: Foreign Securities -- Emerging Markets." The
Portfolio intends to have at least three different countries represented in its
portfolio. It is the current intention of the Portfolio to invest primarily in
companies with large market capitalizations. The Portfolio seeks to outperform
the Morgan Stanley Capital International EAFE (Europe, Australasia and Far East)
Index, a capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The Portfolio invests
in securities listed on foreign or domestic securities exchanges and securities
traded in foreign or domestic over-the-counter markets, and may invest in
certain restricted or unlisted securities.
Under exceptional conditions abroad or when, in the opinion of the
Sub-Adviser, economic or market conditions warrant, the Portfolio may
temporarily invest part or all of its assets in fixed income securities
denominated in foreign currencies, obligations of domestic or foreign
governments and their political subdivisions ("Government Securities"), and
nonconvertible preferred stock, or be held in cash or equivalents. Debt
securities purchased by the Portfolio will be limited to those rated, at the
time of investment, in the four highest rating categories by a nationally
recognized statistical rating organization ("NRSRO") or, if unrated, determined
by the Sub-Adviser to be of comparable quality. Securities rated by a NRSRO in
the fourth highest rating category are considered to have some speculative
characteristics. When the total return opportunities in a foreign bond market
appear attractive in local currency terms, but, in the Sub-Adviser's judgment,
unacceptable currency risk exists, currency futures, forwards and options may be
used to hedge the currency risk. See "Additional Risk Factors and Policies:
Forward Foreign Currency Contracts and Options on Foreign Currencies."
As described under "Sub-Adviser," CGTC, the Portfolio's Sub-Adviser, uses a
system of multiple portfolio managers pursuant to which the Portfolio is divided
into segments which are assigned to individual portfolio managers. Within
investment guidelines, each
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portfolio manager makes individual decisions as to company, country,
industry, timing and percentage based on extensive field research and direct
company contact.
Because of the risks associated with common stocks and other equity
investments, the Portfolio is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on short-term
stock market movements. The Sub-Adviser seeks to reduce these risks by
diversifying the portfolio as well as by monitoring broad economic trends and
corporate and legislative developments.
ADDITIONAL RISK FACTORS AND POLICIES
FOREIGN SECURITIES
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of cash or
other assets of the Portfolio, political or financial instability, or diplomatic
and other developments which could affect such investments. Further, economies
of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. Changes in foreign exchange
rates will affect the value of securities denominated or quoted in currencies
other than the U.S. dollar. Foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater price
volatility. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements,
and transaction costs of foreign currency conversions.
EMERGING MARKETS. Investing in emerging market countries presents greater
risk than investing in foreign issuers in general. A number of emerging markets
restrict foreign investment in stocks. Repatriation of investment income,
capital, and the proceeds of sales by foreign investors may require governmental
registration and/or approval in some emerging market countries. A number of the
currencies of developing countries have experienced significant declines against
the U.S. dollar in recent years, and devaluation may occur subsequent to
investments in these currencies by the Portfolio. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Many of the emerging securities markets are relatively small, have
low trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is the risk that a future
economic or political crisis could lead to price controls, forced mergers of
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companies, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which could have a detrimental effect
on the Portfolio's investments.
Investing in formerly communist East European countries involves the
additional risk that the government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the fall of communism and could follow radically different political and/or
economic policies to the detriment of investors, including non-market oriented
policies such as the support of certain industries at the expense of other
sectors or a return to a completely centrally planned economy. The Portfolio
does not currently intend to invest a significant portion or its assets in
formerly communist East European countries.
As used in this Part A, "emerging markets" include any country which in the
opinion of the Sub-Adviser is generally considered to be an emerging or
developing country by the International Bank for Reconstruction and Development
(the World Bank) and the International Monetary Fund. Currently, these countries
generally include every country in the world except Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, United
Kingdom and United States.
A company in an emerging market is one that: (i) is domiciled and has its
principal place of business in an emerging market, or (ii) (alone or on a
consolidated basis) derives or expects to derive a substantial portion of its
total revenue from either goods produced, sales made or services performed in
emerging markets. The Portfolio may invest up to 20% of its assets in the equity
securities of companies based in emerging markets.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.
DEPOSITARY RECEIPTS
The Portfolio may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs"), and
International Depositary Receipts ("IDRs"), or other similar securities
convertible into securities of foreign issuers. ADRs (sponsored or unsponsored)
are receipts typically issued by a U.S. bank or trust company evidencing the
deposit with such bank or company of a security of a foreign issuer, and are
publicly traded on exchanges or over-the-counter in the United States.
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ADRs (sponsored or unsponsored) are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying securities, and may
be issued as sponsored or unsponsored programs. In sponsored programs, an issuer
has made arrangements to have its securities trade in the form of ADRs. In
unsponsored programs, the issuer may not be directly involved in the creation of
the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program.
EDRs, which are sometimes referred to as Continental Depositary Receipts,
are receipts issued in Europe typically by foreign bank and trust companies that
evidence ownership of either foreign or domestic underlying securities. IDRs are
receipts typically issued by a European bank or trust company evidencing
ownership of the underlying foreign securities. GDRs are receipts issued by
either a U.S. or non-U.S. banking institution evidencing ownership of the
underlying foreign securities.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes, and will commit no
more than 100% of the value of its assets to forward contracts entered into for
hedging purposes.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract may
be used, for example, when the Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security. The Portfolio may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
OPTIONS AND FUTURES TRANSACTIONS
For hedging purposes only, the Portfolio may invest in foreign currency
futures contracts and options on foreign currencies and foreign currency futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of a specific security, at a specified
future time and price. An option is a legal contract that gives the holder the
right to buy or sell a specified amount of the underlying security or futures
contract at a fixed or determinable price upon the exercise of the option. A
call option conveys the right to buy and a put option conveys the right to sell
a specified quantity of the underlying security. The Portfolio will segregate
assets or "cover" its positions consistent with requirements under the
Investment Company Act of 1940 ("1940
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Act").
There are several risks associated with the use of futures and options for
hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the Portfolio and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Portfolio seeks to
close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position and the Portfolio would remain obligated to meet margin
requirements until the position is closed.
CONVERTIBLE SECURITIES
Although the Portfolio's equity investments consist primarily of common and
preferred stocks, the Portfolio may buy securities convertible into common stock
if, for example, the Sub-Adviser believes that a company's convertible
securities are undervalued in the market. Convertible securities eligible for
purchase by the Portfolio consist of convertible bonds, convertible preferred
stocks, warrants and rights. See "Additional Risk Factors and Policies:
Warrants" below and Part B for a discussion of these instruments.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as described below. The
Portfolio may not invest more than 10% of its assets in restricted securities
(including Rule 144A securities). There may be delays in selling these
securities and sales may be made at less favorable prices.
The Sub-Adviser may determine that a particular Rule 144A security is
liquid and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that the Sub-Adviser must consider in determining whether a particular Rule 144A
security is liquid include the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, dealer undertakings to make a market in the
security, and the nature of the security and the nature of the market for the
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security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's
illiquidity to the extent that qualified institutions might become, for a time,
uninterested in purchasing these securities.
WARRANTS
The Portfolio may invest up to 10% of its net assets in warrants, except
that this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Portfolio. Consequently, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its securities to qualified brokers, dealers, banks
and other financial institutions for the purpose of realizing additional income.
Loans of securities will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not loan its portfolio securities to
the extent that greater than one-third of its total assets, at fair market
value, would be committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or
firm-commitment basis, in which a security's price and yield are fixed on the
date of the commitment but payment and delivery are scheduled for a future date.
On the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid, high grade debt securities equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
securities on a when-issued basis.
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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 profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. For the fiscal year ended
October 31, 1997, the portfolio turnover rate for the Portfolio was 30%. It is
expected that in subsequent years the annual turnover rate for the Portfolio
will not exceed 40%.
INVESTMENT RESTRICTIONS
The Portfolio has adopted certain investment restrictions designed to
reduce exposure to specific situations. Some of these investment restrictions
are:
(1) with respect to 75% of its assets, the Portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the Portfolio's total
assets taken at market value would be invested in the securities of any single
issuer;
(2) with respect to 75% of its assets, the Portfolio will not purchase
a security if, as a result, the Portfolio would hold more than 10% of the
outstanding voting securities of any issuer;
(3) the Portfolio will not invest more than 5% of its total assets in
the securities of issuers (other than securities issued or guaranteed by U.S. or
foreign governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years of continuous operation;
(4) the Portfolio will not acquire any securities of companies within
one industry, if, as a result of such acquisition, more than 25% of the value of
the Portfolio's total assets would be invested in securities of companies within
such industry; provided, however, that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, when the Portfolio adopts a temporary defensive
position;
(5) the Portfolio will not make loans except for the lending of
portfolio securities pursuant to guidelines established by its Board of Trustees
and except as otherwise in accordance with its investment objective and
policies;
(6) the Portfolio will not borrow money, except from a bank as a
temporary measure to satisfy redemption requests or for extraordinary or
emergency purposes, provided that the Portfolio maintains asset coverage of at
least 300% for all such borrowings; additional securities will not be purchased
while borrowings exceed 5% of the Portfolio's assets;
(7) the Portfolio will not purchase warrants, valued at the lower of
cost or market,
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in excess of 10% of the Portfolio's net assets. Included within that
amount, but not to exceed 2% of the Portfolio's net assets, are warrants whose
underlying securities are not traded on principal domestic or foreign exchanges.
Warrants acquired by the Portfolio in units or attached to securities are not
subject to these restrictions;
(8) the Portfolio will not issue senior securities, except as permitted
under the 1940 Act; and
(9) the Portfolio will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions of
assets or consolidations and except as may otherwise be permitted by the 1940
Act; provided, however, that the Portfolio shall not invest in the shares of any
open-end investment company unless (1) the Portfolio's Adviser waives any
investment advisory fees with respect to such assets, and (2) the Portfolio pays
no sales charge in connection with the investment.
Limitations (1), (2), (4), (5) and (8), and certain other limitations
described in Part B are fundamental and may be changed only with the approval of
the holders of a "majority of the outstanding voting securities" (as defined in
the 1940 Act) of the Portfolio. The other investment restrictions described here
and in Part B are not fundamental policies, meaning that the Board of Trustees
of the Portfolio Trust may change them without investor approval. If a
percentage limitation on investment or utilization of assets as set forth above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or total cost of the Portfolio's assets will
not be considered a violation of the restriction, and the sale of securities
will not be required.
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, up to and including creating a separate Board of Trustees. 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
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the Portfolio Trust. For its services under the Investment Management Contract,
the Manager is entitled to receive from the Portfolio 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 June 30, 1997, Republic was the 16th
largest commercial bank in the United States measured by deposits.
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
CGTC 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 to 0.70% of net assets up to $25
million, 0.55% of net assets over $25 million up to $50 million, 0.425% of net
assets over $50 million up to $250 million, and 0.375% of net assets over $250
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. See "Portfolio Transactions."
CGTC, which was founded in 1968, is a wholly owned subsidiary of The
Capital Group Companies, Inc., both of which are located at 333 South Hope
Street, Los Angeles, California 90071. As of September 30, 1997, CGTC managed in
excess of $70 billion of assets primarily for large institutional clients.
CGTC's research activities are conducted by affiliated companies with offices in
Los Angeles, San Francisco, New York, Washington, D.C., Atlanta, London, Geneva,
Singapore, Hong Kong and Tokyo.
Capital Research and Management Company ("CRMC"), another wholly owned
subsidiary of The Capital Group Companies, Inc., provides investment advisory
services to the following mutual funds, which are know collectively as the
American Funds Group:
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AMCAP Fund, American Balanced Fund, American High Income Municipal Bond
Fund, American High Income Trust, American Mutual Fund, The Bond Fund of
America, The Cash Management Trust of America, Capital Income Builder, Inc.,
Capital World Bond Fund, EuroPacific Growth Fund, Fundamental Investors, The
Growth Fund of America, Income Fund of America, Intermediate Bond Fund of
America, The Investment Company of America, Limited Term Tax-Exempt Bond Fund of
America, The New Economy Fund, New Perspective Fund, Smallcap World Fund, The
Tax-Exempt Bond Fund of America, The American Funds Tax-Exempt Series I, The
American Funds Tax-Exempt Series II, The Tax-Exempt Money Fund of America, The
American Funds Income Series, The U.S. Treasury Money Fund of America,
Washington Mutual Investors Fund, and Capital World Growth and Income Fund. CRMC
also provides investment advisory services to: American Variable Insurance
Series and Anchor Pathway Fund, which are used exclusively as underlying
investment vehicles for variable insurance contracts and policies, and to
Endowments, Inc. and Bond Portfolio for Endowments, Inc., whose shares may be
owned only by tax-exempt organizations. Capital International, Inc., an indirect
wholly owned subsidiary of The Capital Group Companies, Inc., provides
investment advisory services to Emerging Markets Growth Fund, Inc., which is a
closed-end investment company.
The following persons are primarily responsible for portfolio management of
the Portfolio: David Fisher, Vice Chairman of CGTC, has had 30 years experience
as an investment professional (27 years with CGTC or its affiliates); Harmut
Giesecke, Senior Vice President and Director of Capital International, Inc., has
had 25 years experience as an investment professional (24 years with CGTC or its
affiliates); Nancy Kyle, Senior Vice President of CGTC, has had 23 years
experience as an investment professional (6 years with CGTC or its affiliates;
from 1980 to 1990, Ms. Kyle was managing director of J. P. Morgan Investment
Management, Inc.); John McIlwraith, Senior Vice President of CGTC, has had 27
years experience as an investment professional (13 years with CGTC or its
affiliates); Robert Ronus, President of CGTC, has had 28 years experience as an
investment professional (24 years with CGTC or its affiliates); and Nilly
Sikorsky, Director of The Capital Group, Inc., has had 34 years experience as an
investment professional, all of which was with CGTC or its affiliates.
To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of portfolio investments
for the Portfolio with Republic New York Securities Corporation ("Securities
Corporation"), subject to obtaining best price and execution for a particular
transaction. See Part B.
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. BISYS Fund Services (Ireland) Limited ("BISYS"), acting
as agent for the Portfolio, serves as the placement agent of interests in the
Portfolio. BISYS receives no compensation for serving as placement agent.
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ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS, whose address is Floor 2,
Block 2, Harcourt Centre, Dublin 2, Ireland, 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, BISYS 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 up to $1
billion; 0.04% of the next $1 billion of such assets; and 0.035% of such assets
in excess of $2 billion.
BISYS 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
BISYS or its affiliates.
BISYS and its affiliates also serve as administrator of other investment
companies. BISYS is an indirect wholly-owned subsidiary of The BISYS Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to a fund accounting agreement, IBT Fund Services (Canada) Inc.
("IBT (Canada)") serves as fund accounting agent to the Portfolio. For its
services to the Portfolio, IBT (Canada) receives fees payable monthly equal on
an annual basis to $50,000.
TRANSFER AGENT
The Portfolio Trust has entered into a Transfer Agency Agreement with
Investors Fund Services (Ireland) Limited ("IFS") pursuant to which IFS acts as
transfer agent (the "Transfer Agent") for the Portfolio. The Transfer Agent
maintains an account for each investor in the Portfolio.
CUSTODIAN
Pursuant to respective Custodian Agreements, Investors Bank & Trust Company
("IBT") also acts as the custodian of the foreign assets of the Portfolio and
Republic acts as custodian of the domestic assets of the Portfolios (the
"Custodians"). The Portfolio Trust's Custodian Agreements provide that the
Custodians may use the services of sub-custodians with respect to the Portfolio.
The Custodians' responsibilities include safeguarding and controlling the
Portfolio's cash and securities, 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 Custodians do not determine the investment policies of the
Portfolio or decide which securities will be purchased or sold for the
Portfolio.
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For their services, IBT and Republic each receives such compensation as may
from time to time be agreed upon by each of them and the Portfolio Trust.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio Trust is organized as a series trust under the law 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 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., 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 in the
Portfolio 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
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,
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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 BISYS Fund Services (Ireland)
Limited, Floor 2, Block 2, Harcourt Centre, Dublin 2, Ireland (011-3531-790-
3700).
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.
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 BISYS 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
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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.
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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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 Institutional Advisors, 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, under normal market conditions, at least 80% of its
investible assets 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, under normal market conditions, at least 80% of its
investible assets 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"), and 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. The portfolio turnover rate for the Portfolio
for the fiscal year ended October 31, 1997 was 92%. It is anticipated that the
portfolio turnover rate for the Portfolio in subsequent fiscal years will not
exceed 100%.
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 June 30, 1997, Republic was the 16th
largest commercial bank in the United States measured by deposits.
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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 30, 1997. As of such date, the MFS organization managed
approximately $44.2 billion of assets invested in equity securities,
approximately $20.1 billion of assets invested in fixed income securities, and
$4.1
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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 is a wholly owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. 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.
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
prior to 1991. 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
Institutional Trust, MFS/Sun Life Series Trust, 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. BISYS Fund Services (Ireland), Limited ("BISYS"), acting
as agent for the Portfolio, serves as the placement agent of interests in the
Portfolio. BISYS receives no compensation for serving as placement agent.
ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS, whose address is Floor 2,
Block 2, Harcourt Centre, Dublin 2, Ireland, 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, BISYS 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
up to $1 billion; 0.04% of the next $1 billion of such assets; and 0.035% of
such assets in excess of $2 billion.
BISYS 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
BISYS or its affiliates.
BISYS and its affiliates also serve as administrator of other investment
companies. BISYS is an indirect wholly-owned subsidiary of The BISYS Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to a fund accounting agreement, IBT Fund Services (Canada) Inc.
("IBT (Canada)") serves as fund accounting agent to the Portfolio. For its
services to the Portfolio, IBT (Canada) receives fees, payable monthly, equal on
an annual basis to $40,000.
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TRANSFER AGENT
The Portfolio Trust has entered into a Transfer Agency Agreement with
Investors Fund Services (Ireland) Limited ("IFS") pursuant to which IFS acts as
transfer agent (the "Transfer Agent") for the Portfolio. The Transfer Agent
maintains an account for each investor in the Portfolio.
CUSTODIAN
Pursuant to respective Custodian Agreements, Investors Bank & Trust Company
("IBT") acts as the custodian of the foreign assets of the Portfolio and
Republic acts as custodian of the domestic assets of the Funds and the
Portfolios (the "Custodians"). The Portfolio Trust's Custodian Agreements
provide that the Custodian may use the services of sub-custodians with respect
to the Portfolio. The Custodians' 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 Custodians do not determine the investment policies of the
Portfolio or decide which securities will be purchased or sold for the
Portfolio. For their services, IBT and Republic each receives such compensation
as may from time to time be agreed upon by each of them 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 BISYS Fund Services (Ireland)
Limited, Floor 2, Block 2, Harcourt Centre, Dublin 2, Ireland, (011-3531-790-
3700).
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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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 BISYS 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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PART B
FIXED INCOME PORTFOLIO
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History.................................B-
Investment Objective and Policies...............................B-
Management of the Portfolio Trust...............................B-
Control Persons and Principal Holders
of Securities...................................................B-
Investment Advisory and Other Services..........................B-
Brokerage Allocation and Other Practices........................B-
Capital Stock and Other Securities..............................B-
Purchase, Redemption and Pricing of
Securities Being Offered........................................B-
Tax Status......................................................B-
Underwriters....................................................B-
Calculations of Performance Data................................B-
Financial Statements............................................B-
References in this Part B to "Part A" are to the Part A relating to Fixed
Income 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 supplements the information contained in Part A concerning
the investment objective, policies and techniques of the Portfolio.
<PAGE>
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans made
to residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (see "MORTGAGE PASS-THROUGH
SECURITIES"). The Portfolio may also invest in debt securities which are secured
with collateral consisting of mortgage-related securities (see "COLLATERALIZED
MORTGAGE OBLIGATIONS") and in other types of mortgage-related securities.
There are two methods of trading mortgage-backed securities. A specific
pool transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This is
in contrast with the typical mortgage transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be delivered
is specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. For example, in a
TBA transaction an investor could purchase $1 million 30-year FNMA 9s and
receive up to three pools on the settlement date. The pool numbers of the pools
to be delivered at settlement will be announced shortly before settlement takes
place. The terms of the TBA trade may be made more specific if desired. For
example, an investor may request pools with particular characteristics, such as
those that were issued prior to January 1, 1990. The most detailed specification
of the trade is to request that the pool number be known prior to purchase. In
this case the investor has entered into a specific pool transaction. Generally,
agency pass-through mortgage-backed securities are traded on a TBA basis. The
specific pool numbers of the securities purchased do not have to be determined
at the time of the trade.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
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FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the 12 Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues participation
certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Portfolio will not
purchase mortgage-related securities or other assets which in the Sub-Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the
Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and,
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ultimately, the ability of residential homeowners to make payments of principal
and interest on the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC CMOS. FHLMC CMOs are debt obligations of FHLMC issued in multiple
classes having different maturity dates which are secured by the pledge of a
pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs,
payments of principal and interest on the CMOs are made semiannually, as opposed
to monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which, in
turn, is equal to approximately 100% of FHA prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which
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principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
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CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability and may be deemed "illiquid" and subject
to the Portfolio's limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. Similarly, the Sub-Adviser expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors, such as Certificates for Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARSSM are passed through monthly to certificate holders and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
trust. An investor's
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return on CARSSM may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
trust may be prevented from realizing the full amount due on a sales contract
because of state law requirements and restrictions relating to foreclosure sales
of vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
Consistent with the Portfolio's investment objective and policies, the
Sub-Adviser also may invest in other types of asset-backed securities.
BRADY BONDS
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity,
(ii) the collateralized interest payments, (iii) the uncollateralized payments,
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings totalling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
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FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants such as Currency
Exchange Warrants SM ("CEWs"SM) are warrants which entitle the holder to receive
from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign currency and
the U.S. dollar as of the exercise date of the warrant. Foreign currency
warrants generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese yen or German deutsche mark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required to either sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unaccrued obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation (the "OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
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PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities ("PERLs"SM) are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" PERLS is enhanced if the foreign currency to which the security is
linked appreciates against the U.S. dollar, and is adversely affected by
increases in the foreign exchange value of the U.S. dollar; "reverse" PERLS are
like the "standard" securities, except that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of foreign currency. Interest payments on the securities are generally
made in U.S. dollars at rates that reflect the degree of foreign currency risk
assumed or given up by the purchaser of the notes (i.e., at relatively higher
interest rates if the purchaser has assumed some of the foreign exchange risk,
or relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). PERLS may in
limited cases be subject to acceleration of maturity (generally, not without the
consent of the holders of the securities), which may have an adverse impact on
the value of the principal payment to be made at maturity.
PERFORMANCE INDEXED PAPER. Performance indexed paper ("PIPs"SM) is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on PIPs is
established at maturity as a function of the spot exchange rates between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity. The Portfolio has no current intention
of investing in CEWsSM, PERLsSM or PIPsSM.
SOVEREIGN AND SUPRANATIONAL DEBT OBLIGATIONS. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the prepayment of the debt may be unable to unwilling
to repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Portfolio may engage in dollar roll
transaction with respect to mortgage securities issued by the Government
National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. In a dollar roll transaction, the
Portfolio sells a mortgage-backed security and simultaneously agrees to
repurchase a similar security on a specified future date at an agreed upon
price. During the roll period, the Portfolio will not be entitled to receive any
interest or principal paid on the securities sold. The Portfolio is compensated
for the lost interest on the securities sold by the difference between the sales
price and lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds. The Portfolio may also be
compensated by receipt of a commitment fee. When the Portfolio enters into a
mortgage dollar roll transaction, liquid assets in an amount sufficient to pay
for the future repurchase are segregated with the Portfolio's custodian.
Mortgage dollar roll transactions are considered reverse repurchase agreements
for purposes of the Portfolio's investment restrictions.
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PORTFOLIO MANAGEMENT
The Sub-Adviser's investment strategy for achieving the Portfolio's
investment objective has two basic components: maturity and duration management
and value investing.
MATURITY AND DURATION MANAGEMENT. Maturity and duration management
decisions are made in the context of an intermediate maturity orientation. The
maturity structure of the Portfolio is adjusted in anticipation of cyclical
interest rate changes. Such adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of longer term, secular shifts in the levels of interest rates
(i.e., shifts transcending and/or not inherent to the business cycle).
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Sub-Adviser's maturity and duration strategy lies in analysis
of the U.S. and global economies, focusing on levels of real interest rates,
monetary and fiscal policy actions, and cyclical indicators.
VALUE INVESTING. The second component of the Sub-Adviser's investment
strategy for the Portfolio is value investing, whereby the Sub-Adviser seeks to
identify undervalued sectors and securities through analysis of credit quality,
option characteristics and liquidity. Quantitative models are used in
conjunction with judgment and experience to evaluate and select securities with
embedded put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit the portfolio to benefit from the
price appreciation of individual securities during periods when interest rates
are unchanged.
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 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 Investment Company Act of 1940, as amended (the "1940 Act").
As a matter of fundamental policy, the Portfolio will not:
(1)invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
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(3) make loans, except (i) by purchasing debt securities in accordance
with its investment objective and policies, or entering into repurchase
agreements, subject to the limitations described in (h) below and (ii) by
lending its portfolio securities;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such investment) of
the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any
issuer if, as the result, more than 5% of the Portfolio's total assets, taken at
market value at the time of such investment, would be invested in the securities
of such issuer, except that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities;
(6) borrow money, except (i) as a temporary measure for extraordinary
or emergency purposes, or (ii) in connection with reverse repurchase agreements
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent
that the Portfolio may be deemed to be an underwriter within the meaning of the
1933 Act in the disposition of restricted securities); and
(8) acquire any securities of companies within one industry if as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio adopts a temporary defensive position.
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:
(a) 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 net
assets; provided, however, that the Portfolio may not purchase any security
while outstanding borrowings exceed 5%;
(b) invest in futures and/or options on futures to the extent that its
outstanding obligations to purchase securities under any future contracts in
combination with its
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outstanding obligations with respect to options transactions would
exceed 35% of its total assets;
(c) invest in puts, calls, straddles or spreads except as described
above in (a);
(d) invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of its total assets (included within that amount, but
not to exceed 2% of the value of the Portfolio's net assets, may be warrants
that are not listed on the New York Stock Exchange, the American Stock Exchange
or an exchange with comparable listing requirements; warrants attached to
securities are not subject to this limitation);
(e) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it may
make margin deposits in connection with transactions in options, futures, and
options on futures; or sell short unless, by virtue of its ownership of other
securities, it has the right to obtain securities equivalent in kind and amount
to the securities sold and, if the right is conditional, the sale is made upon
the same conditions (transactions in futures contracts and options are not
deemed to constitute selling securities short);
(f) purchase or retain securities of an issuer if those officers and
Trustees of the Portfolio or the Manager or Sub-Adviser owning more than 1/2 of
1% of such securities together own more than 5% of such securities;
(g) pledge, mortgage or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value;
(h) invest more than an aggregate of 15% of the net assets of the
Portfolio, determined at the time of investment, in securities that are illiquid
because their disposition is restricted under the federal securities laws or
securities for which there is no readily available markets; provided, however,
that this policy does not limit the acquisition of (i) securities that have
legal or contractual restrictions on resale but have a readily available market
or (ii) securities that are not registered under the 1933 Act, but which can be
sold to qualified institutional investors in accordance with Rule 144A under the
1933 Act and which are deemed to be liquid pursuant to guidelines adopted by the
Board of Trustees ("Restricted Securities");
(i) invest more than 25% of its assets in Restricted Securities
(including Rule 144A Securities);
(j) invest for the purpose of exercising control over management of any
company;
(k) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers' commissions or
in connection with mergers, acquisitions of assets or consolidations and except
as may otherwise be permitted
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by the 1940 Act; provided, however, that the Portfolio shall not invest in
the shares of any open-end investment company unless (1) the Portfolio's Adviser
waives any investment advisory fees with respect to such assets and (2) the
Portfolio pays no sales charge in connection with the investment;
(l) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign government or
political subdivisions thereof) which have (with predecessors) a record of less
than three years' continuous operations; and
(m) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases.
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.
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.
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MICHAEL SEELY, TRUSTEE, 405 Lexington Avenue, Suite 909, New York, New York
10174 - President of Investor Access Corporation (investor relations consulting
firm).
GEORGE O. MARTINEZ*, President and Secretary, Senior Vice President and
Director of Legal and Compliance Services, BISYS Fund Services, Inc., March 1995
to present; Senior Vice President, Emerald Asset Management, Inc., August 1995
to present; Vice President and Associate General Counsel, Alliance Capital
Management, June 1989 to March 1995.
KAREN DOYLE*, Vice President, Manager of Client Services for BISYS Fund
Services, Inc., October 1994 to present; from 1979 to October 1994, an employee
of the Bank of New York.
FRANK M. DEUTCHKI*, Vice President, Employee of BISYS Fund Services, Inc.,
April 1996 to present; Vice President, Chase Global Funds Service, September
1995 to April 1996; Vice President, Mutual Funds Service Company, 1989 to
September 1995.
ADRIAN WATERS*, Treasurer, Employee of BISYS Fund Services (Ireland) LTD.,
May 1993 to present; Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer, Employee of BISYS Fund Services
(Ireland) LTD., March 1994 to present; Supervisor, Price Waterhouse, 1990 to
March 1994.
ALAINA METZ*, Assistant Secretary, Chief Administrator, Administrative and
Regulatory Services, BISYS Fund Services, Inc., June 1995 to present;
Supervisor, Mutual Fund Legal Department, Alliance Capital Management, May 1989
to June 1995.
COMPENSATION TABLE
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
Frederick C. Chen 1,139 none none $8,600
Alan S. Parsow 1,139 none none $7,600
Larry M. Robbins 1,328 none none $7,600
Michael Seely 1,139 none none $7,600
* The Fund Complex includes the Portfolio Trust, Republic Funds and
Republic Advisor Funds Trust.
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The compensation table above reflects the fees received by the Trustees
from the Portfolio for the fiscal year ended October 31, 1997. The Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Portfolio will
receive an annual retainer of $5,600 and a fee of $1,000 for each meeting of the
Board of Trustees or committee thereof attended, except that Mr. Robbins will
receive an annual retainer of $7,600 and a fee of $1,000 for each meeting
attended.
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.
Moreover, Republic, its officers and employees do not express any opinion
with respect to the advisability of any purchase of such securities.
As of December 8, 1997, the Trustees and officers of the Portfolio Trust,
as a group, owned less than 1% of the outstanding shares of the Portfolio.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 8, 1997, Republic Fixed Income Fund owned 60.05%, Republic
Bond Fund owned 2.59% and Republic Fixed Income Fund Ltd. owned 37.36% of the
aggregate outstanding interests in the Portfolio. A holder who controls more
than 25% of the outstanding beneficial interests in the Portfolio may take
actions without the approval of other 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 investment manager is entitled to receive
a fee from the Portfolio, computed daily and paid monthly, equal on an annual
basis to 0.20% of the Portfolio's average daily net assets. For the period from
January 9, 1995 (Portfolio commencement of operations) to October 31, 1995 and
for the fiscal years ended October 31, 1996 and October 31, 1997, investment
management fees aggregated $0, $98,923 and $184,724, respectively, of which the
entire amounts were waived.
The Investment Management Contract will continue in effect from year to
year 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 such
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Agreement may be terminated with respect to the Portfolio without
penalty by either party on 60 days' written notice and will terminate
automatically if assigned.
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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.
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
Pursuant to a sub-advisory agreement with Republic (the "Sub-Advisory
Agreement"), MAS, 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 MAS
or Republic in its discretion. See Item 17. MAS also furnishes to the Board of
Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
For its services, MAS receives from the Portfolio a fee, computed daily and
based on the Portfolio's average daily net assets, equal on an annual basis to
0.375% on net assets up to $50 million, 0.25% on net assets over $50 million and
up to $95 million, $300,000 on net assets over $95 million and up to $150
million, 0.20% on net assets over $150 million and up to $250 million, and 0.15%
on net assets over $250 million. For the period from January 9, 1995
(commencement of operations) to October 31, 1995 and for the fiscal years ended
October 31, 1996 and October 31, 1997, sub-advisory fees aggregated $53,963,
$185,480 and $276,784, respectively.
The investment advisory services of MAS to the Portfolio are not exclusive
under the terms of the Sub-Advisory Agreement. MAS is free to and does render
investment advisory services to others.
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ADMINISTRATOR
The Administration Agreement will remain in effect until March 31, 1999,
and automatically will continue in effect thereafter from year to year unless
terminated upon 60 days' written notice to BISYS. The Administration Agreement
will terminate automatically in the event of its assignment. The Administration
Agreement also provides that neither BISYS nor its personnel shall be liable for
any error of judgment or mistake of law or for any act or omission in the
administration or management of the Portfolio Trust 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 Administration Agreement.
For the period from January 9, 1995 (Portfolio commencement of operations)
to October 31, 1995 and for the fiscal years ended October 31, 1996 and October
31, 1997, the Portfolio accrued administration fees of $7,195, $24,731 and
$46,181, respectively.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT
With respect to domestic assets, Republic serves as custodian for the
Portfolio. With respect to foreign assets, Investors Bank & Trust Company
("IBT") serves as custodian for the Portfolio. The Custodians may use the
services of sub-custodians with respect to the Portfolio. The principal business
address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117. IBT Fund
Services (Canada) Inc. serves as the fund accounting agent for the Portfolio,
and Investors Fund Services (Ireland) Limited is the Portfolio's transfer agent.
EXPENSES
Republic has voluntarily agreed to waive a portion of its fees, and to the
extent necessary, reimburse the Portfolios for additional expenses. For the
period ended October 31, 1995 and the years ended October 31, 1996 and October
31, 1997, expenses of the Portfolio were voluntarily limited to no more than
0.46%, 0.67% and 0.57%, respectively, of average daily net assets on an
annualized basis. For the period ended October 31, 1995 and the years ended
October 31, 1996 and October 31, 1997, the fees waived and expenses reimbursed
aggregated $77,292, $113,452 and $184,724, respectively.
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INDEPENDENT AUDITORS
The Portfolio has appointed KPMG, Toronto, Canada as its independent
accountant for the fiscal year ended October 31, 1998, who will audit its
financial statements.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, acts
as counsel to the Portfolio Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Sub-Adviser is primarily responsible for portfolio decisions and the
placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of portfolio investments
for the Portfolio with Republic New York Securities Corporation.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), the Sub-Adviser may cause the Portfolio to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Sub-Adviser an amount of commission for effecting a securities transaction
for the Portfolio in excess of the commission which another broker-dealer would
have charged for effecting that transaction.
Investment decisions for the Portfolio and for the other investment
advisory clients of the Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security may be sold for certain clients even though it could have been bought
for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Sub-Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Portfolio and for other clients of the Sub-
Adviser occur contemporaneously, the purchase or sale orders may be aggregated
in
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<PAGE>
order to obtain any price advantage available to large denomination
purchases or sales. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients in terms of the price paid or received or of the size of the
position obtainable.
Because the Portfolio invests primarily in fixed-income securities, it is
anticipated that most purchases and sales will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
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 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.
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<PAGE>
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's Trustees it is necessary or desirable to
submit matters for an investor vote. The Portfolio Trust's 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's
registration statement, or as submitted to 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's 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
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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's 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.
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.
An investor in the Portfolio may add to or reduce its investment in the
Portfolio on each Portfolio Business Day. As of the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
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 reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
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 the Valuation
Time on such day plus or minus, as the case may be, the amount of net additions
to or reductions in the investor's investment in the Portfolio effected as of
the Valuation Time, and (ii) the denominator of which is the aggregate net asset
value of the Portfolio as of the Valuation Time on such day, plus or minus, as
the case may be, the amount of net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of the Valuation Time on the following Portfolio
Business Day.
Bonds and other fixed-income securities listed on a foreign exchange are
valued at the latest quoted sales price available before the time when assets
are valued. For
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purposes of determining the Portfolio's net asset value, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the bid price of such currencies against U.S. dollars last
quoted by any major bank.
Bonds and other fixed-income securities which are traded over-the-counter
and on a stock exchange will be valued according to the broadest and most
representative market, and it is expected that for bonds and other fixed-income
securities this ordinarily will be the over-the-counter market. Bonds and other
fixed income securities (other than short-term obligations but including listed
issues) in the Portfolio's portfolio may be valued on the basis of valuations
furnished by a pricing service, use of which has been approved by the Board of
Trustees of the Portfolio Trust. In making such valuations, the pricing service
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Portfolio Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such valuations are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of the Portfolio Trust.
Interest income on long-term obligations in the Portfolio's portfolio is
determined on the basis of interest accrued plus amortization of "original issue
discount" (generally, the difference between issue price and stated redemption
price at maturity) and premiums (generally, the excess of purchase price over
stated redemption price at maturity). Interest income on short-term obligations
is determined on the basis of interest accrued plus amortization of premium.
Subject to the Portfolio Trust's compliance with applicable regulations,
the Portfolio Trust has reserved the right to pay the withdrawal price of
beneficial interests in the Portfolio, either totally or partially, by a
distribution in kind of portfolio securities (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 beneficial interest being sold. If an
investor received a distribution in kind, the investor could incur brokerage or
other charges in converting the securities to cash.
ITEM 20. TAX STATUS.
The following is a summary of certain U.S. federal and state income tax
issues concerning the Portfolio and its investors. This discussion does not
purport to be complete or to deal with all relevant aspects of federal, state,
local or foreign taxation. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive.
The Portfolio Trust is organized as a New York trust. 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
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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.
Each year, in order for an investor that is a registered investment company
("Fund") to qualify as a "regulated investment company" ("RIC") under the Code,
at least 90% of the Fund'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) must be distributed to Fund
shareholders and the Fund must meet certain diversification of assets, source of
income, and other requirements. If the Fund does not so qualify, it will be
taxed as an ordinary corporation.
The Portfolio Trust has obtained a ruling from the Internal Revenue Service
that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether each Fund satisfies the income
and diversification requirements to maintain its status as a RIC, each Fund, as
an investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share. The Portfolio Trust has advised
the Funds that it intends to manage Portfolio operations and investments so as
to enable each Fund to qualify each year as a RIC.
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.
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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. 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, an investor 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.
Under certain circumstances, investors may be taxed on income deemed to be
earned from certain CMO residuals.
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP CONTRACTS
Some of the options, futures contracts, forward contracts and swap
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.
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Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap 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 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,
forward contracts and swap contracts to the Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
the Portfolio.
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.
Rules governing the tax aspects of swap contracts are in a developing stage
and are not entirely clear in certain respects. Accordingly, while an investor
intends to account for such transactions in a manner deemed to be appropriate,
the Internal Revenue Service might not necessarily accept such treatment. If it
does not, the status of the investor as a regulated investment company might be
affected. Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Portfolio will be able to engage in swap agreements.
Recently enacted rules may affect the timing and character of gain if the
Portfolio engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Portfolio enters into certain
transactions in property while holding substantially identical property, the
Portfolio would be treated as if it had sold and immediately repurchased the
property and would recognize gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Portfolio's
holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Portfolio's holding period and the application of various
loss deferral provisions of the Code.
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.
B-25
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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.
Earnings derived by the Portfolio from sources outside the U.S. may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty and the
Portfolio would undertake any procedural steps required to claim the benefits of
such a treaty. With respect to any non-U.S. taxes actually paid by the
Portfolio, if more than 50% in value of the Portfolio's total assets at the
close of any taxable year consists of securities of foreign corporations, a Fund
will elect to treat its share of any non-U.S. income and similar taxes the
Portfolio pays as though the taxes were paid by the Fund's shareholders.
ITEM 21. UNDERWRITERS.
The exclusive placement agent of the Portfolio Trust is BISYS Fund Services
(Ireland) Limited, which receives no additional compensation for serving in this
capacity. Other investment 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.
The financial statements included in Republic Portfolios' current report to
Investors filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule
30b2-1 thereunder are hereby incorporated herein by reference.
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<PAGE>
PART B
INTERNATIONAL EQUITY PORTFOLIO
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History................................B-
Investment Objective and Policies..............................B-
Management of the Portfolio Trust..............................B-
Control Persons and Principal Holders
of Securities..................................................B-
Investment Advisory and Other Services.........................B-
Brokerage Allocation and Other Practices.......................B-
Capital Stock and Other Securities.............................B-
Purchase, Redemption and Pricing of
Securities Being Offered.......................................B-
Tax Status.....................................................B-
Underwriters...................................................B-
Calculations of Performance Data...............................B-
Financial Statements...........................................B-
References in this Part B to "Part A" are to the Part A relating to
International 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 supplements the information contained in Part A concerning
the investment objective, policies and techniques of the Portfolio.
<PAGE>
U.S. GOVERNMENT SECURITIES
For liquidity purposes and for temporary defensive purposes, the Portfolio
may invest in U.S. Government securities held directly or under repurchase
agreements. U.S. Government securities include bills, notes, and bonds issued by
the U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government.
Some U.S. Government securities are supported by the direct full faith and
credit pledge of the U.S. Government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as securities issued by
the Federal National Mortgage Association ("FNMA"), are supported by the
discretionary authority of the U.S. Government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. Government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
The Portfolio may buy securities that are convertible into common stock.
The following is a brief description of the various types of convertible
securities in which the Portfolio may invest.
CONVERTIBLE BONDS are issued with lower coupons than non-convertible bonds
of the same quality and maturity, but they give holders the option to exchange
their bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value, and the option to convert to common shares becomes
more valuable.
CONVERTIBLE PREFERRED STOCKS are non-voting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific price
for a specific period of time. The price of a warrant tends to be more volatile
than, and does not always track, the price of its underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
RIGHTS represent a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public.
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<PAGE>
REPURCHASE AGREEMENTS
The Portfolio may invest in instruments subject to repurchase agreements
only with member banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in U.S. Government
securities. Under the terms of a typical repurchase agreement, an underlying
debt instrument would be acquired for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase the
instrument at a fixed price and time, thereby determining the yield during the
Portfolio's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. A repurchase agreement is subject
to the risk that the seller may fail to repurchase the security. Repurchase
agreements may be deemed to be loans under the Investment Company Act of 1940,
as amended (the "1940 Act"). All repurchase agreements entered into on behalf of
the Portfolio are fully collateralized at all times during the period of the
agreement in that the value of the underlying security is at least equal to the
amount of the loan, including accrued interest thereon, and the Portfolio or its
custodian bank has possession of the collateral, which the Portfolio Trust's
Board of Trustees believes gives the Portfolio a valid, perfected security
interest in the collateral. Whether a repurchase agreement is the purchase and
sale of a security or a collateralized loan has not been definitively
established. This could become an issue in the event of the bankruptcy of the
other party to the transaction. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Portfolio but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Portfolio may
suffer time delays and incur costs in connection with the disposition of the
collateral. The Board of Trustees of the Portfolio Trust believes that the
collateral underlying repurchase agreements may be more susceptible to claims of
the seller's creditors than would be the case with securities owned by the
Portfolio. The Portfolio will not invest in a repurchase agreement maturing in
more than seven days if any such investment together with illiquid securities
held for the Portfolio exceed 10% of the Portfolio's net assets.
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 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)invest in physical commodities or contracts on physical commodities:
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<PAGE>
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
(3) make loans except for the lending of portfolio securities pursuant
to guidelines established by the Board of Trustees and except as otherwise in
accordance with the Portfolio's investment objective and policies;
(4) borrow money, except from a bank as a temporary measure to satisfy
withdrawal requests or for extraordinary or emergency purposes, provided that
the Portfolio maintains asset coverage of at least 300% for all such borrowings;
(5) underwrite the securities of other issuers (except to the extent
that the Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities);
(6) acquire any securities of companies within one industry, if as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio adopts a temporary defensive position;
(7) issue senior securities, except as permitted under the 1940 Act;
(8) with respect to 75% of its assets, the Portfolio will not purchase
securities of any issuer if, as a result, more than 5% of the Portfolio's total
assets taken at market value would be invested in the securities of any single
issuer;
(9) with respect to 75% of its assets, the Portfolio will not purchase
a security if, as a result, the Portfolio would hold more than 10% of the
outstanding voting securities of any 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:
(1) sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options and futures contracts are not deemed to
constitute short sales of securities;
(2) purchase warrants, valued at the lower of cost or market, in excess
of 10% of the value of its net assets. Included within that amount, but not to
exceed 2% of the value of the Portfolio's net assets, may be warrants that are
not listed on the New York or American
B-4
<PAGE>
Stock Exchanges or an exchange with comparable listing requirements. Warrants
attached to securities are not subject to this limitation;
(3) purchase securities on margin, except for use of short-term credit
as may be necessary for the clearance of purchases and sales of securities, but
it may make margin deposits in connection with transactions in options, futures,
and options on futures;
(4) invest in securities that are not readily marketable or that are
illiquid because their disposition is restricted under the federal securities
laws other than securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but which can be sold to qualified
institutional investors in accordance with Rule 144A under the 1933 Act
(collectively, "illiquid securities"), if, as a result, more than 15% of the
Portfolio's net assets would be invested in illiquid securities;
(5) invest more than 10% of the Portfolio's assets in restricted
securities (including Rule 144A securities);
(6) invest for the purpose of exercising control over management of any
company;
(7) invest its assets in securities of any investment company, except
by purchase in the open market involving only customary brokers' commissions or
in connection with mergers, acquisitions of assets or consolidations and except
as may otherwise be permitted by the 1940 Act;
(8) invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign government or
political subdivisions thereof) which have (with predecessors) a record of less
than three years' continuous operations;
(9) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases.
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.
B-5
<PAGE>
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.
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).
GEORGE O. MARTINEZ*, President and Secretary, Senior Vice President and
Director of Legal and Compliance Services, BISYS Fund Services, Inc., March 1995
to present; Senior Vice President, Emerald Asset Management, Inc., August 1995
to present; Vice President and Associate General Counsel, Alliance Capital
Management, June 1989 to March 1995.
KAREN DOYLE*, Vice President, Manager of Client Services for BISYS Fund
Services, Inc., October 1994 to present; from 1979 to October 1994, an employee
of the Bank of New York.
FRANK M. DEUTCHKI*, Vice President, Employee of BISYS Fund Services, Inc.,
April 1996 to present; Vice President, Chase Global Funds Service, September
1995 to April 1996; Vice President, Mutual Funds Service Company, 1989 to
September 1995.
ADRIAN WATERS*, Treasurer, Employee of BISYS Fund Services (Ireland) LTD.,
May 1993 to present; Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer, Employee of BISYS Fund Services
(Ireland) LTD., March 1994 to present; Supervisor, Price Waterhouse, 1990 to
March 1994.
ALAINA METZ*, Assistant Secretary, Chief Administrator, Administrative and
Regulatory Services, BISYS Fund Services, Inc., June 1995 to present;
Supervisor, Mutual Fund Legal Department, Alliance Capital Management, May 1989
to June 1995.
COMPENSATION TABLE
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
Frederick C. Chen $2,453 none none $8,600
Alan S. Parsow $2,453 none none $7,600
Larry M. Robbins $2,861 none none $7,600
Michael Seely $2,453 none none $7,600
* The Fund Complex includes the Portfolio Trust, Republic Funds and
Republic Advisor Funds Trust.
<PAGE>
The compensation table above reflects the fees received by the Trustees
from the Portfolio for the fiscal year ended October 31, 1997. The Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Portfolio will
receive an annual retainer of $5,600 and a fee of $1,000 for each meeting of the
Board of Trustees or committee thereof attended, except that Mr. Robbins will
receive an annual retainer of $7,600 and a fee of $1,000 for each meeting
attended.
As of December 8, 1997, the Trustees and officers of the Portfolio Trust,
as a group, owned less than 1% of the outstanding shares 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 December 8, 1997, Republic International Equity Fund owned 63.73%,
Republic Overseas Equity Fund owned 1.76% and Republic International Equity
Fund, Ltd. owned 34.51% of the aggregate outstanding interests in the Portfolio.
A holder who controls more than 25% of the outstanding beneficial shares in the
Portfolio may take actions without the approval of other 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 entitled to receive a fee from
the Portfolio, computed daily and paid monthly, equal on an annual basis to
0.25% of the Portfolio's average daily net assets. For the period from January
9, 1995 (Portfolio commencement of operations) to October 31, 1995 and for the
fiscal years ended October 31, 1996 and October 31, 1997, investment management
fees aggregated $0, $243,751 and $466,480, respectively, of which the entire
amounts were waived.
The Investment Management Contract will continue in effect with respect to
the Portfolio, provided such continuance is approved at least 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.
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<PAGE>
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 such Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Agreement 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.
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
Pursuant to a sub-advisory agreement with Republic (the "Sub-Advisory
Agreement"), CGTC, 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
Republic in its discretion. See Item 17. CGTC also furnishes to the Board of
Trustees of the Portfolio Trust, which has overall responsibility for the
business and affairs of the Portfolio Trust, periodic reports on the investment
performance of the Portfolio.
For its services, CGTC receives from the Portfolio a fee, computed daily
and based on the Portfolio's average daily net assets, at the annual rate of
0.70% of net assets up to $25 million, 0.55% of net assets over $25 million up
to $50 million, 0.425% of net assets over $50 million up to $250 million, and
0.375% of net assets in excess of $250 million. For the
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period from January 9, 1995 (commencement of operations) to October 31, 1995 and
for the fiscal years ended October 31, 1996 and October 31, 1997, sub-advisory
fees aggregated $131,059, $514,874, and $893,016, respectively.
The investment advisory services of CGTC to the Portfolio are not exclusive
under the terms of the Sub-Advisory Agreement. CGTC is free to and does render
investment advisory services to others.
ADMINISTRATOR
The Administration Agreement will remain in effect until March 31, 1999,
and automatically will continue in effect thereafter from year to year unless
terminated upon 60 days' written notice to BISYS. The Administration Agreement
will terminate automatically in the event of its assignment. The Administration
Agreement also provides that neither BISYS nor its personnel shall be liable for
any error of judgment or mistake of law or for any act or omission in the
administration or management of the Portfolio Trust 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 Administration Agreement.
For the period from January 9, 1995 (Portfolio commencement of operations)
to October 31, 1995, and for the fiscal years ended October 31, 1996 and October
31, 1997, the Portfolio accrued administration fees of $9,433, $48,750 (of which
$177 was waived voluntarily) and $93,296 (none of which was waived),
respectively.
CUSTODIAN, TRANSFER AGENT, AND FUND ACCOUNTING AGENTS
With respect to domestic assets, Republic serves as custodian for the Fund
and the Portfolio. With respect to foreign assets, Investors Bank & Trust
Company ("IBT") serves as custodian for the Portfolio. The Custodians may use
the services of sub-custodians with respect to the Portfolio. The principal
business address of IBT is 200 Clarendon Street, Boston, Massachusetts 02117.
IBT Fund Services (Canada) Inc. serves as the fund accounting agent for the
Portfolio, and Investors Fund Services (Ireland) Limited is the Portfolio's
transfer agent.
EXPENSES
Republic has voluntarily agreed to waive a portion of its fees, and to the
extent necessary, reimburse the Portfolio for additional expenses. For the
period ended October 31, 1995 and for the fiscal years ended October 31, 1996
and October 31, 1997, expenses of the Portfolio were voluntarily limited to no
more than 0.64%, 0.83% and 0.76%, respectively, of average daily net assets on
an annualized basis. For the period ended October 31, 1995 and for the fiscal
years ended October 31, 1996 and October 31, 1997, the amount of fees waived and
expenses reimbursed aggregated $142,669, $262,712 and $466,480, respectively.
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<PAGE>
INDEPENDENT AUDITORS
The Portfolio has appointed KPMG, Toronto, Ontario as its independent
auditor for the fiscal year ended October 31, 1998. KPMG will audit the
Portfolio's financial statements.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, acts
as counsel to the Portfolio Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Sub-Adviser is primarily responsible for portfolio decisions and the
placing of portfolio transactions. In placing orders for the Portfolio, the
primary consideration is prompt execution of orders in an effective manner at
the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Sub-Adviser may place orders for the purchase and sale of portfolio investments
for the Portfolio with Republic New York Securities Corporation.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), the Sub-Adviser may cause the Portfolio to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Sub-Adviser an amount of commission for effecting a securities transaction
for the Portfolio in excess of the commission which another broker-dealer would
have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such other policies as the Trustees of the
Portfolio Trust may determine, and subject to seeking the most favorable price
and execution available, the Sub-Adviser may consider sales of shares of
investors in the Portfolio as a factor in the selection of broker-dealers to
execute portfolio transactions for the Portfolio.
Investment decisions for the Portfolio and for the other investment
advisory clients of the Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security
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may be sold for certain clients even though it could have been bought for
other clients at the same time. Likewise, a particular security may be bought
for one or more clients when one or more other clients are selling that same
security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Sub-Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Portfolio and for other clients of the
Sub-Adviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantage available to large
denomination purchases or sales. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients in terms of the price paid or received or of the size of
the position obtainable.
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's 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 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.
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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's Trustees it is necessary or desirable to
submit matters for an investor vote. The Portfolio Trust's 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's
registration statement, or as submitted to 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.
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The Portfolio Trust's 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's 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.
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, Martin Luther King, Jr. 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.
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ITEM 20. TAX STATUS.
The following is a summary of certain U.S. federal and state income tax
issues concerning the Portfolio and its investors. This discussion does not
purport to be complete or to deal with all relevant aspects of federal, state,
local or foreign taxation. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive.
The Portfolio Trust is organized as a New York trust. 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.
Each year, in order for an investor that is a registered investment company
("Fund") to qualify as a "regulated investment company" ("RIC") under the Code,
at least 90% of the Fund'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) must be distributed to Fund
shareholders and the Fund must meet certain diversification of assets, source of
income, and other requirements. If the Fund does not so qualify, it will be
taxed as an ordinary corporation.
The Portfolio Trust has obtained a ruling from the Internal Revenue Service
that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether each Fund satisfies the income
and diversification requirements to maintain its status as a RIC, each Fund, as
an investor in the Portfolio, will be deemed to own a proportionate share of the
Portfolio's income attributable to that share. The Portfolio Trust has advised
the Funds that it intends to conduct the Portfolio's operations and investments
so as to enable each Fund to qualify each year as a RIC.
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
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<PAGE>
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. 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, an investor 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.
Under certain circumstances, investors may be taxed on income deemed to be
earned from certain CMO residuals.
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
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<PAGE>
capital gains or losses.
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 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.
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.
Rules governing the tax aspects of swap contracts are in a developing stage
and are not entirely clear in certain respects. Accordingly, while an investor
intends to account for such transactions in a manner deemed to be appropriate,
the Internal Revenue Service might not necessarily accept such treatment. If it
does not, the status of the investor as a regulated investment company might be
affected. Certain requirements that must be net under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Portfolio will be able to engage in swap agreements.
Recently enacted rules may affect the timing and character of gain if the
Portfolio engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Portfolio enters into certain
transactions in property while holding substantially identical property, the
Portfolio would be treated as if it had sold and immediately repurchased the
property and would recognize gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Portfolio's
holding period in the property. Loss from a constructive sale would recognized
when the property was subsequently disposed of, and its character would depend
on the Portfolio's holding period and the application of various loss deferral
provisions of the Code.
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, investors may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the investor to shareholders. 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 taxable years and an
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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.
Alternative tax treatment may be available 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. Alternatively, another election would
involve marking to market the Portfolio's PFIC shares at the end of each taxable
year, with the result that unrealized gains are treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any loss
from an actual disposition of PFIC shares would be deductible as ordinary losses
to the extent of any net mark-to-market gains included in income in prior years.
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.
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ITEM 21. UNDERWRITERS.
The exclusive placement agent of the Portfolio Trust is BISYS Fund Services
(Ireland) Limited, which receives no additional compensation for serving in this
capacity. Other investment 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.
The financial statements included in Republic Portfolios' current report to
Investors filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule
30b2-1 thereunder are hereby incorporated herein by reference.
B-18
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PART B
SMALL CAP EQUITY PORTFOLIO
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History...................................B-
Investment Objective and Policies.................................B-
Management of the Portfolio Trust.................................B-
Control Persons and Principal Holders
of Securities.....................................................B-
Investment Advisory and Other Services............................B-
Brokerage Allocation and Other Practices..........................B-
Capital Stock and Other Securities................................B-
Purchase, Redemption and Pricing of
Securities Being Offered..........................................B-
Tax Status........................................................B-
Underwriters......................................................B-
Calculations of Performance Data..................................B-
Financial Statements..............................................B-
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.
Furthermore, 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, Futures 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
B-14
<PAGE>
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
B-15
<PAGE>
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).
GEORGE O. MARTINEZ*, President and Secretary, Senior Vice President and
Director of Legal and Compliance Services, BISYS Fund Services, Inc., March 1995
to present; Senior Vice President, Emerald Asset Management, Inc., August 1995
to present; Vice President and Associate General Counsel, Alliance Capital
Management, June 1989 to March 1995.
KAREN DOYLE*, Vice President, Manager of Client Services for BISYS Fund
Services, Inc., October 1994 to present; from 1979 to October 1994, an employee
of the Bank of New York.
FRANK M. DEUTCHKI*, Vice President, Employee of BISYS Fund Services, Inc.,
April 1996 to present; Vice President, Chase Global Funds Service, September
1995 to April 1996; Vice President, Mutual Funds Service Company, 1989 to
September 1995.
ADRIAN WATERS*, Treasurer, Employee of BISYS Fund Services (Ireland) LTD.,
May 1993 to present; Manager, Price Waterhouse, 1989 to May 1993.
CATHERINE BRADY*, Assistant Treasurer, Employee of BISYS Fund Services
(Ireland) LTD., March 1994 to present; Supervisor, Price Waterhouse, 1990 to
March 1994.
ALAINA METZ*, Assistant Secretary, Chief Administrator, Administrative and
Regulatory Services, BISYS Fund Services, Inc., June 1995 to present;
Supervisor, Mutual Fund Legal Department, Alliance Capital Management, May 1989
to June 1995.
B-21
<PAGE>
COMPENSATION TABLE
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
Frederick C. Chen $2,365 none none $8,600
Alan S. Parsow $2,365 none none $7,600
Larry M. Robbins $2,760 none none $7,600
Michael Seely $2,365 none none $7,600
* The Fund Complex includes the Republic Funds, Republic Advisor Funds
Trust and the Portfolio Trust.
The compensation table above reflects the fees received by the Trustees for
the fiscal year ended October 31, 1997 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 $5,600 and a
fee of $1,000 for each meeting of the Board of Trustees or committee thereof
attended, except that Mr. Robbins will receive an annual retainer of $7,600 and
a fee of $1,000 for each meeting attended.
B-22
<PAGE>
As of December 8, 1997, 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 December 8, 1997, the Republic Small Cap Equity Fund owned 62.85%,
the Republic Opportunity Fund owned 5.02% and the Republic Small Cap Equity
Fund, Ltd. owned 32.13% of the aggregate outstanding interests in the Portfolio.
A holder who controls more than 25% of the outstanding beneficial shares in the
Portfolio may take actions without the approval of the other 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. For the period September 3, 1996
(Portfolio commencement of operations) to October 31, 1996 and for the fiscal
year ended October 31, 1997, investment management fees aggregated $30,803 and
$429,442, respectively, the entire amounts of which were waived.
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 business 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 is a wholly owned subsidiary of Sun
Life of Canada (U.S.) Holdings, Inc., which is in turn 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. For the period from September 3, 1996 (Portfolio
commencement of operations) to October 31, 1996 and for the fiscal year ended
October 31, 1997, sub-advisory fees aggregated $85,616 and $1,104,635,
respectively.
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 Administration Agreement will remain in effect until March 31, 1999,
and automatically will continue in effect thereafter from year to year unless
terminated upon 60 days' written notice to BISYS (Ireland). The Administration
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement also provides that neither BISYS (Ireland) nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the administration or management of the Portfolio Trust
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 Administration Agreement.
For the fiscal period ended October 31, 1996 and for the fiscal year ended
October 31, 1997, the Portfolio accrued administration fees equal to $6,161 (of
which $2,683 was waived) and $85,889 (none of which was waived), respectively.
CUSTODIAN, TRANSFER AGENTS AND FUND ACCOUNT AGENTS
With respect to domestic assets, Republic serves as custodian for the
Portfolio. With respect to foreign assets, Investors Bank & Trust Company
("IBT") serves as custodian for the Portfolio. A custodian may use the services
of sub-custodians with respect to the Portfolio. The principal business address
of IBT is 200 Clarendon Street, Boston, Massachusetts 02117. IBT Fund Services
(Canada) Inc. serves as the fund accounting agent for the Portfolio, and
Investors Fund Services (Ireland) Limited is the Portfolio's transfer agent.
EXPENSES
Republic has voluntarily agreed to waive a portion of its fees, and to the
extent necessary, reimburse the Portfolio for additional expenses. For the
period ended October 31, 1996 and for the fiscal year ended October 31, 1997,
expenses of the Portfolio were voluntarily limited to no more than 0.82% and
0.84%, respectively, of average daily net assets on an annualized basis. For the
period ended October 31, 1996 and for the fiscal year ended October 31, 1997,
the amount of the fees waived and expenses reimbursed aggregated $35,152 and
$429,442, respectively.
INDEPENDENT AUDITORS
The Portfolio Trust has appointed KPMG, Toronto, Ontario as its independent
auditors to audit the Portfolio's financial statements for the fiscal year
ending October 31, 1998.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, 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.
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<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's 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
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<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's Trustees it is necessary or desirable to
submit matters for an investor vote. The Portfolio Trust's 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's
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's 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's 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, Martin Luther King, Jr. 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 following is a summary of certain U.S. federal and state income tax
issues concerning the Portfolio and its investors. This discussion does not
purport to be complete or to deal with all relevant aspects of federal, state,
local or foreign taxation. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive.
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.
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<PAGE>
Each year, in order for an investor that is a registered investment company
(the "Fund") to qualify as a "regulated investment company" ("RIC") under the
Code, it must distribute at least 90% of its 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 its shareholders
and must meet certain diversification of assets, source of income, and other
requirements. If the Fund does not so qualify, it will be taxed as an ordinary
corporation.
The Portfolio Trust has obtained a ruling from Internal Revenue Service for
that the Portfolio will be treated for federal income tax purposes as a
partnership. 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. The Portfolio Trust has advised
the Funds that it intends to conduct the Portfolio's operations and investments
so as to enable each Fund to qualify each year as a RIC.
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, an investor 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.
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.
Recently enacted rules may affect the timing and character of gain if the
Portfolio engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Portfolio enters into certain
transactions in property while holding substantially identical property, the
Portfolio would be treated as if it had sold and immediately repurchased the
property and would recognize gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Portfolio's
holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Portfolio's holding period and the application of various
loss deferral provisions of the Code.
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>
Alternative tax treatment may be available 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. Alternatively, another election would
involve marking to market the Portfolio's PFIC shares at the end of each taxable
year, with the result that unrealized gains are treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any loss
from an actual disposition of PFIC shares would be deductible as ordinary losses
to the extent of any net mark-to-market gains included in income in prior years.
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.
ITEM 21. UNDERWRITERS.
The exclusive placement agent of the Portfolio Trust is BISYS Fund Services
(Ireland) Limited, 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.
The financial statements included in Republic Portfolios' current report to
investors filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule
30b2-1 thereunder are hereby incorporated by reference.
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:
REPUBLIC FIXED INCOME PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Report of Independent Auditors
REPUBLIC INTERNATIONAL EQUITY PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Report of Independent Auditors
REPUBLIC SMALL CAP EQUITY PORTFOLIO
Schedule of Investments, October 31, 1997
Statement of Assets and Liabilities, October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the Period September 3,1996(commencement
of operation) to October 31, 1996 and the year ended October 31, 1997
Financial Highlights
Notes to Financial Statements, October 31, 1997
Report of Independent Auditors
(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 BISYS
Fund Services (Ireland) Limited ("BISYS (Ireland)").4
8. Custodian Agreement between Republic Portfolios and Investors Bank & Trust
Company.2
9. Administration Agreement between Republic Portfolios and BISYS (Ireland).4
11. Consent of Independent Auditors.*
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.*
<PAGE>
- ----------------------
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. Incorporated herein by reference from amendment no. 2 to the Registration
Statement as filed with the SEC on July 1, 1996.
4. Incorporated herein by reference from amendment no. 3 to the Registration
Statement as filed with the SEC on February 28, 1997.
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 20, 1998, the number of record holders of each Portfolio was
as follows:
Fixed Income Portfolio: 3
International Equity Portfolio: 3
Small Cap Equity Portfolio: 3
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):
<PAGE>
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.
<PAGE>
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)
<PAGE>
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)
<PAGE>
Edus H. Warren, Jr.
Senior Vice President and Director, CGTC.(7)
- --------------------------------------
(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, BISYS Fund Services (Ireland) Limited,
Floor 2, Block 2, Harcourt Centre, Dublin 2, Ireland 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 post-effective amendment to its
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereto duly authorized on the 25th day of February, 1998.
REPUBLIC PORTFOLIOS
By /s/CATHERINE BRADY
--------------------
Catherine Brady
Assistant Treasurer
<PAGE>
EXHIBIT INDEX
NO. EXHIBIT
11 Consent of Independent Auditors
17 Financial Data Schedules
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
Republic Portfolios:
We consent to the use of our report, dated December 12, 1997, incorporated
herein by reference and to the reference to our firm under the caption
"Independent Auditors" in the statements of additional information.
KPMG
Toronto, Ontario
February 25, 1998
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