-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LUgN2fmyYOY82N/WEV5ipiNC2XXqBE7Xn6eODdsdV6riMVrf5W0HcpiOQBBel9k2 QpDLi15qnXOY2qMd2s6FZw== 0000950130-96-001344.txt : 19960425 0000950130-96-001344.hdr.sgml : 19960425 ACCESSION NUMBER: 0000950130-96-001344 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19960424 EFFECTIVENESS DATE: 19960424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINER MUTUAL FUNDS TRUST CENTRAL INDEX KEY: 0000861106 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-33734 FILM NUMBER: 96550304 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06057 FILM NUMBER: 96550305 BUSINESS ADDRESS: STREET 1: 370 17TH STREET STREET 2: SUITE 2700 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036232577 MAIL ADDRESS: STREET 1: 370 17TH STREET STREET 2: SUITE 2700 CITY: DENVER STATE: CO ZIP: 80202 485BPOS 1 POST EFFECTIVE AMENDMENT NO. 17 As Filed with the Securities and Exchange Commission on April 24, 1996 Registration Nos. 33-33734 811-6057 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X / Pre-Effective Amendment No. _____ / / Post-Effective Amendment No. 17 / X / and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X / Amendment No. 19 / X / HSBC MUTUAL FUNDS TRUST (Exact Name of Registrant as Specified in Charter) 3435 Stelzer Road, Columbus, Ohio 43219 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (800) 634-2536 Steven R. Howard, Secretary Baker & McKenzie, 805 Third Avenue, 30th Floor New York, New York 10022 (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate box): X immediately upon filing pursuant to paragraph (b) --- on (date) pursuant to paragraph (b) --- 75 days after filing pursuant to paragraph (a) --- on (date) pursuant to paragraph (a) of Rule 485 --- The Registrant has registered an indefinite number of shares of beneficial interest, par value $0.001 per share, by filing a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for the fiscal year ended December 31, 1995 was filed with the Commission on February 29, 1996. Calculation of Registration Fee
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of Registered Registered* Offering Price Per Aggregate Offering Registration Fee Unit Price** Shares of Beneficial Interest: $.001 par value of each Portfolio Indefinite Growth and Income Fund 871,300 $15.34 $ 145,535 $48.81 New York Tax-Free Bond Fund 445,072 $10.80 $ 50,901 $17.55 Small Cap Fund 180,779 $16.23 $ 31,070 $10.71 Short-Term U.S. Government Fund 462,109 $9.74 $ 47,662 $16.44 International Equity Fund 172,321 $10.32 $ 18,832 $6.49 ------------- -------------------------------------- Total 2,131,581 $ 290,000 $100.00
* Registrant continues its election to register an indefinite number of shares of beneficial interest pursuant to rule 24f-2 under the Investment Company Act of 1940. ** The calculation of the maximum aggregate offering price is made pursuant to rule 24e-2(a) under the Investment Company Act of 1940 and is based on the following: the total amount of securities redeemed or repurchased of the Registrant's series indicated above during the fiscal year ended December 31, 1995 was 17,894,688 securities of the Growth and Income Fund; 9,413,776 securities of the New York Tax-Free Bond Fund; 5,957,958 securities of the Small Cap Fund; 24,118,178 securities of the Fixed Income Fund; 7,337,356 of the Short-Term U.S. Government Fund; and 20,372,761 securities of the International Equity Fund, were previously used for reduction pursuant to Rule 24f-2 and 2,131,580 (representing 871,300 shares of the Growth and Income Fund; 445,072 shares of the New York Tax-Free Bond Fund; 180,778 shares of the Small Cap Fund; 462,109 shares of the Short-Term U.S. Government Fund; and 172,321 shares of the International Equity Fund), is being so used for such reduction in this Amendment. *** Unless otherwise indicated, amount represents the maximum offering price per unit as of April 16, 1996. HSBC MUTUAL FUNDS TRUST Registration Statement on Form N-1A CROSS REFERENCE SHEET Pursuant to Rule 495(a) under the Securities Act of 1933 FIXED INCOME FUND SHORT-TERM U.S. GOVERNMENT FUND NEW YORK TAX-FREE BOND FUND SMALL CAP FUND GROWTH & INCOME FUND INTERNATIONAL EQUITY FUND N-1A Item No. Location Part A Prospectus Caption Item 1. Cover Page........................ Cover Page Item 2. Synopsis.......................... Summary of Annual Fund Operating Expenses Item 3. Condensed Financial Information..................... Yield Information; Financial Highlights Item 4. General Description of Registrant...................... Investment Objective, Policies and Risk Factors; Investment Restrictions Item 5. Management of the Fund............ Management of the Fund; Transactions with Affiliates; Purchase of Shares; Transfer and Dividend Disbursing Agent and Custodian Item 5A. Management's Discussion of Fund Performance................ Not Applicable Item 6. Capital Stock and Other Securities...................... Dividends, Distributions and Taxes; Account Services; Shares of Beneficial Interest Item 7. Purchase of Securities Being Offered................... Determination of Net Asset Value; Purchase of Shares; Exchange Privilege Item 8. Redemption or Repurchase.......... Redemption of Shares; Redemptions (Part B) Item 9. Legal Proceedings................. Not Applicable Part B Statement of Additional Information Caption Item 10. Cover Page........................ Cover Page Item 11. Table of Contents................. Table of Contents Item 12. General Information and History......................... Not Applicable Item 13. Investment Objective and Policies......................... Investment Policies and Risk Factors; Investment Restrictions Item 14. Management of the Registrant...... Management Item 15. Control Persons and Principal Holders of Securities........... Management; Shares of Beneficial Interest Item l6. Investment Advisory and Other Services.................. Management; Custodian, Transfer Agent and Dividend Disbursing Agent; Independent Auditors Item 17. Brokerage Allocation.............. Portfolio Transactions Item 18. Capital Stock and Other Securities...................... Shares of Beneficial Interest Item 19. Purchase, Redemption and Pricing of Securities Being Offered................... Purchase of Shares (Part A); Redemptions; Redemption of Shares (Part A); Determination of Net Asset Value; Exchange Privilege Item 20. Tax Status........................ Dividends, Distributions and Taxes (Part A); Federal Income Taxes (Part B); Item 21. Underwriters...................... Management Item 22. Calculation of Performance Data............................ Performance Information Item 23. Financial Statements.............. Financial Statements ================================================================================ HSBC Mutual Funds Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Short-Term U.S. Government Fund 3435 Stelzer Road, Columbus, Ohio 43219 Fixed Income Fund New York Tax Free Bond Fund Information: (800) 634-2536 HSBC ASSET MANAGEMENT AMERICAS INC. --Investment Adviser and Co-Administrator BISYS FUNDS SERVICES--Distributor - -------------------------------------------------------------------------------- HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust (the "Trust") was organized in Massachusetts on November 1, 1989 as a Massachusetts business trust and is an open-end, diversified management investment company with multiple investment portfolios, including the Short-Term U.S. Government Fund (formerly known as the Short-Term Fixed Income Fund) (the "Short-Term Fund"), the Fixed Income Fund (the "Fixed Income Fund") and the New York Tax-Free Bond Fund (the "New York Fund") to which this Prospectus relates (herein referred to individually as a "Fund" and collectively as the "Funds"). The investment objective of the Short-Term Fund is preservation of capital and generation of current income by investing in fixed-income securities with a dollar-weighted average portfolio maturity of between one and three years. The Short-Term Fund will invest primarily in securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. The investment objective of the Fixed Income Fund is generation of high current income consistent with appreciation of capital by investing in a variety of fixed-income securities. The investment objective of the New York Fund is to provide its investors with as high a level of current income exempt from Federal, New York State and New York City income taxes as is consistent with relative stability of capital. See "Investment Objectives and Policies" in this Prospectus. There can be no assurances that the Funds will achieve their investment objectives. The Funds' investment adviser is HSBC Asset Management Americas Inc. ("HSBC Americas" or the "Adviser"), the North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation) and Marine Midland Bank (the "HSBC Group"). See "Management of the Funds" in this Prospectus. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SHARES OF THE FUNDS ARE NOT AN OBLIGATION OF OR GUARANTEED OR ENDORSED BY HSBC GROUP OR ITS AFFILIATES. IN ADDITION, SUCH SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY AND MAY INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. Shares of the Funds are offered for sale primarily through its Distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain broker-dealers, banks, financial institutions and corporations (the "Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at these Participating Organizations and to perform certain services for the Funds. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Funds. A Statement of Additional Information (the "SAI"), dated April 24, 1996, containing additional detailed information about the Funds, has been filed with the Securities and Exchange Commission and is hereby incorporated by reference into this Prospectus. A copy is available without charge and can be obtained by writing the Trust at the above address, or calling the telephone number listed above. ---------- This Prospectus should be read and retained for ready reference to information about the Fund. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. April 24, 1996 TABLE OF CONTENTS Summary of Annual Fund Operating Expenses ............................................................. 2 Financial Highlights ...................................................... 4 Investment Objectives, Policies and Risk Factors .............................................................. 7 Other Investment Policies ................................................. 17 Investment Restrictions ................................................... 21 Management of the Funds ................................................... 22 Transactions with Affiliates .............................................. 25 Determination of Net Asset Value .......................................... 26 Purchase of Shares ........................................................ 26 Redemption of Shares ...................................................... 30 Exchange Privilege ........................................................ 32 Dividends and Distributions ............................................... 32 Federal Income Taxes ...................................................... 33 New York Taxes ............................................................ 35 Account Services .......................................................... 35 Transfer and Dividend Disbursing Agent and Custodian ........................................................ 35 Performance Information ................................................... 36 Shares of Beneficial Interest ............................................. 36
---------- SUMMARY OF ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) The purpose of the following information is to assist an investor in understanding the costs and expenses that an investor in the Funds would bear directly or indirectly. The information is based on expenses for the Funds for the fiscal year ended December 31, 1995, as adjusted for estimated other operating expenses and voluntary reductions of investment advisory, co-administration and 12b-1 fees.
Shareholder Transaction Expenses: Short-Term Fixed Income New York Fund Fund Fund ---- ---- ---- Maximum sales charge imposed on purchases of Fund's shares (as a percentage of offering price) .................................................... 2.00% 4.75% 4.75% ---- ---- ---- Certain investors will not be subject to the sales charge. See "Purchase of Shares" in this Prospectus ............................................................. Annual Fund Operating Expenses: Management Fees (net of fees not imposed)* .................................................. 0.20% 0.55% 0.25% 12b-1 Fees (net of fees not imposed)** ...................................................... 0.05% 0.08% 0.25% Other Expenses (net of fees and expenses not imposed) Administrative Services Fee*** ......................................................... 0.10% 0.10% 0.10% Co-Administrative Services Fee**** ..................................................... 0.00% 0.00% 0.00% Other Operating Expenses ............................................................... 0.75% 0.29% 0.40% ---- ---- ---- Total Fund Operating Expenses (net of fees and expenses not imposed)+ .......................................................................... 1.10% 1.02% 1.00% ==== ==== ==== Total Fund Operating Expenses Before Non-Imposition of Fees and Expense Reimbursements ..................................................... 1.87% 1.41% 1.42% ==== ==== ====
Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual shareholder's own investment in the Funds. Rather, the table has been provided only to assist investors in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. 2 THE FOLLOWING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. THE EXPENSES SET FORTH ABOVE AND EXAMPLE SET FORTH BELOW REFLECT THE NON-IMPOSITION OF CERTAIN FEES AND EXPENSES. THE ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE FOLLOWING EXAMPLE ASSUMES A 5% ANNUAL RETURN; HOWEVER, THE FUNDS' ACTUAL RETURN WILL VARY AND MAY BE GREATER OR LESS THAN 5%. You would pay the following expenses on a $1,000 investment assuming a 5% annual return and the reinvestment of all dividends and distributions:++ Example: Short-Term Fixed Income New York Fund Fund Fund ---------- ------------ -------- 1 year.......................... $ 31 $ 57 $ 57 3 years......................... $ 54 $ 78 $ 78 5 years ........................ $ 79 $101 $100 10 years........................ $151 $166 $164
- ---------- * Reflects advisory fees not imposed as a result of a voluntary waiver by the Adviser. If these fees had been imposed, the Short Term Fund and New York Fund would have paid 0.55%, and 0.45%, respectively, for advisory fees. See "Management of the Funds--Investment Adviser." ** The fee under each Fund's Distribution Plan and Agreement is calculated on the basis of the average daily net assets of each Fund at an annual rate not to exceed 0.35% with respect to each Fund. See "Management of the Funds--Distribution Plan and Agreement." *** Reflects administrative fees not imposed as a voluntary waiver by BISYS Fund Services of 0.05% for each Fund. See "Management of the Funds--Administration." **** Reflects co-administrative fees of 0.03% and shareholder servicing fees of 0.04% voluntarily waived by HSBC Americas for each Fund. See "Management of the Funds--Administrator and Shareholder Servicing Agent." + Investors who purchase and redeem shares of a Fund through a customer account maintained at a Participating Organization may be charged additional fees by such Participating Organization. (See "Management of the Funds--Servicing Agreements.") ++ Includes a maximum sales charge from which certain shareholders may be exempt. See "Purchase of Shares." 3 FINANCIAL HIGHLIGHTS The following supplementary financial information for each of the three years in the period ended December 31, 1995 for the Fixed Income and Short-Term U.S. Government Funds and for each of the five years in the period ended December 31, 1995 for the New York Tax-Free Bond Fund has been audited by Ernst & Young LLP whose reports thereon appear in the Statement of Additional Information ("SAI"). The supplementary financial information for each of the years ended December 31, 1990 and 1989 also has been audited by Ernst & Young LLP whose report thereon was unqualified. This information should be read in conjunction with the financial statements and notes thereto which are included in the SAI and may be obtained by shareholders. Selected data for a share outstanding throughout each period:
FIXED INCOME FUND For the Period January 15, 1993 (Commencement of Year Ended December 31, Operations) to ----------------------- -------------- 1995 1994 December 31, 1993 ---- ---- ----------------- Net asset value, beginning of period................. $ 9.35 $ 10.13 $ 10.00 ------ ------- ------- Income From Investment Operations: - ---------------------------------- Net investment income........................... 0.59 0.59 0.63 Net realized and unrealized gain (loss) on investments............................... 0.93 (0.78) 0.21 ---- ------ ---- Total from investment operations............. $ 1.52 (0.19) 0.84 ------ ------ ---- Less Distributions from: - ------------------------ Net investment income........................... (0.59) (0.59) (0.63) Net realized gain............................... -- -- (0.07) Excess of current year net realized gain on investments................. -- -- (0.01) ------ ------ ------ Total distributions.......................... (0.59) (0.59) (0.71) ------ ------ ------ Net asset value, end of period....................... $ 10.28 $ 9.35 $ 10.13 ======= ====== ======= Total Return (a)..................................... (16.73)% (1.89)%(b) 8.57%(b) Ratios/Supplemental Data: - ------------------------- Net assets (000), end of period................. $99,942 $84,774 $90,907 Ratio of expenses (without waivers) to average net assets................................... 0.96% 0.86% 0.87%(c) Ratio of expenses (with waivers) to average net assets................................... 0.93% 0.77% 0.22%(c) Ratio of net investment income (without fee waivers) to average net assets............... 6.00% 6.01% 5.75%(c) Ratio of net investment income (with fee waivers) to average net assets........................ 6.03% 6.10% 6.40%(c) Portfolio turnover rate......................... 41.58% 63.96% 107.34%(b)
- ---------- (a) Excludes sales charge. (b) Not annualized. (c) Annualized. 4
SHORT-TERM U.S. GOVERNMENT FUND For the Period March 1, 1993 (Commencement of Year Ended December 31, Operations) to 1995 1994 December 31, 1993 ---- ---- ----------------- Net asset value, beginning of period................. $ 9.49 $ 9.91 $ 10.00 ------ ------ ------- Income From Investment Operations: - ---------------------------------- Net investment income........................... 0.54 0.50 0.41 Net realized and unrealized gain (loss) on investments............................... 0.48 (0.42) (0.09) ---- ------ ------ Total from investment operations................ 1.02 0.08 0.32 ---- ---- ---- Less Distributions from: - ------------------------ Net investment income........................... (0.54) (0.50) (0.41) Net asset value, end of period....................... $ 9.97 $ 9.49 $ 9.91 ====== ====== ====== Total Return (a)..................................... 10.99% 0.86% 3.24%(b) Ratios/Supplemental Data: - ------------------------- Net assets (000), end of period................. $10,908 $14,642 $17,511 Ratio of expenses (without fee waivers) to average net assets........................... 1.44% 1.21% 1.29%(c) Ratio of expenses (with fee waivers) to average net assets................................... 1.04% 0.78% 0.60%(c) Ratio of net investment income (without fee waivers) to average net assets............... 5.13% 4.75% 4.22%(c) Ratio of net investment income (with fee waivers) to average net assets............... 5.53% 5.18% 4.91%(c) Portfolio turnover rate......................... 53.28% 68.13% 32.02%(b)
- ---------- (a) Excludes sales charge. (b) Not annualized. (c) Annualized. 5
NEW YORK TAX-FREE BOND FUND For the Period March 21, 1989 Year Ended December 31, (commencement ----------------------- of operations) to 1995 1994 1993 1992 1991 1990 December 31, 1989 ---- ---- ---- ---- ---- ---- ------------------ Net asset value, beginning of period.. $10.20 $11.70 $11.01 $10.66 $10.14 $10.20 $10.00 ------ ------ ------ ------ ------ ------ ------ Income From Investment Operations: Net investment income.............. 0.54 0.53 0.59 0.66 0.66 0.64 0.50 Net realized and unrealized gain (loss) on investments................... 0.97 (1.47) 0.95 0.44 0.57 (0.04) 0.20 ---- ------ ---- ---- ---- ------ ---- Total from investment operations... 1.51 (0.94) 1.54 1.10 1.23 0.60 0.70 ---- ------ ---- ---- ---- ---- ---- Less Distributions from: Net investment income.............. (0.54) (0.53) (0.59) (0.66) (0.66) (0.64) (0.50) Net realized gain.................. (0.03) (0.26) (0.09) (0.05) (0.02) ------ ------ ------ ------ ------ ------ ------ Total distributions.............. (0.54) (0.56) (0.85) (0.75) (0.71) (0.66) (0.50) ------ ------ ------ ------ ------ ------ ------ Net asset value, end of period........ $11.17 $10.20 $11.70 $11.01 $10.66 $10.14 $10.20 ====== ====== ====== ====== ====== ====== ====== Total Return (a)...................... 15.17% (8.13)% 14.27% 10.66% 12.59% 6.13% 7.13%(b) Ratios/Supplemental Data Net assets (000), end of period.... $50,677 $50,711 $61,740 $32,407 $14,929 $7,268 $ 7,150 Ratio of expenses (without fee waivers) to average net assets............ 1.20% 1.10% 1.06% 1.17% 1.32% 1.53% 1.58%(c) Ratio of expenses (with fee waivers) to average net assets............ 0.99% 0.84% 0.63% 0.38% 0.34% 0.50% 0.50%(c) Ratio of net investment income (without fee waivers) to average net assets... 4.86% 4.67% 4.55% 5.25% 5.38% 5.35% 5.21%(c) Ratio of net investment income (with fee waivers) to average net assets... 5.07% 4.93% 4.98% 6.04% 6.36% 6.38% 6.29%(c) Portfolio turnover rate............ 24.43% 122.43% 70.36% 66.44% 110.27% 88.48% 78.7%(b)
- ---------- (a) Excludes sales charge. (b) Not Annualized. (c) Annualized. 6 INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS Short-Term U.S. Government Fund The investment objective of the Short-Term U.S. Government Fund (the "Short-Term Fund") is preservation of capital and generation of current income by investing in fixed-income securities with a dollar-weighted average portfolio life of between one and three years. The Short-Term Fund invests primarily in notes, bonds, debentures and other fixed-income securities including obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; U.S. dollar-denominated corporate debt securities of domestic or foreign issuers; mortgage and other asset-backed securities; variable and floating rate debt securities; U.S. dollar-denominated obligations of foreign governments and foreign government agencies described below. Under normal market conditions, at least 65% of the total assets of the Short-Term Fund will be invested in fixed-income securities which are rated at least Baa by Moody's Investors Service ("Moody's") or BBB by Standard & Poor's Corporation ("S&P") or which are comparably rated by another rating agency or, if unrated, are determined to be of comparable quality by the Adviser pursuant to guidelines established and regularly reviewed by the Board of Trustees. The Board of Trustees has adopted a non-fundamental policy to invest at least 65% of the Short-Term Fund's total assets in securities guaranteed by the U.S. Government, its agencies or instrumentalities under normal market conditions. The Short-Term Fund will not purchase debt securities rated below Baa by Moody's or BBB by S&P and expects to maintain an average quality rating of its investment portfolio of Aa by Moody's or AA by S&P or, to the extent certain securities are unrated or rated by other rating agencies, result in comparable portfolio quality. While "Baa"/"BBB" securities and comparable unrated securities may produce a higher return, they are subject to a greater degree of market fluctuation and credit risks than the higher quality securities in which the Short-Term Fund may invest and may be regarded as having speculative characteristics as well. The Short-Term Fund will not invest in any fixed income security with a remaining maturity in excess of 51/4 years (63 months). The Short-Term Fund may invest up to 35% of its total assets in variable and floating rate debt securities which meet the issuer and quality standards described above. Fixed Income Fund The investment objective of the Fixed Income Fund is generation of high current income consistent with appreciation of capital. The Fixed Income Fund invests primarily in notes, bonds, debentures and other fixed-income securities substantially similar to those eligible for investment by the Short-Term Fund but which may be of longer maturity. Under normal market conditions, at least 65% of the total assets of the Fixed Income Fund will be invested in fixed-income securities which are rated at least Baa by Moody's or BBB by S&P or which are comparably rated by another rating agency or, if unrated, are determined to be of comparable quality by the Adviser pursuant to guidelines established and regularly reviewed by the Board of Trustees. The Fixed Income Fund will not purchase debt securities rated below Baa by Moody's or BBB by S&P and expects to maintain an average quality rating of its investment portfolio of Aa by Moody's or AA by S&P or, to the extent certain securities are unrated or rated by other rating agencies, result in comparable average portfolio quality. While "Baa"/"BBB" and comparable unrated securities may produce a higher return, they are subject to a greater degree of market fluctuation and credit risk than the higher quality securities in which the Fixed Income Fund may invest and may be regarded as having speculative characteristics as well. The quality restrictions on the Fixed Income Fund's investments prevent the Fund from utilizing certain more speculative investments which would otherwise serve to achieve the Fund's investment objective of providing investors with high current income. The Fixed 7 Income Fund may invest up to 35% of its total assets in variable and floating rate debt securities which meet the issuer and quality standards described above. After purchase by a Fund, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by such Fund. Neither event will require a sale of such security by a Fund. However, the Adviser will consider such event in its determination of whether a Fund should continue to hold the security. A security which has had its rating downgraded or revoked may be subject to greater risk of principal and income, and often involve greater volatility of price, than securities in the higher rating categories. Such securities are also subject to greater credit risks (including, without limitation, the possibility of default by or bankruptcy of the issuers of such securities) than securities in higher rating categories. To the extent the ratings given by a rating agency may change as a result of changes in such organization or its rating systems, such Fund will attempt to conform its ratings systems to such changes as standards for investments in accordance with the investment policies contained in this Prospectus and in the SAI. Each Fund will base its investment selection upon analysis of prevailing market and economic conditions. Although neither Fund has a present intention of doing so, each Fund may utilize options on securities, interest rate futures contracts and options thereon to reduce certain risks to its investments and to attempt to enhance income, but not for speculation. The investment objective and the investment policies described above for each Fund are fundamental and may not be changed by the Board of Trustees without a vote of shareholders of the applicable Fund. The other investment policies of each Fund are not fundamental, except as otherwise indicated, including those discussed below under "Investment Policies," and therefore may be changed by the Board of Trustees without a shareholder vote. There can be no assurance that either Fund's investment objective will be attained. New York Tax-Free Bond Fund The investment objective of the New York Tax-Free Bond Fund (the "New York Fund") is to provide investors with as high a level of current income exempt from regular Federal, New York State and New York City income taxes as is consistent with relative stability of capital. Generally, long-term municipal obligations provide higher yield and higher price volatility than short-term and intermediate-term municipal obligations. There can be no assurance that the New York Fund's investment objective will be attained. Municipal Obligations and Quality Standards To attain its investment objective, the New York Fund invests substantially all of its assets in municipal obligations that are exempt from Federal, New York State and New York City income tax in the opinion of bond counsel to the issuer and in participation certificates in such obligations purchased from banks, insurance companies and other financial institutions ("New York Obligations") which meet the rating standards described below. As a matter of fundamental policy, the New York Fund will maintain at least 80% of its total assets in tax-exempt municipal obligations that are not subject to Federal income tax and the alternative minimum tax. Generally, during normal market conditions at least 65% of the value of the New York Fund's total assets will be invested in bonds of New York issuers and the remainder may be invested in other New York Obligations or in securities that are not New York Obligations and therefore are subject to New York State and New York City income taxes. Although the New York Fund will have no restrictions on the minimum or maximum maturity of 8 any individual New York Obligations held by it, the New York Fund will have an average portfolio maturity ranging from three to 30 years. See "Investment Restrictions" in this Prospectus for additional information. Municipal Bonds. Municipal bonds may be categorized as "general obligation" or "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue bonds are secured by the revenue derived from a particular facility or group of facilities or, in some cases, the proceeds of a special excise or other specific revenue source, but not by the general taxing power. Investments in municipal bonds are limited to bonds which are rated at the date of purchase "Baa" or better by Moody's or "BBB"or better by S&P or comparably rated by other NRSROs, or, in certain instances, unrated municipal bonds if they are deemed by the Fund's investment adviser to be comparable to "Baa" or "BBB" rated based upon the investment adviser's assessment of publicly available information. Bonds rated "Baa" by Moody's are judged to be "medium-grade obligations, i.e., they are neither highly protected nor poorly secured." In addition, "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." Under the S&P classification, bonds rated "BBB" have an "adequate capacity to pay interest and repay principal" and "whereas they normally exhibit 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 bonds in this category than for bonds in higher rated categories." Municipal Notes. Municipal notes consist of tax anticipation notes, bond anticipation notes, revenue anticipation notes, construction loan notes and project notes. Notes sold as interim financing in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuer. Project notes are issued by local housing authorities to finance urban renewal and public housing projects and are secured by the full faith and credit of the United States Government. Investments in municipal notes are limited to notes which are rated at the date of purchase "MIG-2" or better ("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or better by S&P or comparably rated by other NRSROs, or, if not rated, are in the opinion of the New York Fund's investment adviser, of comparable investment quality. Notes rated "MIG-2" by Moody's are judged to be of "high quality, with margins of protection ample enough although not as large as" in "MIG-1"-rated issues. Under the S&P classification, notes rated "SP-1" exhibit very strong or strong capacity to pay principal and interest and notes rated "SP-2" exhibit satisfactory capacity to pay principal and interest. Municipal Commercial Paper. Investments in municipal commercial paper are limited to issues rated "Prime-2" or better by Moody's or "A-2" or better by S&P or comparably rated by other NRSROs, or, if not rated, are in the opinion of the Fund's investment adviser of comparable investment quality. Commercial paper rated "Prime-2" by Moody's is considered to have a "strong capacity for repayment of short-term promissory obligations". Under the S&P classification, the "A-2" rating indicates a strong capacity for timely payment but the relative degree of safety is not as high as for issues designated "A-1". 9 If not rated, securities purchased by the New York Fund will be of comparable quality to the above ratings as determined by the Fund's investment adviser. After purchase by the New York Fund, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require a sale of such security by the Fund. However, the New York Fund's investment adviser will consider such event in its determination of whether the New York Fund should continue to hold the security. To the extent the ratings given by a NRSRO may change as a result of changes in such organizations or their rating systems, the New York Fund will attempt to conform its rating systems to such changes as standards for investments in accordance with the investment policies contained in this Prospectus and in the Statement of Additional Information. Although an investment in the New York Fund is not insured, certain of the municipal obligations purchased by the New York Fund may be insured as to principal and interest by companies that provide insurance for municipal obligations. These obligations are identified as such in the New York Fund's financial statements. New York Obligations The New York Fund's assets will be invested primarily in municipal obligations that are exempt from Federal, New York State and New York City income tax in the opinion of bond counsel to the issuer and in participation certificates in such obligations purchased from banks, insurance companies and other financial institutions. Dividends paid by the New York Fund which are attributable to interest income on tax-exempt obligations of the State of New York and its political subdivisions, and of Puerto Rico, other U.S. territories or possessions and their political subdivisions will be exempt from Federal, New York State and New York City personal and corporate income taxes. The New York Fund may purchase municipal obligations issued by other states, their agencies and instrumentalities, the interest income on which will be exempt from Federal income tax but will be subject to New York State and New York City personal and corporate income taxes. Floating Rate Instruments. Certain municipal obligations which the Fund may purchase have a floating or variable rate of interest. Such obligations bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices, such as a Federal Reserve composite index. Such obligations may carry a demand or "put" feature which would permit the holder to tender them back to the issuer (or to a third party) at par value prior to maturity. The Fund's investment adviser will monitor on an ongoing basis the earning power, cash flow and other liquidity ratios of the issuers of such obligations, and will similarly monitor the ability of an issuer of a demand instrument to pay principal and interest on demand. The Fund's right to obtain payment at par on a demand instrument could be affected by events occurring between the date the Fund elects to demand payment and the date payment is due, which may affect the ability of the issuer of the instrument to make payment when due. The New York Fund may elect to invest up to 20% of the current value of its total assets in securities subject to the Federal alternative minimum tax. In addition, the Fund may invest up to 100% of its total assets in these and other taxable securities to maintain a temporary "defensive" posture when, in the opinion of the Fund's investment adviser, it is advisable to do so. During times when the Fund is maintaining a temporary defensive posture, it may be unable to fully achieve its investment objective. 10 The types of taxable securities (in addition to "alternative minimum tax" securities) in which the Fund may invest are limited to the following money market instruments which have remaining maturities not exceeding one year: (i) obligations of the United States Government, its agencies or instrumentalities; (ii) negotiable certificates of deposit and bankers' acceptances of United States banks which have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation; (iii) domestic commercial paper rated "P-1" by Moody's or "A-1" or "A-1+" by S&P or comparably rated by another nationally recognized statistical rating organization; and (iv) repurchase agreements. The Fund also has the right to hold cash equivalents of up to 100% of its total assets when the Fund's investment adviser deems it necessary for temporary defensive purposes. Opinions relating to the validity of municipal obligations (including New York Obligations) and to the exemption of interest thereon from Federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. Neither the Trust nor the Adviser will review the proceedings relating to the issuance of municipal obligations or the basis for such opinions. Risk Considerations for the New York Fund Investors should be aware that certain substantial issuers of New York municipal obligations (including issuers whose obligations may be acquired by the New York Fund), have experienced serious financial difficulties in recent years. These difficulties have at times jeopardized the credit standing and impaired the borrowing abilities of all New York issuers and have generally contributed to higher interest rates and lower market prices for their debt obligations. A recurrence of the financial difficulties previously experienced by such issuers could result in defaults or declines in the market values of their existing obligations and, possibly, in the obligations of other issuers of New York Municipal Obligations. The ability of the New York Fund to meet its objective is affected by the ability of issuers to meet their payment obligations. A default by an issuer of an obligation held by the New York Fund could result in a substantial loss of principal with respect to that obligation and a potential decline in the New York Fund's net asset value. There are additional risks associated with an investment which concentrates in issues of one state. Since the New York Fund invests primarily in obligations of New York issuers, the marketability and market value of these obligations may be affected by long-term economic problems which face New York City and New York State. In particular, the ability of the State and the City to finance independently has been adversely affected in the past by their inability to achieve or maintain favorable credit ratings. There can also be an effect on the market price of securities of other New York issuers if the City receives less favorable credit ratings and if certain of its economic problems continue. If these problems are not resolved, or if new ones develop, they could adversely affect the various New York issuers' ability to meet their financial obligations. Recently, for example, a significant slowdown in the financial services sector of New York City has adversely affected the City's revenues and has created budget gaps. In addition, the State's budget includes dramatic reductions in Medicaid and other sources of State aid to the City and local entities. It is unclear at this time what the affect of these reductions, if passed, will be on the finances of the City and local entities. There can be no assurance that New York City or the local entities, or the State, will not face budget gaps in future years. In addition, Moody's and S&P have on several occasions lowered their ratings of New York State and City debt obligations. In January, 1995, S&P placed New York City on "credit watch" for a possible downgrade. As of 11 the date of this Prospectus, New York State General Obligations are rated A by Moody's and A-by S&P. On July 10, 1995, S&P revised its rating of the City's General Obligation Bonds downward to BBB+. S&P stated that "structural budgetary balance remains elusive because of persistent volatile financial services sector." Other factors identified by S&P in lowering its rating on City bonds included a trend of using one-time measures, including debt refinancing, to close projected budget gaps, dependence on unratified labor savings to help balance the Financial Plan, optimistic projections on additional Federal and State aid or mandate relief, a history of cash flow difficulties caused by State budget delays and continued high debt levels. Moody's rating on New York City's bonds currently are Baa1. On March 1, 1996, Moody's stated that the rating for City general obligation bonds remains under review pending the outcome of the adoption of the City's budget for the 1997 fiscal year and in light of the status of the debate on public assistance and Medicaid reform; the enactment of a State budget, upon which major assumptions regarding State aid are dependent, which may be extensively delayed; and the seasoning of the City's economy with regard to its strength and direction in the face of a potential national economic slowdown. Ratings reflect only the respective views of such organizations, and an explanation of the significance of such ratings must be obtained from the rating agency furnishing the same. There is no assurance that a particular rating will continue for any given period of time or that any such rating will not be revised downward or withdrawn entirely if, in the judgment of the agency originally establishing the rating, circumstances so warrant. A downward revision or withdrawal of such ratings, or either of them, may have an effect on the market price of the bonds. The New York Fund is permitted to invest up to 25% of the value of its total assets in the securities of any one issuer without adhering to the 5% issuer limitation described under "investment restrictions". To the extent that the New York Fund invests up to 25% of its total assets in the securities of any one issuer, there may be an increased risk of loss to the New York Fund. The New York Fund does not intend to concentrate its investments in any industry. The New York Fund may, however, invest 25% or more of its total assets in municipal obligations that are related in other ways such that an economic, business or political development or change affecting one such obligation could also affect the other obligations; for example, municipal obligations, the interest on which is paid from revenues of similar types of projects. In addition, from time to time, the New York Fund may invest 25% or more of its assets in industrial development bonds, which, although issued by industrial development authorities, may be backed only by those assets and revenues of non-governmental users. The liquidity of the New York Fund may make it difficult in certain circumstances to dispose of large investments advantageously. Nonetheless, the Adviser has determined that there is a sufficient market to invest in New York Obligations. In general, tax-exempt municipal obligations are subject to credit risks such as the loss of credit ratings or possible default. In addition, an issuer of tax-exempt municipal obligations may lose its tax-exempt status in the event of a change in the current tax laws. See "Federal Income Taxes" in this Prospectus. The net asset value of the New York Fund generally will not be stable and should fluctuate based upon changes in the value of the New York Fund's portfolio securities. The prices of such securities are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. 12 Investment Policies U.S. Government Securities. (Short-Term and Fixed Income Funds only.) Each Fund may invest in all types of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities, or instrumentalities, including U.S. Treasury obligations with varying interest rates, maturities and dates of issuance, such as U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (generally maturities of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years) and obligations issued or guaranteed by U.S. Government agencies or which are supported by the full faith and credit pledge of the U.S. Government. In the case of U.S. Government obligations which are not backed by the full faith and credit pledge of the United States, each Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States in the event the agency or instrumentality is unable to meet its commitments. Such securities may also include securities with respect to which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, its agencies, authorities or instrumentalities and participations in loans made to foreign governments or their agencies that are substantially guaranteed by the U.S. Government (such as Government Trust Certificates). See "Mortgage-Related Securities" and "Asset-Backed Securities" below. Securities of Foreign Governments and Supranational Organizations. (Short-Term and Fixed Income Funds only.) Each Fund may invest in U.S. dollar-denominated debt securities issued by foreign governments, their political subdivisions, governmental authorities, agencies and instrumentalities and supranational organizations. A supranational organization is an entity designated or supported by the national government of one or more countries to promote economic reconstruction or development. Examples of supranational organizations include, among others, the International Bank for Reconstruction and Development (World Bank), the European Economic Community, the European Coal and Steel Community, the European Investment Bank, the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank. Each Fund may also invest in "quasi-government securities" which are debt obligations issued by entities owned by either a national, state or equivalent government or are obligations of such a government jurisdiction which are not backed by its full faith and credit and general taxing powers. Investing in foreign government and quasi-government securities involves considerations and possible risks not typically associated with investing in obligations issued by the U.S. Government. The values of foreign investments are affected by changes in governmental administration or economic or monetary policy (in the U.S. or other countries) or changed circumstances in dealings between countries. In addition, investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation and lack of uniform accounting and auditing standards. Corporate Debt Obligations. (Short-Term and Fixed Income Funds only.) Each Fund may invest in U.S. dollar-denominated obligations issued or guaranteed by U.S. corporations or U.S. commercial banks, or U.S. dollar-denominated obligations of foreign issuers, including but not limited to debt securities issued by foreign banks, foreign branches of U.S. banks, U.S. branches of foreign banks and foreign branches of foreign banks. Such debt obligations include, among others, bonds, notes, debentures, commercial paper and variable rate demand notes. Bank obligations include, but are not limited to certificates of deposit, bankers' acceptances, and fixed time deposits. The Adviser, in choosing corporate debt securities on behalf of each Fund, will evaluate each issuer based on (i) general economic and financial conditions; (ii) the specific issuer's (a) business and management, (b) cash flow, (c) earnings coverage of interest and dividends, (d) ability to operate under adverse economic conditions, (e) 13 fair market value of assets, and (f) in the case of foreign issuers, unique political, economic or social conditions to such issuer's country; and (iii) other considerations the Adviser deems appropriate. Investment in obligations of foreign issuers may present a greater degree of risk than investment in domestic securities because of less publicly available financial and other information, less securities regulation, potential imposition of foreign withholding and other taxes, war, expropriation or other adverse governmental actions. Mortgage-Related Securities. (Short-Term and Fixed Income Funds only.) Each Fund may invest in various mortgage-backed securities or mortgage-related securities. Mortgage loans made by banks, savings and loan institutions and other lenders are often assembled into pools, the interests in which may be issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Interests in such pools are called "mortgage-related securities" or "mortgage-backed securities." Most mortgage securities are pass-through securities, which means that investors hold an undivided interest or participation in the mortgage pool. Such securities provide investors with payments consisting of both principal and interest as mortgages in the underlying mortgage pool are paid off by the borrower. Investors receive a pro rata share of both regular interest and principal payments (less issuer fees and applicable loan servicing fees), as well as unscheduled early prepayments on the underlying mortgage pool. The dominant issuers or guarantors of mortgage securities today are the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA guarantees mortgage securities composed of pools of Government-guaranteed or insured (Federal Housing Authority, Veterans Administration or Farmers Home Administration) mortgages originated by mortgage banks, commercial banks and savings and loan associations. FNMA and FHLMC guarantee mortgage-backed securities composed of pools of conventional and Federally insured or guaranteed residential mortgages obtained from various entities, including savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. The principal and interest on GNMA pass-through securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA guarantees full and timely payment of all interest and principal, while FHLMC currently guarantees timely payment and ultimate repayment of interest and either timely payment of principal or eventual payment of principal, depending upon the date of issue. Securities issued by FNMA and FHLMC are not backed by the full faith and credit of the United States; however, their close relationship with the U.S. Government makes them high quality securities with minimal credit risks. The yields provided by these mortgage securities have historically exceeded the yields on other types of U.S. Government securities. However, like most mortgage-backed securities, the experienced yield is sensitive to the rate of principal payments (including prepayments). Prepayments on underlying mortgages result in a loss of anticipated interest, and all or part of a premium if any has been paid, and the actual yield (or total return) to the Fund may be different than the quoted yield on the securities. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Like other fixed income securities, when interest rates rise, the value of a mortgage pass-through security generally will decline; however, when interest rates are declining, the value of mortgage pass-through securities with prepayment features may not increase as much as that of other fixed-income securities. In addition to GNMA, FNMA or FHLMC certificates, through which the holder receives a share of all interest and principal payments from the mortgages underlying the certificate, each Fund also may invest in mortgage pass-through securities, where all interest payments go to one class of holders ("Interest Only Securities" or "IOs") and all principal payments go to a second class of holders ("Principal Only Securities" or "POs"). Generally, the Short- 14 Term Fund will not invest in POs. These securities are commonly referred to as mortgage-backed security strips or MBS strips. The yields to maturity on IOs and POs are particularly sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the return on POs could be adversely affected. Each Fund will treat IOs and POs as illiquid securities except for IOs and POs issued by U.S. Government agencies and instrumentalities backed by fixed-rate mortgages, whose liquidity is monitored by the Adviser subject to the supervision of the Board of Trustees. Each Fund may also invest in certain Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs") which are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Interest and principal (including prepaid principal) on a CMO or REMIC are paid monthly or semi-annually. CMOs and REMICs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs and REMICs are structured into multiple classes, with each class bearing a different expected maturity. Payments of principal, including prepayments, are first returned to investors holding the shortest maturity class; investors holding the longer maturity classes generally receive principal only after the earlier classes have been retired. To the extent a particular CMO or REMIC is issued by an investment company, the Funds' ability to invest in such CMOs or REMICs will be limited. Neither Fund will invest in the residual interests of REMICs. See "Investment Policies and Risk Factors" in the SAI. The Adviser expects that new types of mortgage-related securities may be developed and offered to investors. The Adviser will, consistent with each Fund's investment objective, policies and quality standards, consider making investments in such new types of mortgage-related securities. The yield characteristics of mortgage-related securities differ from traditional debt securities. Among the major differences are that interest and principal payments are often made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. The principal returned may be invested in instruments having a higher or lower yield than the prepaid instruments. However, because prepayments generally occur more frequently during periods of declining interest rates, it is more likely that the returned principal will be invested in instruments with a lower yield. As a result, if a Fund purchases a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if a Fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. Like other bond investments, the value of mortgage-backed securities will tend to rise when interest rates fall and to fall when interest rates rise. Their value may also be affected by changes in the market's perception of the creditworthiness of the entity issuing or guaranteeing them or by changes in government regulations and tax policies. Because of these factors, the Funds' share value and yield are not guaranteed and will fluctuate, and there can be no assurance that the Funds' investment objective will be achieved. The magnitude of these fluctuations generally will be greater when the average maturity of the Funds' portfolio securities is longer. 15 Assumptions generally accepted by the industry concerning the probability of early payment may be used in the calculation of maturities for debt securities that contain put or call provisions, sometimes resulting in a calculated maturity different than the stated maturity of the security. Asset-Backed Securities. (Short-Term and Fixed Income Funds only.) Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans and automobile and credit card receivables, are being securitized in pass-through structures similar to the mortgage pass-through structures described above or in a pay-through structure similar to the collateralized mortgage structure. Consistent with the Funds' investment objectives, policies and quality standards, each Fund may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements such as a letter of credit from a bank, excess collateral or a third-party guarantee. Municipal Securities. Each Fund may, when deemed appropriate by the Adviser and consistent with the investment objective of such Fund, invest in obligations of state and local governmental issuers which carry taxable yields that are comparable to yields of other fixed-income instruments of comparable quality or, with respect to the Fixed Income Fund only, which the Adviser believes possess the possibility of capital appreciation. Municipal obligations may include bonds which may be categorized as either "general obligation" or "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are secured by the net revenue derived from a particular facility or group of facilities or, in some cases, the proceeds of a special excise or other specific revenue source, but not by the general taxing power. Each Fund may also invest in municipal notes rated at least MIG-1 by Moody's or SP-1 by S&P. Municipal notes will consist of tax anticipation notes, bond anticipation notes, revenue anticipation notes and construction loan notes. Notes sold as interim financing in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuer. Each Fund may also invest in municipal commercial paper, provided such commercial paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if unrated, is of comparable investment quality as determined by the Adviser. Zero Coupon Securities. (Short-Term and Fixed Income Funds only.) The Fixed Income Fund may invest in zero coupon securities. The Short-Term Fund may invest in zero coupon securities with less than one year remaining to maturity. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are more sensitive to changes in interest rates than non-zero coupon securities having similar maturities and credit qualities. 16 The Fixed Income Fund may invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury if such components are traded independently. Under the STRIPS (Separate Trading of Registered Interest and Principal of Securities) program, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. Current Federal income tax law requires that a holder of a zero coupon security report as income each year the portion of the original issue discount on such security that accrues during that year even though the holder receives no cash payments of interest during the year. Money Market Securities. (Short-Term and Fixed Income Funds only.) Under normal market conditions, each Fund may invest up to 20% of its total assets in various money market instruments such as bank obligations, commercial paper, variable rate master demand notes, shares of money market mutual funds, bills, notes and other obligations issued by a U.S. company, the U.S. Government, a foreign company or a foreign government, its agencies or instrumentalities denominated in U.S. dollars. For temporary defensive purposes, each Fund may invest 100% of its total assets in such money market instruments subject to certain restrictions. All money market instruments will be limited to those which carry a rating of MIG-1 or P-1 by Moody's or SP-1 or A-1 by S&P, or which are comparably rated by another rating agency or, if unrated, are of comparable quality as determined by the Adviser pursuant to guidelines established and regularly reviewed by the Board of Trustees. During times when the Funds are maintaining a temporary defensive posture, they may be unable to achieve fully their investment objectives. OTHER INVESTMENT POLICIES A number of the investment practices and techniques described below are subject to certain risks described more fully in the SAI. Lending of Portfolio Securities. The Funds may lend their securities if such loans are secured continuously by cash or equivalent collateral or by a letter of credit in favor of the Fund at least equal at all times to 102% of the market value of the securities loaned plus interest or dividends. While such securities are on loan, the borrower will pay the Fund the amount of any income accruing thereon or, in some cases, a separate fee. The Fund will not lend securities having a value which exceeds 10% of the current value of its total assets. There may be risk of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral should the borrower of the securities fail financially. In determining whether to lend a security to a particular broker, dealer or financial institution, the Investment Adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution and whether the income to be earned from the loan justifies the attendant risks. Options on Securities. (Short-Term and Fixed Income Funds only.) Each Fund may write (sell) covered put and call options and purchase put and call options on securities in its portfolio. The principal reason for writing call options is to obtain, through the receipt of premiums, a greater current return than would be realized on the underlying securities alone. However, a Fund may receive a greater or lesser total return from its optioned positions than it would have received from its underlying securities if they had not been subject to options (See "Risks of Options and Futures Contracts" below). Each Fund may write call options on a covered basis only. 17 Each Fund may purchase call options, but only to effect a "closing transaction", i.e., to offset an obligation pursuant to a previously written call option to prevent an underlying security from being called or to permit the sale of the underlying security or the writing of a new option on the security prior to the outstanding option's expiration. Each Fund may also purchase securities with put options, sometimes referred to as stand-by commitments, which are otherwise eligible for investment in amounts not exceeding 10% of its total assets, when the Adviser anticipates a decline in the market value of securities in a Fund's portfolio. The Funds will incur costs, in the form of premiums, on options they purchase and may incur transaction costs on options that they exercise. A Fund will ordinarily realize a gain from a put option it has purchased if the value of the securities subject to the option decreases sufficiently below the exercise price to cover both the premium and the transaction costs. Interest Rate Futures Contracts. (Short-Term and Fixed Income Funds only.) Each Fund may, to a limited extent, enter into interest rate futures contracts-i.e., contracts for the future delivery of securities or index-based futures contracts that are, in the opinion of the Adviser, sufficiently correlated with the Fund's portfolio. These investments will be made primarily in an attempt to protect a Fund against the effects of adverse changes in interest rates (i.e., "hedging"). When interest rates are increasing and portfolio values are falling, the sale of futures contracts can offset a decline in the value of a Fund's current portfolio securities. The SAI describes these investments in greater detail. See "Risks of Options and Futures Contracts" below for information on certain risks associated with interest rate futures contracts. Options on Interest Rate Futures Contracts. (Short-Term and Fixed Income Funds only.) Each Fund may purchase put and call options on interest rate futures contracts, which give a Fund the right to sell or purchase the underlying futures contract for a specified price upon exercise of the option at any time during the option period. Each Fund may also write (sell) put and call options on such futures contracts. For options on interest rate futures that a Fund writes, such Fund will receive a premium in return for granting to the buyer the right to sell to the Fund or to buy from the Fund the underlying futures contract for a specified price at any time during the option period. Risks of Options and Futures Contracts. (Short-Term and Fixed Income Funds only.) Except as otherwise provided in this Prospectus, the Funds are permitted to engage in bona fide hedging transactions (as defined in the rules and regulations of the Commodity Futures Trading Commission) without any quantitative limitations. Futures and related option transactions which are not for bona fide hedging purposes may be used provided the total amount of the initial margin and any option premiums attributable to such positions does not exceed 5% of each Fund's liquidating value after taking into account unrealized profits and unrealized losses, and excluding any in-the-money option premiums paid. The Funds will not market, and are not marketing, themselves as commodity pools or otherwise as vehicles for trading in futures and related options. The Funds will segregate assets to cover the futures and options. Notwithstanding these protective limitations, one risk involved in the purchase and sale of futures options is that a Fund may not be able to effect closing transactions at a time when it wishes to do so. Positions in futures contracts and options on futures contracts may be closed out only on an exchange or board of trade that provides an active market for them, and there can be no assurance that a liquid market will exist for the contract or the option at any particular time. To mitigate this risk, each Fund will ordinarily purchase and write options only if a secondary market for the options exists on a national securities exchange or in the over-the-counter market. Another risk is that during the option period, if a Fund has written a covered call option, it will have given up the opportunity to profit from a price increase in the underlying securities above the exercise price in return for the premium on the option (although, of course, the premium can be used to offset any losses or add to a Fund's income) but, as long as its obligation as a 18 writer continues, such Fund will have retained the risk of loss should the price of the underlying security decline. In addition, a Fund has no control over the time when it may be required to fulfill its obligation as a writer of the option; once a Fund has received an exercise notice, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. More information concerning the risk factors associated with these option and hedging techniques is contained in the SAI. Repurchase Agreements. The Funds may enter into repurchase agreements. A repurchase agreement is a transaction in which a Fund acquires securities and simultaneously commits to resell the securities to the seller at an agreed upon price plus an agreed upon market rate of interest. Each Fund will enter into repurchase agreements only with dealers, domestic banks or recognized financial institutions which, in the opinion of the Fund's investment adviser, present minimal credit risk. The seller typically is a Federally insured major bank which is a member of the Federal Reserve System, or a registered securities dealer meeting the creditworthiness and other quality standards established by the investment adviser and approved by the Funds' Board of Trustees. In these transactions, the securities acquired by the Fund are held by the Fund's custodian bank until they are repurchased. Each Fund's investment adviser will continually monitor the value of the underlying securities to ensure that their value always equals or exceeds the repurchase price plus accrued interest. The Funds may enter into repurchase agreements, if as a result, no more than 15% (10% in the case of the New York Fund) of the market value of a Fund's net assets would be invested in repurchase agreements. Repurchase agreements are considered to be loans collateralized by the underlying securities under the Investment Company Act of 1940, as amended (the "1940 Act"). Repurchase agreements may involve certain risks. If the seller in the transaction becomes insolvent and subject to liquidation or reorganization under the Bankruptcy Code, recent amendments to the Bankruptcy Code permit the Funds to exercise a contractual right to liquidate the underlying securities. However, if the seller is a stockbroker or other entity not afforded protection under the Bankruptcy Code, an agency having jurisdiction over the insolvent entity may determine that a Fund does not have the immediate right to liquidate the underlying securities. If the seller defaults, a Fund might incur a loss if the value of the underlying securities declines. A Fund may also incur disposition costs in connection with the liquidation of the securities. While the Fund's management acknowledges these risks, it is expected that they can be controlled through selection criteria established by the Board of Trustees and monitoring procedures. When-Issued and Delayed-Delivery Securities. The Funds may purchase securities on a when-issued or delayed-delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the transaction. The New York Fund will only make commitments to purchase municipal obligations on a when-issued basis with the intention of actually acquiring the securities but may sell them before the settlement date if it is deemed advisable. The when-issued securities are subject to market fluctuation and no interest accrues to the purchaser during this period. The payment obligation and the interest rate that will be received on the securities are each fixed at the time the purchaser enters into the commitment. Purchasing on a when-issued basis is a form of leveraging and can involve a risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself in which case there could be an unrealized loss at the time of delivery. Each Fund will maintain liquid assets in segregated accounts with its custodian in an amount at least equal in value to the Fund's commitments to purchase when-issued securities. If the value of these assets declines, the Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. 19 Securities with Put Rights. (New York Fund only.) The Fund may enter into put transactions, sometimes referred to as stand-by commitments, with respect to municipal obligations held in its portfolio. The amount payable to the Fund by the buyer upon its exercise of a put will normally be (i) the Fund's acquisition cost of the securities (excluding any accrued interest which the Fund paid on their acquisition), less any amortized market premium or plus an amortized original issue discount during the period the Fund owned the securities, plus (ii) all interest accrued on the securities since the last interest payment date during the period the securities were owned by the Fund. Absent unusual circumstances, the Fund values the underlying securities at their market value. Accordingly, the amount payable by a broker-dealer or bank during the time a put is exercisable will be substantially the same as the value of the underlying securities. If necessary and advisable, the Fund may pay for certain puts either separately in cash or by paying a higher price for portfolio securities which are acquired subject to such a put (thus reducing the yield to maturity otherwise available for the same securities). The Fund's ability to exercise a put will depend on the ability of the broker-dealer or bank to pay for the underlying securities at the time the put is exercised. In the event that a broker-dealer or bank should default on its obligation to repurchase an underlying security, the Fund might be unable to recover all or a portion of any loss sustained from having to sell the security elsewhere. For a more detailed description of put transactions, see "Investment-- Policies-Securities with Put Rights" in the SAI. Illiquid Securities. Each Fund may invest in illiquid securities if immediately after such investment no more than 15% (10% in the case of the New York Fund) of a Fund's net assets (taken at market value) would be invested in such securities. For this purpose, illiquid securities include (a) securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market, (b) participation interests in loans that are not subject to puts, and (c) repurchase agreements not terminable within seven days. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation. Consequently, investments in restricted securities eligible for resale pursuant to Rule 144A of the Securities Act of 1933 which have been determined to be liquid by a Fund's Board of Trustees based upon the trading markets for such securities, will not be included for purposes of this limitation. Portfolio Turnover. The Funds generally will not engage in the trading of securities for the purpose of realizing short-term profits, but each Fund will adjust its portfolio as it deems advisable in view of prevailing or anticipated market conditions or fluctuations in interest rates to accomplish its respective investment objective. For example, each Fund may sell portfolio securities in anticipation of an adverse market movement. Other than for tax purposes, frequency of portfolio turnover will not be a limiting factor if a Fund considers it advantageous to purchase or sell securities. A high rate of portfolio turnover involves correspondingly greater transaction expenses than a lower rate, which expenses must be borne by each Fund and its shareholders. Investment Company Securities. Each Fund may invest up to 10% of its respective total assets in the securities of other investment companies subject to the limitations of Section 12(d)(1) of the 1940 Act. Investors should recognize that the purchase of securities of other investment companies results in duplication of expenses such that investors indirectly bear a proportionate share of the expenses of such companies, including operating costs and investment advisory and administrative fees. 20 INVESTMENT RESTRICTIONS The SAI contains more information on each Fund's investment policies, and also identifies the restrictions on a Fund's investment activities, which provide among other things: The Funds may not: 1. Issue senior securities, borrow money or pledge or mortgage its assets, except that a Fund may borrow from banks up to 10% of the current value of its total net assets for temporary purposes only in order to meet redemptions, and those borrowings may be secured by the pledge of not more than 10% of the current value of its total net assets (but investments may not be purchased by a Fund while such borrowings exist). 2. Invest more than 25% of the value of its total assets in securities of companies engaged principally in any one industry, provided that there is no limitation with respect to U.S. Government Securities including repurchase agreements and loans of securities collateralized by U.S. Government Securities. With respect to the New York Fund, there is no limitation with respect to investments in municipal obligations (for purposes of this restriction, industrial development and pollution control bonds shall not be deemed municipal obligations if the payment of principal and interest on such bonds are the ultimate responsibility of nongovernmental users). 3. Lend more than 10% of the value of the total assets of such Fund's portfolio securities to qualified borrowers, except that the Funds may purchase or hold a portion of an issue of publicly-distributed bonds, debentures or other obligations, make deposits with banks and enter into repurchase agreements with respect to its portfolio securities. All such loans shall require the borrower to deposit and maintain with the Fund cash collateral equal to 102% of the market value of the securities loaned. As with any extension of credit, loans by a Fund may be made to large financial institutions such as broker-dealers and are subject to the risks of delay in recovery and loss of rights in the collateral should the borrower of the securities fail financially. 4. Invest an amount equal to 15% (10% in the case of the New York Fund) or more of the current value of the Fund's net assets in illiquid securities, including those securities which do not have readily available market quotations and repurchase agreements having maturities of more than seven days. 5. With respect to 75% of its total assets, invest more than 5% of its total assets in the securities of any one issuer, other than obligations of the United States Government, its agencies or instrumentalities or securities which are backed by the full faith and credit of the United States. The Short-Term and Fixed Income Funds will not invest more than 10% of their total assets in any one issuer. In addition, the New York Fund may not: 6. Invest less than 80% of its net assets in New York Obligations except when, in the opinion of the Fund's investment adviser, it is advisable for the Fund to invest temporarily up to 100% of its total assets in taxable securities to maintain a "defensive" posture because of usual market conditions. For instance, a "defensive" posture is warranted when the Fund's assets exceed the available amount of municipal obligations that meet the Fund's investment objective and policies. 21 There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in the market value of an investment, in the net or total assets of the Funds, in the securities rating of the investment, or any other later change. The investment restrictions referred to above are fundamental and may be changed only when permitted by law and approved by a majority of the outstanding voting securities of a Fund. As used in this Prospectus, such approval means approval of the lesser of (i) the holders of 67% or more of the shares represented in a meeting if the holders of more than 50% of the outstanding shares are present in person or by proxy or (ii) the holders of more than 50% of the outstanding shares. MANAGEMENT OF THE FUNDS The property, affairs and business of the Funds are managed by the Board of Trustees. The Trustees elect officers who are charged with responsibility for the day-to-day operations of the Funds and the execution of policies formulated by the Trustees. Information about the Trustees as well as the Trust's executive officers, may be found in the SAI under the heading "Management--Trustees and Officers." Investment Adviser The Trust retains HSBC Asset Management Americas Inc. ("HSBC Americas") to act as the investment adviser for each of the Funds (the "Adviser"). HSBC Americas is the North American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. At December 31, 1995, HSBC Americas managed over $3.7 billion of assets of individuals, pension plans, corporations and institutions. Mr. David Fox, Managing Director and Senior Fixed Income Manager of HSBC Americas, is responsible for the day-to-day management of the Short-Term and Fixed Income Fund's portfolio. Prior to joining HSBC Americas in 1994, Mr. Fox was Vice President and Senior Portfolio Manager of CDC Investments. From 1987 through 1990, Mr. Fox was a Vice President at Lehman Brothers. Mr. Jerry Samet, Municipal Bond Portfolio Manager, Fixed Income Group of HSBC Americas, is responsible for the day-to-day management of the New York Fund. Before joining HSBC in February 1996, Mr. Samet worked for Bankers Trust in the Private Clients Group for eight years. He was a portfolio manager/trader for six years, and before that, he was a trading assistant for two years. Pursuant to each Advisory Contract, the Adviser furnishes continuous investment guidance to the Trust consistent with each Fund's investment objective and policies and provides administrative assistance in connection with the operation of each Fund. Information regarding the investment performance of each Fund is contained in each Fund's Annual Report dated December 31, 1995 which may be obtained, without charge, from the Trust. Banking Laws Counsel to the Trust and special counsel to the Adviser, have advised the Adviser that the Adviser may perform the services for the Trust contemplated by the Advisory Contract without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Such counsel has pointed out, however, that this question has 22 not been authoritatively determined and that judicial or administrative decisions or interpretations of present Federal or state statutes and regulations relating to the permissible activities of banks or trust companies and their subsidiaries or affiliates, as well as future changes in Federal or state statutes and regulations and judicial or administrative decisions or interpretations thereof, could prevent the Adviser from continuing to perform such services for the Trust. If the Adviser were prohibited from performing any of its services for the Trust, it is expected that the Board of Trustees would recommend to the Trust's shareholders that they approve new agreements with another entity or entities qualified to perform such services and selected by the Board. Distributor BISYS Fund Services, the Distributor (the "Distributor"), has its principal office at 3435 Stelzer Road, Columbus, Ohio 43219. The Distributor will receive orders for, sell and distribute shares of the Funds. Shareholder Servicing Agent The Trust retains HSBC Americas to act as Shareholder Servicing Agent of the Funds in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains personnel who deliver prospectuses and Fund applications, (ii) assists and trains personnel who assist customers with filling out Fund applications, (iii) performs customer education, reviews Fund written communications and assists personnel who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of each Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of each Fund's average daily net assets. Administrator The Trust retains BISYS Fund Services ("BISYS") to act as the Administrator of the Funds in accordance with the terms of the Management and Administration Agreements. Pursuant to the Management and Administration Agreements, the Administrator, at its expense, generally supervises the operation of the Trust and the Funds by reviewing the expenses of the Funds monthly to ensure timing and accuracy of each Fund's operating expense budget and by providing administrative personnel, office space and administrative services reasonably necessary for the operation of the Trust and the Funds, other than those services which are provided by HSBC Americas pursuant to the Advisory Contract. BISYS's annual administration and accounting fee is an asset-based fee of 0.15% of each Fund's first $200 million of average net assets; 0.125% of each Fund's next $200 million of average net assets; 0.10% of each Fund's next $200 million of average net assets; and 0.08% of each Fund's average net assets in excess of $600 million. The asset-based administration and accounting fee paid to BISYS does not include out-of-pocket expenses which shall be borne by the Trust. The Trust also retains HSBC Americas to act as Co-Administrator of the Funds in accordance with the terms of the Co-Administration Services Contract. Pursuant to the Co-Administration Services Contract, HSBC 23 Americas (i) manages each Fund's relationship with service providers, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as a liaison with Fund trustees, and (iv) assists with general product management and oversight. For its services as a Co-Administrator, HSBC Americas is paid an annual fee equal to 0.03% of each Fund's average daily net assets. Servicing Agreements The Funds may enter into agreements (the "Servicing Agreement") with certain banks, financial institutions and corporations (the "Participating Organizations") so that each Participating Organization handles recordkeeping and provides certain administrative services for its customers who invest in the Funds through accounts maintained at that Participating Organization. In such cases, the Participating Organization or one of its nominees will be the shareholder of record as nominee for its customers and will maintain subaccounts for its customers. In addition, the Participating Organization will credit cash distributions to each customer account, process purchase and redemption requests, mail statements of all transactions with respect to each customer and, if required by law, distribute the Trust's shareholder reports and proxy statements. However, any customer of a Participating Organization may become the shareholder of record upon written requests to its Participating Organization or BISYS Fund Services, as transfer agent. Each Participating Organization will receive monthly payments which in some cases may be based upon expenses that the Participating Organization has incurred in the performance of its services under the Servicing Agreement. The payments will not exceed, on an annualized basis, an amount equal to 0.25% of the average daily net assets of Fund shares in the subaccount of which the Participating Organization is record owner as nominee for its customers. Such payments will be separately negotiated with each Participating Organization and will vary depending upon such factors as the services provided and the costs incurred by each Participating Organization. The payments may be more or less than the fees payable to BISYS for the services it provides pursuant to the Transfer Agency Agreement for similar services. The payments will be made by the Funds to the Participating Organizations pursuant to the Servicing Agreements. BISYS Fund Services will not receive any compensation as transfer or dividend disbursing agent with respect to the subaccounts maintained by Participating Organizations. The Board of Trustees will review, at least quarterly, the amounts paid and the purposes for which such expenditures were made pursuant to the Servicing Agreements. Under separate agreements, the Adviser (not the Funds) may make supplementary payments from its own revenues to a Participating Organization that agrees to perform services such as advising customers about the status of their subaccounts, the current yield and dividends declared to date and providing related services a shareholder may request. Such payments will vary depending upon such factors as the services provided and the costs incurred by each Participating Organization. Investors who purchase and redeem shares of the Funds through a customer account maintained at a Participating Organization may be charged one or more of the following types of fees by a Participating Organization, as agreed upon by the Participating Organization and the investor, with respect to the customer services provided by the Participating Organization: account fees (a fixed amount per month or per year); transaction fees (a fixed amount per transaction processed); compensating balance requirements (a minimum dollar amount a customer must maintain in order to obtain the services offered); or account maintenance fees (a periodic charge based upon a percentage of the assets in the account or of the dividends paid on those assets. 24 Distribution Plan and Agreement The Board of Trustees of the Trust has adopted a Distribution Plan and Agreement on behalf of each Fund (the "Plan") pursuant to Rule 12b-1 of the 1940 Act, as amended, after having concluded that there is a reasonable likelihood that the Plan will benefit each Fund and its shareholders. The Plan provides for a monthly payment by the Funds to reimburse the Distributor in such amounts that the Distributor may request for expenses such as the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses, associated with media advertisements and telephone services and other direct and indirect distribution-related expenses including the payment of a monthly fee to broker-dealers for rendering distribution-related asset introduction and asset retention services. The Funds may also make payments to other broker-dealers or financial institutions for their assistance in distributing shares of the Funds and otherwise promoting the sale of shares of each Fund. The total of each monthly payment is based on each Fund's average daily net assets during the preceding month and is calculated at an annual rate not to exceed 0.35% with respect to each Fund. The Plan provides for the Distributor to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plan may not be amended to increase materially the amount spent for distribution expenses on behalf of a Fund without approval by a majority of such Fund's outstanding shares and approval of a majority of the non-interested Trustees. Distribution expenses incurred in one year will not be carried forward into and reimbursed in the next year for actual expenses incurred in the previous year. Fees and Expenses The Short-Term and Fixed Income Funds pay HSBC Americas, as compensation for its advisory services, a monthly fee equal to an annual rate of 0.550% of average daily net assets up to $400 million. The fee is reduced at several breakpoints for average daily net assets in excess of $400 million up to $2 billion, at which point it becomes 0.315% of the average daily net assets in excess of $2 billion. The New York Fund pays HSBC Americas, as compensation for its advisory services a monthly fee equal to an annual rate of 0.450% of average daily net assets up to $300 million. The fee is reduced at several break points for average daily net assets in excess of $300 million up to $2 billion, at which point they become 0.280% of the average daily net assets in excess of $2 billion. Each Fund also pays HSBC Americas, as compensation for its co-administrative services and shareholder services, a monthly fee equal to an annual rate of 0.07% of average daily net assets of each Fund. HSBC Americas reserves the right to waive in advance a portion of its advisory, co-administrative services, and shareholder's servicing fees at any time. TRANSACTIONS WITH AFFILIATES Broker-dealers which are affiliates of HSBC Americas may act as brokers for the Funds. At all times, however, their commissions, fees or other charges must be reasonable and fair in comparison with those that would be paid to unaffiliated firms for comparable transactions. Neither Fund will do business with nor pay commissions to affiliates of HSBC Americas in any portfolio transactions where such affiliates act as principal. In placing orders for the purchase and sale of portfolio securities, the Funds seek the best execution at the most favorable price, considering all of the circumstances. The Adviser may consider sales of shares of the Fund and of other HSBC 25 Funds as a factor in selecting a broker. The Adviser may cause a Fund to pay commissions higher than another broker-dealer would have charged if the Adviser believes the commission paid is reasonable in relation to the value of the research services incurred by the Adviser. DETERMINATION OF NET ASSET VALUE Each Fund's net asset value per share for the purpose of pricing purchase and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the Fund's transfer agent is open for business. The net asset value of the Funds will not be determined on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per share of each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of the assets less the liabilities) by the total number of shares outstanding. All expenses, including the management, advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. Portfolio securities are valued at current market value, if available. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the supervision of the Trust's officers in accordance with guidelines which have been adopted by the Board of Trustees. Such procedures include the use of independent pricing services which use prices based on yields or prices of securities of comparable quality, coupon, maturity and type; indications as to value from dealers; and general market conditions. Short-term obligations of sixty days or less are valued at amortized cost, which approximates the market value. PURCHASE OF SHARES Shares of the Funds are offered on a continuous basis at net asset value, plus any applicable sales charge, by the Distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Prospectuses and accompanying sales material can be obtained from the Transfer Agent or Distributor. The minimum initial investment requirement for each Fund is $1,000. The minimum subsequent investment requirement for each Fund is $50. There are no minimum investment requirements with respect to investments effected through certain automatic purchase and redemption arrangements on behalf of customer accounts maintained at Participating Organizations. The minimum investment requirements may be waived or lowered for investments effected on a group basis by certain other institutions and their employees, such as pursuant to a payroll deduction plan. All funds will be invested in full and fractional shares. The Trust reserves the right to reject any purchase order. 26 Orders for shares of a Fund will be executed at the net asset value per share next determined after receipt of an order by the dealer, plus a sales charge varying with the amount invested in accordance with the following schedules:
Short-Term Fund Reallowance to Service Total Sales Load Organizations ---------------- ------------- As a % of As a % of Net Asset As a % of Amount Invested Offering Price Value Per Offering Price (including sales charge) Per Share Share Per Share ------------------------ --------- ----- --------- Less than $100,000.................................... 2.00% 2.04% 1.75% $100,000 but less than $250,000....................... 1.25% 1.27% 1.00% $250,000 but less than $500,000....................... 0.75% 0.76% 0.65% $500,000 but less than $1 million..................... 0.50% 0.50% 0.40% $1 million and above.................................. 0.25% 0.25% 0.20%
Fixed Income and New York Funds Reallowance to Service Total Sales Load Organizations ---------------- ------------- As a % of As a % of Net Asset As a % of Amount Invested Offering Price Value Per Offering Price (including sales charge) Per Share Share Per Share ------------------------ --------- ----- --------- Less than $50,000..................................... 4.75% 4.99% 4.25% $50,000 but less than $100,000........................ 4.25% 4.44% 3.75% $100,000 but less than $250,000....................... 3.50% 3.63% 3.15% $250,000 but less than $500,000....................... 2.50% 2.56% 2.25% $500,000 but less than $1 million..................... 2.00% 2.04% 1.75% $1 million and above.................................. 1.00% 1.01% 0.90%
The sales load does not apply to shareholders of the New York Fund who were shareholders on May 1, 1990. The sales charge will be waived on the following purchases: (1) by Trustees and officers of the Trust and of HSBC Funds Trust and members of their immediate families (parents, spouses, children, brothers and sisters), (2) by directors, employees and retirees of Marine Midland Bank and its affiliates and members of their immediate families, (3) by financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit-sharing or other benefit plan for such customers or employees, (4) by directors and employees of the Distributor and its affiliates and members of their immediate families, (5) by charitable organizations as defined in Section 501(c)(3) of the Internal Revenue Code ("Charitable Organizations") or for charitable remainder trusts or life income pools established for the benefit of Charitable Organizations, (6) by registered representatives of selling brokers and members of their immediate families, (7) by individuals who have terminated their Employee Benefit Trust ("EBT") Plan or have retired and are purchasing shares in a Fund with the proceeds of their benefits checks (the EBT Plan must currently own shares of a Fund at the time of the 27 individual's purchase), (8) with respect to the Short Term and New York Funds only, by corporations, their officers or directors, partnerships, and their partners which are customers or prospective customers of Marine Midland Bank when authorized by an officer of Marine Midland Bank, (9) with respect to the Fixed Income Fund only, by customers or prospective customers of Marine Midland Bank when authorized by an officer of Marine Midland Bank, and (10) by individuals who, as determined by an officer of the Funds in accordance with guidelines by the Funds' Board of Trustees, have purchased shares under special circumstances not involving sales expenses to dealers or the Distributor. Eligible investors should contact HSBC Americas for details. The sales load does not apply in any instance to reinvested dividends. From time to time dealers who receive dealer discounts and broker commissions from the Distributor may reallow all or a portion of such dealer discounts and broker commissions to other dealers or brokers. The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of shares of any of the Funds. Such compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more funds of the Trust, and/or other dealer-sponsored special events. In some instances, this compensation will be made available only to certain dealers whose representatives have sold a significant number of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Compensation may also include the following types of non-cash compensation offered through sales contests: (1) vacation trips, including the provision of travel arrangements and lodging at luxury resorts at an exotic location, (2) tickets for entertainment events (such as concerts, cruises and sporting events) and (3) merchandise (such as clothing, trophies, clocks and pens). Dealers may not use sales of a Fund's shares to qualify for the compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned compensation is paid for by any Fund or its Shareholders. Stock certificates will not be issued with respect to the shares of each Fund. The Transfer Agent shall keep accounts upon the books of the Trust for record holders of such shares. Right of Accumulation The Funds offer to all shareholders a right of accumulation under which any shareholder may purchase shares of a Fund at the offering price applicable to the total of (a) the dollar amount then being purchased plus (b) an amount equal to the offering price of the shareholder's combined holdings of the shares of the Funds. For the right of accumulation to be exercised, the shareholder must provide at the time of purchase confirmation of the total number of shares of a Fund owned by such shareholder. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time on sixty days notice to shareholders. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares held in the name of such nominee or custodian for other plans to qualify for the right of accumulation. Letter of Intent By initially investing at least $1,000 and submitting a Letter of Intent to the transfer agent, a "single purchaser" may purchase shares of a Fund and other eligible HSBC Funds (other than Money Market Funds) 28 during a 13-month period at the reduced sales charge rates applying to the aggregate amount of the intended purchases stated in the Letter of Intent. The Letter of Intent may apply to purchases made up to 90 days before the date of submission of the Letter. Dividends and distributions of capital gains paid in shares of the Funds at net asset value will not apply towards the completion of the Letter of Intent. The Letter of Intent does not obligate a shareholder to buy the amount indicated in the Letter of Intent; however, if the intended purchases are not completed during the Letter of Intent period, the shareholder will be obligated to pay the Distributor an amount equal to the difference between the regular sales charge applicable to a single purchase of the number of shares purchased and the sales charge actually paid. For further details, including escrow provisions, see the Letter of Intent. The Funds reserve the right to amend, suspend or cease offering this program at any time. Prospective investors who wish to obtain additional information concerning investment procedures should contact the Transfer Agent at: (800) 634-2536. New Account Purchase By Wire 1. Telephone the Transfer Agent at (800) 634-2536 for instructions. Please note your bank will normally charge you a fee for handling this transaction. New Account Purchase By Mail 1. Complete a Purchase Application. Indicate the services to be used. 2. Mail the Purchase Application and a check for $1,000 or more, payable to HSBC Family of Funds to the Transfer Agent at: HSBC Mutual Funds Trust, c/o BISYS, P.O. Box 163850 Columbus, Ohio 43216-3850. Third-party checks will not be accepted. Checks must be in U.S. dollars. Please include the Fund name and your account number on all checks. Additional Purchases By Wire and Mail Additional purchases of shares may be made by wire by telephoning the Transfer Agent at 800-634-2536 and then instructing the wiring bank to transmit the amount ($50 or more) of any additional purchase in Federal funds. Additional purchases may also be made by mail by making a check ($50 or more) payable to the HSBC Family of Funds indicating your fund account number on the check and mailing it to the Transfer Agent at the address set forth above. Purchase Through Customer Accounts Purchases of shares also may be made through customer accounts maintained at Participating Organizations, including qualified Individual Retirement and Keogh Plan accounts. Purchases will be made through a customer's account only as directed by or on behalf of the customer on a direction form executed prior to the customer's first purchase of shares of a Fund. For example, a customer with an account at a Participating Organization may instruct the Participating Organization to invest money in excess of a level agreed upon between the customer and the Participating Organization in shares of a Fund periodically or give other instructions to the Participating Organization within limits prescribed by that Participating Organization. 29 Automatic Investment Plan Investors may make regular monthly investments of $50 or more in shares automatically from a checking or savings account if their bank is a member of automated clearing house (ACH). Upon written authorization, the Transfer Agent will electronically debit the investor's checking or savings account each month and use the proceeds to purchase shares for the investor's account. Approval by the investor's bank is required, so that establishment of a program may require at least 30 days. The authorized amount and/or bank information may be changed or the program terminated at any time by writing to the Transfer Agent. A reasonable period (usually up to 15 days) may be required after receipt of such instructions to implement them. The purchase application contains the requirements applicable to this plan. The Trust reserves the right to amend, suspend or cease offering this program at any time without prior notice. REDEMPTION OF SHARES Upon receipt by the Trust's transfer agent of a redemption request ($50 minimum) in proper form, shares of a Fund will be redeemed at their next determined net asset value after the order is received by the dealer. See "Determination of Net Asset Value" in this Prospectus. For the shareholder's convenience, the Trust has established several different direct redemption procedures. Redemptions of shares purchased by check will be effected immediately upon clearance of the purchase check, which may take up to 15 days after those shares have been credited to the shareholder's account. A redemption of shares is a taxable transaction on which gain or loss may be recognized for tax purposes. The Funds reserve the right to redeem (on 30 days' notice) accounts whose values shareholders have reduced to $50 or less. Redemption By Mail 1. Complete a letter of instruction indicating the Fund, the account number and either the dollar amount or number of shares to be redeemed. Refer to the shareholder's Fund account number. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, the signature(s) must be guaranteed by a bank, trust company, broker, dealer, credit union, securities exchange or association, clearing agency or savings association. Signature guarantees by notaries public are not acceptable. Further documentation, such as copies of corporate resolutions and instruments of authority, may be requested from corporations, administrators, executors, personal representatives, trustees or custodians to evidence the authority of the person or entity making the redemption request. 4. Mail the letter to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. Checks for redemption proceeds will normally be mailed within seven days to the shareholder's address of record. 30 Upon request, the proceeds of a redemption amounting to $1,000 or more can be sent by wire to the shareholder's predesignated bank account. Please note a wire transfer fee will normally be charged. When proceeds of a redemption are to be paid to someone other than the shareholder, either by wire or check, the signature(s) on the letter of instruction must be guaranteed regardless of the amount of the redemption. Redemption By Expedited Redemption Service If shares are held in book credit form and the Expedited Redemption Service has been elected on the Purchase Application on file with the Transfer Agent, redemption of shares may be requested on any day the Transfer Agent is open for business by telephone or letter. A signature guarantee is not required. 1. Telephone the request to the Transfer Agent at: (800) 634-2536; or 2. Mail the request to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. Proceeds of Expedited Redemptions of $1,000 or more can be wired to the shareholder's bank indicated in the Purchase Application. If an Expedited Redemption request is received by the Trust's transfer agent by 4:00 p.m. (Eastern time) on a day the transfer agent is open for business, the redemption proceeds will be transmitted to the shareholder's bank on the next business day. A check for proceeds of less than $1,000 will be mailed to the shareholder's address of record. The Transfer Agent employs reasonable procedures to confirm that instructions communicated by telephone are genuine. If the Transfer Agent fails to employ such reasonable procedures, the transfer agent may be liable for any loss, damage or expense arising out of any telephone transactions purporting to be on a shareholder's behalf. In order to assure the accuracy of instructions received by telephone, the Transfer Agent requires some form of personal identification prior to acting upon instructions received by telephone, records telephone instructions and provides written confirmation to investors of such transactions. Systematic Withdrawal Plan An owner of $10,000 or more of shares of a Fund may elect to have periodic redemptions from his account to be paid on a monthly basis. The minimum periodic payment is $50. A sufficient number of shares to make the scheduled redemption will be redeemed on the first or fifteenth day of the month. Redemptions for the purpose of making such payments may reduce or even exhaust the account if the monthly checks paid exceed dividends, interest and capital appreciation, if any, on your shares. A shareholder may request that these payments be sent to a predesignated bank or other designated party. Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a return on your investment. Payments to you pursuant to the Systematic Withdrawal Plan are derived from the redemption of shares in your account and is a taxable transaction on which gain or loss may be recognized for Federal, state and city income tax purposes. Reinstatement Privilege A shareholder in a Fund who has redeemed shares may reinvest, without a sales charge, up to the full amount 31 of such redemption at the net asset value determined at the time of the reinvestment within 60 days of the original redemption. This privilege must be effected within 60 days of the redemption. The shareholder must reinvest in the same Fund and account from which the shares were redeemed. A redemption is a taxable transaction and gain or loss may be recognized for Federal income tax purposes even if the reinstatement privilege is exercised. Any loss realized upon the redemption will not be recognized as to the number of shares acquired by reinstatement, except through an adjustment in the tax basis of the shares so acquired. Redemption through Customer Accounts Investors who purchase shares through customer accounts maintained at Participating Organizations may redeem those shares only through the Participating Organization. In some cases, a customer may instruct the Participating Organization which maintains the account through which the customer purchases shares to redeem shares periodically as required to bring the customer's account balance up to a level agreed upon between the customer and the Participating Organization. If a redemption request with respect to such an automatic redemption arrangement is received by the transfer agent by 4:15 p.m. (Eastern time) on a day the transfer agent is open for business, the redemption proceeds will be transmitted on the next business day to the investor's customer account (unless otherwise specified by the Participating Organization). EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in a Fund for at least seven days may exchange shares of one Fund for shares of any of the other investment portfolios of the Trust and the HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will be subject only to that portion of the sales load of the Fund into which the shareholder is exchanging which exceeds the sales load originally paid by the shareholder. The Transfer Agent must be advised of the applicability of the sales charge differential when the exchange order is placed. Shareholders of any of the HSBC Money Market Funds who exchange shares of any such Money Market Funds for shares of any of the Funds of the Trust are charged the sales loads applicable to such Funds as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal and New York State and City income tax purposes and, depending on the circumstances, a gain or loss may be recognized. The Funds reserve the right to change the terms or terminate the Exchange Privilege at any time upon at least 60 days prior written notice to Shareholders. DIVIDENDS AND DISTRIBUTIONS Each Fund intends to declare daily dividends from net investment income at the close of each business day to the shareholders of record at 4:15 p.m. (Eastern time) on the previous day and pay such amounts monthly. Shares purchased will begin earning dividends on the day of settlement and shares redeemed will earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend on the previous business day. Each Fund's present intention is to distribute annually to its shareholders any net capital gains for the year (taking into account any capital loss carryovers). 32 Dividends declared in, and attributable to, the preceding month will be paid within five business days after the end of such month. Dividends declared by each Fund in October, November or December of any calendar year (as of a record date in such a month) will be treated for Federal income tax purposes as having been received by shareholders on December 31 of the year they are declared, if they are paid during January of the following year. Each Fund's dividends and capital gains distributions may be reinvested in additional shares or received in cash. For all investments effected through customer accounts maintained at Participating Organizations (see "Purchase of SharesPurchase through Customer Accounts" above), dividend payments in cash will be transmitted to the investor's account through which the shares were purchased or, if a Participating Organization so specifies, to it for crediting to its customer's account. Dividend checks will be mailed to all other shareholders who elect to be paid in cash within five business days after the end of each month. Investors who redeem shares of a Fund prior to a dividend payment will be entitled to all dividends declared but will not be credited prior to the designated dividend payment date. FEDERAL INCOME TAXES Each Fund is treated as a separate entity for Federal income tax purposes notwithstanding that it is one of multiple series of the Trust. Each Fund has elected to be treated, and has qualified and intends to continue to qualify to be treated as a regulated investment company by complying with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") applicable to regulated investment companies. Accordingly, the Funds will not be liable for federal income tax with respect to amounts distributed to shareholders in accordance with the timing requirements of the Code. Each Fund intends to distribute substantially all of its net investment income and net realized capital gains to its shareholders for each taxable year. Dividends derived from each Fund's taxable net investment income (if any) and the excess of net short-term capital gain over net long-term capital loss will be taxable to that Fund's shareholders at ordinary income rates, whether such dividends are invested in additional shares or received in cash. Distributions of the excess of net long-term capital gain over net short-term capital loss designated by a Fund as capital gain dividends will be taxable to shareholders as long-term capital gains, regardless of how long a shareholder has held Fund shares, whether invested in additional shares of a Fund or received in cash. Dividends and distributions from the New York Fund and long-term capital gain distributions from the Short-Term and Fixed Income Funds do not qualify for the dividends-received deduction available to corporations. Each year the Funds will notify shareholders of the character of dividends and distributions for Federal income tax purposes including, with respect to the New York Fund, the portion, if any, of exempt-interest dividends paid by the New York Fund that should be treated as a tax preference item under the Federal alternative minimum tax. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of Fund shares in their particular circumstances. See "Taxation" in the SAI. The Funds are required to report to the Internal Revenue Service (the "IRS") all distributions of taxable dividends and of capital gains, as well as the gross proceeds of share redemptions. The Funds may be required to 33 withhold Federal income tax at a rate of 31% ("backup withholding") from taxable dividends (including capital gain dividends) and the proceeds of redemptions of shares paid to non-corporate shareholders who have not furnished a Fund with a correct taxpayer identification number and made certain required certifications or who have been notified by the IRS that they are subject to backup withholding. In addition, the Funds may be required to withhold Federal income tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer identification number is incorrect or that backup withholding applies because of underreporting of interest or dividend income. Any gain or loss realized on the redemption or exchange of Fund shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. However, any loss realized by a shareholder upon the redemption or exchange of shares in the Fund held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain distributions received by the shareholder with respect to such shares. New York Fund Provided that the New York Fund complies with applicable requirements of the Code, dividends derived from interest on New York Obligations will constitute exempt-interest dividends and, except as discussed below, will not be subject to Federal income tax. Some portion of the exempt-interest dividends paid by the New York Fund will be treated as an item of "tax preference" for purposes of the alternative minimum tax if the New York Fund invests in certain types of municipal obligations and New York Obligations (see discussion below). Under the Code, interest on certain types of Municipal Obligations and New York Obligations is designated as an item of tax preference for purposes of the alternative minimum tax on individuals and corporations. Therefore, if the Fund were to invest in such types of obligations, shareholders would be required to treat as an item of tax preference that part of the distributions by the New York Fund that is derived from interest income on such obligations. Exempt-interest dividends received by corporations which hold shares of the New York Fund may result in or increase liability for the corporate alternative minimum tax. Entities or persons who are "substantial users" (or persons related to "substantial users") as defined in the Code, of facilities financed by Municipal Obligations and New York Municipal Obligations issued for certain private activities should consult their tax advisers before purchasing shares of the New York Fund. Exempt-interest dividends and other distributions paid by the New York Fund are includable in the tax base for determining the taxability of social security or railroad retirement benefits. Interest on debt incurred to purchase or carry shares in the Fund may not be deductible for Federal income tax purposes. Depending on the residence of the New York Fund's shareholders for tax purposes, distributions may also be subject to state and local taxes. Shareholders are required to report the amount of tax-exempt interest received each year, including exempt-interest dividends, on their Federal tax returns. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership of the New York Fund shares in their particular circumstances. 34 NEW YORK TAXES New York Fund Exempt-interest dividends paid by the New York Fund will be exempt from New York State and City personal income taxes to the extent they are derived from interest on New York Obligations. For New York State and City personal income tax purposes, whether invested in additional shares of the New York Fund or received in cash, dividends derived from interest on the New York Fund's other investments (including interest on Municipal Obligations other than New York Obligations) and the excess of net short-term capital gain over net long-term capital loss will be taxed as ordinary income, and dividends treated as long-term capital gains for Federal tax purposes will be taxed as long-term capital gains, regardless of how long a shareholder has held his shares. Dividends paid by the New York Fund, including exempt-interest dividends derived from interest on New York Obligations, may be subject to the New York State franchise tax and to the New York City General Corporation Tax if they are received by a corporation subject to those taxes. Such dividends may also be subject to state taxes in states other than New York and to local taxes in cities other than New York City. ACCOUNT SERVICES All transactions in shares of the Funds will be reflected in confirmations for each shareholder and a monthly shareholder statement. In those cases where a Participating Organization or its nominee is shareholder of record of shares purchased for its customer, the Trust has been advised that the statement may be transmitted to the customer in the discretion of the Participating Organization. Shareholders can write or call the Trust's transfer agent at P.O. Box 163850, Columbus, OH 43216-3850, or telephone: (800) 634-2536 with any questions relating to their investments in Fund shares. Participating Organizations or their nominees may be the shareholders of record as nominees for their customers, and may maintain subaccounts for those customers. Any such customer may become the shareholder of record upon written request to the Participating Organization, or Transfer Agent. The Transfer Agent will transmit promptly to each of its customers for whom it processes purchases and redemptions of shares and to each Participating Organization copies of all reports to shareholders, proxy statements and other Trust communications. The Trust's arrangements with the transfer agent and the subtransfer agent arrangements require Participating Organizations to grant investors who purchase shares through customer accounts the opportunity to vote their shares by proxy at all shareholder meetings of the Trust. In certain cases, a customer of a Participating Organization may have given his Participating Organization the power to vote shares on his behalf. Customers with accounts at Participating Organizations should consult their Participating Organization for information concerning their rights to vote shares. TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN Pursuant to an Agency Agreement, BISYS Fund Services ("Transfer Agent") acts as each Fund's transfer and dividend disbursing agent and is responsible for maintaining account records detailing ownership of Fund shares 35 and for crediting income, capital gains and other changes in share ownership to investors' accounts. For its services, the Transfer Agent receives from the Funds an annual base fee of $25 per shareholder account and subaccount plus additional transaction costs. The Bank of New York is the Trust's custodian. Pursuant to the Custodian Agreement, The Bank of New York is responsible for holding each Fund's cash and portfolio securities. Bank of New York may enter into such custodian agreements with certain qualified banks. PERFORMANCE INFORMATION Each Fund's total return may be included in advertisements or mailings to prospective investors. Each Fund may occasionally cite statistical reports concerning its performance. The Funds may also from time to time compare their performance to various unmanaged indices. (See the SAI for more details concerning the various indices which might be used.) Each Fund's "total return" refers to the average annual compounded rates of return over one, five and ten year periods or for the life of such Fund (which periods will be stated in the advertisement) that would equate an initial amount invested at the beginning of a stated period to the ending redeemable value of the investment, assuming the deduction of the maximum sales charge and the reinvestment of all dividend and capital gains distributions. Each Fund calculates its total return by adding the total dividends paid for the period to the applicable Fund's ending net asset value per share for that period and dividing that sum by the net asset value per share of the applicable Fund at the beginning of the period. Each Fund may also furnish total return calculations based on investments at various sales charge levels or at net asset value. Any performance data which is based on a Fund's net asset value per share would be reduced if a sales charge were taken into account. Each Fund may quote total return on a before tax or after tax basis. Each Fund may also from time to time include in advertisements or mailings to prospective investors a current yield quotation based on a specific thirty day period. Both yield and total return figures are based on historical earnings and are not intended to indicate future performance. Investors who purchase and redeem shares of the Fund through a customer account maintained at a Participating Organization may be charged by such Participating Organization certain fees, as agreed upon by the Participating Organization and the investor with respect to the customer services provided by the Participating Organization. Such fees will have the effect of reducing the return and yield for those investors. See "Management of the Funds--Servicing Agreements" in this Prospectus. SHARES OF BENEFICIAL INTEREST The authorized capital of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Trust's Board of Trustees has authorized the issuance of multiple series representing shares in corresponding investment portfolios of the Trust and may, in the future, authorize the issuance of other series or classes of shares of beneficial interest representing interest in other investment portfolios. Each additional portfolio within the Trust is separate for investment and accounting purposes and is represented by a separate series of shares. Each portfolio will be treated as a separate entity for Federal income tax purposes. All shares of the Trust have equal voting rights and will be voted in the aggregate, and not by class, except where voting by class is required by law or where the matter involved affects only one class. All shares of the Trust 36 issued and outstanding are fully paid and nonassessable. The Trust is not required by law to hold annual shareholder meetings and does not intend to hold such meetings. For more details concerning the voting rights of shareholders see the SAI. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing Trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Under Massachusetts law, it is possible that shareholders of a Massachusetts business trust might, under certain circumstances, be held personally liable for acts or obligations of the Trust. The Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's assets for all loss and expense of any shareholder held personally liable by reason of being or having been a shareholder of the Trust. Thus, the risk that a shareholder of a Fund could incur financial loss on account of shareholder liability is considered remote since it is limited to circumstances in which the disclaimer is inoperative and the Fund itself would be unable to meet its obligations. 37 [This page intentionally left blank] 38 [This page intentionally left blank] 39 - ----------------------- HSBC Mutual Funds Trust - ----------------------- HSBC Fund Group - ----------------------- HSBC Asset Management [Logo] - ----------------------- HSBC (SM) Mutual Funds Trust 3435 Stelzer Road Columbus, Ohio 43219 General Information: (800) 634-2536 Investment Adviser and Co-Administrator HSBC Asset Management Americas Inc. 250 Park Avenue New York, New York 10177 Distributor, Administrator, Transfer Agent and Dividend Disbursing Agent BISYS Fund Services 3435 Stelzer Road Columbus, OH 43219 Custodian Bank of New York 90 Washington Street New York, New York 10286 Independent Auditors Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 Legal Counsel Baker & McKenzie 805 Third Avenue New York, New York 10022 No dealer, salesman, or other person has been authorized to give any information or to make any representations, other than those contained in the Prospectus, in connection with the offer contained in this Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Trust, the Distributor or the Investment Adviser. This Prospectus does not constitute an offering in any state in which such offering may not lawfully be made. - -------------------------------------------------------------------------------- Prospectus April 24, 1996 - -------------------------------------------------------------------------------- Funds: Short-Term U.S. Government Fund Fixed Income Fund New York Tax-Free Bond Fund - -------------------------------------------------------------------------------- Managed and Advised by: HSBC Asset Management Americas Inc. - -------------------------------------------------------------------------------- Sponsored and Distributed by: BISYS Fund Services - -------------------------------------------------------------------------------- HSBC MUTUAL FUNDS TRUST SHORT-TERM U.S. GOVERNMENT FUND FIXED INCOME FUND NEW YORK TAX-FREE BOND FUND 3435 Stelzer Road Columbus, Ohio 43219 Information: (800) 634-2536 STATEMENT OF ADDITIONAL INFORMATION HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust, (the "Trust") is an open-end, diversified management investment company with multiple investment portfolios including the Short-Term U.S. Government Fund (the "Short- Term Fund"), the Fixed Income Fund (the "Fixed Income Fund"), and the New York Tax-Free Bond Fund (the "New York Tax-Free Fund") herein referred to individually as a "Fund" and collectively as the "Funds". The investment objective of the Short-Term Fund is preservation of capital --------------- and generation of current income by investing primarily in fixed-income securities with a dollar-weighted average portfolio life of between one and three years. The investment objective of the Fixed Income Fund is generation of high ----------------- current income consistent with appreciation of capital by investing in a variety of fixed-income securities. The investment objective of the New York Tax-Free Fund is to provide as high a level of current income exempt from regular Federal, New York State and New York City income taxes as is consistent with relative stability of capital. The Fund will invest primarily in New York Obligations. Although the Fund will have no restriction on the minimum or maximum maturity of any individual New York Obligation held by it, the Fund will have an average portfolio maturity ranging from three to 30 years. Shares of the Funds are primarily offered for sale by BISYS Funds Services, Inc., the Distributor, as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain banks, financial institutions and corporations ("Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at the Participating Organizations and to perform certain services for the Funds. This Statement of Additional Information is not a prospectus and is only authorized for distribution when preceded or accompanied by the Funds' Prospectus dated April 18, 1996. This Statement of Additional Information ("SAI") contains additional and more detailed information than that set forth in each Prospectus and should be read in conjunction with each Prospectus, additional copies of which may be obtained without charge from the Trust. April 18, 1996 TABLE OF CONTENTS
Page No. -------- INVESTMENT POLICIES AND RISK FACTORS..................... 1 INVESTMENT RESTRICTIONS.................................. 20 MANAGEMENT............................................... 22 CALCULATION OF YIELDS AND PERFORMANCE INFORMATION........ 26 DETERMINATION OF NET ASSET VALUE......................... 29 PORTFOLIO TRANSACTIONS................................... 29 PORTFOLIO TURNOVER....................................... 30 EXCHANGE PRIVILEGE....................................... 30 REDEMPTIONS.............................................. 31 FEDERAL INCOME TAXES..................................... 31 SHARES OF BENEFICIAL INTEREST............................ 34 CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.. 35 INDEPENDENT AUDITORS..................................... 36 EXPERTS.................................................. 36 FINANCIAL STATEMENTS..................................... 37
INVESTMENT POLICIES AND RISK FACTORS The following information supplements the discussion of the investment objective and policies of the Funds found under "Investment Objective, Policies and Risk Factors" in the Prospectus. MORTGAGE-RELATED SECURITIES. (Short-Term and Fixed Income Funds Only) Each Fund may, consistent with its respective investment objective and policies, invest in mortgage-related securities. Mortgage-related securities, for purposes of the Short-Term and Fixed Income Funds' Prospectuses and this SAI, represent pools of mortgage loans assembled for sale to investors by various governmental agencies such as the Government National Mortgage Association and government-related organizations such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as by nongovernmental issuers such as commercial banks, savings and loan institutions, mortgage bankers, and private mortgage insurance companies. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured. If a Fund purchases a mortgage-related security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. However, though the value of a mortgage- related security may decline when interest rates rise, the converse is not necessarily true since in periods of declining interest rates the mortgages underlying the securities are prone to prepayment. For this and other reasons, a mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the security's return to a Fund. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the yield and total return a Fund will receive when these amounts are reinvested. There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities, and among the securities that they issue. Mortgage-related securities created by the Government National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as to the timely payment of principal and interest and such guarantee is backed by the full faith and credit of the United States. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Government to make payments under its guarantee. Mortgage-related securities issued by the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of the FNMA and are not backed by or entitled to the full faith and credit of the United States. The FNMA is a government- sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of the principal and interest by FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC currently guarantees timely payment of interest and either timely payment of principal or eventual payment of principal depending upon the date of issue. When the FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due based on its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase securities on a when-issued or delayed-delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the transaction. The securities so purchased are subject to market fluctuation during this period and no income accrues to a Fund until settlement takes place. To facilitate such acquisitions, a Fund will maintain with the custodian a separate account with a segregated portfolio of securities in an amount at least equal to such commitments. On the delivery dates for such transactions, a Fund will meet its obligations from maturities or sales of the securities held in the separate account and/or from cash flow. While a Fund normally enters into these transactions with the intention of actually receiving or delivering the securities, it may sell these securities before the settlement date or enter into new commitments to extend the delivery date into the future, if the Investment Adviser considers such action advisable as a matter of investment strategy. Such securities have the effect of leverage on a Fund and may contribute to volatility of a Fund's net asset value. LOANS OF PORTFOLIO SECURITIES. The Funds may, subject to the restrictions set forth under "Investment Restrictions" in the Prospectus, make loans of portfolio securities to brokers, dealers and financial institutions if cash or cash equivalent collateral, including letters of credit, equal to at least 102% for the Short-Term and Fixed Income Funds and 100% for the New York Tax-Free Fund of the current market value of the securities loaned (including accrued dividends and interest thereon) plus the interest payable with respect to the loan is maintained by the borrower with the lending Fund in a segregated account. In determining whether to lend a security to a particular broker, dealer or financial institution, the Adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. The Funds will not enter into any portfolio security lending arrangement having a duration of longer than one year. Any securities which a Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund will, if permitted by law, dispose of such collateral except for such part thereof which is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay a Fund an amount equal to any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed upon fee from a borrower which has delivered cash equivalent collateral. The Funds will not loan securities having a value which exceeds 10% of the current value of such Fund's total assets. Loans of securities will be subject to termination at the lender's or the borrower's option. Each Fund may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Funds, its investment adviser or subadviser. The Funds may (as applicable), in the future, engage in the following investment techniques, although these funds have no present intention of doing so. INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON. (Short-Term and Fixed Income Funds Only) The Funds may use interest rate futures contracts ("futures contracts") principally as a hedge against the effects of interest rate changes. A futures contract is an agreement to purchase or sell a specified amount of designated debt securities for a set price at a specified future time. At the time it enters into a futures transaction, a Fund is required to make a performance deposit (initial margin) of cash or liquid securities with its custodian in a segregated account in the name of the futures broker. Subsequent payments of "variation margin" are then made on a daily basis, depending on the value of the futures which is continually "marked to market." The Funds are permitted to engage in bona fide hedging transactions (as defined in the rules and regulations of the Commodity Futures Trading Commission) without any quantitative limitations. Futures and related option transactions which are not for bona fide hedging purposes may be used provided the total amount of the initial margin and any option premiums attributable to such positions does not exceed 5% of each Fund's liquidating value after taking into account unrealized profits and unrealized losses, and excluding any in-the- money option premiums paid. The Funds will not market, and are not marketing, themselves as commodity pools or otherwise as vehicles for trading in futures and related options. The Funds will segregate assets to cover the futures and options. If the market moves favorably after a Fund enters into an interest rate futures contract as a hedge against anticipated adverse market movements, the benefits from such favorable market movements on the value of the securities so hedged will be offset in whole or in part, by a loss on the futures contract. - 2 - The Funds may engage in futures contract sales to maintain the income advantage from continued holding of a long-term security while endeavoring to avoid part or all of the loss in market value that would otherwise accompany a decline in long-term security prices. If, however, securities prices rise, a Fund would realize a loss in closing out its futures contract sales that would offset any increases in prices of the long-term securities it holds. An option on a futures contract gives the purchaser the right, but not the obligation, in return for the premium paid, to assume (in the case of a call) or sell (in the case of a put) a position in a specified underlying futures contract (which position may be a long or short position) a specified exercise price at any time during the option exercise period. Sellers of options on futures contracts, like buyers and sellers of futures contracts, make an initial performance deposit and are subject to calls for variation margin. INVESTMENT IN BOND OPTIONS. (Short-Term and Fixed Income Funds Only) The Funds may purchase put and call options and write covered put and call options on securities in which each such Fund may invest directly and that are traded on registered domestic securities exchanges or that result from separate, privately negotiated transactions with primary U.S. Government securities dealers recognized by the Board of Governors of the Federal Reserve System (i.e., over-the-counter (OTC) options). The writer of a call option, who receives a premium, has the obligation, upon exercise, to deliver the underlying security against payment of the exercise price during the option period. The writer of a put, who receives a premium, has the obligation to buy the underlying security, upon exercise, at the exercise price during the option period. The Funds may write put and call options on bonds only if they are covered, and such options must remain covered as long as the Fund is obligated as a writer. A call option is covered if a Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration if the underlying security is held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A put option is covered if a Fund maintains cash, U.S. Treasury bills or other high grade short-term obligations with a value equal to the exercise price in a segregated account with its custodian. The principal reason for writing put and call options is to attempt to realize, through the receipt of premiums, a greater current return than would be realized on the underlying securities alone. In return for the premium received for a call option, the Funds forego the opportunity for profit from a price increase in the underlying security above the exercise price so long as the option remains open, but retains the risk of loss should the price of the security decline. In return for the premium received for a put option, the Funds assume the risk that the price of the underlying security will decline below the exercise price, in which case the put would be exercised and the Fund would suffer a loss. The Funds may purchase put options in an effort to protect the value of a security it owns against a possible decline in market value. Writing of options involves the risk that there will be no market in which to effect a closing transaction. An exchange-traded option may be closed out only on an exchange that provides a secondary market for an option of the same series. OTC options are not generally terminable at the option of the writer and may be closed out only by negotiation with the holder. There is also no assurance that a liquid secondary market on an exchange will exist. In addition, because OTC options are issued in privately negotiated transactions exempt from registration under the Securities Act of 1933, there is no assurance that the Funds will succeed in negotiating a closing out of a particular OTC option at any particular time. If a Fund, as covered call option writer, is unable to effect a closing purchase transaction in the secondary market or otherwise, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. The staff of the SEC has taken the position that purchased options not traded on registered domestic securities exchanges and the assets used as cover for written options not traded on such exchanges are generally illiquid securities. However, the staff has also opined that, to the extent a mutual fund sells an OTC option to a primary dealer that it considers creditworthy and contracts with such primary dealer to establish a formula price at which the fund would have the absolute right to repurchase the option, the fund would only be required to treat as illiquid the portion of the assets - 3 - used to cover such option equal to the formula price minus the amount by which the option is in-the-money. Pending resolution of the issue, the Funds will treat such options and, except to the extent permitted through the procedure described in the preceding sentence, assets as subject to each such Fund's limitation on investments in securities that are not readily marketable. RISKS INVOLVING FUTURES TRANSACTIONS. Transactions by the Funds in futures contracts and options thereon involve certain risks. One risk in employing futures contracts and options thereon to protect against cash market price volatility is the possibility that futures prices will correlate imperfectly with the behavior of the prices of the securities in a Fund's portfolio (the portfolio securities will not be identical to the securities underlying the futures contracts). In addition, commodity exchanges generally limit the amount of fluctuation permitted in futures contract and option prices during a single trading day, and the existence of such limits may prevent the prompt liquidation of futures and option positions in certain cases. Inability to liquidate positions in a timely manner could result in the Fund's incurring larger losses than would otherwise be the case. ILLIQUID SECURITIES. Each Fund has adopted a fundamental policy with respect to investments in illiquid securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended ("Securities Act"), securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. Each Fund may also invest in restricted securities issued under Section 4(2) of the Securities Act, which exempts from registration "transactions by an issuer not involving any public offering." Section 4(2) instruments are restricted in the sense that they can only be resold through the issuing dealer and only to institutional investors; they cannot be resold to the general public without registration. Restricted securities issued under Section 4(2) of the Securities Act will be treated as illiquid and subject to the Fund's investment restriction on illiquid securities. The Commission has recently adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act applicable to resales of certain securities to qualified institutional buyers. The Investment Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this new regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. (the "NASD"). Consequently, it is the intent of the Fund to invest, pursuant to procedures established by the Board of Trustees and subject to applicable investment restrictions, in securities eligible for resale under Rule 144A which are determined to be liquid based upon the trading markets for the securities. - 4 - The Investment Adviser will monitor the liquidity of restricted securities in each Fund's portfolio under the supervision of the Trustees. In reaching liquidity decisions, the Investment Adviser will consider, inter alia, ----- ---- the following factors: (1) the frequency of trades and quotes for the security over the course of six months or as determined in the discretion of the Investment Adviser; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers over the course of six months or as determined in the discretion of the Investment Adviser; (3) dealer undertakings to make a market in the security; (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of ---- the security, the method of soliciting offers and the mechanics of the transfer); and (5) other factors, if any, which the Investment Adviser deems relevant. The Investment Adviser will also monitor the purchase of Rule 144A securities to assure that the total of all Rule 144A securities held by a Fund does not exceed 10% of the Fund's average daily net assets. Rule 144A securities which are determined to be liquid based upon their trading markets will not, however, be required to be included among the securities considered to be illiquid for purposes of Investment Restriction No. 9. MUNICIPAL OBLIGATIONS. (New York Tax-Free Fund Only) To attempt to attain its investment objective, the Fund invests in a broad range of Municipal Obligations which meet the rating standards described in the Prospectus. The tax-exempt status of a Municipal Obligation is determined by the issuer's bond counsel at the time of the issuance of the security. Municipal Obligations, which pay interest that is excludable from gross income for Federal income tax purposes and which are debt obligations issued by or on behalf of states, cities, municipalities and other public authorities, include: MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various public purposes, including the construction of schools, highways and other public facilities, for general operating expenses and for making loans to other public institutions. Industrial development and pollution control bonds are municipal bonds which are issued by or on behalf of public authorities to provide funding for the construction, equipment, repair and improvement of various privately operated facilities. Municipal bonds may be categorized as "general obligation" or "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and general taxing power for the payment of principal and interest. Revenue bonds are secured by the net revenue derived from a particular facility or group of facilities or, in some cases, the proceeds of a special excise or other specific revenue source, but not by the general taxing power. Industrial development and pollution control bonds (now generally referred to as "private activity bonds") are, in most cases, revenue bonds and do not generally carry the pledge of the credit of the issuing municipality or public authority. MUNICIPAL NOTES. Municipal notes include, but are not limited to, tax anticipation notes, bond anticipation notes, revenue anticipation notes, construction loan notes and project notes. Notes sold as interim financing in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuer. Project notes are issued by local housing authorities to finance urban renewal and public housing projects and are secured by the full faith and credit of the United States Government. MUNICIPAL COMMERCIAL PAPER. Municipal commercial paper is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. It is paid from the general revenues of the issuer or refinanced with additional issuances of commercial paper or long-term debt. For purposes of diversification under the Investment Company Act of 1940, the identification of the issuer of New York Municipal Obligations depends on the terms and conditions of the obligation. If the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating the subdivision and the obligation is backed only by the assets and revenues of the subdivision, such subdivision would be regarded as the sole issuer. Similarly, in the case of an industrial development bond or pollution control bond, if the bond is backed only by the assets and revenues of the non-governmental user, the non-governmental user would be deemed to be the sole issuer. If in either case the creating government or another entity guarantees an obligation, the guarantee would be considered a separate security and be treated as an issue of such government or entity. - 5 - The Fund's assets will be invested primarily in Municipal Obligations that are exempt from regular Federal, New York State and New York City income tax in the opinion of bond counsel to the issue. The value of municipal securities may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders in the event of a bankruptcy. Municipal bankruptcies are relatively rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear and remain untested. Further, the application of state law to municipal issuers could produce varying results among the states or among municipal securities issuers within a state. These legal uncertainties could affect the municipal securities market generally, certain specific segments of the market, or the relative credit quality of particular securities. Any of these effects could have a significant impact on the prices of some or all of the municipal securities held by the Fund. TAXABLE SECURITIES. (New York Tax-Free Fund Only) As described in the Prospectus, the Fund may, with certain limitations, elect to invest in certain taxable securities and repurchase agreements with respect to those securities. The Fund will enter into repurchase agreements only with dealers, domestic banks or recognized financial institutions which, in the opinion of the Fund's investment adviser, present minimal credit risks. In the event of default by the seller under a repurchase agreement, the Fund may have problems in exercising its rights to the underlying securities and may incur costs and experience time delays in connection with the disposition of such securities. The Fund's investment adviser will monitor the value of the underlying security at the time the transaction is entered into and at all times during the term of the repurchase agreement to ensure that the value of the security always equals or exceeds the agreed upon repurchase price. Repurchase agreements are considered to be loans under the Investment Company Act of 1940, collateralized by the underlying securities. SECURITIES WITH PUT RIGHTS. (New York Tax-Free Fund Only) When the Fund purchases municipal obligations it may obtain the right to resell them, or "put" them, to the seller at an agreed upon price within a specific period prior to their maturity date. The amount payable to the Fund by the seller upon its exercise of a put will normally be (i) the Fund's acquisition cost of the securities (excluding any accrued interest which the Fund paid on their acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Fund owned the securities, plus (ii) all interest accrued on the securities since the last interest payment date during the period the securities were owned by the Fund. Absent unusual circumstances, the Fund values the underlying securities at their amortized value. Accordingly, the amount payable by a broker-dealer or bank during the time a put is exercisable will be substantially the same as the value of the underlying securities. The Fund's right to exercise a put is unconditional and unqualified. A put is not transferable by the Fund, although the Fund may sell the underlying securities to a third party at any time. The Fund expects that puts will generally be available without the payment of any direct or indirect consideration. However, if necessary and advisable, the Fund may pay for certain puts either separately in cash or by paying a higher price for portfolio securities which are acquired subject to such a put (thus reducing the yield to maturity otherwise available for the same securities). The Fund may enter into put transactions only with broker-dealers and banks which, in the opinion of the Fund's investment adviser, present minimal credit risks. The Fund's ability to exercise a put will depend on the ability of the broker-dealer or bank to pay for the underlying securities at the time the put is exercised. In the event that a broker-dealer or bank should default on its obligation to repurchase an underlying security, the Fund might be unable to recover all or a portion of any loss sustained from having to sell the security elsewhere. The Fund intends to enter into put transactions solely to maintain portfolio liquidity and does not intend to exercise its rights thereunder for trading purposes. The acquisition of a put will not affect the valuation of the underlying security which will continue to be valued in accordance with the amortized cost method. The actual put will be valued at zero in determining net asset value. Where the Fund pays directly or indirectly for a put, its cost will be reflected as an unrealized loss for the period during which the put is held by the Fund and will be reflected in realized - 6 - gain or loss when the put is exercised or expires. If the value of the underlying security increases, the potential for unrealized or realized gain is reduced by the cost of the put. RISK FACTORS FOR THE NEW YORK TAX-FREE BOND FUND The following information as to certain New York risk factors is given to investors in view of the New York Tax-Free Fund's policy of concentrating its investments in New York Municipal Obligation issuers. The factors affecting the financial conditions of the State of New York (the "State") are complex, and the following description constitutes only a brief summary; it does not purport to be a complete description and is based on information from official statements relating to general obligation bonds issued by the State of New York. General. The economy of the State is diverse with a comparatively large share of the nation's finance, insurance, transportation, communications and services employment, and a comparatively small share of the nation's farming and mining activity. The State has a declining portion of its work force engaged in manufacturing, and an increasing portion engaged in service industries, reflecting the national trend. The national economy began the current expansion in 1991 and has added over 7 million jobs since early 1992. However, the recession lasted longer in the State and the State's economic recovery has lagged behind the nation's. Although the State has added approximately 185,000 jobs since November 1992, employment growth in the State has been hindered during recent years by significant cutbacks in the computer and instrument manufacturing, utility, defense, and banking industries. New York has a very high state and local tax burden relative to other states. The State and its localities have used these taxes to develop and maintain their transportation networks, public schools and colleges, public health systems, and social services and recreational facilities. Despite these benefits, the burden of state and local taxation may have contributed to the decisions of some businesses and individuals to relocate outside, or not locate within, the State. The State Budget Process. The requirements of the State budget process are set forth in Article VII of the State Constitution and the State Finance law. The process begins with the Governor's submission of the Executive Budget to the Legislature each January, in preparation for the start of the fiscal year on April 1. (The submission date is February 1 following a gubernatorial election.) The budget must contain a complete plan of available receipts and projected disbursements for the ensuing fiscal year ("State Financial Plan"). That proposed State Financial Plan must be balanced on a cash basis, and must be accompanied by bills which: (i) set forth all proposed appropriations and reappropriations, (ii) provide for any new or modified revenue measures, and (iii) make any other changes to existing law necessary to implement the budget recommended by the Governor. In acting on the bills submitted by the Governor, the Legislature has the power to alter both recommended appropriations and proposed changes to substantive law. The Legislature may strike out or reduce an item of appropriation recommended by the Governor. The Legislature may add items of appropriation provided such additions are stated separately. These additional items are then subject to line-item veto by the Governor. If the Governor vetoes an appropriation or a bill related to the budget, these can be reconsidered in accordance with the rules of each house of the Legislature. If approved by two-thirds of the members of each house, the measure will become law notwithstanding the Governor's veto. Once the appropriation and other bills become law, the State's Division of the Budget ("DOB") revises the State Financial Plan based on the Legislatures's action, and begins the process of implementing the budget. Throughout the fiscal year, DOB monitors actual receipts and disbursements, and may adjust the estimates in the State Financial Plan. Adjustments may also be made to the State Financial Plan to reflect changes in the economy, as well as new actions taken by the Governor or the Legislature. The Governor is required to submit to the Legislature quarterly budget updates which include a revised cash-basis State Financial Plan, and an explanation of any changes from the previous State Financial Plan. As required by - 7 - the State Finance law, the Governor updates the State Financial Plan within 30 days of the close of each quarter of the fiscal year, generally issuing reports by July 30, October 30, and as part of the Executive Budget. Financial Accounting. New York utilizes the fund method of accounting to report on its financial position and the results of its operations. Substantially all State non-pension financial operations are accounted for in the State's governmental funds group ("Governmental Funds"). The Governmental Funds include the General Fund, which receives all income not required by law to be deposited in another fund and which for the State's 1995-1996 fiscal year ("Fiscal Year 1995-96") comprises approximately 50% of total projected Governmental Funds receipts; the Special Revenue Funds, which receive a preponderance of money received by the State from the federal government and other income the use of which is legally restricted to certain purposes and which comprises approximately 40% of total projected Governmental Funds receipts in the Fiscal Year 1995-96; the Capital Projects Funds, used to finance the acquisition and construction of major capital facilities by the State and to aid in certain of such projects conducted by local governments or public authorities; and the Debt Service Funds, which are used for the accumulation of monies for the payment of principal of and interest on long term debt and other contractual commitments. Receipts in the Capital Projects and Debt Service Funds comprise an aggregate of approximately 10% of total projected Governmental Funds receipts in the Fiscal Year 1995-96. Financial information for the funds during each fiscal year is maintained on a cash basis of accounting ("Cash Basis"). New York also prepares financial statements in accordance with generally accepted accounting principles ("GAAP"). The GAAP statements differ in format from the Cash Basis statements in that, among other things, they are prepared on an accrual basis, include a combined balance sheet, and report on the activities of all funds. The Cash Basis financial information is adjusted at fiscal year end by an independent public accounting firm to reflect financial reporting in conformity with GAAP. The State maintains a March 31st fiscal year end. Revenues and Expenditures. New York's Governmental Funds receive over 54% of their revenues from taxes levied by the State. Investment income, fees and assessments, abandoned property collections, and other varied sources supply the balance of the receipts for these funds. Revenues not required to be deposited in another fund are deposited in the General Fund. The major tax sources for the General Fund are the personal income tax (53% of General Fund tax receipts in Fiscal Year 1994-95, and 52% of the Fiscal Year 1995-96 budgeted figure), the 4% user taxes and fees (20% in Fiscal Year 1994-95, 20% of the Fiscal Year 1995-96 budget), business taxes (15% of the fiscal 1994 budget and 14% of the Fiscal 1995 budget), and other taxes. The majority of Special Revenue Funds receipts come from federal grants (78% of receipts in Fiscal Year 1994-95, 75% of the Fiscal Year 1995-96 budget). Generally, approximately 87% of the federal funds received by the Special Revenue Funds are on account of Medicaid, income maintenance and associated social services, education and health programs. New York's major expenditures are grants to local governments, which are projected to account for 69% of all Governmental Funds expenditures in Fiscal Year 1995-96. These grants include disbursements for elementary, secondary and higher education, social services, drug abuse control, and mass transportation programs. Fiscal 1994-95 Financial Results (Cash Basis). New York State ended its 1994-95 fiscal year with the General Fund in balance. The closing fund balance of $158 million reflects $157 million in the Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund ("CRF"). The CRF was established in State fiscal year 1993-94, funded partly with surplus moneys, to assist the State in financing the 1994-95 fiscal year costs of extraordinary litigation known or anticipated at that time; the opening fund balance in State fiscal year 1994-95 was $265 million. The $241 million change in the fund balance reflects the use of $264 million in the CRF as planned, as well as the required deposit of $23 million to the Tax Stabilization Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve account, $250 million of which was deposited at the end of the State's 1994-95 fiscal year to continue the process of restructuring the State's cash flow as part of the New York Local Government Assistance Corporation (LGAC) program. Compared to the State Financial Plan for 1994-95 as formulated on June 16, 1994, reported receipts fell short of original projections by $1.163 billion, primarily in the categories of personal income and business taxes. Of this - 8 - amount, the personal income tax accounts for $800 million, reflecting weak estimated tax collections and lower withholding due to reduced wage and salary growth, more severe reductions in brokerage industry bonuses than projected earlier, and deferral of capital gains realizations in anticipation of potential Federal tax changes. Business taxes fell short by $373 million, primarily reflecting lower payments from banks as substantial overpayments of 1993 liability depressed net collections in the 1994-95 fiscal year. These shortfalls were offset by better performance in the remaining taxes, particularly the user taxes and fees, which exceeded projections by $210 million. Of this amount, $227 million was attributable to certain restatements for accounting treatment purposes pertaining to the CRF and LGAC; these restatements had no impact on balance in the General Fund. Disbursements were also reduced from original projections by $848 million. After adjusting for the net impact of restatements relating to the CRF and LGAC which raised disbursements by $38 million, the variance is $886 million. Well over two-thirds of this variance is in the category of grants to local governments, primarily reflecting the conservative nature of the original estimates of projected costs for social services and other programs. Lower education costs are attributable to the availability of $110 million in additional lottery proceeds and the use of LGAC bond proceeds. The spending reductions also reflect $188 million in actions initiated in January 1995 by the Governor to reduce spending to avert a potential gap in the 1994-95 State Financial Plan. These actions included savings from a hiring freeze, halting the development of certain services, and the suspension of non- essential capital projects. These actions, together with $71 million in other measures comprised the Governor's $259 million gap-closing plan, submitted to the Legislature in connection with the 1995-96 Executive Budget. 1995-96 State Financial Plan (Cash Basis). The State issued the first of the three required quarterly updates to the 1995-96 cash-basis State Financial Plan on July 28, 1995 (the "First Quarter Update"). The First Quarter Update projected continued balance in the State's 1995-96 Financial Plan, and incorporated few revisions to the initial State Financial Plan of June 20, 1995. The economic forecast was unchanged. A number of small, offsetting changes were made to the annual receipts and disbursements estimates. The First Quarter Update also incorporated the restatement of three transactions within the budget so that these transactions conformed with accounting treatments utilized by the Office of the State Comptroller. These restatements had the net effect of reducing both General Fund receipts and disbursements by $251 million; therefore, they had no impact on the closing balance of the General Fund. The State issued its second quarterly update to the cash-basis 1995-96 State Financial Plan (the "Mid-Year Update") on October 26, 1995. The Mid-Year Update projected continued balance in the State's 1995-1996 Financial Plan, with estimated receipts reduced by a net $71 million and estimated disbursements reduced by a net $30 million as compared to the First Quarter Update. The resulting General Fund balance decreased from $213 million in the First Quarter Update to $172 million in the Mid-Year Update, reflecting the expected use of $41 million from the Contingency Reserve Fund for payments of litigation and disallowance expenses. The Mid-Year Update also incorporated changes resulting from implementation of the Governor's Management Review Plan which was released on October 12, 1995. The Management Review Plan is expected to produce savings of $148 million in State fiscal year 1995-96, primarily through Medicaid utilization controls, consolidation of State agency staffing and office space, controls on staffing, overtime and contractual expenses, and increased productivity. Of the $148 million in savings attributable to the Management Review Plan, $146 million was reflected in lower spending from the General Fund and $2 million was reflected in increased General Fund receipts. The State also updated its forecast of national and State economic activity through the end of calendar year 1996. The national economic forecast remained basically unchanged from the initial forecast on which the original 1995-96 State Financial Plan was based, while the State economic forecast was marginally weaker. Receipts through the first two quarters of the 1995-96 State fiscal year fell short of expectations by $101 million. Much of this shortfall was due to time-related delays in sources other than taxes. Based on the revised economic outlook and actual receipts for the first six months of 1995-96, projected General Food receipts for the - 9 - 1995-96 State fiscal year were reduced by $73 million, offset by $2 million in increased revenues and transfers associated with actions taken in the Management Review Plan. Disbursements through the first six months of the fiscal year were $89 million less than projected, primarily because of delays in processing payments following delayed enactment of the State budget. No savings were included in the Mid-Year Update from this slower-than-expected spending. Projected disbursements for the 1995-96 State fiscal year were reduced by $30 million because spending increases in local assistance and State operations was more than offset by debt service savings and the reductions from the Management Review Plan. Financial Plan Update. The State revised the cash-basis 1995-96 State Financial Plan on December 15, 1995, in conjunction with the release of the Executive Budget for the 1996-97 fiscal year. The 1995-96 General Fund Financial Plan continues to be balanced, with reductions in projected receipts offset by an equivalent reduction in projected disbursements. Modest changes were made to the Mid-Year Update, reflecting two more months of actual results, deficiency requests by State agencies (the largest of which is for school aid resulting from revisions to data submitted by school districts), and administrative efficiencies achieved by State agencies. Total General Fund receipts are expected to be approximately $73 million lower than estimated at the time of the Mid-Year Update. Tax receipts are now projected to be $29.57 billion, $8 million less than in the earlier plan. Miscellaneous receipts and transfers from other funds are estimated at $3.15 billion, $65 million lower than in the Mid-Year Update. The largest single change in these estimates is attributable to the lag in achieving $50 million in proceeds from sales of State assets, which are unlikely to be completed prior to the end of the fiscal year. Projected General Fund disbursements are reduced by a total of $73 million, with changes made in most major categories of the 1995-96 State Financial Plan. The reduction in overall spending masks the impact of deficiency requests totaling more than $140 million, primarily for school aid and tuition assistance to college students. Offsetting reductions in spending are attributable to the continued maintenance of strict controls on spending through the fiscal year by State agencies, yielding savings of $50 million. Reductions of $49 million in support for capital projects reflect a stringent review of all capital spending. Reductions of $30 million in debt service costs reflect savings from refundings undertaken in the current fiscal year, as well as savings from lower interest rates in the financial market. Finally, the 1995-96 Financial Plan reflects reestimates based on actual results through November, the largest of which is a reduction of $70 million in projected costs for income maintenance. This reduction is consistent with declining caseload projects. The balance in the General Fund at the close of the 1995-96 fiscal year is expected to be $172 million, entirely attributable to monies in the Tax Stabilization Reserve Fund following the required $15 million payment into that Fund. A $40 million deposit to the Contingency Reserve Fund included as part of the enacted 1995-96 budget will not be made, and the minor balance of $1 million currently in the Fund will be transferred to the General Fund. These Contingency Reserve Fund monies are expected to support payments from the General Fund for litigation related to the State's Medicaid program, and for federal disallowances. CHANGES IN FEDERAL AID PROGRAMS CURRENTLY PENDING IN CONGRESS ARE NOT EXPECTED TO HAVE A MATERIAL IMPACT ON THE STATE'S 1995-96 FINANCIAL PLAN, ALTHOUGH PROLONGED INTERRUPTIONS IN THE RECEIPT OF FEDERAL GRANTS COULD CREATE ADVERSE DEVELOPMENTS, THE SCOPE OF WHICH CAN NOT BE ESTIMATED AT THIS TIME. THE MAJOR REMAINING UNCERTAINTIES IN THE 1995-96 STATE FINANCIAL PLAN CONTINUE TO BE THOSE RELATED TO THE ECONOMY AND TAX COLLECTIONS, WHICH COULD PRODUCE EITHER FAVORABLE OR UNFAVORABLE VARIANCES DURING THE BALANCE OF THE YEAR. State Financial Plan--GAAP-Basis Results--1995-96 Update. The State issued its first update to the GAAP-basis Financial Plan for the State's 1995-96 fiscal year on September 1, 1995. The September GAAP-basis update projected a General Fund operating surplus of $401 million. The prior projection of the 1995-96 GAAP-basis State Financial Plan, issued in March 1995 as part of the 1995-96 Executive Budget, projected an operating surplus in the General Fund of $800 million. The change to the projection primarily reflects the impact of legislative changes to - 10 - the 1995-96 Executive Budget, as well as increases in projected accruals for certain local assistance programs (primarily Medicaid). Total revenues in the General Fund are projected at $31.871 billion, consisting of $29.625 billion in tax revenues and $2.246 billion in miscellaneous revenue. Total expenditures in the General Fund are projected at $32.444 billion, including $22.678 billion for grants to local governments, $8.037 billion for State operations, $1.711 billion for general State charges, and $18 million for debt service. Compared to the projections made in March, expenditures for grants to local governments are substantially increased, primarily because of legislative changes to the 1995-96 Executive Budget and increased projected accruals for Medicaid. For all governmental funds, the summary GAAP-basis Financial Plan shows an excess of revenues and other financing sources over expenditures and other financing uses of $359 million. 1996-97 State Financial Plan. The Governor presented his 1996-97 Executive Budget to the Legislature on December 15, 1995, one month before the legal deadline. As provided by the State Constitution, the Governor submitted amendments to this 1996-97 Executive Budget within 30 days following submission. See "Amendments to 1996-97 Executive Budget" below. The 1996-97 Financial Plan projects balance on a cash basis in the General Fund. It reflects a continuing strategy of substantially reduced State spending, including program restructurings, reductions in social welfare spending, and efficiency and productivity initiatives. Total General Fund receipts and transfers from other funds are projected to be $31.32 billion, a decrease of $1.4 billion from total receipts projected in the current fiscal year. Total General Fund disbursements and transfers to other funds are projected to be $31.22 billion, a decrease of $1.5 billion from spending totals projected for the current fiscal year. After adjustments and transfers for comparability between the 1995-96 and 1996-97 State Financial Plans, the Executive Budget proposes an absolute year-to-year decline in General Fund spending of 5.8 percent. Spending from all funding sources (including federal aid) is proposed to increase by 0.4 percent from the prior fiscal year after adjustments and transfers for comparability. The Executive Budget proposes $3.9 billion in actions to balance the 1996-97 Financial Plan. Before reflecting any actions proposed by the Governor to restrain spending, General Fund disbursements for 1996-97 were projected at $35 billion, an increase of $2.3 billion or 7 percent from 1995-96. This increase would have resulted from growth in Medicaid, inflationary increases in school aid, higher fixed costs such as pensions and debt service, collective bargaining agreements, inflation, and the loss of non-recurring resources that offset spending in 1995-96. Receipts would have been expected to fall by $1.6 billion. This reduction would have been attainable to modest growth in the State's economy and underlying tax base, the loss of non-recurring revenues available in 1995-96 and implementation of previously enacted tax reduction programs. The Executive Budget proposes to close this gap primarily through a series of spending reductions and cost containment measures. The Executive Budget projects (i) over $1.8 billion in savings from cost containment and other actions in social welfare programs, including Medicaid, welfare and various health and mental health programs; (ii) $1.3 billion in savings from a reduced State General Fund share of Medicaid made available from anticipated changes in the federal Medicaid program, including an increase in the federal share of Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in educational services (including school aid and higher education), while providing fiscal relief from certain State mandates that increase local spending; and (iv) $350 million in savings from efficiencies and reductions in other State programs. The 1996-97 Financial Plan projects receipts of $31.32 billion and spending of $31.22 billion, allowing for a deposit of $85 million to the Contingency Reserve Fund and a required repayment of $15 million to the Tax Stabilization Reserve Fund. Detailed explanations of the 1996-97 Financial Plan follow a discussion of the economic outlook. - 11 - A SIGNIFICANT RISK TO THE 1996-97 STATE FINANCIAL PLAN PROJECTIONS ARISES FROM TAX LEGISLATION UNDER CONSIDERATION BY CONGRESS AND THE PRESIDENT. CONGRESSIONALLY-ADOPTED RETROACTIVE CHANGES TO FEDERAL TAX TREATMENT OF CAPITAL GAINS WOULD FLOW THROUGH AUTOMATICALLY TO THE STATE PERSONAL INCOME TAX. SUCH CHANGES, IF ULTIMATELY ENACTED, COULD PRODUCE REVENUE LOSSES IN THE 1996-97 FISCAL YEAR. UNCERTAINTIES WITH REGARD TO BOTH THE ECONOMY AND POTENTIAL DECISIONS AT THE FEDERAL LEVEL ADD FURTHER PRESSURE ON FUTURE BUDGET BALANCE IN NEW YORK STATE. FOR EXAMPLE, VARIOUS PROPOSALS RELATING TO FEDERAL TAX AND SPENDING POLICIES COULD, IF ENACTED, HAVE A SIGNIFICANT IMPACT ON THE STATE'S FINANCIAL CONDITION IN 1996-97 AND IN FUTURE FISCAL YEARS. SPECIFICALLY, THE ASSUMPTION OF $1.3 BILLION IN 1996-97 FINANCIAL PLAN SAVINGS FROM A REDUCED STATE GENERAL FUND SHARE OF MEDICAID IS CONTINGENT UPON ANTICIPATED CHANGES TO FEDERAL PROVISIONS WHICH WOULD INCREASE THE FEDERAL SHARE OF MEDICAID FROM 50 TO 60 PERCENT. OTHER BUDGET AND TAX PROPOSALS UNDER CONSIDERATION AT THE FEDERAL LEVEL BUT NOT INCLUDED IN THE STATE'S 1996-97 EXECUTIVE BUDGET FORECAST COULD ALSO HAVE A DISPROPORTIONATELY NEGATIVE IMPACT ON THE LONGER-TERM OUTLOOK FOR THE STATE'S ECONOMY AS COMPARED TO OTHER STATES. MOREOVER, THERE CAN BE NO ASSURANCE THAT THE LEGISLATURE WILL ENACT THE EXECUTIVE BUDGET AS PROPOSED BY THE GOVERNOR INTO LAW, OR THAT THE STATE'S ADOPTED BUDGET PROJECTIONS WILL NOT DIFFER MATERIALLY AND ADVERSELY FROM THE PROJECTIONS SET FORTH IN THIS UPDATE. Amendments to the 1996-97 Executive Budget. The Governor has submitted several amendments to the Executive Budget. These amendments have a nominal impact on the State's Financial Plan for 1996-97 and the subsequent years. The net impact of the amendments leaves unchanged the total estimated amount of General Fund spending in 1996-97, which continues to be projected at $31.22 billion. All funds spending in 1996-97 is increased by $68 million, primarily reflecting adjustments to projections of federal funds, and now totals $63.87 billion. The budget amendments advanced by the Governor involve largely technical revisions, with General Fund spending increases fully offset by spending decreases. Reductions in estimated 1996-97 disbursements are recommended primarily for welfare (associated with updated projections showing a declining caseload) and debt service (reflecting lower interest rates and recent bond sales). Disbursement increases are projected for snow and ice control, the AIDS Institute, Health Department utilization review programs and other items. Estimated disbursements for other funds are increased to accommodate updated projections of federal funding in certain categorical grant programs and reduced for welfare as noted for the General Fund. State Debt. Under the State Constitution, the State may not, with limited exceptions for emergencies, undertake long term borrowing (i.e., borrowing for more than one year) unless the borrowing is authorized in a specific amount for a single work or purpose by the Legislature and approved by the voters. There is no limitation on the amount of long term debt that may be so authorized and subsequently incurred by the State. With the exception of housing bonds (which must be paid in equal annual installments, within 50 years after issuance, commencing no more than three years after issuance), general obligation bonds must be paid in equal annual installments, within 40 years after issuance, beginning not more than one year after issuance of such bonds. The total amount of long term State general obligation debt outstanding as of March 31, 1995, was approximately $5.181 billion. The State may undertake short term borrowings without voter approval (i) in the anticipation of the receipt of taxes and revenues, by issuing tax and revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds from the sale of duly authorized but unissued bonds, by issuing bond anticipation notes. Tax and revenue anticipation notes must mature within one year from their dates of issuance and may not be refunded or refinanced beyond such period. The amount of tax and revenue anticipation notes issued may not exceed either the amount of appropriations in force or the amount of taxes and revenues reasonably expected, at the time the notes are issued, to be available to pay such notes. The State may issue bond anticipation notes only for the purposes and within the amounts for which bonds may be issued. Such notes must be paid from the proceeds of the sale of bonds in anticipation of which they were issued or from other sources within two years of the date of issuance or, in the case of notes for housing purposes, within five years from the date of issuance. - 12 - In 1990, as part of a State fiscal reform program, legislation was enacted creating the New York Local Government Assistance Corporation ("LGAC"), a public benefit corporation empowered to issue long term obligations to fund certain payments to local governments traditionally funded through the State's annual seasonal borrowing. The legislation empowered LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion. Over a period of years, the issuance of those long term obligations, which will be amortized over no more than 30 years, is expected to result in eliminating the need for continuing short term seasonal borrowing for those purposes. As of June 30, 1995, LGAC has issued its bonds to provide net proceeds of $4.7 billion, completing the program. The impact of LGAC's borrowing is that the State is able to meet its cash flow needs in the first quarter of the fiscal year without relying on short-term seasonal borrowings. The 1995-96 State Financial Plan includes no spring borrowing nor did the 1994-95 State Financial Plan, which was the first time in 35 years there was no short-term seasonable borrowing. This reflects the success of the LGAC program in permitting the State to accelerate local aid payments from the first quarter of the current fiscal year to the fourth quarter of the previous fiscal year. Long-term Debt Reform. In June 1994, the Legislature passed a proposed constitutional amendment that would significantly change the long-term financing practices of the State and its public authorities. The proposed amendment would permit the State, within a formula-based cap, to issue revenue bonds, which would be debt of the State secured solely by a pledge of certain State tax receipts (including those allocated to State funds dedicated for transportation purposes), and not by the full faith and credit of the State. In addition, the proposed constitutional amendment would (i) permit multiple purpose general obligation bond proposals to be proposed on the same ballot, (ii) require that State debt be incurred only for capital projects included in a multi-year capital financing plan, and (iii) prohibit, after its effective date, lease-purchase and contractual-obligation financing mechanisms for State facilities. Before the approved constitutional amendment can be presented to the voters for their consideration, it must be passed again by a separately elected Legislature. The amendment must therefore be passed by the newly elected Legislature in 1995 prior to presentation to the voters in November 1995. The amendment was passed by the Senate in June 1995, and the Assembly is expected to pass the amendment shortly. If approved by the voters, the amendment would become effective January 1, 1996. 1995-96 Borrowing Plan. The State anticipates that its capital programs will be financed, in part, through borrowings by the State and public authorities in the 1995-96 fiscal year. The State expects to issue $248 million in general obligation bonds (including $70 million for purposes of redeeming outstanding Bond Anticipation Notes) and $186 million in general obligation commercial paper. The Legislature has also authorized the issuance of up to $33 million in COPs during the State's 1995-96 fiscal year for equipment purchases and $14 million for capital purposes. The projection of the State regarding its borrowings for the 1995-96 fiscal year may change if circumstances require. LGAC is authorized to provide net proceeds of up to $529 million during the State's 1995-96 fiscal year, to redeem notes sold in June 1995, completing its financing program as discussed above. Borrowings by other public authorities pursuant to lease-purchase and contractual-obligation financings for capital programs of the State are projected to total $2.7 billion, including costs of issuances, reserve funds, and other costs, net of anticipated refundings and other adjustments for 1994-95 capital projects. Included therein are borrowings by (i) the Dormitory Authority of the State of New York ("DA") for SUNY, the City University of New York ("CUNY"), and health facilities, (ii) MCFFA for mental health facilities; (iii) Thruway Authority for the Dedicated Highway and Bridge Trust Fund and Consolidated Highway Improvement Program; (iv) UDC for prison and youth facilities and economic development programs; (v) the Housing Finance Agency ("HFA") for housing programs; and (vi) other borrowings by the Environmental Facilities Corporation ("EFC") and the Energy Research and Development Authority ("ERDA"). State-Guaranteed Debt. The State Constitution provides that the State may guarantee the repayment of certain borrowings to carry out designated projects by the New York State Thruway Authority, the Job Development Authority and the Port Authority of New - 13 - York and New Jersey. As of March 31, 1995, a total of $358 million in such State-guaranteed debt was outstanding. In the case of the Job Development Authority and the Port Authority of New York and New Jersey, additional debt may be issued as debt is retired. The State has never been called upon to make any direct payments pursuant to such guarantees. Lease-Purchase and Contractual-Obligation Financing Arrangements. Lease Purchase arrangements have been used to finance the construction of State office buildings, State University and City University buildings, health and mental hygiene facilities, to reconstruct and preserve the State's highways, to construct and rehabilitate prison facilities, and to finance various other State capital projects. In addition, the State has entered into certain contractual- obligation financing arrangements with numerous public authorities in connection with the financing of capital facilities or in the furtherance of certain State programs. Moral Obligation Financing. Moral obligation indebtedness, to the extent authorized by legislation, may be incurred by vote of the governing board of an authority accompanied, in most cases, with the approval of the public authority's control board. As of March 31, 1995, approximately $7.009 billion in moral obligation bonds were outstanding. In fiscal 1987, the State was called upon to appropriate a total of $162.8 million to make up deficiencies in the debt service reserve funds of the Housing Finance Agency pursuant to moral obligation provisions. The State has not been called to make such payments since fiscal 1987 and no payments are anticipated during Fiscal Year 1995-96. Debt Ratings. Due primarily to the deteriorating economy and recurring deficits, Moody's lowered its ratings on New York State general obligations in 1990 from A1 to A. In January 1992, Moody's lowered the ratings on a substantial number of the State's appropriation-backed debt from A to Baal, and stated that it had put the State's general obligations under review for possible downgrade in the future. S&P lowered its rating on the State's general obligations in March 1990 from AA- to A, and in January 1992, S&P further lowered the rating to A-. In January 1992, S&P also downgraded to A- various agency debt, State moral obligations, contractual obligations, lease purchase obligations, guarantees and school district debt. S&P currently assesses the rating outlook for New York obligations as "negative." Fitch maintains an A+ rating for New York State general obligations. Future negative rating actions would tend to increase the State's borrowing costs as well as to negatively effect the prices of bonds held by the New York Intermediate-Term Municipal Portfolio. Litigation. The legal proceedings noted below involve State finances, State programs and miscellaneous tort, real property and contract claims in which the State is a defendant and the monetary damages sought are substantial. These proceedings could affect adversely the financial condition of the State in the 1995-96 fiscal year or thereafter. Adverse developments in these proceedings or the initiation of new proceedings could affect the ability of the State to maintain a balanced 1995-96 State Financial Plan. The State believes that the 1995-96 State Financial Plan includes sufficient reserves for the payment of judgments that may be required during the 1995-96 fiscal year. There can be no assurance, however, that an adverse decision in any of these proceedings would not exceed the amount of the 1995-96 State Financial Plan reserves for the payment of judgments and, therefore, could affect the ability of the State to maintain a balanced 1995-96 State Financial Plan. In its General Purpose Financial Statements, the State reports its estimated liability in subsequent fiscal years for awarded and anticipated unfavorable judgments. Although other litigation is pending against the State, except as described below, no current litigation involves the State's authority, as a matter of law, to contract indebtedness, issue its obligation, or pay such indebtedness when its matures, or affects the State's power or ability, as a matter of law, to impose or collect significant amounts of taxes and revenues. In addition to the proceedings noted below, the State is party to other claims and litigation which its legal counsel has advised are not probable of adverse court decisions. Although the amounts of potential losses, if any, are not presently determinable, it is the State's opinion that its ultimate liability in these cases is not expected to have a material adverse effect on the State's financial position in the 1995-96 fiscal year or thereafter. Insurance Law. Two cases challenge provisions of Section 2807-c of ------------- the Public Health Law, which impose a 13 percent surcharge on inpatient hospital bills paid by commercial insurers and employee welfare benefit plans, and - 14 - portions of Chapter 55 of the Laws of 1992 which require hospitals to impose and remit to the State an 11 percent surcharge on hospital bills paid by commercial insurers and which require health maintenance organizations to remit to the State a surcharge of up to 9 percent. In The Travelers Insurance Company v. Cuomo, et al., commenced June 2, 1992, and The Health Insurance Association of America, et al. v. Chassin, et al., commenced July 20, 1992, both in the United States District Court for the Southern District of New York and consolidated, plaintiffs allege that the surcharges are preempted by Federal law. By decision dated April 26, 1995, the United States Supreme Court upheld the surcharges as not preempted by Federal law. In Trustees of and The Pension, Hospitalization Benefit Plan of the Electrical Industry, et al. v. Cuomo, et al., commenced November 25, 1992 in the United States District Court for the Eastern District of New York, plaintiff employee welfare benefit plans seek a declaratory judgment nullifying on the ground of Federal preemption provisions of Section 2807-c of the Public Health Law and implementing regulations which impose a bad debt and charity care allowance on all hospital bills and a 13 percent surcharge on inpatient bills paid by employee welfare benefit plans. Tax Law. Aspects of petroleum business taxes are the subject of ------- administrative claims and litigation (e.g., Tug Buster Bouchard, et al. v. Wetzler, Supreme Court, Albany County, commenced November 13, 1992). In Tug Buster Bouchard, petitioner corporations, which purchase fuel out of State and consume such fuel within State, contend that the assessment of the petroleum business tax pursuant to Tax Law (S)301 to such fuel violates the Commerce Clause of the United States Constitution. Petitioners contend that the application of Section 301 to the interstate transaction but not to purchasers who purchase and consume fuel within the State discriminates against interstate commerce. Medicaid Cases. Several cases challenge the rationality and the retroactive application of State regulations recalibrating nursing home Medicaid rates. Following invalidation of such previous regulations by the Court of Appeals, the State Department of Health in 1991 promulgated new recalibration regulations, 10 NYCRR (S)86-2.31(a) and (b), for 1989-1991 and 1992 and subsequent rate years, respectively. In Matter of New York Association of Homes and Services for the Aging, Inc. v. Commissioner (Supreme Court, Albany County; Index No. 4885-92), by decision dated June 30, 1994, the Court of Appeals held invalid the Department's retroactive application to rate years 1989 through 1991 of the nursing home Medicaid reimbursement rate recalibration adjustment set forth in 10 NYCRR (S)86-2.31(a). Matter of New York Association of Homes and Services for the Aging, Inc. v. Commissioner (Supreme Court Albany County; Index No. 4370-92), challenges the new recalibration regulations for rate years commencing 1992, and is pending. In Matter of New York State Health Facilities Association, Inc. et al. v. Axelrod, Supreme Court, Albany County, commenced 1990, petitioner nursing homes challenge regulations of the State Department of Health, 10 NYCRR (S)86- 2.10 (c) and (d), which reduce base prices for the direct and indirect components of Medicaid reimbursement for rate years commencing 1989. In a consolidated action commenced in 1992, Medicaid recipients and home health care providers and organizations challenge promulgation by the State Department of Social Services ("DSS") in June 1992 of a home assessment resource review instrument ("HARRI"), which is to be used by DSS to determine eligibility for and the nature of home care services for Medicaid recipients, and challenge the policy of DSS of limiting reimbursable hours of service until a patient is assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County). Office of Mental Health Patient-Care Costs. Two actions, Balzi, et al. v. Surles, et al., commenced in November 1985 in the United States District Court for the Southern District of New York, and Brogan, et al. v. Sullivan, et al., commenced in May 1990 in the United States District Court for the Western District of New York, now consolidated, challenge the practice of using patients' Social Security benefits for the costs of care of patients of State Office of Mental Health facilities. Shelter Allowance. In an action commenced in March 1987 against State and New York City officials (Jiggetts, et al. v. Bane, et al.), plaintiffs allege that the shelter allowance granted to recipients of public assistance is not adequate for proper housing. - 15 - In an action commenced in 1985 (United States, et al. v. Yonkers Board of Education, et al.), the United States District Court for the Southern District of New York found that Yonkers and its public schools were intentionally segregated. Yonkers enacted an "education improvement plan" which was adopted in 1986. Plaintiffs allege that defendants have not fulfilled their responsibility to alleviate the segregation. On January 19, 1989 the State, the State Education Department and the New York State Urban Development Corporation were added as defendants. Indian Land Claims. On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of Oneida, the United States Supreme Court affirmed a judgment of the United States Court of Appeals for the Second Circuit holding that the Oneida Indians have a common-law right of action against Madison and Oneida Counties for wrongful possession of 872 acres of land illegally sold to the State in 1795. At the same time, however, the Court reversed the Second Circuit by holding that a third-party claim by the counties against the State for indemnification was not properly before the Federal courts. The case was remanded to the District Court for an assessment of damages, which action is still pending. The counties may still seek indemnification in the State courts. Several other actions involving Indian claims to land in upstate New York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York, et al., both in the United States District Court for the Northern District of New York. The Supreme Court's holding in Oneida Indian Nation of New York may impair or eliminate certain of the State's defenses to these actions but may enhance others. Cogeneration Facility. In Inter-Power of New York, Inc. v. State of New York, commenced November 16, 1994 in the Court of Claims, plaintiff alleges that by reason of the failure of the State's Department of Environmental Conservation to provide in a timely manner accurate and complete data, plaintiff was unable to complete by the projected completion date a cogeneration facility, and thereby suffered damages. New York City. The fiscal health of the State is closely related to the fiscal health of its localities, particularly the City, which has required and continues to require significant financial assistance from the State. The City's independently audited operating results for each of its 1981 through 1992 fiscal years, which end on June 30, show a General Fund surplus reported in accordance with GAAP. The City has eliminated the cumulative deficit in its net General Fund position. In addition, the City's financial statements for fiscal 1992 received an unqualified opinion from the City's independent auditors, the tenth consecutive year the City has received such an opinion. The City, with a population of approximately 7.3 million, is an international center of business and culture. Its non-manufacturing economy is broadly based, with the banking and securities, life insurance, communications, publishing, fashion design, retailing and construction industries accounting for a significant portion of the City's total employment earnings. Additionally, the City is the nation's leading tourist destination. Manufacturing activity in the City is conducted primarily in apparel and printing. The national economic downturn which began in July 1990 adversely affected the local economy, which had been declining since late 1989. As a result, the City experienced job losses in 1990 and 1991 and real Gross City Product ("GCP") fell in those two years. Beginning in calendar year 1992, the improvement in the national economy helped stabilize conditions in the City. Employment losses moderated toward year-end and real GCP increased, boosted by strong wage gains. However, after noticeable improvements in the City's economy during calendar year 1994, economic growth slowed in calendar year 1995, and the City's current four-year financial plan assumes that economic growth will continue to slow in calendar year 1996, with local employment increasing modestly. For each of the 1981 through 1995 fiscal years, the City achieved balanced operating results as reported in accordance with then applicable generally accepted accounting principles ("GAAP"). The City was required to close substantial budget gaps in recent years in order to maintain balanced operating results. For fiscal year 1995, the City adopted a budget which halted the trend in recent years of substantial increases in City-funded spending from one year to the next. There can be no assurance that the City will continue to maintain a balanced budget as required by State - 16 - law without additional tax or other revenue increases or additional reductions in City services or entitlement programs, which could adversely affect the City's economic base. Pursuant to the laws of the State, the City prepares a four-year annual financial plan, which is reviewed and revised on a quarterly basis and which includes the City's capital, revenue and expense projections and outlines proposed gap-closing programs for years with projected budget gaps. The City's current four-year financial plan projects substantial budget gaps for each of the 1997 through 1999 fiscal years, before implementation of the proposed gap- closing program contained in the current financial plan. The City is required to submit its financial plans to review bodies, including the New York State Financial Control Board ("Control Board"). The City depends on State aid both to enable the City to balance its budget and to meet its cash requirements. The State's 1995-96 Financial Plan projects a balanced General Fund. There can be no assurance that there will not be reductions in State aid to the City from amounts currently projected or that State budgets in future fiscal years will be adopted by the April 1 statutory deadline or that any such reductions or delays will not have adverse effects on the City's cash flow or expenditures. In addition, the Federal budget negotiation process could result in a reduction in or a delay in the receipt of Federal grants in the City's 1996 fiscal year which could have additional adverse effects on the City's cash flow or revenues. The Mayor is responsible for preparing the City's four-year financial plan, including the City's current financial plan for the 1996 through 1999 fiscal years (the "1996-1999 Financial Plan" or "Financial Plan"). The City's projections set forth in the Financial Plan are based on various assumptions and contingencies which are uncertain and which may not materialize. Changes in major assumptions could significantly affect the City's ability to balance its budget as required by State law and to meet its annual cash flow and financing requirements. Such assumptions and contingencies include the condition of the regional and local economies, the impact on real estate tax revenues of the real estate market, wage increases for City employees consistent with those assumed in the Financial Plan, employment growth, the ability to implement proposed reductions in City personnel and other cost reduction initiatives, which may require in certain cases the cooperation of the City's municipal unions, the ability of the New York City Health and Hospitals Corporation ("HHC") and the Board of Education ("BOE") to take actions to offset reduced revenues, the ability to complete revenue generating transactions, provision of State and Federal aid and mandate relief and the impact on City revenues of proposals for Federal and State welfare reform. Implementation of the Financial Plan is also dependent upon the City's ability to market its securities successfully. The City's financing program for fiscal years 1996 through 1999 contemplates the issuance of $11.8 billion of general obligation bonds primarily to reconstruct and rehabilitate the City's infrastructure and physical assets and to make other capital investments. In addition, the City issues revenue and tax anticipation notes to finance its seasonal working capital requirements. The success of projected public sales of City bonds and notes will be subject to prevailing market conditions, and no assurance can be given that such sales will be completed. If the City were unable to sell its general obligation bonds and notes, it would be prevented from meeting its planned capital and operating expenditures. Future developments concerning the City and public discussion of such developments, as well as prevailing market conditions, may affect the market for outstanding City general obligation bonds and notes. The City Comptroller and other agencies and public officials have issued reports and made public statements which, among other things, state that projected revenues and expenditures may be different from those forecast in the City's financial plans. It is reasonable to expect that such reports and statements will continue to be issued and to engender public comment. On January 31, 1996, the City published the Financial Plan for the 1996-1999 fiscal years, which is a modification to a financial plan submitted to the Control Board on July 11, 1995 (the "July Financial Plan") and which relates to the City, BOE and the City University of New York ("CUNY"). The Financial Plan sets forth proposed actions by the City for the 1996 fiscal year to close substantial projected budget gaps resulting from lower than projected tax receipts and other revenues and greater than projected expenditures. In addition to substantial proposed agency - 17 - expenditure reductions, the Financial Plan reflects a strategy to substantially reduce spending for entitlements for the 1996 and subsequent fiscal years, and to decrease the City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing the Federal share of Medicaid costs otherwise paid by the City. This strategy is the subject of substantial debate, and implementation of this strategy will be significantly affected by State and Federal budget proposals currently being considered. The Financial Plan, which is consistent with the City's preliminary budget for the 1997 fiscal year, may be changed significantly by the time the budget for the 1997 fiscal year is adopted. 1996 Fiscal Year. The July Financial Plan set forth proposed actions to close a previously projected gap of approximately $3.1 billion for the 1996 fiscal year. The proposed actions in the July Financial Plan for the 1996 fiscal year included (i) a reduction in spending of $400 million, primarily affecting public assistance and Medicaid payments by the City; (ii) agency reduction programs, totaling $1.2 billion; (iii) transitional labor savings, totaling $600 million; and (iv) the phase-in of the increased annual pension funding cost due to revisions resulting from an actuarial audit of the City pension systems, which would reduce such costs in the 1996 fiscal year. A modification to the July Financial Plan published on November 29, 1995 (the "November Financial Plan") included savings from a proposed refunding of outstanding debt and other expenditure reductions to offset a $129 million increase in projected expenditures. The 1996-1999 Financial Plan published on January 31, 1996 reflects actual receipts and expenditures and changes in forecast revenues and expenditures since the November Financial Plan, and projects revenues and expenditures for the 1996 fiscal year balanced in accordance with GAAP. For the 1996 fiscal year, the Financial Plan includes actions to offset an additional $759 million budget gap resulting primarily from (i) the failure of the Port Authority of New York and New Jersey (the "Port Authority") to pay disputed back rent for the City's airports in the amount included in the November Financial Plan, (ii) shortfalls in Federal and State aid included in the November Financial Plan, (iii) shortfalls in revenues and in amounts to be saved through gap-closing actions at BOE, (iv) shortfalls in projected savings from cost containment initiatives proposed in the July Financial Plan affecting public assistance and Medicaid, and (v) the failure of the City and its labor unions to identify assumed savings in the City's health benefits system. The gap-closing measures for the 1996 fiscal year set forth in the Financial Plan include (i) additional proposed agency actions aggregating $207 million, (ii) the receipt of $150 million from the Municipal Assistance Corporation for the City of New York ("MAC"), and (iii) the receipt of $120 million from the proposed sale of mortgages, $75 million from increased revenues from the proposed sale of City tax liens on real property and $207 million from the proposed sale of the City's television station. The receipt of funds from MAC is subject to approval of MAC, the sale of the tax liens requires adoption of a local law by the City Council and the proposed sale of the City's television station is subject to Federal regulatory approval. In addition, the Federal budget negotiation process for the 1996 Federal fiscal year could result in a reduction in, or a delay in the receipt of, Federal grants in the City's 1996 fiscal year. If such approvals are not received on a timely basis, the City may be required to identify alternative measures to balance its 1996 fiscal year budget. For additional information concerning changes since the July Financial Plan, which are reflected in the Financial Plan. 1997-1999 Fiscal Years. The Financial Plan also sets forth ---------------------- projections for the 1997 through 1999 fiscal years and outlines a proposed gap- closing program to eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999 fiscal years, respectively, assuming successful implementation of the gap-closing program for the 1996 fiscal year. The projected gaps for the 1997 through 1999 fiscal years have increased from the gaps projected in the November Financial Plan to reflect (i) reductions in projected property taxes of $177 million, $294 million and $421 million in the 1997, 1998 and 1999 fiscal years, respectively, due to a lower than forecast increase in the tentative assessment roll published by the New York City Department of Finance, (ii) reductions in other forecast tax revenues of $114 million, $216 million and $261 million in the 1997, 1998 and 1999 fiscal years, respectively, (iii) reductions in tax revenues of $79 million, $224 million and $341 million in the 1997, 1998 and 1999 fiscal years, respectively, as a result of new tax reduction initiatives, including a proposed sales tax exemption on clothing items under $500, and (iv) increased agency expenditures. - 18 - The proposed gap-closing actions for the 1997 through 1999 fiscal years include (i) additional agency actions, totaling between $643 million and $691 million in each of the 1997 through 1999 fiscal years; (ii) additional savings resulting from State and Federal aid and cost containment in entitlement programs to reduce City expenditures and increase revenues by $650 million in the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal years; (iii) additional proposed Federal aid of $50 million in the 1997 fiscal year and State aid of $100 million in each of the 1997 through 1999 fiscal years; (iv) the receipt of $300 million in the 1997 fiscal year from privatization or other initiatives, including the sale of the City's parking meters and associated revenues, which may require legislative action by the City Council, or the sale of other assets; and (v) the assumed receipt of revenues relating to rent payments for the City's airports, totaling $244 million, $226 million and $70 million in the 1997 through 1999 fiscal years, respectively, which are currently the subject of a dispute with the Port Authority and the collection of which may depend on the successful completion of negotiations with the Port Authority or the enforcement of the City's remedies under the leases through pending legal actions. The City is also preparing an additional contingency gap-closing program for the 1997 fiscal year to be comprised of $200 million in additional agency actions. The Governor has released the 1996-1997 Executive Budget, which will be considered for adoption by the State Legislature. The City estimates that the 1996-1997 Executive Budget provides the City with $173 million of savings from Medicaid cost containment proposals and $127 million of savings from proposed reductions in welfare spending in the 1997 fiscal year. The Financial Plan assumes that the remaining $350 million of the $650 million of entitlement reform benefits included in the Financial Plan for the 1997 fiscal year will be generated by the State providing the City with a portion of the additional funds received by the State as a result of the increased Federal share of Medicaid costs proposed in the State Executive Budget. However, the State Executive Budget does not currently contemplate sharing such funds with the City. In addition, the President and Congress are currently considering budget proposals for the 1996 Federal fiscal year. The Federal budget or other factors may cause substantial amendments to the State Executive Budget. The Federal and State budgets, when adopted, may result in substantial reductions in revenues for the City, as well as a reduction in projected expenditures in entitlement programs, including Medicare, Medicaid and welfare programs. The Federal and State aid projected in the Financial Plan, and the substantial savings assumed from cost containment in entitlement programs included in the Financial Plan gap-dosing program for the 1997 through 1999 fiscal years, will be significantly affected both by the outcome of the current Federal budget negotiations and by the State budget proposals made by the Governor and to be considered by the State Legislature. The nature and extent of the impact on the City of the Federal and State budgets, when adopted, is uncertain, and no assurance can be given that Federal or State actions included in the Federal and State adopted budgets may not have a significant adverse impact on the City's budget and its Financial Plan. The projections for the 1996 through 1999 fiscal years reflect the costs of the proposed settlement with the United Federation of Teachers ("UFT") and the recent settlement with a coalition of unions headed by District Council 37 of the American Federation of State, County and Municipal Employees, and assume that the City will reach agreement with its remaining municipal unions under terms which are generally consistent with such settlements. For further information concerning the labor settlements, including the rejection by certain UFT members of the tentative settlement. The projections for the 1996 through 1999 fiscal years also assume that BOE will be able to identify actions to offset possible substantial shortfalls in Federal, State and City revenues. The City's financial plans have been the subject of extensive public comment and criticism. The City Comptroller has issued a report identifying risks ranging between $408 million and $528 million in the 1996 fiscal year before taking into account the availability of $160 million in the General Reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year after implementation of the City's proposed gap-closing actions. In addition, Moody's and S&P have on several occasions lowered their ratings of New York State and City debt obligations. On July 10, 1995, S&P revised its rating of the City's General Obligation Bonds downward to BBB+. S&P's stated that "structural budgetary balance remains elusive because of persistent softness in the City's economy, - 19 - highlighted by weak job growth and a growing dependence on the historically volatile financial services sector". Other factors identified by S&P in lowering its rating on City bonds included a trend of using one-time measures, including debt refinancing, to close projected budget gaps, dependence on unratified labor savings to help balance the Financial Plan, optimistic projections on additional Federal and State aid or mandate relief, a history of cash flow difficulties caused by State budget delays and continued high debt levels. Moody's ratings on New York City's bonds are Baa1. On March 1, 1996, Moody's stated that the rating for City general obligation bonds remains under review pending the outcome of the adoption of the City's budget for the 1997 fiscal year and in light of the status of the debate on public assistance and Medicaid reform; the enactment of a State budget, upon which major assumptions regarding State aid are dependent, which may be extensively delayed; and the seasoning of the City's economy with regard to its strength and direction in the face of a potential national economic slowdown. INVESTMENT RESTRICTIONS The Funds observe the following fundamental investment restrictions which can be changed only when permitted by law and approved by a majority of a Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented in person or by proxies or (ii) more than 50% of the outstanding shares. Each Fund may not: (1) purchase securities on margin (but Short-Term and Fixed Income Funds may make margin payments in connection with financial futures contracts and related options) or purchase real estate or interests therein, commodities or commodity contracts (except Short-Term and Fixed Income Funds may purchase financial futures contracts and related options), or make loans, except loans of portfolio securities and except that each Fund may purchase or hold short-term debt securities and enter into repurchase agreements with respect to its portfolio securities described in each Prospectus. For this purpose, repurchase agreements are considered loans; (2) invest more than 10% of the Fund's (5% of the New York Tax-Free Fund's) total assets taken at market value in the securities of any one issuer (including securities subject to repurchase agreements for the Short-Term and Fixed Income Funds only), other than obligations which are issued or guaranteed by the United States Government, its agencies or instrumentalities, except that up to 25% of the New York Tax-Free Fund's total assets may be invested without regard to this 5% limitation; (3) engage in the underwriting of securities of other issuers, except to the extent that each Fund may be deemed to be an underwriter in selling, as part of an offering registered under the Securities Act of 1933, as amended, securities which it has acquired; or participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders with other accounts under the management of the Adviser to save commissions or to average prices among them is not deemed to result in a securities trading account; (4) effect a short sale of any security (other than index options or hedging strategies in the case of Short-Term and Fixed Income Funds only), or issue senior securities except as permitted in paragraph (5). For purposes of this restriction, the purchase and sale of financial futures contracts and related options does not constitute the issuance of a senior security; (5) borrow money, except that each Fund may borrow from banks as a temporary measure for emergency purposes where such borrowings would not exceed 10% of its total assets (including the amount borrowed) taken at market value; or pledge, mortgage or hypothecate its assets, except to secure indebtedness permitted by this paragraph and then only if such pledging, mortgaging or hypothecating does not exceed 10% of each Fund's total assets taken at market value. The Funds have no present intention of engaging in transactions under this paragraph; - 20 - (6) purchase securities of any company with a record of less than three years' continuous operation if such purchase would cause each Fund's investments in all such companies taken at cost to exceed 5% of such Fund's total assets taken at market value; (7) invest for the purpose of exercising control over management of any company; (8) invest more than 10% of its total assets in the securities of other investment companies; (9) invest in any security, including repurchase agreements maturing in over seven days or other illiquid investments which are subject to legal or contractual delays on resale or which are not readily marketable, if as a result more than 15% (10% in the case of the New York Tax-Free Fund) of the market value of the Fund's total assets would be so invested; (10) purchase interests in oil, gas, or other mineral exploration programs of real estate and real estate mortgage loans except as provided in the Prospectus of the Funds; however, this policy will not prohibit the acquisition of securities of companies engaged in the production or transmission of oil, gas, other minerals or companies which purchase or sell real estate or real estate mortgage loans; (11) purchase or retain securities of any company if, to the knowledge of the Funds, officers and Trustees of the Trust and officers and directors of the Adviser who individually own more than 1/2 of 1% of the securities of that company together own beneficially more than 5% of such securities; (12) have dealings on behalf of the Funds with Officers and Trustees of the Funds, except for the purchase or sale of securities on an agency or commission basis, or make loans to any officers, directors or employees of the Funds; (13) purchase equity securities or other securities convertible into equity securities; or (14) purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of each Fund's investments in that industry would exceed 25% of the current value of a Fund's total assets, provided that there is no limitation with respect to investments in obligations of the United States Government, its agencies or instrumentalities (and, in the case of the New York Tax-Free Fund, investments in Municipal Obligations (for the purpose of this restriction, industrial development and pollution control bonds shall not be deemed Municipal Obligations if the payment of principal and interest on such bonds is the ultimate responsibility of nongovernmental users)). There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in the market value of an investment, in the net or total assets of the Funds, in the securities rating of the investment, or any other later change. MANAGEMENT TRUSTEES AND OFFICERS - --------------------- The principal occupations of the Trustees and executive officers of the Funds for the past five years are listed below. The address of each, unless otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. Trustees deemed to be "interested persons" of the Funds for purposes of the Investment Company Act of 1940, as amended, are indicated by an asterisk. - 21 - WILLIAM B. BLUNDIN, Chief Executive Officer and Trustee* - Executive Vice ----------------------------------- President BISYS Fund Services, Inc., March 1995 to Present; Vice Chairman of Concord Holding Corporation, July 1993 to March 1995; Director and President of Concord Holding Corporation, February 1987 to July 1993. Trustee, HSBC Funds Trust. WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville, Virginia ------- 22901. Trustee, Excelsior Funds, Inc. Excelsior Tax-Exempt Funds, Inc. and Excelsior Institutional Funds, Inc. (mutual funds); Director, Deutsche Bank Financial, Inc.; Director, the Harbus Corporation; Trustee, HSBC Funds Trust. WILLIAM L. KUFTA, Trustee - 97 Main Street, Chatham, New Jersey 07928. ------- Chief Investment Officer, Beacon Trust Company; Senior Vice President, Pitcairn Financial Management Group from 1987 to 1991; Trustee, HSBC Funds Trust. ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut ------- 06840. Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee, U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc. (mutual funds); Trustee, HSBC Funds Trust. HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017. ------- Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten and Company since 1991; Advisory Managing Director, Lepercq de Neuflize & Co. Incorporated 1993 to1995; Director, Price Waterhouse AG 1992 to 1993; Trustee, HSBC Funds Trust. JOHN P. PFANN, Chairman and Trustee - 43 Captains Walk, Marina Cove, Palm -------------------- Coast, Florida 32137. Chairman and President, JPP Equities, Inc. 1982 to 1995; Trustee, HSBC Funds Trust. ANN E. BERGIN President - First Vice President of BISYS Fund Services, --------- Inc., March 1995 to Present; Senior Vice President, Administration, Concord Financial Group, August 1991 to March 1995; Assistant Vice President, Dreyfus Service Corporation, 1982 to August 1991. WILLIAM J. TOMKO, Vice President - Vice President, BISYS Fund Services, -------------- Inc. since 1987. MARK E. NAGLE, Treasurer - Senior Vice President, Fund Accounting Services, BISYS Fund Services, Inc., September 1995 to present; Senior Vice President, Fidelity Institutional Retirement Services 1993 to September 1995; Senior Vice President, Fidelity Accounting & Custody Services 1981 to 1993. MARTIN R. DEAN, Assistant Treasurer - Manager, Mutual Fund Accounting, ------------------- BISYS Fund Services since 1994; Senior Manager, KPMG Peat Marwick 1989 to 1994. STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York 10022. --------- Partner, Baker & McKenzie since April 1991; Partner, Gaston & Snow from 1988 to 1991; Secretary, HSBC Funds Trust since 1987. ROBERT L. TUCH, Assistant Secretary - Senior Counsel of BISYS Fund ------------------- Services, Inc., June 1991 to Present; Vice President and Associate General Counsel with Nation Securities Research Corp., July 1990 to June 1991. ALAINA V. METZ, Assistant Secretary - Chief Administrator, Administration ------------------- and Regulatory Services of BISYS Fund Services, Inc., June 1995 to Present; Supervisor of Mutual Fund Legal Department, Alliance Capital Management, May 1989 to June 1995. - 22 -
COMPENSATION TABLE Aggregate Pension or Retirement Estimated Annual Total Compensation Compensation Benefits Accrued as Benefits Upon from the Fund from the Funds Part of Fund Expenses Retirement Complex* -------------- ---------------------- ---------------- ------------------ Wolfe J. Frankl, Trustee $4,942 0 N/A $22,000 William L. Kufta, Trustee $4,442 0 N/A $20,000 Harald Paumgarten, Trustee 0 0 N/A 0 John P. Pfann, Trustee $4,942 0 N/A $22,000 Robert A. Robinson, Trustee $4,942 0 N/A $22,000
* Represents the total compensation paid to such persons during the calendar year ending December 31, 1995 (and with respect to the Funds, estimated to be paid during a full calendar year). Mr. Paumgarten was appointed as a new Trustee subsequent to December 31, 1995 and, therefore, did not receive any compensation from the Trust. Trustees that are "interested persons" do not receive compensation from the Trust in connection with their role as Trustee. Trustees of the Funds receive from the Funds an annual fee and a fee for attending each meeting of the Trustees and each committee meeting and are reimbursed for all out-of-pocket expenses relating to attendance at meetings. As of the date of this Statement of Additional Information the Trustees and officers of the Funds as a group owned less than 1% of the outstanding shares of the Trust. INVESTMENT ADVISER. The Funds retain HSBC Asset Management Americas Inc. ("HSBC Americas") to act as the adviser for each Fund. HSBC Americas is the North American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. The Advisory Contracts for the Funds provide that HSBC Americas will manage the portfolio of each Fund and will furnish to each Fund investment guidance and policy direction in connection therewith. HSBC Americas has agreed to provide to the Trust, among other things, information relating to money market portfolio composition, credit conditions and average maturity of the portfolio of each Fund. Pursuant to the Advisory Contract, HSBC Americas also furnishes to the Trust's Board of Trustees periodic reports on the investment performance of each Fund. HSBC Americas has also agreed in the Advisory Contract to provide administrative assistance in connection with the operation of each Fund. Administrative services provided by HSBC Americas include, among other things, (i) data processing, clerical and bookkeeping services required in connection with maintaining the financial accounts and records for the Funds, (ii) compiling statistical and research data required for the preparation of reports and statements which are periodically distributed to the Funds' officers and Trustees, (iii) handling general shareholder relations with Fund investors, such as advice as to the status of their accounts, the current yield and dividends declared to date and assistance with other questions related to their accounts, and (iv) compiling information required in connection with the Funds' filings with the Securities and Exchange Commission. - 23 - Effective February 1, 1996 the Board of Trustees of the Trust approved a Co-Administration Services Contract between the Fund and HSBC Americas. Pursuant to the Co-Administration Services Contract, HSBC Americas (i) manages the Fund's relationship with BISYS Fund Services, the Administrator to the Funds, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as liaison with the Board of Trustees, and (iv) assists with general product management and oversight. HSBC is paid an annual fee equal to 0.03% of each Fund's average daily net assets pursuant to the Co-Administration Services Contract. SHAREHOLDER SERVICING AGENT. The Trust retains HSBC Americas to act as Shareholder Servicing Agent of each Fund in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third-parties who deliver prospectuses and Fund applications, (ii) assists and trains third-parties who assist customers with completing Fund applications, (iii) conducts customer education, reviews Fund written communications and assists third-parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of the Trust's average Trust assets. DISTRIBUTOR. Shares of the Funds are offered on a continuous basis through BISYS Fund Services, the Distributor, pursuant to the Distribution Contract. The Distributor is not obligated to sell any specific amount of shares. ADMINISTRATOR. In accordance with resolutions adopted by the Board of Trustees of the Trust, as of March 1, 1996, BISYS Fund Services became Administrator of the Fund pursuant to the terms of an Administration and Accounting Services Agreement (the "Administrative Services Agreement"), replacing PFPC Inc. Pursuant to the Administrative Services Agreement, BISYS Fund Services: (i) provides administrative services reasonably necessary for the operation of the Funds, (other than those services which are provided by HSBC Americas pursuant to the Advisory Contract) and Fund accounting services; (ii) provides the Funds with office space and office facilities reasonably necessary for the operation of the Funds; and (iii) employs or associates with itself such persons as it believes appropriate to assist it in performing its obligations under the Administrative Services Agreement. As compensation for its administrative and accounting services under the Administrative Services Agreement, BISYS Fund Services is paid a monthly fee at the following annual rates: 0.15% of a Fund's first $200 million of average daily net assets; .125% of a Fund's second $200 million of average daily net assets; 0.10% of a Fund's third $200 million of average daily net assets; and 0.08% of a Fund's average daily net assets in excess of $600 million. For the year ended December 31, 1995, the Short-Term, Fixed Income, and New York Tax-Free Funds paid $11,600 (net of fee waivers of $1,000), $78,200 (net of fee waivers of $6,300), and $47,800 (net of fee waivers of $3,800), respectively, to PFPC Inc. in administration fees under the Administrative Services Agreement. For the period of July 1, 1994 to December 31, 1994, the Fixed Income Fund and Short-Term Income Fund paid $39,779 (net of fee waivers of $4,420) and $8,300 (net of fee waivers of $593), respectively, to PFPC Inc. in administration fees under the Administrative Services Agreement. HSBC Americas, the predecessor to PFPC Inc., earned $771 (net of fee waivers of $6,309) and $25,868 (net of fee waivers of $5,472) from the Short-Term Income Fund and Fixed Income Fund, respectively, in administration fees for the six month period ended June 30, 1994. For the period of June 22, 1994 to December 31, 1994, the New York Tax-Free Fund paid $25,177 (net of fee waivers of $2,797) to PFPC Inc. in administration fees under the Administrative Services Agreement. HSBC Americas, the predecessor to PFPC Inc., waived its entire administration fee of $21,174 for the period January 1, 1994 to June 30, 1994. For the year ended December 31, 1993, HSBC Americas waived its entire administrative fee totaling $12,352 and $53,912, respectively, for the Short Term Income Fund and Fixed Income Fund. - 24 - Effective February 1, 1996 the Board of Trustees of the Trust approved a Co-Administration Services Contract between the Fund and HSBC Americas. Pursuant to the Co-Administration Services Contract, HSBC Americas (i) manages the Fund's relationship with BISYS Fund Services, the Administrator to the Funds, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as liaison with the Board of Trustees, and (iv) assists with general product management and oversight. HSBC is paid an annual fee equal to 0.03% of each Fund's average daily net assets pursuant to the Co-Administration Services Contract. Shareholder Servicing Agent. The Trust retains HSBC Americas to act as Shareholder Servicing Agent of each Fund in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third-parties who deliver prospectuses and Fund applications, (ii) assists and trains third-parties who assist customers with completing Fund applications, (iii) conducts customer education, reviews Fund written communications and assists third-parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of the Trust's average Trust assets. Distributor. Shares of the Funds are offered on a continuous basis through BISYS Fund Services, the Distributor, pursuant to the Distribution Contract. The Distributor is not obligated to sell any specific amount of shares. Administrator. In accordance with resolutions adopted by the Board of Trustees of the Trust, as of March 1, 1996, BISYS Fund Services became Administrator of the Fund pursuant to the terms of an Administration and Accounting Services Agreement (the "Administrative Services Agreement"), replacing PFPC Inc. Pursuant to the Administrative Services Agreement, BISYS Fund Services: (i) provides administrative services reasonably necessary for the operation of the Funds, (other than those services which are provided by HSBC Americas pursuant to the Advisory Contract) and Fund accounting services; (ii) provides the Funds with office space and office facilities reasonably necessary for the operation of the Funds; and (iii) employs or associates with itself such persons as it believes appropriate to assist it in performing its obligations under the Administrative Services Agreement. As compensation for its administrative and accounting services under the Administrative Services Agreement, BISYS Fund Services is paid a monthly fee at the following annual rates: 0.15% of a Fund's first $200 million of average daily net assets; .125% of a Fund's second $200 million of average daily net assets; 0.10% of a Fund's third $200 million of average daily net assets; and 0.08% of a Fund's average daily net assets in excess of $600 million. For the year ended December 31, 1995, the Short-Term, Fixed Income, and New York Tax-Free Funds paid $11,600 (net of fee waivers of $1,000), $78,200 (net of fee waivers of $6,300), and $47,800 (net of fee waivers of $3,800), respectively, to PFPC Inc. in administration fees under the Administrative Services Agreement. For the period of July 1, 1994 to December 31, 1994, the Fixed Income Fund and Short-Term Income Fund paid $39,779 (net of fee waivers of $4,420) and $8,300 (net of fee waivers of $593), respectively, to PFPC Inc. in administration fees under the Administrative Services Agreement. HSBC Americas, the predecessor to PFPC Inc., earned $771 (net of fee waivers of $6,309) and $25,868 (net of fee waivers of $5,472) from the Short-Term Income Fund and Fixed Income Fund, respectively, in administration fees for the six month period ended June 30, 1994. For the period of June 22, 1994 to December 31, 1994, the New York Tax-Free Fund paid $25,177 (net of fee waivers of $2,797) to PFPC Inc. in administration fees under the Administrative Services Agreement. HSBC Americas, the predecessor to PFPC Inc., waived its entire administration fee of $21,174 for the period January 1, 1994 to June 30, 1994. For the year ended December 31, 1993, HSBC Americas waived its entire administrative fee totaling $12,352 and $53,912, respectively, for the Short Term Income Fund and Fixed Income Fund. - 25 - Fees and Expenses As compensation for its advisory and management services, HSBC Americas is paid a monthly fee by each Fund at the following annual rates: Portion of Average Daily Value of Net Assets of the Short-Term and Fixed Income Funds Advisory ------------------------------------------------ ------------- Not exceeding $400 million ................... 0.550% In excess of $400 million but not exceeding $800 million ................. 0.505 In excess of $800 million but not exceeding $1.2 billion ................. 0.460 In excess of $1.2 billion but not exceeding $1.6 billion ................. 0.415 In excess of $1.6 billion but not exceeding $2 billion ................... 0.370 In excess of $2 billion ...................... 0.315 Portion of Average Daily Value of Net Assets of the Short-Term and Fixed Income Funds Advisory ------------------------------------------------ ------------- Not exceeding $300 million .................... 0.450% In excess of $300 million but not exceeding $600 million .................. 0.420 In excess of $600 million but not exceeding $1 billion .................... 0.385 In excess of $1 billion but not exceeding $1.5 billion .................. 0.350 In excess of $1.5 billion but not exceeding $2 billion .................... 0.315 In excess of $2 billion ....................... 0.280 With respect to the Short-Term Fund, for the years ended December 31, 1995, 1994 and 1993, HSBC Americas was paid $25,500 (net of fee waivers of $44,500), $32,823 (net of fee waivers of $65,649) and $0 (net of fee waivers of $97,053), respectively, for advisory fees. With respect to the Fixed Income Fund, for the years ended December 31, 1995, 1994 and 1993, HSBC Americas was paid $464,400 (net of fee waivers of $0), $446,346 (net of fee waivers of $42,992) and $0 (net of fee waivers of $423,593), respectively, in advisory fees. - 26 - With respect to the New York Tax-Free Fund, for the years ended December 31, 1995, 1994, and 1993 HSBC Americas was paid $128,900 (net of fee waivers of $103,200), $144,878 (net of fee waivers of $117,129), and $43,698 (net of fee waivers of $178,543), respectively, for advisory fees. One of the states in which the shares of the Short-Term and Fixed Income Funds are qualified for sale imposes limitations on the expenses of the Funds. The Advisory Contract and the Administrative Services Agreement provide that if, in any fiscal year, the total expenses of the Funds (excluding taxes, interest, brokerage commissions and other portfolio expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles and extraordinary expenses, but including the advisory and administrative and management fees) exceed the expense limitations applicable to the Funds imposed by the securities regulations of any state, HSBC Americas will reimburse the Funds in an amount equal to 100% of that excess. Although there is no certainty that the state limitations will be in effect in the future, the most restrictive of these limitations on an annual basis with respect to the Funds are currently 2.5% of the first $30 million of average daily net assets, 2% of the next $70 million of average daily net assets and 1.5% of average daily net assets in excess of $100 million. For the period ended December 31, 1995, there were no payments or reimbursements required as a result of these expense limitations. Except for the expenses paid by HSBC Americas under the Advisory Contract and Co-Administration Services Contract and by PFPC Inc. under the Administrative Services Agreement, the Funds bear all costs of their operations. Expenses attributable to a Fund are charged against the assets of the Fund. The Advisory Contract, Distribution Contract and Administrative Services Agreement will continue in effect with respect to a Fund from year to year provided such continuance is approved annually (i) by the holders of a majority of the outstanding voting securities of such Fund or by the Trust's Trustees and (ii) by a majority of the Trustees who are not parties to such contracts or "interested persons" (as defined in the Investment Company Act of 1940) of any such party. Each contract may be terminated with respect to a Fund at any time, without payment of any penalty, by a vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940) or by a vote of a majority of the Trustees. The Advisory Contract, Administrative Services Contract and the Distribution Contract shall terminate automatically in the event of their assignment (as defined in the Investment Company Act of 1940). The Board of Trustees of the Trust approved the continuance of each Fund's Advisory Contract, the Distribution Contract and the Administrative Services Agreement at a meeting of the Board of Trustees on January 23, 1996. Distribution Plans and Expenses Each Fund has adopted a Distribution Plan and Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940, after having concluded that there is a reasonable likelihood that the Plan will benefit each Fund and its shareholders. The Plan provides for a monthly payment by each Fund to BISYS Fund Services for expenses incurred not to exceed an annual rate of 0.35%. BISYS Fund Services will use all amounts received under each Plan for payments to broker-dealers or financial institutions for their assistance in distributing shares of each Fund and otherwise promoting the sale of the Funds' shares. BISYS Fund Services may also use all or any portions of such fee to pay expenses such as the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses associated with media advertisements and telephone services. The Plans provide for BISYS Fund Services to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plans may not be amended to increase materially the amount spent for distribution expenses without approval by a majority of each Fund's outstanding shares and approval of a majority of the non-interested Trustees. - 27 - The Plan will continue in effect with respect to each Fund from year to year provided such continuance is approved annually by a vote of the Board of Trustees of the Trust and of the Trustees who are not interested persons of the Trust and have no direct or indirect financial interest in the operation of the Plan or in any agreements related to the Plan, cast in person at a meeting called for the purpose of voting on such Plan. The Board of Trustees of the Trust approved the continuance of the Plan at a meeting of the Board of Trustees on January 23, 1996. The Short-Term Fund made payments of $14,135, $24,814 and $8,823, respectively, for the years ended December 31, 1995 and 1994 and for the period March 1, 1993 (commencement of operations) through December 31, 1993, pursuant to the Plans. The Fixed Income Fund made payments of $57,506, $67,381, and $38,508, respectively, for the years ended December 31, 1995 and 1994 and for the period January 15, 1993 (commencement of operations) through December 31, 1993, pursuant to the Plans. The New York Tax-Free Fund made payments of $60,753, $160,394 and $101,402, respectively, for the years ended December 31, 1995, 1994, and 1993. CALCULATION OF YIELDS AND PERFORMANCE INFORMATION From time to time, the Funds quote current yield based on a specific thirty day period. Such thirty day yield, which may be used in advertisements and marketing material, is calculated by using a method known as "semi-annual compounding." Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: Where: yield = 2[(a-b/cd + 1) to the 6th power -1] a = dividends and interest earned during the period, including the amortization of market premium or accretion of market discount. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. The public offering price (net asset value of $9.97, $10.28, and $11.17 plus maximum sales charge of 2.00%, 4.75% and 4.75% of the offering price for the Short-Term Fund, Fixed Income Fund and New York Tax Free Fund, respectively) per share at December 31, 1995 was $10.17, $10.79 and $11.73 for the Short-Term Fund, Fixed Income Fund and New York Tax-Free Fund, respectively. The current yield for the Short-Term, Fixed Income and New York Tax-Free Funds as of December 31, 1996, was 4.70%, 5.83% and 4.74%, respectively (excluding the maximum sales of 2.0%, 4.75%, and 4.75%, respectively). The current yield as of the same date including the maximum sales charge was 4.61%, 5.55% and 4.51%, respectively, for the Short-Term, Fixed Income and New York Tax-Free Funds. - 28 - The Funds from time to time may advertise total return and cumulative total return figures. Total return is the average annual compound rate of return for the periods of one year and the life of each Fund, where applicable, each ended on the last day of a recent calendar quarter. Total return quotations reflect the change in the price of each Fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in shares of each Fund. Total return is calculated by finding the average annual compound rates of return of a hypothetical investment over such periods, that would compare the initial amount to the ending redeemable value of such investment according to the following formula (total return is then expressed as a percentage): Where: P(1+T)n = ERV P = a hypothetical initial investment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. The average annual total return information for the Funds for the periods indicated below is as follows: Short-Term Fund Sales Charge * NAV -------------- --- One Year Ended December 31, 1995 8.81% 10.99% Inception (March 1, 1993) to December 31, 1995 4.50% 5.23% Fixed Income Fund Sales Charge * NAV -------------- --- One Year Ended December 31, 1995 11.17% 16.73% Inception (January 15, 1993) to December 31, 1995 5.90% 7.64% New York Tax-Free Fund Sales Charge * NAV -------------- --- One Year Ended December 31, 1995 9.69% 15.17% Five Years Ended December 31, 1995 7.48% 8.53% Inception (March 21, 1989) to December 31, 1995 6.16% 8.25% * Includes maximum sales charge. Past Performance is not predictive of future performance. - 29 - Cumulative total return is the rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect the change in the price of the Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in shares of the Fund. Cumulative total return is calculated by finding the rate of return of a hypothetical investment over such period, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 C = Cumulative Total Return P = a hypothetical initial investment of $1,000 ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. All Funds From time to time, in marketing pieces and other Fund literature, each Fund's or the Funds' total performance may be compared to the performance of broad groups of comparable funds or unmanaged indices of comparable securities. Evaluations of Fund performance made by independent sources may also be used in advertisements concerning the Funds. Sources for Fund performance information may include, but are not limited to, the following: * Barron's, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews mutual fund performance data. * Business Week, a national business weekly that periodically reports the performance rankings and ratings of a variety of mutual funds investing abroad. Changing Times, The Kiplinger Magazine, a monthly investment advisory publication that periodically features the performance of a variety of securities. Financial Times, Europe's business newspaper, which features from time to time articles on international or country-specific funds. * Forbes, a national business publication that from time to time reports the performance of specific investment companies in the mutual fund industry. Fortune, a national business publication that periodically rates the performance of a variety of mutual funds. Global Investor, a European publication that periodically reviews the performance of U.S. mutual funds investing internationally. * Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly publication of industry-wide mutual fund averages by type of fund. - 30 - Money, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole. New York Times, a nationally distributed newspaper which regularly covers financial news. Personal Investor, a monthly investment advisory publication that includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings. Sylvia Porter's Personal Finance, a monthly magazine focusing on personal money management that periodically rates and ranks mutual funds by performance. * Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly covers financial news. * Wiesenberger Investment Companies Services, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges. - ------------------ * Sources of Fund performance information actually used by the Funds in the past. DETERMINATION OF NET ASSET VALUE The Funds' net asset value per share is determined by dividing the total current market value of the assets of a Fund, less its liabilities, by the total number of shares outstanding at the time of determination. All expenses, including the advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. Portfolio securities are valued at current market value, if available. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the supervision of the Trust's officers in accordance with guidelines which have been adopted by the Board of Trustees. Such procedures include the use of independent pricing services which use prices based on yields or prices of securities of comparable quality, coupon, maturity and type; indications as to value from dealers; and general market conditions. Short-term obligations of sixty days or less are valued at amortized cost, which approximates market value. The Funds will compute their net asset value once daily as of 4:15 p.m. (Eastern time), on each day on which the Funds' transfer agent is open for business. The net asset value of the Funds will not be determined on the following national, regional or local holidays: New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas. PORTFOLIO TRANSACTIONS The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Trustees, HSBC Americas is primarily responsible for portfolio decisions and the placing of portfolio transactions. In placing orders, it is the policy of the Funds to obtain the best results taking into account the dealer's general execution and operational facilities, the type of transaction involved and other factors such as the dealer's risk in positioning the securities involved. Brokerage may be allocated to the Distributor to the extent and in the manner permitted by applicable law, provided that in the judgment of the investment - 31 - adviser the use of the Distributor is likely to result in an execution at least as favorable as that of other qualified brokers. While HSBC Americas generally seeks reasonably competitive spreads or commissions, the Funds will not necessarily be paying the lowest spread or commission available. Purchases and sales of securities will often be principal transactions in the case of debt securities and, for the Short-Term and Fixed Income Funds, equity securities traded otherwise than on an exchange. The purchase or sale of equity securities will frequently involve the payment of a commission to a broker-dealer who effects the transaction on behalf of a Fund. Debt securities normally will be purchased or sold from or to issuers directly or to dealers serving as market makers for the securities at a net price. Generally, money market securities are traded on a net basis and do not involve brokerage commissions. Under the Investment Company Act of 1940 ("ICA of 1940"), persons affiliated with Marine Midland, HSBC Americas, the Funds or BISYS Fund Services are prohibited from dealing with the Funds as a principal in the purchase and sale of securities except in accordance with regulations adopted by the Securities and Exchange Commission. The Funds may purchase Municipal Obligations from underwriting syndicates of which the Distributor or other affiliate is a member under certain conditions in accordance with the provisions of a rule adopted under the ICA of 1940. Under the ICA of 1940, persons affiliated with HSBC Americas, the Funds or BISYS Fund Services may act as a broker for the Funds. In order for such persons to effect any portfolio transactions for the Funds, the commissions, fees or other remuneration received by such persons must be reasonable and fair compared to the commissions, fees or other remunerations paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliate to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arms-length transaction. The Trustees of the Trust regularly review the commissions paid by the Funds to affiliated brokers. HSBC Americas may, in circumstances in which two or more dealers are in a position to offer comparable results, give preference to a dealer which has provided statistical or other research services to HSBC Americas. By allocating transactions in this manner, HSBC Americas is able to supplement its research and analysis with the views and information of securities firms. PORTFOLIO TURNOVER A Fund's portfolio turnover rate measures the frequency with which a Fund's portfolio of securities is traded. The Funds will attempt to purchase securities with intent of holding them for investment but may purchase and sell portfolio securities whenever the Adviser believes it to be warranted (e.g., the Fund may sell portfolio securities in anticipation of an adverse market movement). The purchase and sale of portfolio securities may involve dealer mark-ups, underwriting commissions or other transaction costs. Generally, the higher the portfolio turnover rate, the higher the transaction costs to the Fund, which will generally increase the Fund's total operating expenses. In order to qualify as a regulated investment company, less than 30% of a Fund's gross income must be derived from the sale or other disposition of stock, securities or certain other investments held for less than 3 months. Although increased portfolio turnover may increase the likelihood of additional capital gains for each Fund, a Fund expects to satisfy the 30% income test. The Fixed Income Fund's portfolio turnover rate for the years ended December 31, 1995 and 1994 and for the period January 15, 1993 to December 31, 1993 was 41.6%, 64.0% and 107.3%, respectively. The Short-Term Fund's portfolio turnover rate for the years ended December 31, 1995 and 1994 and for the period March 1, 1993 to December 31, 1993 was 53.3%, 68.1% and 32.0%, respectively. The New York Tax-Free Fund's portfolio turnover rate for the years ended December 31, 1995, 1994, and 1993, was 24.4%, 122.4%, and 70.4%, respectively. - 32 - EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in a Fund for at least seven days may exchange those shares for shares of the other portfolios of the Trust and the HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will not be subject to any additional sales loads in the event such shareholder exchanges shares of one Fund for shares of another Fund. Shareholders of any of the HSBC Money Market Funds who exchange shares of any of such Money Market Funds for shares of any of the Funds are charged the sales loads applicable to the Funds as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal and New York State and City income tax purposes and, depending on the circumstances, a gain or loss may be recognized. See the Prospectus discussion of the Federal tax treatment of load reductions or eliminations in an exchange. The exchange privilege may be modified or terminated upon sixty (60) days' notice to shareholders. Although initially there will be no limit on the number of times a shareholder may exercise the exchange privilege, the Funds reserve the right to impose such a limitation. Call or write the Funds for further details. REDEMPTIONS The proceeds of a redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for Federal and New York State and City income tax purposes. Any loss realized on the redemption of Fund shares held, or treated as held, for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividends received on the redeemed shares. A shareholder's account with a Fund remains open for at least one year following complete redemption and all costs during the period will be borne by the Fund. This permits an investor to resume investments in such Fund during the period in an amount of $50 or more. To be in a position to eliminate excessive shareholder expense burdens, each Fund reserves the right to adopt a policy pursuant to which it may redeem, upon not less than 30 days' notice, shares of the Fund in an account which has a value below a designated amount. However, any shareholder affected by the exercise of this right will be allowed to make additional investments prior to the date fixed for redemption to avoid liquidation of the account. The Funds may suspend the right of redemption during any period when (i) trading on the New York Stock Exchange is restricted or that Exchange is closed, other than customary weekend and holiday closings, (ii) the Securities and Exchange Commission has by order permitted such suspension or (iii) an emergency exists making disposal of portfolio securities or determination of the value of the net assets of the Funds not reasonably practicable. Although it would not normally do so, the Trust has the right to pay the redemption price in whole or in part in securities of a Fund's portfolio as prescribed by the Trustees. When a shareholder sells portfolio securities received in this fashion he would incur a brokerage charge. The Trust has, however, elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, as amended. Under that rule, the Trust must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of a Fund's net asset value at the beginning of such period. - 33 - FEDERAL INCOME TAXES The Funds have elected to be treated and intend to continue to be treated and so qualified in 1995, as regulated investment companies for each taxable year by complying with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") applicable to regulated investment companies so that they will not be liable for Federal income tax with respect to amounts distributed to shareholders in accordance with the timing requirements of the Code. In order to qualify as a regulated investment company for a taxable year, each Fund must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to loans of stock or securities and gains from the sale or other disposition of stock or securities or foreign currency gains related to investments in stock or securities or other income (including gains from options, futures or forward contracts) derived with respect to the business of investing in stock, securities or currency; (b) derive less than 30% of its gross income from the sale or other disposition of stock or securities or certain other investments held less than three months (excluding some amounts included in income as a result of certain hedging transactions); and (c) diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of a Fund's assets is represented by cash, cash items, U.S. Government securities, securities of other regulated investment companies and other stocks and securities limited, in the case of other stocks or securities for purposes of this calculation, in respect of any one issuer, to an amount not greater than 5% of its assets or 10% of the voting stocks or securities of the issuer, and (ii) not more than 25% of the value of its assets is invested in the stocks or securities of any one issuer (other than U.S. Government securities or securities of other regulated investment companies). As such, and by complying with the applicable provisions of the Code, a Fund will not be subject to Federal income tax on taxable income (including realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Compliance with the "30% test" described in clause (b) above may, in particular, limit a Fund's ability to engage in some transactions involving options, short-term trading and stock index futures. The amount of capital gains, if any, realized in any given year will result from sales of securities made with a view to the maintenance of a portfolio believed by each Fund's management to be most likely to attain such Fund's investment objective. Such sales and any resulting gains or losses, may therefore vary considerably from year to year. Since at the time of an investor's purchase of shares, a portion of the per share net asset value by which the purchase price is determined may be represented by realized or unrealized appreciation in each Fund's portfolio or undistributed income of such Fund, subsequent distributions (or portions thereof) on such shares may be taxable to such investor even if the net asset value of his shares is, as a result of the distributions, reduced below his cost for such shares and the distributions (or portions thereof) represent a return of a portion of his investment. Each Fund is required to report to the Internal Revenue Service (the "IRS") all distributions of taxable dividends and of capital gains, as well as the gross proceeds of share redemptions. Each Fund may be required to withhold Federal income tax at a rate of 31% ("backup withholding") from taxable dividends (including capital gain dividends) and the proceeds of redemptions of shares paid to non-corporate shareholders who have not furnished such Fund with a correct taxpayer identification number and made certain required certifications or who have been notified by the IRS that they are subject to backup withholding. In addition, a Fund may be required to withhold Federal income tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer identification number is incorrect or that backup withholding applies because of underreporting of interest or dividend income. Distributions of taxable net investment income and net realized capital gains will be taxable as described in the Prospectus whether made in shares or in cash. In determining amounts of net realized capital gains to be distributed, any capital loss carryovers from prior years will be applied against capital gains. Shareholders receiving distributions in the form of additional shares will have a cost basis for Federal income tax purposes in each share so received equal to the net asset value of a share of the Fund on the reinvestment date. Fund distributions will also be included in individual and corporate shareholders' income on which the alternative minimum tax may be imposed. - 34 - Any loss realized upon the redemption of shares held (or treated as held) for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividend received on the redeemed shares. Any loss realized upon the redemption of shares within six months after receipt of an exempt-interest dividend will be disallowed. All or a portion of a loss realized upon the redemption of shares may be disallowed to the extent shares are purchased (including shares acquired by means of reinvested dividends) within 30 days before or after such redemption. Exchanges are treated as redemptions for Federal tax purposes. Different tax treatment is accorded to accounts maintained as IRAs, including a penalty on early distributions. Shareholders should consult their tax advisers for more information. Each portfolio within the Trust will be separate for investment and accounting purposes and will be treated as a separate taxable entity for Federal income tax purposes. Provided that each Fund qualifies as a regulated investment company under the Code, it will not be required to pay Massachusetts income or excise taxes. Current federal income tax law requires that a holder of a zero coupon security report as income each year the portion of the original issue discount on such security that accrues that year, even though the holder receives no cash payments of interest during the year. The "straddle" rules of Section 1092 of the Code may require the Funds which are permitted to engage in such transactions to defer the recognition of certain losses incurred on its transactions involving certain stock or securities, futures contracts or options. Section 1092 defines a "straddle" to include "offsetting positions" with respect to publicly traded stock or securities. A "position" is defined to include a futures contract and an option. In general, the Funds will be considered to hold offsetting positions if there is a substantial diminution of its risk of loss from holding one position by reason of its holding one or more other positions. Section 1092 generally provides that in the case of a straddle, any loss from the disposition of a position (the "loss position") in the straddle shall be recognized for any taxable year only to the extent that the amount of such loss exceeds the unrealized gains on any offsetting straddle position (the "gain position") and the unrealized gain on any successor position (which is a position that is itself offsetting to the gain position and is acquired during a period commencing 30 days prior to, and ending 30 days after, the disposition of the loss position). These special tax rules applicable to options and futures transactions could affect the amount, timing and character of capital gain distributions to shareholders by causing holding period adjustments, converting short-term capital losses into long-term capital losses, and accelerating a Fund's income or deferring its losses. Corporate shareholders should also note that their basis in shares of the Fund may be reduced by the untaxed portion (i.e., the portion qualifying for the dividends-received deduction) of an "extraordinary dividend" if the shares have not been held for at least two years prior to declaration of the dividend. Extraordinary dividends are dividends paid during a prescribed period which equal or exceed 10% of a corporate shareholder's basis in its Fund shares or which satisfy an alternative test based on the fair market value of the shares. To the extent dividend payments received by corporate shareholders of the Fund constitute extraordinary dividends, such shareholders' basis in their Fund shares will be reduced and any gain realized upon a subsequent disposition of such shares will therefore be increased. The untaxed portion of dividends received by such shareholders is also included in adjusted alternative minimum taxable income in determining shareholders' liability under the alternative minimum tax. Each Fund is subject to a 4% nondeductible excise tax to the extent that it fails to distribute to its shareholders during each calendar year an amount equal to at least the sum of (a) 98% of its taxable ordinary investment income (excluding long-term and short-term capital gain income) for the calendar year; plus (b) 98% of its capital gain net income for the one year period ending on October 31 of such calendar year; plus (c) any ordinary investment income or capital gain net income from the preceding calendar year which was neither distributed to shareholders nor taxed to - 35 - a Fund during such year. Each Fund intends to distribute to shareholders each year an amount sufficient to avoid the imposition of such excise tax. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge the shareholder would have owed upon purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. Shareholders should consult their own tax advisers with respect to the tax status of distributions from each Fund, and redemptions of shares of each Fund, in their own states and localities. Shareholders who are not United States persons should also consult their tax advisers as to the potential application of foreign and U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on dividends representing ordinary income to them. Special Tax Considerations for the New York Tax-Fee Fund. The New York Tax-Free Fund also intends to qualify to pay "exempt-interest dividends" within the meaning of the Code by holding at the end of each quarter of its taxable year at least 50% of the value of its total assets in the form of Municipal Obligations. Dividends derived from interest on Municipal Obligations that constitute exempt-interest dividends will not be includable in gross income for Federal income tax purposes and exempt-interest dividends derived from interest on New York Municipal Obligations will not be includable in gross income for Federal income tax purposes or subject to New York State or City personal income tax. The Tax Reform Act of 1986 (the "Tax Act") and subsequent restrictive legislation may significantly affect the supply and yields of Municipal Obligations and New York Obligations. The Tax Act imposed new restrictions on the issuance of Municipal Obligations and New York Obligations. As described in the Prospectus, pursuant to the Tax Reform Act of 1986, if the Fund invested in Municipal Obligations and New York Municipal Obligations that are private activity bonds, some portion of exempt-interest dividends paid by the Fund would be treated as an item of tax preference for purposes of the Federal alternative minimum tax on individuals and corporations. In addition, a portion of original issue discount relating to stripped Municipal Obligations and their coupons may be treated as taxable income under certain circumstances, as will income from repurchase agreements and securities loans. Exempt-interest dividends received by corporations which hold shares of the Fund will be part of the "adjusted current earnings" of such corporations, and will increase the "alternative minimum taxable income" of such corporations for purposes of the alternative minimum tax on corporations. Property and casualty insurance companies will be required to reduce their deductions for "losses incurred" by a portion of the exempt-interest dividends they receive for shares of the Fund. The portion of the income from the Fund derived from bonds with respect to which a holder is a "substantial user" will not be tax-exempt in the hands of such user. Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of the Fund may not be deductible in whole or in part for Federal or New York State or City income tax purposes. Pursuant to Treasury Regulations, the Internal Revenue Service may deem indebtedness to have been incurred for the purpose of purchasing or carrying shares, even though the borrowed funds may not be directly traceable to the purchase of shares. The Fund will determine the portion of any distribution that will qualify as an exempt-interest dividend based on the proportion of its gross income derived from interest on Municipal Obligations over the course of the Fund's taxable year. Therefore, the percentage of any particular distribution designated as an exempt-interest dividend may - 36 - be substantially different from the percentage of the Fund's gross income derived from interest on Municipal Obligations for the period covered by the distribution. Opinions relating to the validity of Municipal Obligations (including New York Municipal Obligations) and to the exclusion of interest thereon from Federal, New York State and New York City gross income are rendered by bond counsel for each issue at the time of issuance. Neither the Trust nor its investment adviser will review the proceedings relating to the issuance of Municipal Obligations or the basis for such opinions. The Fund may obtain put rights with respect to certain of its Municipal Obligations. The Internal Revenue Service has issued published and private rulings concerning the treatment of such put transactions for Federal income tax purposes. Since these rulings are ambiguous in certain respects, there can be no assurance that the Fund will be treated as the owner of the Municipal Obligations subject to the puts or that the interest on such obligations received by the Fund will be exempt from Federal income tax (and New York State and City personal income tax in the case of New York Municipal Obligations). If the Fund is not treated as the owner of the Municipal Obligations subject to the puts, distributions of income derived from such obligations will be taxed as ordinary income. The Fund anticipates that, in any event, it will remain qualified to pay exempt-interest dividends with respect to interest derived from other obligations in its portfolio. SHARES OF BENEFICIAL INTEREST The authorized capital of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Declaration of Trust authorizes the Trustees to classify or reclassify any unissued shares of beneficial interest. Pursuant to that authority, the Board of Trustees has authorized the issuance of shares in seven investment portfolios. All shares have equal voting rights and will be voted in the aggregate, and not by portfolio, except where voting by portfolio is required by law or where the matter involved affects only one portfolio. As used in the Prospectus and in this Statement of Additional Information, the term "majority," when referring to the approvals to be obtained from shareholders in connection with general matters affecting all of the Funds (e.g., election of Trustees and ratification of independent auditors), means the vote of a majority of each Fund's outstanding shares represented at a meeting. The term "majority", when referring to the approvals to be obtained from shareholders in connection with approval of the Advisory Contract or changing the fundamental policies of a Fund, means the vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund. Shareholders are entitled to one vote for each full share held and fractional votes for fractional shares held. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Each share of a Fund represents an equal proportionate interest in the Fund with each other share of such Fund and is entitled to such dividends and distributions out of the income earned on the assets belonging to the Fund as are - 37 - declared in the discretion of the Trustees. In the event of liquidation or dissolution, shares of a Fund are entitled to receive the assets belonging to the Fund which are available for distribution, and of any general assets not belonging to such Fund which are available for distribution. Shareholders are not entitled to any preemptive rights. All shares, when issued, will be fully paid and non-assessable by the Funds. At March 31, 1996 no person owned of record or, to the knowledge of management beneficially owned more than 5% of the outstanding shares of any Fund except as set forth below: Shares Held & Percent of Class
Name and Address of Short-Term Fixed Income Fund New York Tax-Free Holder of Record Fund Fund - ---------------------------------------------------------------------------------------- Marine Midland Bank 996,499 9,291,839 814,518 Buffalo, NY 95.2% 97.6% 18.7% Total Shares Outstanding 1,047,170 9,520,197 4,354,500
HSBC has informed the Trust that it was not the beneficial owner of any of the shares it held of record. CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT As of September 25, 1995, the Bank of New York has been retained, pursuant to a Custodian Agreement, to act as custodian for each Fund. The Bank of New York's address is 90 Washington Street, New York, New York 10286. Under the Custodian Agreement, the Custodian maintains a custody account or accounts in the name of each Fund; receives and delivers all assets for each such Fund upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each such Fund; pays all expenses of each such Fund; receives and pays out cash for purchases and redemptions of shares of each such Fund and pays out cash if requested for dividends on shares of each such Fund; calculates the daily value of the assets of the Short-Term and Fixed Income Funds; determines the daily net asset value per share, net investment income and dividend rate for the Short-Term and Fixed Income Funds; and maintains records for the foregoing services. Under the Custodian Agreement, each such Fund has agreed to pay the Custodian for furnishing custodian services a fee for certain administration and transaction charges and out-of-pocket expenses. For the period from January 1, 1995 to September 25, 1995, HSBC Americas paid custodian fees on behalf of the Short-Term Fund and Fixed Income Fund totaling $4,300 and $9,500, respectively. The Short-Term Fund and Fixed Income Fund paid $3,991 and $10,148 respectively, for custody services to Marine Midland for the year ended December 31, 1994. For the period March 1, 1993 (commencement of operations) through December 31, 1993 with respect to the Short-Term Fund and the period January 15, 1993 (commencement of operations) through December 31, 1993 with respect to the Fixed Income Fund, Marine Midland received $8,094 and - 38 - $14,883, respectively, for custody services from the Funds, all of which was paid by HSBC Americas. For the period from January 1, 1995 to September 25, 1995, the New York Tax-Free Fund paid $6,400 in custody fees to Marine Midland Bank. The New York Tax-Free Fund paid $8,726, and $8,930, respectively, for custody services to Marine Midland for the years ended December 31, 1994 and 1993. The Board of Trustees has authorized The Bank of New York in its capacity as custodian of each such Fund to enter into Subcustodian Agreements with banks that qualify under the Investment Company Act of 1940 to act as subcustodians with respect to certain variable rate short-term tax-exempt obligations in each Fund's portfolio. Effective April 15, 1996, BISYS Fund Services has been retained by the Trust to act as transfer agent and dividend disbursing agent for the Funds. Under the Agency Agreement, BISYS Fund Services performs general transfer agency and dividend disbursing services. It maintains an account in the name of each shareholder of record in each Fund reflecting purchases, redemptions, daily dividend accruals and monthly dividend disbursements, processes purchase and redemption requests, issues and redeems shares of each Fund, addresses and mails all communications by each Fund to its shareholders, including financial reports, other reports to shareholders, dividend and distribution notices, tax notices and proxy material for its shareholder meetings, and maintains records for the foregoing services. Under the Agency Agreement, each Fund has agreed to pay BISYS Fund Services $25.00 per account and subaccount (whether maintained by HSBC Americas or a correspondent bank) per annum. In addition, the Funds have agreed to pay BISYS Fund Services certain transaction charges, wire charges and out-of-pocket expenses incurred by BISYS Fund Services. The Short-Term Fund and Fixed Income Fund paid $9,179 and $36,235, respectively, to PFPC Inc., BISYS Fund Services' predecessor, for transfer agency services for the year ending December 31, 1995. The Short-Term Fund and Fixed Income Fund paid $9,519 and $20,493, respectively, to PFPC Inc. and its predecessor, HSBC Americas, for transfer agency services for the year ending December 31, 1994. For the period March 1, 1993 (commencement of operations) through December 31, 1993 with respect to the Short-Term Fund and the period January 15, 1993 (commencement of operations) through December 31, 1993 with respect to the Fixed Income Fund, HSBC Americas waived its entire fee in the amount of $5,094 and $7,897, respectively, for transfer agency services from the Funds. The New York Tax-Free Fund paid $63,295 and $54,827, respectively, to PFPC Inc., for transfer agency services for the years ending December 31, 1995 and 1994. For the year ended December 31, 1993, HSBC Americas, PFPC Inc.'s predecessor, received $45,067, respectively, from the Fund for transfer agency services. INDEPENDENT AUDITORS Ernst & Young LLP serves as the independent auditors for the Funds. Ernst & Young LLP provides audit services, tax return preparation and assistance and consultation in connection with Securities and Exchange Commission filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York 10019. - 39 - EXPERTS The financial statements audited by Ernst & Young LLP have been included in this SAI for the year ended December 31, 1995 for the Funds in reliance on their report, given on the authority of that firm as experts in auditing and accounting. - 40 - Growth and Income Fund 3435 Stelzer Road, Columbus, Ohio 43219 Small Cap Fund Information: (800) 634-2536 HSBC ASSET MANAGEMENT AMERICAS INC. --Investment Adviser and Co-Administrator INVESTMENT CONCEPTS, INC. --Sub-Adviser to the Small Cap Fund BISYS FUND SERVICES -- Distributor - -------------------------------------------------------------------------------- HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust, (the "Trust") was organized in Massachusetts on November 1, 1989 as a Massachusetts business trust and is an open-end, diversified management investment company with multiple investment portfolios, including the Growth and Income Fund (formerly known as the Total Return Equity Fund) and the Small Cap Fund (herein referred to individually as a "Fund" and collectively as the "Funds"). The Growth and Income Fund seeks as its investment objective to provide investors with long-term growth of capital and current income by investing, under ordinary market conditions, at least 65% of its total assets in common stocks, preferred stocks and securities convertible into or with rights to purchase common stocks. The Small Cap Fund seeks as its investment objective to provide investors with long-term capital appreciation and, secondarily, income by investing, under ordinary market conditions, at least 70% of its total assets in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-size companies. The balance of each Fund's assets may be invested in various types of fixed income securities (and preferred stocks with respect to the Small Cap Fund) and in money market instruments. See "Investment Objectives, Policies and Risk Factors." The Funds may also utilize certain other investment practices to seek to enhance return or to hedge against fluctuations in the value of portfolio securities. See "Investment Objectives, Policies and Risk Factors-Other Investment Practices." Each Fund's investment adviser is HSBC Asset Management Americas Inc. ("HSBC Americas" or the "Adviser"), the North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation) and Marine Midland Bank (the "HSBC Group"). Investment Concepts, Inc. serves as sub-adviser to the Small Cap Fund. See "Management of the Funds" in this Prospectus. Prospective investors should be aware that shares of the Funds are not an obligation of or guaranteed or endorsed by HSBC Group or its affiliates. In addition, such shares are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency and may involve investment risks, including the possible loss of principal. Shares of the Funds are offered for sale primarily through its Distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain broker-dealers, banks, financial institutions and corporations (the "Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at these Participating Organizations and to perform certain services for the Funds. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Funds. A Statement of Additional Information (the "SAI"), dated April 24, 1996, containing additional detailed information about the Funds, has been filed with the Securities and Exchange Commission and is hereby incorporated by reference into this Prospectus. A copy is available without charge and can be obtained by writing the Trust at the above address, or calling the telephone number listed above. -------------------------- This Prospectus should be read and retained for ready reference to information about the Funds. -------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. April 24, 1996
TABLE OF CONTENTS Summary of Annual Fund Operating Expenses.................................. 2 Financial Highlights........................... 4 Investment Objectives, Policies and Risk Factors................................... 6 Investment Restrictions........................ 17 Management of the Funds........................ 18 Transactions with Affiliates................... 22 Determination of Net Asset Value............... 23 Purchase of Shares............................. 23 Redemption of Shares........................... 27 Exchange Privilege............................. 29 Dividends, Distributions and Taxes............. 29 Account Services............................... 30 Transfer and Dividend Disbursing Agent and Custodian............................. 31 Performance Information........................ 31 Shares of Beneficial Interest.................. 31
- -------------------------------------------------------------------------------- SUMMARY OF ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) The purpose of the following information is to assist an investor in understanding the costs and expenses that an investor in the Funds would bear directly or indirectly. The information is based on expenses for each Fund for the fiscal year ended December 31, 1995 as adjusted for estimated other operating expenses and voluntary reductions of investment advisory, co-administration and 12b-1 fees.
Growth and Shareholder Transaction Expenses Income Small Cap ------ --------- Maximum sales charge imposed on purchases of shares of the Funds (as a percentage of offering price)............................................. 5.00% 5.00% Certain investors will not be subject to the sales charge. See "Purchase of Shares in this Prospectus." Annual Fund Operating Expenses Management Fees.................................................................... 0.55% 0.70% 12b-1 Fees (net of fees not imposed)*.............................................. 0.08% 0.12% Other Expenses (net of fees and expenses not imposed) Administrative Services Fee**................................................. 0.10% 0.10% Co-Administrative Services Fee***............................................. 0.00% 0.00% Other Operating Expenses...................................................... 0.31% 0.45% ---- ---- Total Fund Operating Expenses (net of fees and expenses not imposed)****........... 1.04% 1.37% ---- ---- Total Fund Operating Expenses Before Non-Imposition of Fees and Expense Reimbursements .............................. 1.58% 1.72% ==== ====
Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual shareholder's own investment in the Funds. Rather, the table has been provided only to assist investors in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. 2 The following example should not be considered a representation of past or future expenses. The expenses set forth above and example below reflect the non-imposition of certain fees and expenses. The actual expenses may be greater or lesser than those shown. The following example assumes a 5% annual return; however the Funds' actual return will vary and may be greater or less than 5%. Example: You would pay the following expenses on a $1,000 investment assuming a 5% annual return and the reinvestment of all dividends and distributions:+ Growth and Income Small Cap ------ --------- 1 year...................................... $ 60 $ 63 3 years..................................... $ 81 $ 91 5 years.................................... $105 $121 10 years.................................... $171 $206
- -------------------------------------------------------------------------------- * The fee under each Fund's Distribution Plan and Agreement is calculated on the basis of the average daily net assets at an annual rate not to exceed 0.35% and 0.50% for the Small Cap Fund and Growth and Income Fund, respectively. See "Management of the Funds-Distribution Plan and Agreement." ** Reflects administrative fees not imposed due to a voluntary waiver by BISYS Fund Services of 0.05% for each Fund. See "Management of the Funds-Administration." *** Reflects co-administrative fees of .03% and shareholder servicing fees of 0.04% voluntarily waived by HSBC Americas for each Fund. "See Management of the Fund, Administrator and Shareholder Servicing Agent" in this Prospectus. **** Investors who purchase and redeem shares of the Funds through a customer account maintained at a Participating Organization may be charged additional fees by such Participating Organization. See "Management of the Funds-Servicing Agreements." + Includes a maximum sales charge from which certain shareholders may be exempt. See "Purchase of Shares." 3 FINANCIAL HIGHLIGHTS The following supplementary financial information for each of the five years in the period ended December 31, 1995 with respect to the Growth and Income Fund and for each of the three years in the period ended December 31, 1995, with respect to the Small Cap Fund has been audited by Ernst & Young LLP whose report thereon is contained in the Statement of Additional Information ("SAI"). The supplementary financial information for each of the years ended December 31, 1990 and 1989 also has been audited by Ernst & Young LLP whose report thereon was unqualified. The supplementary financial information for the year ended December 31, 1988 and prior has been audited by other auditors. This information should be read in conjunction with the financial statements and notes thereto which are included in the SAI. Selected data for a share of each Fund outstanding throughout each period:
Growth and Income Fund For the Period June 2, 1986 Year Ended December 31, (commencement --------------------------------------------------------------------------------- of operations) to 1995 1994 1993 1992 1991 1990 1989 1988 1987 December 31, 1986 ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------ Net asset value, beginning of period .................. $11.93 $12.87 $12.02 $13.12 $10.77 $11.59 $10.38 $9.56 $10.32 $10.00 ------ ------ ------ ------ ------ ------ ------ ----- ------ ------ Income From Investment Operations: Net investment income ...... 0.30 0.29 0.33 0.15 0.21 0.32 0.41 0.38 0.31 0.25 Net realized and unrealized gain/(loss) on investments . 3.64 (0.67) 1.00 0.80 3.21 (0.82) 2.21 1.09 (0.27) 0.07 Total from investment operations ................. 3.94 (0.38) 1.33 0.95 3.42 (0.50) 2.62 1.47 (0.04) 0.32 Less Distributions from: Net investment income ...... (0.30) (0.29) (0.33) (0.15) (0.21) (0.38) (0.45) (0.55) -- -- Net realized gains ......... (0.80) (0.15) (0.15) (1.90) (0.86) (1.03) (0.20) (0.25) -- -- Excess of current year net realized gain on investments -- (0.12) -- -- -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total distributions ........ (1.10) (0.56) (0.48) (2.05) (1.07) (1.41) (0.65) (0.80) -- -- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net asset value, end of period ..................... $14.77 $11.93 $12.87 $12.02 $13.12 $10.77 $11.59 $10.38 $9.56 $10.32 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Total Return (a) 33.11% (2.97)% 11.23% 7.74% 31.92% (4.41%) 25.56% 15.52% (0.17%) 3.20%(b) Ratios/Supplemental Data: Net assets (000), end of period ..................... $66,062 $64,985 $77,718 $3,609 $4,798 $4,041 $4,334 $3,863 $5,517 $7,079 Ratio of expenses (without fee waivers) to average net assets ......... 0.97% 0.86% 0.88% 2.29% 2.18% 2.86% 2.36% 0.29% 0.19% 0.24%* Ratio of expenses (with fee waivers) to average net assets ......... 0.94% 0.78% 0.23% 1.68% 1.40% 1.19% 0.47% 0.29% 0.19% 0.24%* Ratio of net investment income (without fee waivers) to average net assets ................. 2.03% 2.17% 2.30% 0.51% 0.91% 1.23% 1.61% 3.17% 2.65% 4.30%* Ratio of net investment income (without fee waivers) to average net assets ................. 2.06% 2.25% 2.95% 1.12% 1.69% 2.90% 3.50% 3.17% 2.65% 4.30%* Portfolio turnover rate .... 52.77% 23.31% 14.25% 54.99% 77.11% 45.21% 50.47% 49.11% 163.56% 18.57%(b) - ----------------------------------------------------------------------------------------------------------------------------------- (a) Excludes sales charge. (b) Not annualized. * Annualized.
4
Small Cap Fund For the Period January 4, 1993 (Commencement of Year Ended December 31, Operations) to ---------------------- 1995 1994 December 31, 1993 ---- ---- ----------------- Net asset value, beginning of period .................... $11.90 $12.29 $10.00 ------ ------ ------ Income From Investment Operations: - ---------------------------------- Net investment loss ................................ (0.12) (0.07) (0.05) Net realized and unrealized gain/(loss) on investments ...................... 3.24 (0.32) 2.42 ---- ----- ---- Total from investment operations ............. 3.12 (0.39) 2.37 ---- ----- ---- Less Distribution from: - ----------------------- Net realized capital gain .......................... (0.56) -- (0.08) ---- ----- ---- Net asset value, end of period .......................... $14.46 $11.90 $12.29 Total Return (a) ........................................ 26.20% (3.17%) 23.74%(b) Ratios/Supplemental Data: Net assets (000), end of period .................... $26,036 $24,308 $17,659 Ratio of expenses (without fee waivers) to average net assets ........................... 1.35% 1.38% 1.58%* Ratio of expenses (with fee waivers) to average net assets ........................... 1.33% 1.23% 1.12%* Ratio of net investment loss (without fee waivers) to average net assets ........................... (0.87%) (0.73%) (0.97%)* Ratio of net investment loss (with fee waivers) to average net assets ........................... (0.85%) (0.68%) (0.51%)* Portfolio turnover rate ............................ 29.86% 20.17% 5.96%(b) - ---------- * Annualized. (a) Excludes sales charge. (b) Not annualized.
5 INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS Growth and Income Fund Investment Objective The investment objective of the Growth and Income Fund is to provide investors with long-term growth of capital and current income by investing primarily in common stocks, preferred stocks and securities convertible into or with rights to purchase common stocks ("equity securities"). There is no assurance that this objective will be attained. The Growth & Income Fund's investment objective is fundamental and cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities as defined in the SAI. The other investment policies and practices of the Growth & Income Fund, unless otherwise noted, are not fundamental and may therefore be changed by a vote of the Board of Trustees without shareholder approval. Investment Policies and Risk Factors In selecting securities for the portfolio of the Growth and Income Fund, the Adviser looks for securities that appear to be undervalued, some of which will be income-producing. To meet the Growth and Income Fund's investment objective of growth of capital, the Investment Adviser will invest in securities that appear to be undervalued because the value or potential for growth has been overlooked by many investors or because recent changes in the economy, industry or the company have not been reflected yet in the price of the securities. In order to increase the income generated by the Growth and Income Fund's portfolio, the Adviser looks for securities that provide current dividends or, in the opinion of the Adviser, have a potential for dividend growth in the future. In addition, the Growth and Income Fund may, within certain limitations as set forth below, lend portfolio securities, enter into repurchase agreements, invest in when-issued and delayed delivery securities and write covered call options. The Growth and Income Fund may use stock index futures, related options and options on stock indices for the sole purpose of hedging the portfolio. See "Other Investment Practices" for more information. The Growth and Income Fund will place greater emphasis on capital appreciation as compared to income, although changes in market conditions and interest rates will cause the Growth and Income Fund to vary the emphasis of these two elements of its investment program in order to meet its investment objective. For example, in a period of rising interest rates, the Adviser may decide to emphasize the investment objective of current income by investing in money market investments. During ordinary market conditions, at least 65% of the Growth and Income Fund's total assets will be invested in equity securities, and it is expected that the percentage will ordinarily be much higher. Most of the Growth and Income Fund's investments will be securities listed on the New York or American Stock Exchanges or on NASDAQ and may also consist of American Depository Receipts ("ADRs") and investment company securities (see "Other Investment Practices" in this Prospectus for further information on these investments). The Adviser expects that the Growth and Income Fund's investments will consist of companies which will be of various sizes and in various industries and may in many cases be leaders in their fields. Criteria for selecting particular securities are expected to include the issuer's managerial strength, competitive position, profit and earnings ratio, profitability, prospects for growth, underlying asset value and relative market value. 6 The Fund intends to stay invested in the equity securities described above to the extent practicable in light of its investment objective and long-term investment perspective. Under ordinary market conditions, therefore, no more than 35% of the Fund's total assets will be invested in fixed income securities and money market instruments for purposes of meeting the Fund's investment objective of current income. However, for temporary defensive purposes, e.g., during periods in which adverse market changes or other adverse economic conditions warrant as determined by the Adviser, the Fund may invest up to 100% of its total assets in money market instruments as described below. The Growth and Income Fund's investments in fixed income securities will primarily consist of securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, and investment grade debt obligations issued or guaranteed by domestic corporations or commercial banks. From time to time, the Growth and Income Fund may also invest up to 5% of its total assets in the debt obligations of foreign issuers (see "Other Investment Practices" in this Prospectus for more information). Investment grade bonds, for example, are those rated "Baa" or better by Moody's Investors Service, Inc. ("Moody's") or "BBB" or better by Standard & Poor's Corporation ("S&P") or of a comparable rating by another nationally recognized statistical rating organization or, if unrated, determined by the Adviser to be of comparable investment quality. While "Baa"/"BBB" securities and comparable unrated securities may produce a higher return, they are subject to a greater degree of market fluctuation and credit risks than the higher quality securities in which the Fund may invest and may be regarded as having speculative characteristics as well. For a complete description of the ratings of Moody's and S&P, see the Appendix to the SAI. The types of debt obligations in which the Growth and Income Fund will invest include, among others, bonds, notes, debentures, commercial paper, variable and floating rate demand and master demand notes, zero coupon securities and asset-backed and mortgage-related securities. See "Other Investment Practices" in this Prospectus for further information concerning these investments. As a result of investments in fixed income securities, the net asset value of the Growth and Income Fund may be adversely affected in response to fluctuations in prevailing interest rates and resulting changes in the value of its fixed income portfolio securities. When interest rates decline, the value of fixed income securities already held in the Growth and Income Fund's portfolio can generally be expected to rise. Conversely, when interest rates rise, the value of existing fixed income portfolio security holdings can generally be expected to decline. The risk of these fluctuations increases in the case of fixed income securities with longer maturities. Consequently, the Growth and Income Fund will not invest in any fixed income security with a remaining maturity in excess of five years. The Growth and Income Fund's investments in money market instruments will consist of (i) short-term obligations of the U.S. Government, its agencies and instrumentalities; (ii) other short-term debt securities rated A or higher by Moody's or S&P or, if unrated, of comparable quality in the opinion of the Adviser; (iii) commercial paper, including master demand notes; (iv) bank obligations, including certificates of deposit, bankers' acceptances and time deposits; and (v) repurchase agreements. At the time the Growth and Income Fund invests for temporary defensive purposes in any commercial paper, bank obligation or repurchase agreement, the issuer must have outstanding debt rated A or higher by Moody's or S&P, or the issuer's parent corporation must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by S&P or, if no such ratings are available, the investment must be of comparable quality in the opinion of the Adviser. During times when the Growth and Income Fund is maintaining a temporary defensive posture, it may be unable to achieve fully its investment objective. 7 The foregoing investment objective and policies and those additional policies described under "Other Investment Practices" in this Prospectus with respect to the Growth and Income Fund, unless otherwise noted, are not fundamental and may be changed by a vote of the Board of Trustees of the Trust without shareholder approval. Small Cap Fund Investment Objective The investment objective of the Small Cap Fund is to seek long-term capital appreciation and, secondarily, income by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-size companies with an initial market capitalization of $500 million or less at the time of purchase by the Fund. The universe of small to medium-size companies includes those companies with market capitalizations of up to $5 billion. The inherent risks of small to medium-size companies are two-fold: business risk and market risk. Business risk refers to the possibility that a company may do poorly due to competitive or financial factors. Market risk refers mainly to the relatively small number of shares publicly owned as compared to larger companies. The Small Cap Fund's investment objective is fundamental and cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities as defined in the SAI. The other investment policies and practices of the Small Cap Fund, unless otherwise noted, are not fundamental and may therefore be changed by a vote of the Board of Trustees without shareholder approval. Investment Policies and Risk Factors The Small Cap Fund will tend to utilize a "bottom-up" approach to securities selection. In this analysis, emphasis is placed upon the prospects of each individual company rather than on its sector prospects. Particular attention will be focused upon the prospects of above market earnings growth. Other characteristics will include return on equity, product profile, condition of the balance sheet and company management. The Small Cap Fund primarily seeks long-term return from capital appreciation. The Fund will be managed in a manner that seeks to provide the same level of income as a growth fund. Also, the Small Cap Fund will attempt to achieve growth over a period of years that is greater than that of an income fund. Depending upon the performance of the Small Cap Fund's investments, the net asset value per share of such Fund may increase or decrease. Under normal market conditions, the Small Cap Fund will invest at least 70% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by the Adviser to be characterized by sound management and the ability to finance expected growth. The Small Cap Fund may also invest up to 30% of the value of its total assets in preferred stocks, corporate bonds, notes, warrants, debentures, zero coupon securities, asset-backed and mortgage-related securities, and cash equivalents. Such securities will be rated at least "A" by Moody's or S&P, or, if not rated, deemed to be of comparable quality by the Adviser. In addition to the general risks inherent in investing in common stock, the Fund's investments in fixed-income investments, if any, may adversely affect the net asset value of the Small Cap Fund due to fluctuations in prevailing interest rates and resulting changes in the value of such investments. When interest rates decline, the value of fixed securities investments already held in the Small Cap Fund's portfolio can generally be expected to rise. 8 Conversely, when interest rates rise, the value of existing fixed income portfolio security holdings can generally be expected to decline. The risk of these fluctuations increases in the case of fixed income securities with longer maturities. Consequently, the Small Cap Fund will not invest in any fixed income security with a remaining maturity in excess of five years. "Cash equivalents" are short-term, interest-bearing instruments or deposits. The purpose of cash equivalents is to provide liquidity and income at money market rates while minimizing the risk of decline in value to the maximum extent possible. The instruments may include, but are not limited to, commercial paper, domestic and Eurodollar certificates of deposit, repurchase agreements, bankers' acceptances, United States Treasury Bills, variable and floating rate demand and master demand notes, agency discount notes, bank money market deposit accounts and money market mutual funds. The Small Cap Fund will only purchase commercial paper rated at the time of purchase A-1 or better by S&P, Prime-1 or better by Moody's or F-1 or better by Fitch Investors Service ("Fitch") or, if not rated, deemed to be of comparable quality by the Adviser. See the Appendix to the SAI for an explanation of these ratings. During temporary defensive periods as determined by the Adviser, the Small Cap Fund may hold up to 100% of its total assets in cash equivalents. The foregoing investment objective and policies and those additional policies described under "Other Investment Practices" in this Prospectus with respect to the Small Cap Fund, unless otherwise noted, are not fundamental and may be changed by a vote of the Board of Trustees of the Trust without shareholder approval. Other Investment Practices Lending of Portfolio Securities. Each Fund may lend its securities if such loans are secured continuously by cash or equivalent collateral or by a letter of credit in favor of such Fund at least equal at all times to 102% of the market value of the securities loaned plus interest or dividends. While such securities are on loan, the borrower will pay the Fund the amount of any income accruing thereon, or, in some cases, a separate fee. Each Fund will not lend securities having a value which exceeds 10% of the current value of its total assets. There may be risks of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral should the borrower of the securities fail financially. In determining whether to lend a security to a particular broker, dealer or financial institution, the Investment Adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution and whether the income to be earned from the loan justifies the attendant risks. Investment Company Securities. Each Fund may invest up to 10% of its total assets in securities issued by other investment companies. Such securities will be acquired by the Funds within the limits prescribed by the 1940 Act, as amended, which include a prohibition against a Fund investing more than 10% of the value of its total assets in such securities. Investors should recognize that the purchase of securities of other investment companies results in duplication of expenses such that investors indirectly bear a proportionate share of the expenses of such companies including operating costs, and investment advisory and administrative fees. U.S. Government Securities. Each Fund may invest in all types of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities, including U.S. Treasury obligations with varying interest rates, maturities and dates of issuance, such as U.S. Treasury bills (maturities of one year or less) U.S. Treasury notes (generally maturities of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years) and obligations issued or guaranteed by U.S. Government 9 agencies or which are supported by the full faith and credit pledge of the U.S. Government. In the case of U.S. Government obligations which are not backed by the full faith and credit pledge of the United States, each Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States in the event the agency or instrumentality is unable to meet its commitments. Such securities may also include securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, its agencies, authorities or instrumentalities and participations in loans made to foreign governments or their agencies that are substantially guaranteed by the U.S. Government (such as Government Trust Certificates). See "Mortgage-Related Securities" and "Asset-Backed Securities" below. Corporate Debt Obligations. Each Fund may invest in U.S. dollar-denominated obligations issued or guaranteed by U.S. corporations or U.S. commercial banks, U.S. dollar denominated obligations of foreign issuers, including those described below under "Foreign Securities and American Depository Receipts." Such debt obligations include, among others, bonds, notes, debentures, commercial paper and variable rate demand notes. Bank obligations include, but are not limited to certificates of deposit, bankers' acceptances, and fixed time deposits. The Adviser, in choosing corporate debt securities on behalf of each Fund will evaluate each issuer based on (i) general economic and financial conditions; (ii) the specific issuer's (a) business and management, (b) cash flow, (c) earnings coverage of interest and dividends, (d) ability to operate under adverse economic conditions, (e) fair market value of assets, and (f) in the case of foreign issuers, unique political, economic or social conditions to such issuer's country; and (iii) other considerations the Adviser deems appropriate. Investment in obligations of foreign issuers may present a greater degree of risk than investment in domestic securities (see "Foreign Securities and American Depository Receipts" below for more details). Mortgage-Related Securities. Each Fund may invest in various mortgage-related securities. Mortgage loans made by banks, savings and loan institutions and other lenders are often assembled into pools, the interests in which may be issued or guaranteed by the U.S. Government, its agencies or instrumentalities (but not the market value of the mortgage-related securities themselves). Interests in such pools are called "mortgage-related securities" or "mortgage-backed securities." Most mortgage securities are pass-through securities, which means that they provide investors with payments consisting of both principal and interest on mortgages in the underlying mortgage pool. Investors receive a pro rata share of both regular interest and principal payments (less issuer fees and applicable loan servicing fees), as well as unscheduled early prepayments on the underlying mortgage pool. The dominant issuers or guarantors of mortgage securities today are the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA guarantees mortgage-backed securities composed of U.S. Government guaranteed or insured (Federal Housing Authority, Veterans Administration or Farmers Home Administration) mortgages originated by mortgage bankers, commercial banks and savings and loan associations. FNMA and FHLMC guarantee mortgage securities are composed of pools of conventional and Federally insured or guaranteed residential mortgages obtained from various entities, including savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. The principal and interest on GNMA pass-through securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA guarantees full and timely payment of all interest and principal, while FHLMC currently guarantees timely payment and ultimate payment of interest and either timely 10 payment of principal or eventual payment of principal depending upon the date of issue. Securities issued by FNMA and FHLMC are not backed by the full faith and credit of the United States; however, their close relationship with the U.S. Government makes them high quality securities with minimal credit risks. The yields provided by these mortgage securities have historically exceeded the yields on other types of U.S. Government securities. However, like most mortgage-backed securities, the experienced yield is sensitive to the rate of principal payments (including prepayments). Prepayments on underlying mortgages result in a loss of anticipated interest, and all or part of a premium if any has been paid, and the actual yield (or total return) to the Fund may be different than the quoted yield on the securities. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Like other fixed income securities, when interest rates rise, the value of a mortgage pass-through security generally will decline; however, when interest rates are declining, the value of mortgage pass-through securities with prepayment features may not increase as much as that of other fixed-income securities. In addition to GNMA, FNMA or FHLMC certificates, through which the holder receives a share of all interest and principal payments from the mortgages underlying the certificate, each Fund also may invest in mortgage pass-through securities, where all interest payments go to one class of holders ("Interest Only Securities" or "IOs") and all principal payments go to a second class of holders ("Principal Only Securities" or "POs"). These securities are commonly referred to as mortgage-backed security strips or MBS strips. The yields to maturity on IOs and POs are particularly sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the return on POs could be adversely affected. Each Fund will treat IOs and POs as illiquid securities except for IOs and POs issued by U.S. Government agencies and instrumentalities backed by fixed-rate mortgages, whose liquidity is monitored by the Adviser subject to the supervision of the Board of Trustees. Each Fund may also invest in certain Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs") which are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Interest and prepaid principal on a CMO or REMIC are paid monthly or semi-annually. CMOs and REMICs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs and REMICs are structured into multiple classes, with each class bearing a different expected maturity. Payments of principal, including prepayments, are first returned to investors holding the shortest maturity class; investors holding the longer maturity classes generally receive principal only after the earlier classes have been retired. To the extent a particular CMO or REMIC is issued by an investment company, the Funds' ability to invest in such CMOs or REMICs will be limited. Neither Fund will invest in the residual interests of REMICs. See "Investment Policies and Risk Factors" in the SAI. The Adviser expects that new types of mortgage-related securities may be developed and offered to investors. The Adviser will, consistent with each Fund's investment objectives, policies and quality standards, consider making investments in such new types of mortgage-related securities. The yield characteristics of mortgage-related securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that 11 principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if a Fund purchases a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if a Fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. Like other bond investments, the value of mortgage-backed securities will tend to rise when interest rates fall and to fall when interest rates rise. Their value may also be affected by changes in the market's perception of the creditworthiness of the entity issuing or guaranteeing them or by changes in government regulations and tax policies. Because of these factors, each Fund's share value and yield are not guaranteed and will fluctuate, and there can be no assurance that each Funds' investment objective will be achieved. The magnitude of these fluctuations generally will be greater when the average maturity of a Fund's portfolio securities is longer. Assumptions generally accepted by the industry concerning the probability of early payment may be used in the calculation of maturities for debt securities that contain put or call provisions, sometimes resulting in a calculated maturity different than the stated maturity of the security. Asset-Backed Securities. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans and automobile and credit card receivables, are being securitized in pass-through structures similar to the mortgage pass-through structures described above or in a pay-through structure similar to the collateralized mortgage structure. Consistent with the Funds' investment objectives, policies and quality standards, each Fund may invest these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements as a letter of credit from a bank, excess collateral or a third-party guarantee. Zero Coupon Securities. Each Fund may invest in zero coupon securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are more sensitive to changes in interest rates than non-zero coupon securities having similar maturities and credit qualities. Each Fund may invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury if such components are traded independently. Under the STRIPS (Separate Trading of Registered Interest and Principal of Securities) program, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. Current Federal income tax law requires that a holder of a zero coupon security report as income each year the portion of the original issue discount on such security that accrues that year, even though the holder receives no cash payments of interest during the year. 12 Variable and Floating Rate Demand and Master Demand Notes. Each Fund may, from time to time, buy variable or floating rate demand notes issued by corporations, bank holding companies and financial institutions and similar taxable and tax-exempt instruments issued by government agencies and instrumentalities. These securities will typically have a maturity over one year but carry with them the right of the holder to put the securities to a remarketing agent or other entity at designated time intervals and on specified notice. The obligation of the issuer of the put to repurchase the securities may be backed by a letter of credit or other obligation issued by a financial institution. The purchase price is ordinarily par plus accrued and unpaid interest. Generally, the remarketing agent will adjust the interest rate every seven days (or at other specified intervals) in order to maintain the interest rate of the prevailing rate for securities with a seven-day or other designated maturity. A Fund's investment in demand instruments which provide that the Fund will not receive the principal note amount within seven days' notice, in combination with the Fund's other investments which are not readily marketable, will be limited to an aggregate total of 15% of that Fund's net assets. Each Fund may also buy variable rate master demand notes. The terms of the obligations permit a Fund to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. These instruments permit weekly and, in some instances, daily changes in the amounts borrowed. A Fund has the right to increase the amount under the note at any time up to the full amount provided by the note agreement, or to decrease the amount and the borrower may repay up to the full amount of the note without penalty. The notes may or may not be backed by bank letters of credit. Because the notes are direct lending arrangements between a Fund and borrower, it is not generally contemplated that they will be traded, and there is no secondary market for them, although they are redeemable (and, thus, immediately repayable by the borrower) at principal amount, plus accrued interest, at any time. In connection with any such purchase and on an ongoing basis, the Adviser will consider the earning power, cash flow and other liquidity ratios of the issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes make demand simultaneously. While master demand notes, as such, are not typically rated by credit rating agencies, a Fund may, under its minimum rating standards, invest in them only if, at the time of an investment, the issuer meets the criteria set forth in this Prospectus for investment by the Growth and Income Fund in money market instruments and investment by the Small Cap Fund in cash equivalents, as described above. Repurchase Agreements. Each Fund may invest in securities pursuant to repurchase agreements, whereby the seller agrees to repurchase such securities at a Fund's cost plus interest within a specified time (generally one day). While repurchase agreements involve certain risks not associated with direct investments in the underlying securities, each Fund will follow procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized banks and registered broker-dealers having creditworthiness determined by the Investment Adviser to be substantially equivalent to that of issuers of debt securities rated investment grade. In addition, each Fund's repurchase agreements will provide that the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement, and that the Fund's custodian will take possession of such collateral. In the event of a default or bankruptcy by the seller, each Fund will seek to liquidate such collateral. However, the exercise of a Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, each Fund could suffer a loss. Repurchase agreements are considered to be loans by an investment company under the 1940 Act. It is the current policy of each Fund not to enter into repurchase agreements exceeding in the aggregate 10% of the market value of each Fund's total assets. 13 Reverse Repurchase Agreements. The Small Cap Fund may borrow funds for temporary purposes by entering into reverse repurchase agreements in accordance with the investment restrictions described below. Pursuant to such agreements, the Small Cap Fund would sell portfolio securities to financial institutions such as banks and broker-dealers, and agree to repurchase them at a mutually agreed upon date and price. The Small Cap Fund intends to enter into reverse repurchase agreements only to avoid selling securities during market conditions deemed unfavorable by the Adviser to meet redemptions. At the time the Small Cap Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account assets such as liquid high quality debt securities, consistent with the Fund's investment objective having a value not less the 100% of the repurchase price (including accrued interest), and will subsequently monitor the account to ensure that such required value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Small Cap Fund may decline below the price at which such Fund is obligated to repurchase the securities. Reverse repurchase agreements are considered to be borrowings by an investment company under the 1940 Act. When-Issued and Delayed-Delivery Securities. Each Fund may purchase securities on a when-issued or delayed-delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the transaction. The securities so purchased are subject to market fluctuation during this period and no income accrues to a Fund until settlement takes place. To facilitate such acquisitions, a Fund will maintain with the custodian a separate account with a segregated portfolio of securities in an amount at least equal to such commitments. On the delivery dates for such transactions, each Fund will meet its obligations from maturities or sales of the securities held in the separate account and/or from cash flow. It is the current policy of each Fund not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Fund's total assets, less liabilities other than the obligations created by when-issued commitments. Writing Covered Calls. Each Fund may seek to earn premiums by writing covered call options against some of the securities in its portfolio. A call option is "covered" if a Fund owns the underlying securities covered by the call. The purchaser of the call option obtains the right to acquire these securities at a fixed price (which may be less than, the same as, or greater than the current market price of such securities) during a specified period of time. Until an option lapses or is cancelled by a closing transaction, the maximum sales price a Fund can realize on the underlying security is limited to the strike price. The Fund continues to bear the risk of a decline in the market price of the security during the option period, although the decline in value would be mitigated by the amount of the premium received for the call. The aggregate value of the securities subject to options written by each Fund may not exceed 25% of the value of such Fund's net assets. Futures, Related Options and Options on Stock Indices. Each Fund may attempt to reduce the risk of investment in equity securities by hedging a portion of its portfolio through the use of certain futures transactions, options on futures traded on a board of trade and options on stock indices traded on national securities exchanges. In addition, each Fund may hedge a portion of its portfolio by purchasing such instruments during a market advance or when the Adviser anticipates an advance. In attempting to hedge a portfolio, a Fund may enter into contracts for the future delivery of securities and futures contracts based on a specific security, class of securities or an index, purchase or sell options on any such futures contracts, and engage in related closing transactions. A stock index assigns relative weightings to the common stocks in the index, and the index generally fluctuates with changes in the market values of these stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the 14 price at which the agreement is made. Each Fund will sell stock index futures only if the amount resulting from the multiplication of the then current level of the indices upon which such futures contracts are based, and the number of futures contracts which would be outstanding, do not exceed one-third of the value of the Fund's net assets. When a futures contract is executed, each party deposits with a broker or in a segregated custodial account up to 5% of the contract amount, called the "initial margin," and during the term of the contract, the amount of the deposit is adjusted based on the current value of the futures contract by payments of variation margin to or from the broker or segregated account. In the case of options on stock index futures, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to assume the option writer's position in a stock index futures contract. If the option is exercised by the holder before the last trading day during the option period, the option writer delivers the futures position, as well as any balance in the writer's futures margin account. If it is exercised on the last trading day, the option writer delivers to the option holder cash in an amount equal to the difference between the option exercise price and the closing level of the relevant index on the date the option expires. In the case of options on stock indexes, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to receive cash equal to the dollar amount of the difference between the closing price of the relevant index and the option exercise price times a specified multiple, called the "multiplier." During a market decline or when the Adviser anticipates a decline, each Fund may hedge a portion of its portfolio by selling futures contracts or purchasing puts on such contracts or on a stock index in order to limit exposure to the decline. This provides an alternative to liquidation of securities positions and the corresponding costs of such liquidation. Conversely, during a market advance or when the Adviser anticipates an advance, each Fund may hedge a portion of its portfolio by purchasing futures, options on these futures or options on stock indices. This affords a hedge against a Fund not participating in a market advance at a time when it is not fully invested and serves as a temporary substitute for the purchase of individual securities which may later be purchased in a more advantageous manner. The Funds' successful use of stock index futures contracts, options on such contracts and options on indices depends upon the Adviser's ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the price of the futures contract and the price of the securities being hedged is imperfect and the risk from imperfect correlation increases in the case of stock index futures as the composition of the Funds' portfolios diverge from the composition of the relevant index. Such imperfect correlation may prevent the Funds from achieving the intended hedge or may expose the Funds to risk of loss. In addition, if the Funds purchase futures to hedge against market advances before they can invest in common stock in an advantageous manner and the market declines, the Funds might create a loss on the futures contract. Particularly in the case of options on stock index futures and on stock indices, the Funds' ability to establish and maintain positions will depend on market liquidity. The successful utilization of hedging and risk management transactions requires skills different from those needed in the selection of the Funds' portfolio securities. The Funds believe that the Adviser possesses the skills necessary for the successful utilization of hedging and risk management transactions. 15 Positions in options, futures and options on futures may be closed out only on an exchange which provides a secondary market for such purposes. There can be no assurance that a liquid secondary market will exist for any particular option, futures contract or related option at any specific time. Thus, it may not be possible to close such an option or futures position which could have an adverse impact on the Funds' ability to effectively hedge their securities. The Funds will enter into an option or futures position only if there appears to be a liquid secondary market for such options or futures. Except as otherwise provided in this Prospectus, the Funds are permitted to engage in bona fide hedging transactions (as defined in the rules and regulations of the Commodity Futures Trading Commission) without any quantitative limitations. Futures and related option transactions which are not for bona fide hedging purposes may be used provided the total amount of the initial margin and any option premiums attributable to such positions does not exceed 5% of each Fund's liquidating value after taking into account unrealized profits and unrealized losses, and excluding any in-the-money option premiums paid. The Funds will not market, and are not marketing, themselves as commodity pools or otherwise as vehicles for trading in futures and related options. The Funds will segregate assets to cover the futures and options. Portfolio Turnover. The Funds generally will not engage in the trading of securities for the purpose of realizing short-term profits, but will adjust their portfolios as they deem advisable in view of prevailing or anticipated market conditions to accomplish their investment objective. For example, a Fund may sell portfolio securities in anticipation of an adverse market movement. Other than for tax purposes, frequency of portfolio turnover will not be a limiting factor if a Fund considers it advantageous to purchase or sell securities. The Small Cap Fund and the Growth and Income Fund do not anticipate that their annual portfolio turnover rates will exceed 100%. Foreign Securities and American Depository Receipts ("ADRs"). Each Fund may invest in foreign securities through the purchase of ADRs and may also invest directly in certain debt securities of foreign issuers. The foreign debt securities in which the Small Cap Fund may invest include securities issued by foreign branches of U.S. banks and foreign banks, Canadian commercial paper and Europaper (U.S. dollar denominated commercial paper of a foreign issuer). The foreign debt securities in which the Growth and Income Fund may invest include debt obligations of foreign banks, corporations and governmental entities, and supranational organizations, such as the International Bank for Reconstruction and Development, the European Economic Community and the Inter-American Development Bank, among others. Each Fund's investment in foreign debt securities is limited to 5% of the total assets of each Fund. Investment in foreign securities is subject to special risks, such as future adverse political and economic developments, possible seizure, nationalization, or expropriation of foreign investments, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source, or the adoption of other foreign governmental restrictions. Investors should note that there is no uniformity among foreign accounting standards. As noted above, each Fund may also invest in securities represented by ADRs. ADRs are dollar-denominated receipts generally issued by domestic banks, which represent the deposit with the bank of a security of a foreign issuer, and which are publicly traded on exchanges or over-the-counter in the United States. The Funds may invest in both sponsored and unsponsored ADR programs. There are certain risks associated with investments in unsponsored ADR programs. Because the non-U.S. company does not actively participate in the creation of the 16 ADR program, the underlying agreement for service and payment will be between the depository and the shareholder. The company issuing the stock underlying the ADRs pays nothing to establish the unsponsored facility, as fees for ADR issuance and cancellation are paid by brokers. Investors directly bear the expenses associated with certificate transfer, custody and dividend payment. In an unsponsored ADR program, there also may be several depositories with no defined legal obligations to the non-U.S. company. The duplicate depositories may lead to marketplace confusion because there would be no central source of information to buyers, sellers and intermediaries. The efficiency of centralization gained in a sponsored program can greatly reduce the delays in delivery of dividends and annual reports. In addition, with respect to all ADRs there is always the risk of loss due to currency fluctuations. Each Fund will not invest more than 20% of its total assets in ADRs. Illiquid Securities. The Small Cap Fund will not invest in illiquid securities if immediately after such investment more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. For this purpose, illiquid securities include (a) securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market, (b) participation interests in loans that are not subject to puts and (c) repurchase agreements not terminable within seven days. See "Repurchase Agreements" above. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation. Consequently, investments in restricted securities eligible for resale pursuant to Rule 144A of the Securities Act of 1933 which have been determined to be liquid by the Fund's Board of Trustees based upon the trading markets for the securities will not be included for purposes of this limitation. The Growth and Income Fund will not invest in any security, including repurchase agreements maturing in over seven days or other illiquid investments which are subject to legal or contractual delays on resale or which are not readily marketable, if as a result more than 15% of the market value of the Fund's net assets would be so invested. INVESTMENT RESTRICTIONS The Statement of Additional Information contains more information on the Funds' Investment Policies, and also identifies the restrictions on the Funds' investment activities, which provide among other things: Growth and Income Fund The Growth and Income Fund shall not invest more than 5% of its total assets taken at market value in the securities (including securities subject to repurchase agreements) of any one issuer other than securities issued or guaranteed by the United States Government, its agencies or instrumentalities. The Growth and Income Fund shall not purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the investments of the Growth and Income Fund in that industry would exceed 25% of the current value of the total assets of the Fund, except that there is no limitation with respect to investments in obligations of the United States Government, its agencies or instrumentalities which are backed by the full faith and credit of the United States. The Growth and Income Fund shall not borrow money, except that it may borrow from banks as a temporary measure for emergency purposes where such borrowing would not exceed 5% of the total assets (including amount 17 borrowed) taken at market value. The Growth and Income Fund shall not purchase securities while its borrowings exceed 5% of its total assets. Small Cap Fund The Small Cap Fund shall not purchase a security if, as a result, with respect to 75% of its portfolio, (i) more than 5% of the value of its total assets would be invested in any one issuer, or (ii) it would hold more than 10% of any class of securities of such issuer or more than 10% of the outstanding voting securities of the issuer. There is no limit on the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities. The Small Cap Fund shall not purchase a security if, as a result, more than 25% of the value of its total assets would be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) this limitation shall not apply to obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric and telephone will each be considered a separate industry. The Small Cap Fund shall not borrow money or issue senior securities, except that it may borrow from banks or enter into reverse repurchase agreements for temporary purposes in amounts up to 10% of the value of its total assets at the time of such borrowing; or mortgage, pledge, or hypothecate any assets, except in connection with any such borrowing and in amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the value of its total assets at the time of its borrowing. The Small Cap Fund shall not purchase securities while its borrowings (including reverse repurchase agreements) exceed 5% of its total assets. The investment restrictions referred to above are fundamental and may be changed only when permitted by law and approved by a majority of the outstanding voting securities of the Funds. As used in this Prospectus, such approval means approval of the lesser of (i) the holders of 67% or more of the shares represented in a meeting of the holders of more than 50% of the outstanding shares are present in person or by proxy or (ii) the holders of more than 50% of the outstanding shares. MANAGEMENT OF THE FUNDS The property, affairs and business of the Funds are managed by the Board of Trustees. The Trustees elect officers who are charged with the responsibility for the day-to-day operations of the Funds and the execution of policies formulated by the Trustees. Information about the Trustees as well as the Trust's executive officers, may be found in the SAI under the heading "Management--Trustees and Officers". Investment Adviser The Trust retains HSBC Asset Management Americas Inc. ("HSBC Americas" or the "Adviser") to act as the investment adviser for each of its Funds. HSBC Americas is the North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. At December 31, 1995, HSBC Americas managed over $3.7 billion of assets of individuals, pension plans, corporations and institutions. 18 Mr. Leo Grohowski, Chief Investment Officer of HSBC Americas, is responsible for the day-to-day management of the Growth and Income Fund's portfolio. Mr. Grohowski has been the Managing Director, Equity Portfolio Management of HSBC Americas since 1987 and became Chief Investment Officer in 1994. Pursuant to the Advisory Contract, HSBC Americas furnishes continuous investment guidance to the Trust consistent with each Fund's investment objective and policies and provides administrative assistance in connection with the operation of each Fund. Information regarding the investment performance of each Fund is contained in each Fund's Annual Report dated December 31, 1995 which may be obtained, without charge, from the Trust. Sub-Adviser to the Small Cap Fund HSBC Americas retains Investment Concepts, Inc. ("ICI") to serve as sub-adviser to the Small Cap Fund. ICI is a subsidiary of BancOklahoma Trust Company ("BOTC"), the largest trust company in the State of Oklahoma. BOTC is a subsidiary of Bank of Oklahoma, N.A. ("BOK") which in turn is a subsidiary of Bank of Oklahoma Corporation ("BOK Financial"). BOK Financial is controlled by its principal shareholder, George B. Kaiser. Through its subsidiaries, BOK Financial provides a full array of trust, commercial banking and retail banking services. Its non-bank subsidiaries engage in various bank-related services, including mortgage banking and providing credit life, accident, and health insurance on certain loans originated by its subsidiaries. ICI maintains an office in Tulsa, Oklahoma, and offers a variety of services for both corporate and individual customers. BOTC also serves as transfer agent and registrar for corporate securities, paying agent for dividends and interest, and indenture trustee of bond issues. At December 31, 1995, BOTC was responsible for approximately $7.2 billion in assets including approximately $3.2 billion in assets under management and possessed total capital, surplus and undivided profits of $7.7 million. Mr. Joe P. Sing, Jr. is responsible for the day-to-day management of the Small Cap Fund. Mr. Sing has been a portfolio manager with ICI since 1984. Under its Sub-Advisory Contract with HSBC Americas, ICI will undertake at its own expense to furnish the Small Cap Fund and HSBC Americas with micro- and macroeconomic research, advice and recommendations, and economic and statistical data, with respect to the Fund's investments, subject to the overall review by HSBC Americas and the Board of Trustees. Banking Laws Counsel to the Trust and special counsel to the Advisers, have advised the Adviser that the Adviser may perform the services for the Funds contemplated by the Advisory Contract without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Counsel to ICI has given similar advice to ICI with respect to its performance of services under the Sub-Advisory Contract. Such counsel has pointed out, however, that this question has not been authoritatively determined and that judicial or administrative decisions or interpretations of present Federal or state statutes and regulations relating to the permissible activities of banks or trust companies and their subsidiaries or affiliates, as well as future changes in Federal or state statutes and regulations and judicial or administrative decisions or interpretations thereof, could prevent HSBC Americas and ICI from continuing to perform such services for the Funds. 19 If the Adviser and ICI were prohibited from performing any of their services for the Trust, it is expected that the Board of Trustees would recommend to the Funds' shareholders that they approve new agreements with another entity or entities qualified to perform such services and selected by the Board. Distributor BISYS Fund Services, the Distributor (the "Distributor"), has its principal office at 3435 Stelzer Road, Columbus, Ohio 43219. The Distributor will receive orders for, sell, and distribute shares of the Funds. Shareholder Servicing Agent The Trust retains HSBC Americas to act as Shareholder Servicing Agent of the Fund in accordance with that terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third parties who distribute prospectuses and Fund applications, (ii) assists and trains third parties who assist customers with completing Fund applications, (iii) performs customer education, reviews Fund written communications and assists third parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists third parties who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of each Fund's average daily net assets. Administrator The Trust retains BISYS Fund Services to act as the Administrator of the Funds in accordance with to the terms of an Administration and Accounting Services Agreement replacing PFPC Inc. ("PFPC"). BISYS has its principal office at 3435 Stelzer Road, Columbus, Ohio 43219. Pursuant to the Administrative and Accounting Services Agreement, the Administrator, at its expense, generally will supervise the operation of the Trust and the Funds by reviewing the expenses of the Funds monthly to ensure the Funds are within their respective budgets and by providing personnel, office space and administrative and fund accounting services reasonably necessary for the operation of the Trust and the Funds other than those provided by HSBC Americas pursuant to the Advisory Contract. BISYS's annual administration and accounting fee is an asset-based fee of .15% of each Fund's first $200 million of average net assets; .125% of each Fund next $200 million of average net assets; .10% of each Fund's next $200 million of average net assets; and .08% of each Fund's average net assets in excess of $600 million; exclusive of out-of-pocket expenses. The Trust also retains HSBC Americas to act as Co-Administrator in accordance with the terms of the Co-Administration Services Contract. Pursuant to the Co-Administration Services Contract, HSBC Americas (i) manages the Funds' relationship with service providers, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as a liaison with Fund trustees, and (iv) assists with general product management and oversight. For its services as Co-Administrator, HSBC Americas is paid an annual fee equal to 0.03% of each Fund's daily average net assets. 20 Servicing Agreements The Fund may enter into agreements (the "Servicing Agreement") with certain banks, financial institutions and corporations (the "Participating Organizations") so that each Participating Organization handles recordkeeping and provides certain administrative services for its customers who invest in the Funds through accounts maintained at that Participating Organization. In such cases, the Participating Organization or one of its nominees will be the shareholder of record as nominee for its customers and will maintain subaccounts for its customers. In addition, the Participating Organization will credit cash distributions to each customer account, process purchase and redemption requests, mail statements of all transactions with respect to each customer and, if required by law, distribute the Trust's shareholder reports and proxy statements. However, any customer of a Participating Organization may become the shareholder of record upon written requests to its Participating Organization or the Fund's as transfer agent. Each Participating Organization will receive monthly payments which in some cases may be based upon expenses that the Participating Organization has incurred in the performance of its services under the Servicing Agreement. The payments will not exceed, on an annualized basis, an amount equal to 0.25% of the average daily net assets during the month of Fund shares in the subaccount of which the Participating Organization is record owner as nominee for its customers. Such payments will be separately negotiated with each Participating Organization and will vary depending upon such factors as the services provided and the costs incurred by each Participating Organization. The payments may be more or less than the fees payable to BISYS for the services it provides pursuant to the Transfer Agency Agreement for similar services. The payments will be made by the Fund to the Participating Organizations pursuant to the Servicing Agreements. BISYS will not receive any compensation as transfer or dividend disbursing agent with respect to the subaccounts maintained by Participating Organizations. The Board of Trustees will review, at least quarterly, the amounts paid and the purposes for which such expenditures were made pursuant to the Servicing Agreements. Under separate agreements, the Adviser (not the Funds) may make supplementary payments from its own revenues to a Participating Organization that agrees to perform services such as advising customers about the status of their subaccounts, the current yield and dividends declared to date and providing related services a shareholder may request. Such payments will vary depending upon such factors as the services provided and the costs incurred by each Participating Organization. Investors who purchase and redeem shares of the Funds through a customer account maintained at a Participating Organization may be charged one or more of the following types of fees by a Participating Organization, as agreed upon by the Participating Organization and the investor, with respect to the customer services provided by the Participating Organization: account fees (a fixed amount per month or per year); transaction fees (a fixed amount per transaction processed); compensating balance requirements (a minimum dollar amount a customer must maintain in order to obtain the services offered); or account maintenance fees (a periodic charge based upon a percentage of the assets in the account or of the dividends paid on those assets). Distribution Plan and Agreement The Board of Trustees of the Trust has adopted a Distribution Plan and Agreement (the "Plan") pursuant to Rule 12b-1 of the 1940 Act, as amended, after having concluded that there is a reasonable likelihood that the Plan will benefit each Fund and its shareholders. The Plan provides for a monthly payment by each Fund to reimburse the Distributor in such amounts that they may request for expenses such as the printing and distribution of 21 prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses associated with media advertisements and telephone services and other direct and indirect distribution-related expenses, including the payment of a monthly fee to broker- dealers for rendering distribution-related asset introduction and asset retention services. The Funds may also make payments to other broker-dealers or financial institutions for their assistance in distributing shares of the Funds and otherwise promoting the sale of each Fund's shares. The total of each monthly payment is based on each Fund's average daily net assets during the preceding month and is calculated at an annual rate not to exceed 0.35% and 0.50% with respect to the Small Cap Fund & Growth and Income Fund, respectively. The Plan provides for the Distributor to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plan may not be amended to increase materially the amount spent for distribution expenses without approval by a majority of each Fund's outstanding shares and approval of a majority of the non-interested Trustees. Distribution expenses incurred in one year will not be carried forward into and reimbursed in the next year for actual expenses incurred in the previous year. Fees and Expenses The Growth and Income Fund pays HSBC Americas, as compensation for its advisory services a monthly fee equal to an annual rate of 0.55% of average daily net assets up to $400 million. The fee is reduced at several breakpoints for average daily net assets in excess of $400 million up to $2 billion, at which point it becomes 0.315% of the average daily net assets in excess of $2 billion. The Small Cap Fund pays HSBC Americas, as compensation for its advisory services a monthly fee equal to an annual rate of 0.70% of average daily net assets up to $400 million. The fee is reduced at several breakpoints for average daily net assets in excess of $400 million up to $2 billion, at which point it becomes 0.415% of the average daily net assets in excess of $2 billion. As compensation for its services, ICI receives a monthly fee from HSBC Americas at an annual rate not to exceed 0.50% of the Small Cap Fund's average daily net assets up to $400 million. The fee is reduced at several breakpoints for average daily net assets in excess of $400 million up to $2 billion, at which point it becomes 0.290% of the average daily net assets in excess of $2 billion. As compensation for its co-administrative services and shareholder services, HSBC Americas receives from each Fund a monthly fee equal to an annual rate of 0.07% of the average daily net assets of each Fund. HSBC Americas and ICI reserve the right to waive in advance a portion of their fees at any time. TRANSACTIONS WITH AFFILIATES Broker-dealers which are affiliates of HSBC Americas or ICI may act as brokers for the Funds. At all times, however, their commissions, fees or other charges must be reasonable and fair in comparison with those that would be paid to unaffiliated firms for comparable transactions. The Funds will not do business with nor pay commissions to affiliates of HSBC Americas or ICI in any portfolio transactions where they act as principal. In placing orders for the purchase and sale of portfolio securities, the Funds seek the best execution at the most favorable price, considering all of the circumstances. The Adviser may consider sales of shares of the Fund and of other HSBC funds as a factor in selecting a broker. The Adviser may cause a Fund to pay commissions higher than another broker-dealer would have charged if the Adviser believes the commission paid is reasonable in relation to the value of the research services incurred by the Adviser. 22 DETERMINATION OF NET ASSET VALUE Each Fund's net asset value per share for the purpose of pricing purchase and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the Funds' transfer agent is open for business. The net asset value will not be computed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per share of each Fund is computed by dividing the value of the net assets of a Fund (i.e. the value of the assets less the liabilities) by the total number of shares outstanding. All expenses, including the management, advisory, sub-advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. Portfolio securities are valued at the last quoted sales price as of the close of business on the day the valuation is made, or lacking any sales, at the mean between closing bid and asked prices. Price information on listed securities is taken from the exchange where the security is primarily traded. The value for each unlisted security is based on the last trade price for that security on a day in which the security is traded. The value for each unlisted security on a day such security is not traded shall be based on the mean of the bid and ask quotations for that day. The value of each security for which readily available market quotations exist will be based on a decision as to the broadest and most representative market for such security. Options on stock indices traded on national securities exchanges are valued at the close of options trading on such exchanges (which is currently 4:10 p.m., Eastern time). Stock index futures and related options, which are traded on commodities exchanges, are valued at their last sale price as of the close of such exchanges (which is currently 4:15 p.m., Eastern time). Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Short-term investments are valued at amortized cost, which approximates market value. The Board of Trustees has determined in good faith that amortized cost equals fair market value. PURCHASE OF SHARES Shares of each Fund are offered on a continuous basis at net asset value, plus any applicable sales charge, by the Distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Prospectuses and accompanying sales material can be obtained from the Transfer Agent or Distributor. The minimum initial investment requirement for each Fund is $1,000. The minimum subsequent investment requirement for each Fund is $50. There are no minimum investment requirements with respect to investments effected through certain automatic purchase and redemption arrangements on behalf of customer accounts maintained at Participating Organizations. The minimum investment requirements may be waived or lowered for investments effected on a group basis by certain other institutions and their employees, such as pursuant to a payroll deduction plan. All funds will be invested in full and fractional shares. The Trust reserves the right to reject any purchase order. 23 Orders for shares of the Funds will be executed at the net asset value per share next determined after receipt of an order by the dealer, plus a sales charge varying with the amount invested in accordance with the following schedule:
Reallowance to Service Total Sales Load Organizations ---------------- ------------- As a % of As a % of Net Asset As a % of Amount Invested Offering Price Value Per Offering Price (including sales charge) Per Share Share Per Share - ------------------------ --------- ----- --------- Less than $50,000.................... 5.00% 5.26% 4.50% $50,000 but less than $100,000....... 4.50% 4.71% 4.00% $100,000 but less than $250,000...... 3.75% 3.90% 3.40% $250,000 but less than $500,000...... 2.50% 2.56% 2.25% $500,000 but less than $1 million.... 2.00% 2.04% 1.75% $1 million and above................. 1.00% 1.01% 0.90%
The sales charge will be waived on the following purchases: (1) by Trustees and officers of the Trust and of HSBC Funds Trust, and members of their immediate families (parents, spouses, children, brothers and sisters), (2) by directors, employees and retirees of Marine Midland Bank and its affiliates, and members of their immediate families, (3) by financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit-sharing or other benefit plan for such customers or employees, (4) by directors and employees of the Distributor, selected broker-dealers and affiliates and members of their immediate families, (5) by charitable organizations as defined in Section 501(c)(3) of the Internal Revenue Code ("Charitable Organizations") or for charitable remainder trusts or life income pools established for the benefit of Charitable Organizations, (6) by registered representatives of selling brokers and members of their immediate families, (7) by individuals who have terminated their Employee Benefit Trust ("EBT") Plan or have retired and are purchasing shares in the Funds with the proceeds of their benefits checks (the EBT Plan must currently own shares of a Fund at the time of the individual's purchase), (8) by corporations, their officers or directors, partnerships, and their partners which are customers or prospective customers of Marine Midland Bank when authorized by an officer of Marine Midland Bank, and (9) by individuals who, as determined by an officer of the Funds in accordance with guidelines established by the Funds' Board of Trustees, have purchased shares under special circumstances not involving sales expenses to dealers or the Distributor. Eligible investors should contact HSBC Americas for details. The sales load does not apply in any instance to reinvested dividends. From time to time dealers who receive dealer discounts and broker commissions from the Distributor may reallow all or a portion of such dealer discounts and broker commissions to other dealers or brokers. The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of Shares of any of the Funds. Such compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more Funds of the Trust, and/or other dealer-sponsored special events. In some instances, this compensation will be made available only to certain dealers whose representatives have sold a significant amount 24 of such Shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Compensation may also include the following types of non-cash compensation offered through sales contests: (1) vacation trips, including the provision of travel arrangements and lodging at luxury resorts at an exotic location, (2) tickets for entertainment events (such as concerts, cruises and sporting events) and (3) merchandise (such as clothing, trophies, clocks and pens). Dealers may not use sales of a Fund's Shares to qualify for the compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned compensation is paid for by any Fund or its Shareholders. Stock certificates will not be issued with respect to shares of each Fund. The Transfer Agent shall keep accounts upon the books of the Trust for record holders of such shares. Right of Accumulation The Funds offer to all shareholders a right of accumulation under which any shareholder may purchase shares of a Fund at the offering price applicable to the total of (a) the dollar amount then being purchased plus (b) an amount equal to the offering price of the shareholder's combined holdings of the shares of such Fund. For the right of accumulation to be exercised, a shareholder must provide at the time of purchase confirmation of the total number of shares of such Fund owned by such shareholder. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time on sixty days notice to shareholders. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares held in the name of such nominee or custodian for other plans to qualify for the right of accumulation. Letter of Intent By initially investing at least $1,000 and submitting a Letter of Intent to the transfer agent, a "single purchaser" may purchase shares of the Funds and other eligible HSBC Funds (other than Money Market Funds) during a 13-month period at the reduced sales charge rates applying to the aggregate amount of the intended purchases stated in the Letter. The Letter of Intent may apply to purchases made up to 90 days before the date of submission of the Letter of Intent. Dividends and distributions of capital gains paid in shares of the Funds at net asset value will not apply towards the completion of the Letter of Intent. The Letter of Intent does not obligate a shareholder to buy the amount indicated in the Letter of Intent; however, if the intended purchases are not completed during the Letter of Intent period, the shareholder will be obligated to pay the Distributor an amount equal to the difference between the regular sales charge applicable to a single purchase of the number of shares purchased and the sales charge actually paid. For further details, including escrow provisions, see the Letter of Intent. The Funds reserve the right to amend, suspend or cease offering this program at any time. Prospective investors who wish to obtain additional information concerning investment procedures should contact the Transfer Agent at: (800) 634-2536. New Account Purchase By Wire 1. Telephone: The Transfer Agent at (800) 634-2536 for instructions. Please note your bank will normally charge a fee for handling this transaction. 25 New Account Purchase by Mail 1. Complete a Purchase Application. 2. Mail the Purchase Application and a check for $1,000 or more, to HSBC Family of Funds to the Transfer Agent at: HSBC Mutual Funds Trust c/o BISYS, P.O. Box 163850, Columbus, Ohio 43216-3850. Third party checks will not be accepted. Check payments must be in U.S. dollars. Please include the Fund Name and your account number on all checks. Additional Purchases by Wire and Mail Additional purchases of shares may be made by wire by telephoning the Transfer Agent and then instructing the wiring bank to transmit the amount ($50 or more) of any additional purchase in Federal funds. Additional purchases may also be made by mail by making a check ($50 or more) payable to the HSBC Family of Funds indicating your fund account number on the check and mailing it to the Transfer Agent at the address set forth above. Purchase through Customer Accounts Purchases of shares also may be made through customer accounts maintained at Participating Organizations, including qualified Individual Retirement and Keogh Plan accounts. Purchases will be made through a customer's account only as directed by or on behalf of the customer on a direction form executed prior to the customer's first purchase of shares of any Fund. For example, a customer with an account at a Participating Organization may instruct the Participating Organization to invest money in excess of a level agreed upon between the customer and the Participating Organization in shares of one of the Funds periodically or give other instructions to the Participating Organization within limits prescribed by that Participating Organization. Automatic Investment Plan Investors may make regular monthly investments of $50 or more in shares automatically from a checking or savings account if their bank is a member of automated clearing house (ACH). Upon written authorization, the Transfer Agent will electronically debit the investor's checking or savings account each month and use the proceeds to purchase shares for the investor's account. Approval by the investor's bank is required, so that establishment of a program may require at least 30 days. The authorized amount and/or bank information may be changed or the program terminated at any time by writing to the Transfer Agent. A reasonable period (usually up to 15 days) may be required after receipt of such instructions to implement them. The purchase application contains the requirements applicable to this plan. The Trust reserves the right to amend, suspend or cease offering this program at any time without prior notice. 26 REDEMPTION OF SHARES Upon receipt by the Trust's transfer agent of a redemption request in proper form ($50 minimum), shares of the Funds will be redeemed at their next determined net asset value. See "Determination of Net Asset Value" in this Prospectus. For the shareholder's convenience, the Trust has established several different direct redemption procedures. Redemptions of shares purchased by check will be effected immediately upon clearance of the purchase check, which may take up to 15 days after those shares have been credited to the shareholder's account. A redemption of shares is a taxable transaction on which gain or loss may be recognized for tax purposes. The Funds reserve the right to redeem (on 30 days' notice) accounts whose values shareholders have reduced to $500 or less. Redemption by Mail 1. Complete a letter of instruction indicating the Fund, the account number and either the dollar amount or number of shares to be redeemed. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, the signature(s) must be guaranteed by a bank, trust company, broker, dealer, credit union, securities exchange or association, clearing agency or savings association. Signature guarantees by notaries public are not acceptable. Further documentation, such as copies of corporate resolutions and instruments of authority, may be requested from corporations, administrators, executors, personal representatives, trustees or custodians to evidence the authority of the person or entity making the redemption request. 4. Mail the letter to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. Checks for redemption proceeds will normally be mailed within seven days to the shareholder's address of record. Upon request, the proceeds of a redemption amounting to $1,000 or more can be sent by wire to the shareholder's predesignated bank account. Please note a wire transfer fee will normally be charged. When proceeds of a redemption are to be paid to someone other than the shareholder, either by wire or check, the signature(s) on the letter of instruction must be guaranteed regardless of the amount of the redemption. Redemption by Expedited Redemption Service If shares are held in book credit form and the Expedited Redemption Service has been elected on the Purchase Application on file with the Trust's transfer agent, redemption of shares may be requested on any day the Transfer Agent is open for business by telephone or letter. A signature guarantee is not required. 1. Telephone the request to the Transfer Agent toll free: (800) 634-2536; or 2. Mail the request to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. 27 Proceeds of Expedited Redemptions of $1,000 or more can be wired to the shareholder's bank indicated in the Purchase Application. If an Expedited Redemption request is received by the Trust's transfer agent by 4:00 p.m. (Eastern time) on a day the transfer agent is open for business, the redemption proceeds will be transmitted to the shareholder's bank on the next business day. A check for proceeds of less than $1,000 will be mailed to the shareholder's address of record. The Transfer Agent employs reasonable procedures to confirm that instructions communicated by telephone are genuine. If the Transfer Agent fails to employ such reasonable procedures, the transfer agent may be liable for any loss, damage or expense arising out of any telephone transactions purporting to be on a shareholder's behalf. In order to ensure the accuracy of instructions received by telephone, the Transfer Agent requires some form of personal identification prior to acting upon instructions received by telephone, records telephone instructions and provides written confirmation to investors of such transactions. Systematic Withdrawal Plan An owner of $10,000 or more of shares of a Fund may elect to have periodic redemptions from his account to be paid on a monthly basis. The minimum periodic payment is $50. A sufficient number of shares to make the scheduled redemption will be redeemed on the first or fifteenth day of the month. Redemptions for the purpose of making such payments may reduce or even exhaust the account if the monthly checks exceed the dividends, interest and capital appreciation, if any, on your shares. A shareholder may request that these payments be sent to a predesignated bank or other designated party. Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a return on your investment. Payments to you pursuant to the Systematic Withdrawal Plan are derived from the redemption of shares in your account and is a taxable transaction on which gain or loss may be recognized for Federal, state and local income tax purposes. Reinstatement Privilege A shareholder in a Fund who has redeemed shares may reinvest, without a sales charge, up to the full amount of such redemption at the net asset value determined at the time of the reinvestment within 60 days of the original redemption. This privilege must be effected within 60 days of the redemption and the investor at the time of purchase must provide the number of shares redeemed within the 60 day period. The shareholder must reinvest in the same Fund and account from which the shares were redeemed. A redemption is a taxable transaction and gain or loss may be recognized for Federal income tax purposes even if the reinstatement privilege is exercised. Any loss realized upon the redemption will not be recognized as to the number of shares acquired by reinstatement, except through an adjustment in the tax basis of the shares so acquired. Redemption through Customer Accounts Investors who purchase shares through customer accounts maintained at Participating Organizations may redeem those shares only through the Participating Organization. In some cases, a customer may instruct the Participating Organization which maintains the account through which the customer purchases shares to redeem shares periodically as required to bring the customer's account balance up to a level agreed upon between the customer and the Participating Organization. If a redemption request with respect to such an automatic redemption arrangement is received by the transfer agent by 4:00 p.m. (Eastern time) on a day the transfer agent is open for business, the redemption proceeds will be transmitted on the next business day to the investor's customer account (unless otherwise specified by the Participating Organization). 28 EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in a Fund for at least seven days may exchange shares of one Fund for shares of any of the other investment portfolios of the Trust and HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will be subject only to that portion of the sales load of the Fund into which the shareholder is exchanging which exceeds the sales load originally paid by the shareholder. The Transfer Agent must be advised of the applicability of the sales charge differential when the exchange order is placed. Shareholders of any of the HSBC Money Market Funds who exchange shares of any such Money Market Funds for shares of any of the Funds of the Trust are charged the sales load applicable to such Funds as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal and New York State and City income tax purposes and, depending on the circumstances, a gain or loss may be recognized. The Funds reserve the right to change the terms of or terminate the Exchange Privilege at any time upon at least 60 days prior written notice to shareholders. DIVIDENDS, DISTRIBUTIONS AND TAXES Each Fund intends to distribute annually substantially all of its net investment income in the form of dividends. The Funds pay semi-annual dividends. Net capital gains, if any, are distributed at least once annually. Each Fund's dividend and capital gains distributions may be reinvested in additional shares or received in cash. In order to satisfy certain annual distribution requirements of the Internal Revenue Code of 1986, as amended, (the "Code"), the Funds may declare special dividend and capital gains distributions during October, November or December as of a record date in such a month. Such distributions, if paid to shareholders in the following January, are deemed for Federal income tax purposes to have been paid by the Funds and received by shareholders on December 31 of the prior year. Each Fund will be treated as a separate entity for Federal income tax purposes, notwithstanding that it is one of a multiple series of the Trust. Each Fund has elected to be treated and has qualified as a registered investment company and intends to continue to qualify to be treated as a regulated investment company for each taxable year by complying with the provisions of the Code applicable to regulated investment companies so that it will not be liable for Federal income tax with respect to its net investment income and net realized capital gains distributed to shareholders in accordance with the timing requirements of the Code. Each Fund intends to distribute substantially all of its net investment income and net realized capital gains to its shareholders for each taxable year. Dividends derived from each Fund's taxable net investment income (if any) and the excess of net short-term capital gain over net long-term capital loss will be taxable to that Fund's shareholders as ordinary income, whether such dividends are invested in additional shares or received in cash. A portion of each Fund's dividends will normally qualify for the dividends-received deduction for corporations. In general, the amount so qualifying will depend primarily on the portion of a Fund's gross income that is represented by dividends received by such Fund from stock in domestic corporations held by such Fund subject to the requisite holding period under the Code and not treated as debt financed under the Code. The dividends-received deduction will be reduced to the extent shares of such Fund are treated as debt-financed and will be eliminated if such shares are held for less than 46 days. 29 Distributions of the excess of net long-term capital gain over net short-term capital loss designated by the Funds as capital gain dividends will be taxable as long-term capital gains, regardless of how long a shareholder has held his Fund shares, whether they are invested in additional shares or received in cash. Long-term capital gain distributions will generally not qualify for the dividends-received deduction for corporations. Each year the Funds will notify shareholders of the character of its dividends and distributions for federal income tax purposes. Depending on the residence of the shareholder for tax purposes, such dividends and distributions may also be subject to state, local or foreign taxes. Shareholders should consult their own tax advisers as to the Federal, state, local or foreign tax consequences of ownership of Fund shares in their particular circumstances. Shareholders who are not U.S. persons under the Code should also consult their tax advisers as to the possible application of U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on dividends. Any gain or loss realized on the redemption or exchange of Fund shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. However, any loss realized by a shareholder upon the redemption or exchange of shares in a Fund held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain distributions received by the shareholder with respect to such shares. ACCOUNT SERVICES All transactions in shares of the Funds will be reflected in confirmations for each shareholder and a monthly shareholder statement. In those cases where a Participating Organization or its nominee is shareholder of record of shares purchased for its customer, the Trust has been advised that the statement may be transmitted to the customer in the discretion of the Participating Organization. Shareholders can write or call the Trust's transfer agent at P.O. Box 163850, Columbus, OH 43216-3850, telephone (800) 634-2536 with any questions relating to their investments in Fund shares. Participating Organizations or their nominees may be the shareholders of record as nominees for their customers, and may maintain subaccounts for those customers. Any such customer may become the shareholder of record upon written request to the Participating Organization or transfer agent. The transfer agent will transmit promptly to each of its customers for whom it processes purchases and redemptions of shares and to each Participating Organization copies of all reports to shareholders, proxy statements and other Trust communications. The Trust's arrangements with the transfer agent and the subtransfer agent arrangements require Participating Organizations to grant investors who purchase shares through customer accounts the opportunity to vote their shares by proxy at all shareholder meetings of the Trust. In certain cases, a customer of a Participating Organization may have given his Participating Organization the power to vote shares on his behalf. Customers with accounts at Participating Organizations should consult their Participating Organization for information concerning their rights to vote shares. 30 TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN Pursuant to an Agency Agreement, BISYS Fund Services ("Transfer Agent") acts as the Funds' transfer and dividend disbursing agent and is responsible for maintaining account records detailing ownership of Fund shares and for crediting income, capital gains and other changes in share ownership to investors' accounts. For its services, the Transfer Agent receives from the Funds an annual base fee of $25 per shareholder account plus additional transaction costs. Bank of New York is the Funds' custodian. Pursuant to the Custodian Agreement, Bank of New York is responsible for holding the Funds' cash and portfolio securities. Bank of New York may enter into sub-custodian agreements with certain qualified banks. PERFORMANCE INFORMATION Each Fund's total return may be included in advertisements or mailings to prospective investors. Each Fund may occasionally cite statistical reports concerning its performance. Each Fund may also from time to time compare its performance to various unmanaged indices, such as the Standard & Poor's 500 Composite Stock Price Index. (See the Statement of Additional Information for more details concerning the various indices which might be used.) A Fund's "total return" refers to the average annual compounded rates of return over one, five and ten year periods or for the life of the Fund (which periods will be stated in the advertisement) that would equate an initial amount invested at the beginning of a stated period to the ending redeemable value of the investment, assuming the deduction of the maximum sales charge and the reinvestment of all dividend and capital gains distributions. Each Fund may quote total return on a before tax or after tax basis. Each Fund calculates its total return by adding the total dividends paid for the period to the Fund's ending net asset value per share for that period and dividing that sum by the net asset value per share of the Fund at the beginning of the period. Each Fund may also furnish total return calculations based on investments at various sales charge levels or at net asset value. Any performance data which is based on a Fund's net asset value per share would be reduced if a sales charge were taken into account. Total return figures are based on historical earnings and are not intended to indicate future performance. Investors who purchase and redeem shares of the Funds through a customer account maintained at a Participating Organization may be charged by such Participating Organization certain fees, as agreed upon by the Participating Organization and the investor, with respect to the customer services provided by the Participating Organization. Such fees will have the effect of reducing the return for those investors. See "Management of the Funds--Servicing Agreements" in this Prospectus. SHARES OF BENEFICIAL INTEREST The authorized capital stock of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Trust's Board of Trustees has authorized the issuance of multiple series representing shares in corresponding investment portfolios of the Trust. All shares of the Trust have equal voting rights and will be voted in the aggregate, and not by class, except where voting by class is required by law or where the matter involved affects only one class. All shares of the Trust issued and outstanding are fully paid and nonassessable. The Trust is not required by law to hold annual shareholder meetings and does not intend to hold such meetings; however, the Trustees are required to call a meeting for the purpose of considering the removal of persons serving as Trustee if requested to do so in writing by the holders of not less than 10% of the outstanding 31 shares of the Trust. Each Fund will be treated as a separate entity for Federal income tax purposes. For more details concerning the voting rights of shareholders, see the SAI. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing Trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Under Massachusetts law, it is possible that shareholders of a Massachusetts business trust might, under certain circumstances, be held personally liable for acts or obligations of the Trust. The Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's assets for all loss and expense of any shareholder held personally liable by reason of being or having been a shareholder of the Trust. Thus, the risk that a shareholder of a Fund could incur financial loss on account of shareholder liability is considered remote since it is limited to circumstances in which the disclaimer is inoperative and the Fund itself would be unable to meet its obligations. 32 [This page intentionally left blank] 33 [This page intentionally left blank] 34 [This page intentionally left blank] 35 HSBC Mutual Funds Trust - -------------------------------------------------------------------------------- HSBC Fund Group - -------------------------------------------------------------------------------- HSBC Asset Management [LOGO] - -------------------------------------------------------------------------------- HSBC(SM) Mutual Funds Trust 3435 Stelzer Road Columbus, Ohio 43219 Information: (800) 634-2536 Investment Adviser and Co-Administrator HSBC Asset Management Americas Inc. 250 Park Avenue New York, New York 10177 Sub-Adviser to Small Cap Fund Investment Concepts, Inc. One Williams Center P.O. Box 2300 Tulsa, Oklahoma 74192 Distributor, Administrator, Transfer Agent and Dividend Disbursing Agent BISYS Fund Services 3435 Stelzer Road Columbus, Ohio 43219 Custodian The Bank of New York 90 Washington Street New York, New York 10286 Independent Auditors Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 Legal Counsel Baker & McKenzie 805 Third Avenue New York, New York 10022 No dealer, salesman, or other person has been authorized to give any information or to make any representations, other than those contained in the Prospectus, in connection with the offer contained in this Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Trust, the Distributor or the Investment Adviser. This Prospectus does not constitute an offering in any state in which such offering may not lawfully be made. Prospectus April 24, 1996 - -------------------------------------------------------------------------------- Funds: Growth and Income Fund Small Cap Fund - -------------------------------------------------------------------------------- Managed and Advised by: HSBC Asset Management Americas Inc. - -------------------------------------------------------------------------------- Managed by: Investment Concepts, Inc. (with respect to the Small Cap Fund only) - -------------------------------------------------------------------------------- Distributed by: BISYS Fund Services - -------------------------------------------------------------------------------- HSBC MUTUAL FUNDS TRUST GROWTH AND INCOME FUND SMALL CAP FUND 3435 Stelzer Road Columbus, Ohio 43219 Information: (800) 634-2536 STATEMENT OF ADDITIONAL INFORMATION HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust, (the "Trust") is an open-end, diversified management investment company with multiple portfolios, including the Growth and Income Fund (formerly known as the Total Return Equity Fund) (the "Growth and Income Fund") and the Small Cap Fund (the "Small Cap Fund") (together herein referred to as the "Funds"). The investment objective of the Growth and Income Fund is to provide ---------------------- investors with long-term growth of capital and current income by investing primarily in common stocks, preferred stocks and securities convertible into or with rights to purchase common stocks ("equity securities"). As a matter of fundamental policy, during normal market conditions, at least 65% of the value of the Fund's total assets will be invested in equity securities. The investment objective of the Small Cap Fund is to provide investors with -------------- long-term capital appreciation and, secondarily, income by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-size companies with an initial market capitalization of $500 million or less at the time of purchase by the Fund. The universe of small to medium-size companies includes those companies with market capitalization of up to $5 billion ("small cap equity securities"). As a matter of fundamental policy, during normal market conditions, at least 70% of the value of the Fund's total assets will be invested in small cap equity securities. Shares of the Funds are primarily offered for sale by BISYS Fund Services, Inc., the Sponsor and Distributor, as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain banks, financial institutions and corporations ("Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at the Participating Organizations and to perform certain services for the Funds. This Statement of Additional Information ("SAI") is not a prospectus and is only authorized for distribution when preceded or accompanied by the Funds' Prospectus dated April 18, 1996. This SAI contains additional and more detailed information than that set forth in the Prospectus and should be read in conjunction with the Prospectus, additional copies of which may be obtained without charge from the Trust. April 18, 1996 TABLE OF CONTENTS
INVESTMENT POLICIES AND RISK FACTORS..................... 1 INVESTMENT RESTRICTIONS.................................. 6 MANAGEMENT............................................... 8 PERFORMANCE INFORMATION.................................. 14 DETERMINATION OF NET ASSET VALUE......................... 16 PORTFOLIO TRANSACTIONS................................... 16 EXCHANGE PRIVILEGE....................................... 18 REDEMPTIONS.............................................. 18 FEDERAL INCOME TAXES..................................... 19 SHARES OF BENEFICIAL INTEREST............................ 22 CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.. 23 INDEPENDENT AUDITORS..................................... 24 EXPERTS.................................................. 24
-i- INVESTMENT POLICIES AND RISK FACTORS The following information supplements the discussion of the investment objective and policies of the Funds found under "Investment Objective, Policies and Risk Factors" in the Prospectus. The following investment policies apply to each of the Funds. SHORT-TERM TRADING. Although the Funds will not make a practice of short-term trading, purchases and sales of securities will be made whenever necessary in the management's view to achieve the investment objectives of a Fund. Management does not expect that in pursuing each Fund's investment objective unusual portfolio turnover will be required and intends to keep turnover to a minimum consistent with such investment objective. Management believes unsettled market economic conditions during certain periods require greater portfolio turnover in pursuing each Fund's investment objective than would otherwise be the case. A higher incidence of portfolio turnover will result in greater transaction costs to a Fund. During periods of relatively stable market and economic conditions, the management expects that the portfolio turnover of each Fund will not exceed 100% annually, so that normally no more than 100% of the securities held by a Fund would be replaced in any one year. LOANS OF PORTFOLIO SECURITIES. The Funds may make loans of portfolio securities to brokers, dealers and financial institutions if cash or cash equivalent collateral, including letters of credit, equal to at least 100% of the current market value of the securities loaned (including accrued dividends and interest thereon) plus the interest payable with respect to the loan is maintained by the borrower with the lending Fund in a segregated account. In determining whether to lend a security to a particular broker, dealer or financial institution, the adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. Neither Fund will enter into any portfolio security lending arrangement having a duration of longer than one year. Any securities which a lending Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund will, if permitted by law, dispose of such collateral except for such part thereof which is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay the Fund an amount equal to any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed upon fee from a borrower which has delivered cash equivalent collateral. Neither Fund will loan securities having a value which exceeds 10% of the current value of such Fund's total assets. Loans of securities will be subject to termination at the lender's or the borrower's option. Each Fund may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Funds, its investment adviser or subadviser. WRITING COVERED CALLS. The Funds may engage in the writing of covered call options (options on securities which a Fund owns) provided the options are listed on a national securities exchange. Each Fund, as the writer of the option, forgoes the opportunity to profit from an increase in the market price of the underlying security above the exercise price except insofar as the premium represents such a profit. Each Fund retains the risk of loss should the price of the underlying security decline below the purchase price of the underlying security minus the premium. AMERICAN DEPOSITORY RECEIPTS. The Funds may invest in American Depository Receipts ("ADRs"). Generally these are receipts issued by a bank or trust company that evidence ownership of underlying securities issued by a foreign corporation and that are designed for use in the domestic securities market. The Funds intend to invest less than 20% of each Fund's total net assets in ADRs. There are certain risks associated with investments in unsponsored ADR programs. Because the non-U.S. company does not actively participate in the creation of the ADR program, the underlying agreement for service and payment will be between the depository and the shareholder. The company issuing the stock underlying the ADRs pays nothing to establish the unsponsored facility, as fees for ADR issuance and cancellation are paid by brokers. Investors directly bear the expenses associated with certificate transfer, custody and dividend payment. In an unsponsored ADR program, there also may be several depositories with no defined legal obligations to the non-U.S. company. The duplicate depositories may lead to marketplace confusion because there would be no central source of information to buyers, sellers and intermediaries. The efficiency of centralization gained in a sponsored program can greatly reduce the delays in delivery of dividends and annual reports. In addition, with respect to all ADRs, there is always the risk of loss due to currency fluctuations. To the extent permitted in the Prospectus of the Funds, each such Fund may engage in transactions for the purchase and sale of stock index options, stock index futures contracts and options on stock index futures as described below. STOCK INDEX OPTIONS. Each Fund may purchase and write put and call options on stock indexes listed on national securities exchanges in order to realize its investment objectives or for the purpose of hedging its portfolio. A stock index fluctuates with changes in the market values of the stocks included in the index. Some stock index options are based on a broad market index such as the New York Stock Exchange Composite Index, or a narrower market index such as the Standard & Poor's 100. Indexes are also based on an industry or market segment such as the American Stock Exchange Oil & Gas Index or the Computer and Business Equipment Index. Options on stock indexes are similar to options on stock, except that (a) the expiration cycles of stock index options are monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier". Receipt of this cash amount will depend upon the difference between the closing level of the stock index upon which the option is based and the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. STOCK INDEX FUTURES CONTRACTS. Each Fund may enter into stock index futures contracts in order to protect the value of its common stock investments. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. As the aggregate market value of the stocks in the index changes, the value of the index also will change. In the event that the index level rises above the level at which the stock index futures contract was sold, the seller of the stock index futures contract will realize a loss determined by the difference between the two index levels at the time of expiration of the stock index futures contract, and the purchaser will realize a gain in that amount. In the event the index level falls below the level at which the stock index futures contracts was sold, the seller of the stock index futures contract will realize a loss determined by the difference between the two index levels at the time of expiration of the stock index futures contract, and the purchaser will realize a gain in that amount. In the event the index level falls below the level at which the stock -2- index futures contract was sold, the seller will recognize a gain determined by the difference between the two index levels at the expiration of the stock index futures contract, and the purchaser will realize a loss. Stock index futures contracts expire on a fixed date, currently one to seven months from the date of the contract, and are settled upon expiration of the contract. Each Fund intends to utilize stock index futures contracts for the purpose of attempting to protect the value of its common stock portfolio in the event of a decline in stock prices and, therefore, usually will be the seller of stock index futures contracts. This risk management strategy is an alternative to selling securities in a portfolio and investing in money market instruments. Also, stock index futures contracts may be purchased to protect a Fund against an increase in prices of stocks which the Fund intends to purchase. If a Fund is unable to invest its cash (or cash equivalents) in stock in an orderly fashion, the Fund could purchase a stock index futures contract which may be used to offset any increase in the price of the stock. However, it is possible that the market may decline instead, resulting in a loss on the stock index futures contract. If a Fund then concludes not to invest in stock at that time, or if the price of the securities to be purchased remains constant or increases, the Fund will realize a loss on the stock index futures contract that is not offset by a reduction in the price of securities purchased. A Fund also may buy or sell stock index futures contracts to close out existing futures positions. OPTIONS ON STOCK INDEX FUTURES. Each Fund may purchase and write call and put options on stock index futures contracts which are traded on a United States or foreign exchange or board of trade. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time during the option period. Upon exercise of the option, the writer of the option is obligated to convey the appropriate futures position to the holder of the option. If an option is exercised on the last trading day before the expiration date of the option, a cash settlement will be made in an amount equal to the difference between the closing price of the futures contract and the exercise price of the option. If a Fund purchases a call (put) option on a futures contract, it benefits from any increase (decrease) in the value of the futures contract, but is subject to the risk of decrease (increase) in value of the futures contract. The benefits received are reduced by the amount of the premium and transaction costs paid by a Fund for the option. If market conditions do not favor the exercise of the option, the Fund's loss is limited to the amount of such premium and transaction costs paid by a Fund for the option. If a Fund writes a call (put) option on a stock index futures contract, the Fund receives a premium but assumes the risk of a rise (decline) in value in the underlying futures contract. If the option is not exercised, the Fund gains the amount of the premium, which may partially offset unfavorable changes due to interest rate or currency exchange rate fluctuations in the value of securities held or to be acquired for the Fund's portfolio. If the option is exercised, the Fund will incur a loss, which will be reduced by the amount of the premium it receives. However, depending on the degree of correlation between changes in the value of its portfolio securities (or the currency in which they are denominated) and changes in the value of futures positions, the Fund's losses from writing options on futures may be partially offset by favorable changes in the value of portfolio securities or in the cost of securities to be acquired. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. Writing of options involves the risk that there will be no market in which to effect a closing transaction. An exchange-traded option may be closed out only on an exchange that provides a secondary market for an option of the same series. Over-the-Counter ("OTC") options are not generally terminable at the option of -3- the writer and may be closed out only by negotiation with the holder. There is also no assurance that a liquid secondary market on an exchange will exist. In addition, because OTC options are issued in privately negotiated transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), there is no assurance that the Funds will succeed in negotiating a closing out of a particular OTC option at any particular time. If a Fund, as covered call option writer, is unable to effect a closing purchase transaction in the secondary market or otherwise, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. The staff of the Securities and Exchange Commission (the "SEC") has taken the position that purchased options not traded on registered domestic securities exchanges and the assets used as cover for written options not traded on such exchanges are generally illiquid securities. However, the staff has also opined that, to the extent a mutual fund sells an OTC option to a primary dealer that it considers creditworthy and contracts with such primary dealer to establish a formula price at which the fund would have the absolute right to repurchase the option, the fund would only be required to treat as illiquid the portion of the assets used to cover such option equal to the formula price minus the amount by which the option is in-the-money. Pending resolution of the issue, the Funds will treat such options and, except to the extent permitted through the procedure described in the preceding sentence, assets as subject to each such Fund's limitation on investments in securities that are not readily marketable. RISKS INVOLVING FUTURES TRANSACTIONS. Transactions by the Funds in futures contracts and options thereon involve certain risks. One risk in employing futures contracts and options thereon to protect against cash market price volatility is the possibility that futures prices will correlate imperfectly with the behavior of the prices of the securities in a Fund's portfolio (the portfolio securities will not be identical to the securities underlying the futures contracts). In addition, commodity exchanges generally limit the amount of fluctuation permitted in futures contract and option prices during a single trading day, and the existence of such limits may prevent the prompt liquidation of futures and option positions in certain cases. Inability to liquidate positions in a timely manner could result in the Fund's incurring larger losses than would otherwise be the case. MORTGAGE-RELATED SECURITIES. The Funds, may, consistent with its respective investment objective and policies, invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Mortgage-related securities, for purposes of the Fund's Prospectus and this SAI, represent pools of mortgage loans assembled for sale to investors by various governmental agencies such as the Government National Mortgage Association and government-related organizations such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as by nongovernmental issuers such as commercial banks, savings and loan institutions, mortgage bankers, and private mortgage insurance companies. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured. If the Fund purchases a mortgage-related security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. However, though the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true since in periods of declining interest rates the mortgages underlying the securities are prone to prepayment. For this and other reasons, a mortgage-related securities stated maturity may be shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the securities return to the Fund. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested. -4- There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. Mortgage-related securities created by the Government National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest and such guarantee is backed by the full faith and credit of the United States. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Government to make payments under its guarantee. Mortgage-related securities issued by the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of the FNMA and are not backed by or entitled to the full faith and credit of the United States. The FNMA is a government- sponsored organization owned entirely by private stock-holders. Fannie Maes are guaranteed as to timely payment of the principal and interest by FNMA. Mortgage- related securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as ("Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC currently guarantees timely payment of interest and either timely payment of principal or eventual payment of principal, depending upon the date of issue. When the FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. OPTION PREMIUMS. In order to comply with certain state securities regulations, each Fund has agreed to limit maximum premiums paid on put and call options on other than futures contracts to less than 2% of the Fund's net assets at any one time. ILLIQUID SECURITIES. Each Fund has adopted a fundamental policy with respect to investments in illiquid securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act, securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. Each Fund may also invest in restricted securities issued under Section 4(2) of the Securities Act, which exempts from registration "transactions by an issuer not involving any public offering." Section 4(2) instruments are restricted in the sense that they can only be resold through the issuing dealer and only to institutional investors; they cannot be resold to the general public without registration. Restricted securities issued -5- under Section 4(2) of the Securities Act will be treated as illiquid and subject to the Fund's investment restriction on illiquid securities. Rule 144A of the Securities Act provides for a broader institutional trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act applicable to resales of certain securities to qualified institutional buyers. The Investment Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this new regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. (the "NASD"). Consequently, it is the intent of the Fund to invest, pursuant to procedures established by the Board of Trustees and subject to applicable investment restrictions, in securities eligible for resale under Rule 144A which are determined to be liquid based upon the trading markets for the securities. The Adviser will monitor the liquidity of restricted securities in the Fund's portfolio under the supervision of the Trustees. In reaching liquidity decisions, the Investment Adviser will consider, inter alia, the following ----- ---- factors: (1) the frequency of trades and quotes for the security over the course of six months or as determined in the discretion of the Investment Adviser; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers over the course of six months or as determined in the discretion of the Investment Adviser; (3) dealer undertakings to make a market in the security; (4) the nature of the security and the nature of the market place trades (e.g., the time needed to dispose of the security, the method of ---- soliciting offers and the mechanics of the transfer); and (5) other factors, if any, which the Investment Adviser deems relevant. The Investment Adviser will also monitor the purchase of Rule 144A securities to assure that the total of all Rule 144A securities held by a Fund does not exceed 10% of the Fund's average daily net assets. Rule 144A securities which are determined to be liquid based upon their trading markets will not, however, be required to be included among the securities considered to be illiquid for purposes of Investment Restriction No. 8. INVESTMENT RESTRICTIONS The Funds observe the following fundamental investment restrictions which can be changed only when permitted by law and approved by a majority of a Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented in person or by proxies or (ii) more than 50% of the outstanding shares. Except as otherwise noted each Fund may not: (1) purchase securities on margin (but may make margin payments in connection with financial futures contracts and related options) or purchase real estate or interests therein, commodities or commodity contracts (except financial futures contracts and related options), or make loans, except loans of portfolio securities and except that each Fund may purchase or hold short-term debt securities and enter into repurchase agreements with respect to its portfolio securities described in each Prospectus. For this purpose, repurchase agreements are considered loans; (2) engage in the underwriting of securities of other issuers, except to the extent that each Fund may be deemed to be an underwriter in selling, as part of an offering registered under the Securities Act of 1933, as amended, securities which it has acquired; or participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders -6- with other accounts under the management of the Adviser to save commissions or to average prices among them is not deemed to result in a securities trading account; (3) effect a short sale of any security (other than index options or hedging strategies), or issue senior securities except as permitted in paragraph (4). For purposes of this restriction, the purchase and sale of financial futures contracts and related options does not constitute the issuance of a senior security; (4) borrow money, except that each Fund may borrow from banks (and the Small Cap Fund may enter into reverse repurchase agreements) as a temporary measure for emergency purposes where such borrowings would not exceed 5% (or 10% with respect to the Small Cap Fund) of its total assets (including the amount borrowed) taken at market value; or pledge, mortgage or hypothecate its assets, except to secure indebtedness permitted by this paragraph and then only if such pledging, mortgaging or hypothecating does not exceed 5% (or 10% with respect to the Small Cap Fund) of each Fund's total assets taken at market value. The Funds have no present intention of engaging in transactions under this paragraph; (5) purchase securities of any company with a record of less than three years' continuous operation if such purchase would cause each Fund's investments in all such companies taken at cost to exceed 5% of such Fund's total assets taken at market value; (6) invest for the purpose of exercising control over or management of any company; (7) invest more than 10% of its total assets in the securities of other investment companies; (8) invest in any security, including repurchase agreements maturing in over seven days or other illiquid investments which are subject to legal or contractual delays on resale or which are not readily marketable, if as a result more than 15% (10% with respect to the Growth and Income Fund) of the market value of the Fund's total assets would be so invested; (9) purchase interests in oil, gas, or other mineral exploration programs or real estate and real estate mortgage loans except as provided in the Prospectus of the Funds, or invest in oil, gas or other mineral leases, or in real estate limited partnership interests; however, this policy will not prohibit the acquisition of securities of companies engaged in the production or transmission of oil, gas, other minerals or companies which purchase or sell real estate or real estate mortgage loans; (10) purchase or retain securities of any company if, to the knowledge of the Funds, officers and Trustees of the Trust and officers and directors of the Adviser who individually own more than 1/2 of 1% of the securities of that company together own beneficially more than 5% of such securities; (11) have dealings on behalf of the Funds with Officers and Trustees of the Funds, except for the purchase or sale of securities on an agency or commission basis, or make loans to any officers, directors or employees of the Funds; or -7- (12) invest in excess of 5% of net assets in warrants; provided that warrants that are listed on the New York or American Stock Exchange may not exceed 2% of net assets. In addition, the Growth and Income Fund may not: (1) Invest more than 5% of its total assets taken at market value in the securities (including securities subject to repurchase agreements) of any one issuer other than securities issued or guaranteed by the United States Government, its agencies or instrumentalities; or (2) (i) purchase more than 10% of the outstanding voting securities of any one issuer or (ii) purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the investments of the Growth and Income Fund in that industry would exceed 25% of the current value of the total assets of the Fund, except that there is no limitation with respect to investments in obligations of the United States Government, its agencies or instrumentalities which are backed by the full faith and credit of the United States. In addition, the Small Cap Fund may not: (1) purchase a security if, as a result, with respect to 75% of its portfolio, (i) more than 5% of the value of its total assets would be invested in any one issuer, or (ii) it would hold more than 10% of any class of securities of such issuer or more than 10% of the outstanding voting securities of the issuer. There is no limit on the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; or (2) purchase a security if, as a result, more than 25% of the value of its total assets would be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) this limitation shall not apply to obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry. There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in the market value of an investment, in the net or total assets of the Funds, in the securities rating of the investment, or any other later change. MANAGEMENT TRUSTEES AND OFFICERS The principal occupations for the past five of the Trustees and executive officers of the Funds are listed below. The address of each, unless otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. The Trustees deemed to be "interested persons" of the Funds for purposes of the Investment Company Act of 1940 are indicated by an asterisk. WILLIAM B. BLUNDIN, Chief Executive Officer and Trustee* - Executive Vice ----------------------------------- President BISYS Fund Services, Inc., March 1995 to present; Vice Chairman of Concord Holding Corporation, July 1993 to March 1995; Director and President of Concord Holding Corporation, February 1987 to July 1993; Trustee, HSBC Funds Trust. -8- WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville, Virginia ------- 22901. Trustee, Excelsior Funds, Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Institutional Funds, Inc. (mutual funds); Director, Deutsche Bank Financial, Inc.; Director, The Harbus Corporation; Trustee, HSBC Funds Trust (formerly, Mariner Funds Trust). WILLIAM L. KUFTA, Trustee - 97 Main Street, Chatham, New Jersey 07928. Chief ------- Investment Officer, Beacon Trust Company; Senior Vice President, Pitcairn Financial Management Group from 1987 to 1991; Trustee, HSBC Funds Trust. ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut ------- 06840. Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee, U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc. (mutual funds); Trustee, HSBC Funds Trust. HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017. ------- Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten and Company since 1991; Advisory Managing Director, Lepercq de Neuflize & Co. Incorporated 1993 to1995; Director, Price Waterhouse AG 1992 to 1993; Trustee, HSBC Funds Trust. JOHN P. PFANN, Chairman and Trustee - 43 Captains Walk, Marina Cove, Palm -------------------- Coast, Florida 32137. Chairman and President, JPP Equities, Inc., 1982 to 1995; Trustee, HSBC Funds Trust. ANN E. BERGIN President - First Vice President of BISYS Fund Services, Inc., --------- March 1995 to Present; Senior Vice President, Administration, Concord Financial Group, August 1991 to March 1995; Assistant Vice President, Dreyfus Service Corporation, 1982 to August 1991. WILLIAM J. TOMKO, Vice President - Vice President, BISYS Fund Services, Inc. -------------- since 1987. MARK E. NAGLE, Treasurer - Senior Vice President, Fund Accounting Services, --------- BISYS Fund Services, Inc., September 1995 to present; Senior Vice President, Fidelity Institutional Retirement Services 1993 to September 1995; Senior Vice President, Fidelity Accounting & Custody Services, 1981 to 1993. MARTIN R. DEAN, Assistant Treasurer - Manager, Mutual Fund Accounting, BISYS ------------------- Fund Services since 1994; Senior Manager, KPMG Peat Marwick 1989 to 1994. STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York 10022. --------- Partner, Baker & McKenzie since April 1991; Partner, Gaston & Snow from 1988 to 1991; Secretary, HSBC Funds Trust since 1987. ROBERT L. TUCH, Assistant Secretary - Senior Counsel of BISYS Fund Services, ------------------- Inc., June 1991 to Present; Vice President and Associate General Counsel with Nation Securities Research Corp., July 1990 to June 1991. ALAINA V. METZ, Assistant Secretary - Chief Administrator, Administrator and ------------------- Regulatory Services of BISYS Fund Services, Inc., June 1995 to Present; Supervisor of Mutual Fund Legal Department, Alliance Capital Management, May 1989 to June 1995. Trustees of the Funds receive from the Funds an annual fee and a fee for attending each meeting of the Trustees and each committee meeting and are reimbursed for all out-of-pocket expenses relating to attendance at meetings. -9-
COMPENSATION TABLE Pension or Retirement Estimated Total Aggregate Benefits Accrued Annual Benefits Compensation Compensation as Part of Fund Upon from the Fund from the Fund Expenses Retirement complex* ------------- ---------------- --------------- -------------- Wolfe J. Frankl, Trustee $3,295 0 N/A $22,000 William L. Kufta, Trustee $2,961 0 N/A $20,000 Harald Paumgarten, Trustee $ 0 0 N/A $ 0 John P. Pfann, Trustee $3,295 0 N/A $22,000 Robert A. Robinson, Trustee $3,295 0 N/A $22,000
_____________________ * Represents the total compensation paid to such persons during the calendar year ending December 31, 1995 (and with respect to the Funds estimated to be paid during a full calendar year). Mr. Paumgarten was appointed as a new Trustee subsequent to December 31, 1995, and, therefore, did not receive any compensation from the Trust. Trustees that are "interested persons" do not receive compensation from the Trust in connection with their role as Trustee. As of the date of the Statement of Additional Information the Trustees and officers of the Funds as a group owned less than 1% of the outstanding shares of the Funds. INVESTMENT ADVISER. The Funds retain HSBC Asset Management Americas Inc. ("HSBC Americas" or the "Adviser") to act as the adviser for each Fund. HSBC Americas is the North American investment affiliate of HSBC Holdings pc (Hong Kong and Shanghai Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. The Advisory Contracts for the Funds provide that HSBC Americas will manage the portfolio of each Fund and will furnish to each Fund investment guidance and policy direction in connection therewith. HSBC Americas has agreed to provide to the Funds, among other things, information relating to portfolio composition. Pursuant to the Advisory Contract, HSBC Americas also furnishes to the Trust's Board of Trustees periodic reports on the investment performance of each Fund. HSBC Americas has also agreed in the Advisory Contract to provide administrative assistance in connection with the operation of the Funds. Administrative services provided by HSBC Americas include, among other things, (i) data processing, clerical and bookkeeping services required in connection with maintaining the financial accounts and records for the Funds, (ii) compiling statistical and research data required for the preparation of reports and statements which are periodically distributed to the Funds' officers and Trustees, (iii) handling general shareholder relations with Fund investors, such as advice as to the status of their accounts, the dividends declared to date and assistance with other questions related to their accounts, and (iv) compiling information required in connection with the Funds' filings with the SEC. -10- Effective February 1, 1996 the Board of Trustees of the Trust approved a Co-Administration Services Contract between the Fund and HSBC Americas. Pursuant to the Co-Administration Services Contract, HSBC Americas (i) manages the Fund's relationship with BISYS Fund Services, the Administrator to the Fund, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as liaison with the Board of Trustees, and (iv) assists with general product management and oversight. HSBC is paid an annual fee equal to 0.03% of the Fund's average daily net assets pursuant to the Co-Administration Services Contract. SUB-ADVISER TO THE SMALL CAP FUND. HSBC Americas retains Investment Concepts, Inc. ("ICI") to serve as sub-adviser to the Small Cap Fund. ICI is a subsidiary of BancOklahoma Trust Company ("BOTC"), the largest trust company in the State of Oklahoma. BOTC is a subsidiary of Bank of Oklahoma, N.A. ("BOK") which in turn is a subsidiary of Bank of Oklahoma Corporation ("BOK Financial"). BOK Financial is controlled by its principal shareholder, George B. Kaiser. Through its subsidiaries, BOK Financial provides a full array of trust, commercial banking and retail banking services. Its non-bank subsidiaries engage in various bank-related services, including mortgage banking and providing credit life, accident, and health insurance on certain loans originated by its subsidiaries. ICI maintains an office in Tulsa, Oklahoma and offers a variety of services for both corporate and individual customers. ICI also serves as transfer agent and registrar for corporate securities, paying agent for dividends and interest, and indenture trustee of bond issues. At December 31, 1995, BOTC was responsible for approximately $7.2 billion in assets including approximately $3.2 billion in assets under management and possessed total capital, surplus and undivided profits of $7.7 million. SHAREHOLDER SERVICING AGENT. The Trust retains HSBC Americas to act as Shareholder Servicing Agent of the Fund in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third-parties who deliver prospectuses and Fund applications, (ii) assists and trains third-parties who assist customers with completing Fund applications, (iii) conducts customer education, reviews Fund written communications and assists third-parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of the Fund's average daily net assets. DISTRIBUTOR. Shares of the Funds are offered on a continuous basis through BISYS Fund Services, the Distributor, pursuant to the Distribution Contract. The Distributor is not obligated to sell any specific amount of shares. ADMINISTRATOR. In accordance with resolutions adopted by the Board of Trustees of the Trust, as of March 1, 1996, BISYS Fund Services became Administrator of the Fund pursuant to the terms of an Administration and Accounting Services Agreement (the "Administrative Services Agreement"), replacing PFPC, Inc. Pursuant to the Administrative Services Agreement, BISYS Fund Services: (i) provides administrative services reasonably necessary for the operation of the Fund, (other than those services which are provided by HSBC Americas pursuant to the Advisory Contract) and Fund accounting services; (ii) provides the Funds with office space and office facilities reasonably necessary for the operation of the Funds; and (iii) employs or associates with itself such persons as it believes appropriate to assist it in performing its obligations under the Administrative Services Contract. As compensation for its administrative and accounting services under the Administrative Services Agreement, BISYS Fund Services is paid a monthly fee at the following annual rates: 0.15% of the Fund's first $200 million of average daily net assets; .125% of the Fund's second $200 million of average daily net assets; -11- 0.10% of the Fund's third $200 million of average daily net assets; and 0.08% of the Fund's average daily net assets in excess of $600 million. For the year ended December 31, 1995, the Funds paid $61,800 (net of fee waivers of $5,000) and $23,700 (net of fee waivers of $1,900), respectively, to PFPC, Inc., BISYS Fund Services' predecessor, in administration fees under the Administrative Services Agreement for the Growth and Income Fund and Small Cap Fund, respectively. For the period July 1, 1994 to December 31, 1994, the Growth and Income and Small Cap Funds paid $33,295 (net of fee waivers of $3,699) and $10,459 (net of fee waivers of $1,162), respectively, to PFPC, Inc. in administration fees. HSBC Americas, the predecessor to PFPC, Inc., earned $22,091 (net of fee waivers of $4,687) and $6,110 (net of fee waivers of $1,060) for the six months ended June 30, 1994 for the Growth and Income Fund and Small Cap Fund, respectively. For the year ended December 31, 1993, the Growth and Income Fund paid $46,651 in administration fees, to HSBC Americas. For the period January 4, 1993 (commencement of operations) to December 31, 1993, HSBC Americas waived its entire administration fee totalling $9,390 for the Small Cap Fund. For the year ended December 31, 1995, the Growth and Income and Small Cap Funds paid $20,014 and $7,671, respectively, to HSBC Americas in co- administration fees under the Co-Administration Agreement. FEES AND EXPENSES The Growth and Income Fund. As compensation for its advisory and -------------------------- management services, HSBC Americas is paid a monthly fee with respect to the Total Return Fund at the following annual rates: Portion of average daily value of net assets of the Fund Advisory ------------------------------ -------- Not exceeding $400 million............ 0.550% In excess of $400 million but not exceeding $800 million.......... 0.505% In excess of $800 million but not exceeding $1.2 billion.......... 0.460% In excess of $1.2 billion but not exceeding $1.6 billion.......... 0.415% In excess of $1.6 billion but not exceeding $2 billion............ 0.370% In excess of $2 billion............... 0.315% For the years ended December 31, 1995 and 1994, HSBC Americas earned $367,300 and $377,042, respectively, in advisory fees (net of fee waivers of $ 0 and $36,828, respectively). For the year ended December 31, 1993, HSBC Americas waived its entire fee for advisory services of $366,540. The Small Cap Fund. As compensation for its advisory and management ------------------ services, HSBC Americas is paid a monthly fee with respect to the Small Cap Fund at the following annual rates: -12- Portion of average daily value of net assets of the Fund Advisory ------------------------------ -------- Not exceeding $400 million............. 0.700% In excess of $400 million but not exceeding $800 million........... 0.645% In excess of $800 million but not exceeding $1.2 billion........... 0.590% In excess of $1.2 billion but not exceeding $1.6 billion........... 0.535% In excess of $1.6 billion but not exceeding $2 billion............. 0.480% In excess of $2 billion................ 0.415% As compensation for its management services with respect to the Small Cap Fund, ICI is paid by HSBC Americas a monthly fee at an annual rate not to exceed 0.50% of average daily net assets up to $400 million. The fee is reduced at several breakpoints for average daily net assets in excess of $400 million up to $2 billion, at which point it becomes 0.290% of the average daily net assets in excess of $2 billion. For the years ended December 31, 1995 and 1994, HSBC Americas earned $179,300 and $150,019, respectively, in advisory fees (net of fee waivers of $ 0 and $3,027, respectively), $128,100 and $109,319, respectively, of which was - --- paid to ICI. For the period January 4, 1993 (commencement of operations) to December 31, 1993, HSBC Americas earned $54,524 in advisory fees (net of waivers of $39,376), all of which was paid to ICI. One of the states in which the shares of the Funds are qualified for sale imposes limitations on the expenses of the Funds. If in any fiscal year, the total expenses of a Fund (excluding taxes, interest, distribution expenses, brokerage commissions and other portfolio transaction expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles and extraordinary expenses, but including the advisory and administrative services fees) exceed the expense regulations of such state, HSBC Americas will reimburse the Funds in an amount equal to that excess. Although there is no certainty that these limitations will be in effect in the future, the effective limitation on an annual basis with respect to each Fund is currently 2.5% per annum of the first $30 million of the average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of average daily net assets in excess of $100 million. There were no payments or reimbursements required as a result of these expense limitations with respect to the Total Return Fund and Small Cap Fund for the period ended December 31, 1995. Except for the expenses paid by HSBC Americas under the Advisory Contract and Co-Administration Services Agreement, and by PFPC Inc. under the Administrative Services Agreement and by ICI under the Sub-Advisory Contract with respect to the Small Cap Fund, the Funds bear all costs of their operations subject to the expense limitation provisions discussed above. Expenses attributable to a Fund are charged against the assets of the Fund. The Advisory Contract, Distribution Contract, Administrative Services Agreement and Sub-Advisory Contract will continue in effect with respect to a Fund from year to year provided such continuance is approved annually (i) by the holders of a majority of the outstanding voting securities of the Fund or by the Trust's Trustees and (ii) by a majority of the Trustees who are not parties to such contracts or "interested persons" (as defined in the Investment Company Act of 1940) of any such party. Each contract may be terminated with respect to a Fund at any time, without payment of any penalty, by a vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940) or by a vote of a majority of the Trustees. The Advisory Contract, Administrative Services Contract, the Distribution Contract and Sub-Advisory -13- Contract shall terminate automatically in the event of their assignment (as defined in the Investment Company Act of 1940). The Board of Trustees of the Trust approved the continuance of each of the Fund's Advisory Contract (including Sub-Advisory Contract with respect to the Small Cap Fund), the Distribution Contract and the Administrative Services Agreement at a meeting of the Board of Trustees on January 23, 1996. Distribution Plans and Expenses ------------------------------- Each Fund has adopted a Distribution Plan and Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940, after having concluded that there is a reasonable likelihood that the Plan will benefit each Fund and its shareholders. The Plan provides for a monthly payment by each Fund to BISYS Fund Services for expenses incurred not to exceed an annual rate as follows: The Growth and Income Fund 0.50 of 1% * The Small Cap Fund 0.35 of 1% BISYS Fund Services will use all amounts received under each Plan for payments to broker-dealers or financial institutions for their assistance in distributing shares of each Fund and otherwise promoting the sale of Fund shares. BISYS Fund Services may also use all or any portions of such fee to pay expenses such as the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses associated with media advertisements and telephone services. The Plans provide for BISYS Fund Services to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plans may not be amended to increase materially the amount spent for distribution expenses without approval by a majority of each Fund's outstanding shares and approval of a majority of the non-interested Trustees. The Plans will continue in effect with respect to the Funds from year to year provided such continuance is approved annually by a vote of the Board of Trustees of the Trust and of the Trustees who are not interested persons of the Trust and have no direct or indirect financial interest in the operation of the Plans or in any agreements related to the Plans, cast in person at a meeting called for the purpose of voting on such Plans. The Board of Trustees of the Trust approved the continuance of the Plans at a meeting of the Board of Trustees on January 23, 1996. For the years ended December 31, 1995, 1994, and 1993, the Growth and Income Fund made payments totalling $46,892, $58,524, and $33,322, respectively, pursuant to its Plan. For the years ended December 31, 1995 and 1994, the Small Cap Fund made payments totalling $22,041 and $28,178, respectively, pursuant to its Plan. For the period January 4, 1993 (commencement of operations) through December 31, 1993, the Small Cap Fund made payments totalling $5,452 pursuant to its Plan. - ---------------------- * The Fund has committed not to exceed 0.35 of 1% for the next fiscal year. -14- PERFORMANCE INFORMATION The Funds from time to time may advertise total return and cumulative total return figures. Total return is the average annual compound rate of return for the periods of one year and the life of each Fund, where applicable, each ended on the last day of a recent calendar quarter. Total return quotations reflect the change in the price of each Fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in shares of each Fund. Total return is calculated by finding the average annual compound rates of return of a hypothetical investment over such periods, that would compare the initial amount to the ending redeemable value of such investment according to the following formula (total return is then expressed as a percentage): Where: P(1+T)/n/= ERV P = a hypothetical initial investment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. Cumulative total return is the rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect the change in the price of each Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in shares of each Fund. Cumulative total return is calculated by finding the rate of return of a hypothetical investment over such period, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 C = Cumulative Total Return P = a hypothetical initial investment of $1,000 ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. The average annual total return information for the shares of the Funds are as follows:
Sales Growth and Income Fund Charge/*/ NAV - ---------------------- -------- --------- One Year Ended December 31, 1995 26.41% 33.11% Five Years Ended December 31, 1995 14.16% 15.35% Inception (June 2, 1986) to December 31, 1995 11.21% 11.81%
-15-
Sales Small Cap Fund Charge/*/ NAV - -------------- -------- --------- One Year Ended December 31, 1995 19.85% 26.20% Inception (January 4, 1993) to December 31, 1995 12.88% 14.84%
* INCLUDES MAXIMUM SALES CHARGE. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. From time to time, in marketing pieces and other Fund literature, each Fund's or the Funds' total performance may be compared to the performance of broad groups of comparable funds or unmanaged indices of comparable securities. Evaluations of Fund performance made by independent sources may also be used in advertisements concerning the Funds. Sources for Fund performance information may include, but are not limited to, the following: * Barron's, a Dow Jones and Company, Inc. business and financial weekly -------- that periodically reviews mutual fund performance data. * Business Week, a national business weekly that periodically reports ------------- the performance rankings and ratings of a variety of mutual funds investing abroad. * Changing Times, The Kiplinger Magazine, a monthly investment advisory -------------------------------------- publication that periodically features the performance of a variety of securities. * Financial Times, Europe's business newspaper, which features from time --------------- to time articles on international or country-specific funds. * Forbes, a national business publication that from time to time reports ------ the performance of specific investment companies in the mutual fund industry. * Fortune, a national business publication that periodically rates the ------- performance of a variety of mutual funds. * Global Investor, a European publication that periodically reviews the --------------- performance of U.S. mutual funds investing internationally. * Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a ------------------------------------------------------------------- weekly publication of industry-wide mutual fund averages by type of fund. * Money, a monthly magazine that from time to time features both ----- specific funds and the mutual fund industry as a whole. * New York Times, a nationally distributed newspaper which regularly -------------- covers financial news. * Personal Investor, a monthly investment advisory publication that ----------------- includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings. * Sylvia Porter's Personal Finance, a monthly magazine focusing on -------------------------------- personal money management that periodically rates and ranks mutual funds by performance. -16- * Wall Street Journal, a Dow Jones and Company, Inc. newspaper which ------------------- regularly covers financial news. * Wiesenberger Investment Companies Services, an annual compendium of ------------------------------------------ information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges. DETERMINATION OF NET ASSET VALUE Each Fund's net asset value per share for the purpose of pricing and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the Funds' transfer agent is open for business. The net asset value will not be computed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per share of each Fund is computed by dividing the value of the net assets of a Fund (i.e. the value of the assets less the liabilities) by the total number of shares outstanding. All expenses, including the advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. The public offering price (net asset value of $14.77 and $14.46 for the Growth and Income Fund and Small Cap Fund, respectively, plus maximum sales charge of 5.00% of the offering price) per share at December 31, 1995 was $15.55 and $15.22 for the Growth and Income Fund and Small Cap Fund respectively. Portfolio securities are valued at the last quoted sales price as of the close of business on the day the valuation is made, or lacking any sales, at the mean between closing bid and asked prices. Price information on listed securities is taken from the exchange where the security is primarily traded. The value for each unlisted security is based on the last trade price for that security on a day in which the security is traded. The value for each unlisted security on a day such security is not traded shall be based on the mean of the bid and ask quotations for that day. The value of each security for which readily available market quotations exist will be based on a decision as to the broadest and most representative market for such security. Options on stock indices traded on national securities exchanges are valued at the close of options trading on such exchanges (which is currently 4:10 p.m., Eastern time). Stock index futures and related options, which are traded on commodities exchanges, are valued at their last sale price as of the close of such exchanges (which is currently 4:15 p.m., Eastern time). Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Short-term investments are valued at amortized cost, which approximates market value. The Board of Trustees has determined in good faith that amortized cost approximates fair market value. PORTFOLIO TRANSACTIONS The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Trustees, HSBC Americas is primarily responsible for portfolio decisions and the placing of portfolio transactions. In placing orders, it is the policy of the Funds to obtain the best results taking into account the dealer's general execution and operational facilities, the type of transaction involved and other factors such as the dealer's risk in positioning the securities involved. Brokerage may be allocated to the Distributor to the extent and in the manner permitted by applicable law, provided that in the judgment of the investment adviser the use of the Distributor is likely to result in an execution - -------------------- * Sources of Fund performance information actually used by the Funds in the past. -17- at least as favorable as that of other qualified brokers. While HSBC Americas generally seeks reasonably competitive spreads or commissions, the Funds will not necessarily be paying the lowest spread or commission available. Purchases and sales of securities will often be principal transactions in the case of debt securities and equity securities traded otherwise than on an exchange. The purchase or sale of equity securities will frequently involve the payment of a commission to a broker-dealer who effects the transaction on behalf of a Fund. Debt securities normally will be purchased or sold from or to issuers directly or to dealers serving as market makers for the securities at a net price. Generally, money market securities are traded on a net basis and do not involve brokerage commissions. Under the Investment Company Act of 1940, persons affiliated with Marine Midland, HSBC Americas, the Funds or BISYS Fund Services are prohibited from dealing with the Funds as a principal in the purchase and sale of securities except in accordance with regulations adopted by the SEC. The Funds may purchase Municipal Obligations from underwriting syndicates of which the Distributor or other affiliate is a member under certain conditions in accordance with the provisions of a rule adopted under the Investment Company Act of 1940. Under the Investment Company Act of 1940, persons affiliated with HSBC Americas, the Funds or BISYS Fund Services may act as a broker for the Funds. In order for such persons to effect any portfolio transactions for the Funds, the commissions, fees or other remuneration received by such persons must be reasonable and fair compared to the commissions, fees or other remunerations paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliate to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arms-length transaction. The Trustees of the Trust regularly review the commissions paid by the Funds to affiliated brokers. HSBC Americas may, in circumstances in which two or more dealers are in a position to offer comparable results, give preference to a dealer which has provided statistical or other research services to HSBC Americas. By allocating transactions in this manner, HSBC Americas is able to supplement its research and analysis with the views and information of securities firms. For the years ended December 31, 1995, 1994, and 1993 the Growth and Income Fund paid an aggregate of $117,652, $50,365, and $63,263, respectively, in brokerage commissions. For the years ended December 31, 1995 and 1994, the Small Cap Fund paid an aggregate of $12,091 and $7,006, respectively, in brokerage commissions. For the period January 4, 1993 (commencement of operations) through December 31, 1993, the Small Cap Fund paid an aggregate of $16,398 in brokerage commissions. PORTFOLIO TURNOVER The portfolio turnover rate measures the frequency with which a Fund's portfolio of securities is traded. Each of the Funds will attempt to purchase securities with intent of holding them for investment but may purchase and sell portfolio securities whenever the adviser believes it to be warranted (e.g., the Fund may sell portfolio securities in anticipation of an adverse market movement). The purchase and sale of portfolio securities may involve dealer mark-ups, underwriting commissions or other transaction costs. Generally, the higher the portfolio turnover rate, the higher the transaction costs to the Fund, which will generally increase the Fund's total operating expenses. In order to qualify as a regulated investment company, less than 30% of the Fund's gross income must be derived from the sale or other disposition of stock, securities or certain other investments held for less than 3 months. Although increased portfolio turnover may increase the likelihood of additional capital gains for the Funds, each Fund expects to satisfy the 30% income test. The Growth and Income Fund's portfolio turnover rate for the years ending December 31, 1995, 1994 and 1993 was 52.8%, 23.3% and 14.3%, respectively. The Small Cap Fund portfolio turnover rate for the years ended December 31, 1995 and 1994 and for the period January 4, 1993 to December 31, 1993 was 29.9%, 20.2% and 6%, respectively. -18- EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in a Fund for at least seven days may exchange those shares for shares of the other portfolios of the Trust and the HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will not be subject to any additional sales loads in the event such shareholder exchanges shares of one Fund for shares of another Fund. Shareholders of any of the HSBC Money Market Funds who exchange shares of any of such Money Market Funds for shares of any of such Funds of the Trust are charged the sales loads applicable to the Funds as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal, state and local income tax purposes and, depending on the circumstances, a gain or loss may be recognized. See the Prospectus discussion of the federal tax treatment of load reductions or eliminations in an exchange. The exchange privilege may be modified or terminated upon sixty (60) days' written notice to shareholders. Although initially there will be no limit on the number of times a shareholder may exercise the exchange privilege, the Funds reserve the right to impose such a limitation. Call or write the Funds for further details. REDEMPTIONS The proceeds of a redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for Federal, state and local income tax purposes. Any loss realized on the redemption of Fund shares held, or treated as held, for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividends received on the redeemed shares. A shareholder's account with a Fund remains open for at least one year following complete redemption and all costs during the period will be borne by the Fund. This permits an investor to resume investments in such Fund during the period in an amount of $50 or more. To be in a position to eliminate excessive shareholder expense burdens, each Fund reserves the right to adopt a policy pursuant to which it may redeem, upon not less than 30 days' notice, shares of the Fund in an account which has a value below a designated amount. However, any shareholder affected by the exercise of this right will be allowed to make additional investments prior to the date fixed for redemption to avoid liquidation of the account. The Funds may suspend the right of redemption during any period when (i) trading on the New York Stock Exchange is restricted or that Exchange is closed, other than customary weekend and holiday closings, (ii) the Securities and Exchange Commission has by order permitted such suspension or (iii) an emergency exists making disposal of portfolio securities or determination of the value of the net assets of the Funds not reasonably practicable. Although it would not normally do so, the Trust has the right to pay the redemption price in whole or in part in securities of a Fund's portfolio as prescribed by the Trustees. When a shareholder sells portfolio securities received in this fashion he would incur a brokerage charge. The Trust has, however, elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, as amended. Under that rule, the Trust must redeem its shares for cash except to the extent that the redemption payments to any shareholder -19- during any 90-day period would exceed the lesser of $250,000 or 1% of a Fund's net asset value at the beginning of such period. FEDERAL INCOME TAXES Each of the Funds has elected to be treated as a regulated investment company and qualified as such in 1995. Each Fund intends to continue to so qualify by complying with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") applicable to regulated investment companies so that it will not be liable for Federal income tax with respect to amounts distributed to shareholders in accordance with the timing requirements of the Code. In order to qualify as a regulated investment company for a taxable year, each Fund must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to loans of stock or securities and gains from the sale or other disposition of stock or securities or foreign currency gains related to investments in stock or securities or other income (including gains from options, futures or forward contracts) derived with respect to the business of investing in stock, securities or currency; (b) derive less than 30% of its gross income from the sale or other disposition of certain investments held less than three months (including stocks and securities and excluding some amounts included in income as a result of certain hedging transactions); and (c) diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of each Fund's assets is represented by cash, cash items, U.S. Government securities, securities of other regulated investment companies and other stock and securities limited, in the case of other securities for purposes of this calculation, in respect of any one issuer, to an amount not greater than 5% of each Fund's total assets or 10% of the voting stocks or securities of the issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities or stocks or securities of other regulated investment companies). As such, and by complying with the applicable provisions of the Code, a Fund will not be subject to Federal income tax on taxable income (including realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Compliance with the "30% test" described in clause (b) above may, in particular, limit a Fund's ability to engage in some transactions involving options, short-term trading and stock index futures. The amount of capital gains, if any, realized in any given year will result from sales of securities made with a view to the maintenance of a portfolio believed by each Fund's management to be most likely to attain such Fund's investment objective. Such sales and any resulting gains or losses, may therefore vary considerably from year to year. Since at the time of an investor's purchase of shares, a portion of the per share net asset value by which the purchase price is determined may be represented by realized or unrealized appreciation in each Fund's portfolio or undistributed income of such Fund, subsequent distributions (or portions thereof) on such shares may be taxable to such investor even if the net asset value of his shares is, as a result of the distributions, reduced below his cost for such shares and the distributions (or portions thereof) represent a return of a portion of his investment. Each Fund is required to report to the Internal Revenue Service (the "IRS") all distributions of taxable dividends and of capital gains, as well as the gross proceeds of share redemptions. Each Fund may be required to withhold Federal income tax at a rate of 31% ("backup withholding") from taxable dividends (including capital gain dividends) and the proceeds of redemptions of shares paid to non-corporate shareholders who have not furnished such Fund with a correct taxpayer identification number and made certain required certifications or who have been notified by the Internal Revenue Service that they are subject to backup withholding. In addition, a Fund may be required to withhold Federal income tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer identification number is incorrect or that backup withholding applies because of under reporting of interest or dividend income. -20- Distributions of taxable net investment income and net realized capital gains will be taxable as described in the Prospectus whether made in shares or in cash. In determining amounts of net realized capital gains to be distributed, any capital loss carryovers from prior years will be applied against capital gains. Shareholders receiving distributions in the form of additional shares will have a cost basis for Federal income tax purposes in each share so received equal to the net asset value of a share of the Fund on the reinvestment date. Fund distributions will also be included in individual and corporate shareholders' income on which the alternative minimum tax may be imposed. Any loss realized upon the redemption of shares held (or treated as held) for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividend received on the redeemed shares. Any loss realized upon the redemption of shares within six months after receipt of an exempt-interest dividend will be disallowed. All or a portion of a loss realized upon the redemption of shares may be disallowed to the extent shares are purchased (including shares acquired by means of reinvested dividends) within 30 days before or after such redemption. Exchanges are treated as redemptions for Federal tax purposes. Different tax treatment is accorded to accounts maintained as IRAs, including a penalty on early distributions. Shareholders should consult their tax advisers for more information. Each portfolio within the Trust will be separate for investment and accounting purposes and will be treated as a separate taxable entity for Federal income tax purposes. Provided that each Fund qualifies as a regulated investment company under the Code, it will not be required to pay Massachusetts income or excise taxes. Gains or losses on sales of stock or securities by each Fund will ordinarily be long-term capital gains or losses if the stock or securities have been held by it for more than one year. However, if an Equity Fund writes a covered call option which has an exercise price below the price of the underlying stock or security at the time the call is written, or if it acquires a put option with respect to stock or securities which have been held for less than the applicable capital gain holding period, the holding period of such stock or securities will be terminated or suspended for purposes of determining long-term capital gains treatment and will start again only when such Fund enters into a closing transaction with respect to such option or when such option expires. Each Fund will be required to treat stock index futures, options on such futures and options on the stock indices held at the end of each taxable year as having been sold at market value on the last business day of the year. For purposes of computing gain or loss, 60% of any gain or loss recognized on these deemed sales, on actual sales or on termination by closing transactions, delivery, exercise, lapse or otherwise will be treated as long-term capital gain or loss, and the remaining 40% will be treated as short-term capital gain or loss. However, under certain circumstances a Fund may be able to make an election under which these provisions would not apply to such futures and options. Current federal income tax law requires that a holder of a zero coupon security report as income each year the portion of the original issue discount on such security that accrues that year, even though the holder receives no cash payments of interest during the year. The "straddle" rules of Section 1092 of the Code may require the Funds which are permitted to engage in such transactions to defer the recognition of certain losses incurred on its transactions involving certain stock or securities, futures contracts or options. Section 1092 defines a "straddle" to include "offsetting positions" with respect to publicly traded stock or securities. A "position" is defined to include a futures contract and an option. In general, the Funds will be considered to hold offsetting positions if there is a substantial diminution of its risk of loss from holding one position by reason of its holding one or more other positions. Section 1092 generally provides that in the case of a straddle, any loss from the disposition of a position (the "loss position") in the straddle shall be recognized for any taxable year only to the extent that the amount of such loss exceeds the unrealized gains on any offsetting straddle position (the "gain position") and the unrealized gain on any successor -21- position (which is a position that is itself offsetting to the gain position and is acquired during a period commencing 30 days prior to, and ending 30 days after, the disposition of the loss position). These special tax rules applicable to options and futures transactions could affect the amount, timing and character of capital gain distributions to shareholders by causing holding period adjustments, converting short-term capital losses into long-term capital losses, and accelerating a Fund's income or deferring its losses. For purposes of the dividends-received deduction available to corporations, dividends received by the Funds from taxable domestic corporations in respect of any share of stock treated as debt-financed under the Code or held by each Fund for 45 days or less (90 days or less in the case of certain preferred stock) will not be treated as qualifying dividends. To the extent applicable, for purposes of the dividends-received deduction, the holding period of any share of stock will not include any period during which a Fund has an option or a contractual obligation to sell, or has granted certain call options with respect to, substantially identical stock or securities or, under Treasury regulations to be promulgated, the Funds may diminish their risk of loss by holding one or more other positions with respect to substantially similar or related property. It is anticipated that these rules will operate so as to reduce the portion of distributions paid by the Funds that will be eligible for the dividends-received deduction available to corporate shareholders of such Fund. The dividends-received deduction is reduced to the extent the shares of the Funds with respect to which the dividends are received are treated as debt- financed under the Code and is eliminated if the shares are deemed to have been held for less than 46 days. Corporate shareholders should also note that their basis in shares of a Fund may be reduced by the untaxed portion (i.e., the portion qualifying for - - the dividends-received deduction) of an "extraordinary dividend" if the shares have not been held for at least two years prior to declaration of the dividend. Extraordinary dividends are dividends paid during a prescribed period which equal or exceed 10% of a corporate shareholder's basis in its Fund shares or which satisfy an alternative test based on the fair market value of the shares. To the extent dividend payments received by corporate shareholders of a Fund constitute extraordinary dividends, such shareholders' basis in their Fund shares will be reduced and any gain realized upon a subsequent disposition of such shares will therefore be increased. The untaxed portion of dividends received by such shareholders is also included in adjusted alternative minimum taxable income in determining shareholders' liability under the alternative minimum tax. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge the shareholder would have owed upon purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. Each Fund is subject to a 4% nondeductible excise tax to the extent that it fails to distribute to its shareholders during each calendar year an amount equal to at least the sum of (a) 98% of its taxable ordinary investment income (excluding long-term and short-term capital gain income) for the calendar year; plus (b) 98% of its capital gain net income for the one year period ending on October 31 of such calendar year; plus (c) any ordinary investment income or capital gain net income from the preceding calendar year which was neither distributed to shareholders nor taxed to a Fund during such year. Each Fund intends to distribute to shareholders each year an amount sufficient to avoid the imposition of such excise tax. Shareholders should consult their own tax advisers with respect to the tax status of distributions from each Fund, and redemptions of shares of each Fund, in their own states and localities. Shareholders who are not United States persons should also consult their tax advisers as to the potential application of foreign and U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on dividends representing ordinary income to them. -22- SHARES OF BENEFICIAL INTEREST The authorized capitalization of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Declaration of Trust authorizes the Trustees to classify or reclassify any unissued shares of beneficial interest. Pursuant to that authority, the Board of Trustees has authorized the issuance of shares in seven investment portfolios. All shares have equal voting rights and will be voted in the aggregate, and not by class, except where voting by class is required by law or where the matter involved affects only one class. As used in the Prospectus and in this Statement of Additional Information, the term "majority", when referring to the approvals to be obtained from shareholders in connection with general matters affecting all of the Funds (e.g., election of Trustees and ratification - - of independent auditors), means the vote of a majority of each Fund's outstanding shares represented at a meeting. The term "majority", when referring to the approvals to be obtained from shareholders in connection with approval of the Advisory Contract or changing the fundamental policies of a Fund, means the vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund. Shareholders are entitled to one vote for each full share held, and fractional votes for fractional shares held. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing Trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Each share of a Fund represents an equal proportionate interest in the Fund with each other share of such Fund and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared in the discretion of the Trustees. In the event of liquidation or dissolution, shares of each Fund are entitled to receive the assets belonging to that Fund which are available for distribution, and of any general assets not belonging to such Fund which are available for distribution. Shareholders are not entitled to any preemptive rights. All shares, when issued, will be fully paid and non-assessable by each Fund. At March 31, 1996, no person owned of record or, to the knowledge of management, beneficially owned more than 5% of the outstanding shares of any Fund except as set forth below: -23- SHARES HELD & PERCENT OF CLASS
NAME AND ADDRESS OF GROWTH AND SMALL HOLDER OF RECORD INCOME FUND CAP FUND Marine Midland Bank, N.A. 4,165,210 1,704,597 Buffalo, NY 14240 92.4% 94.8% TOTAL SHARES OUTSTANDING 4,506,970 1,798,151
Marine Midland has informed the Trust that it was not the beneficial owner of any of the shares it held of record. CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT As of September 25, 1995, the Bank of New York has been retained, pursuant to a Custodian Agreement, to act as custodian for each Fund. The Bank of New York's address is 90 Washington Street, New York, New York 10286. Under the Custodian Agreement, the Custodian maintains a custody account or accounts in the name of each Fund; receives and delivers all assets for each such Fund upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each such Fund; pays all expenses of each such Fund; receives and pays out cash for purchases and redemptions of shares of each such Fund and pays out cash if requested for dividends on shares of each such Fund, and maintains records for the foregoing services. Under the Custodian Agreement, each such Fund has agreed to pay the Custodian for furnishing custodian services a fee for certain transaction charges and out-of-pocket expenses. For the period from September 25, 1995 to December 31, 1995, the Bank of New York received $2,681 for custody services for the Growth and Income Fund. For the period January 1, 1995 to September 25, 1995 and the years ended December 31, 1994 and 1993, Marine Midland received $8,200, $8,070, and $12,040, respectively, (all of which was paid by HSBC Americas) from the Growth and Income Fund for custody services. For the period from January 1, 1995 to September 25, 1995 and for the year ended December 31, 1994, HSBC Americas paid Marine Midland $5,535 and $3,744, respectively, for custody services with respect to the Small Cap Fund. For the period January 4, 1993 (commencement of operations) through December 31, 1993, HSBC Americas paid the Small Cap Fund's entire custodial fee totalling approximately $7,307. The Board of Trustees has authorized the Custodian in its capacity as custodian of each such Fund to enter into Subcustodian Agreements with banks that qualify under the Investment Company Act of 1940 to act as subcustodians with respect to certain securities in each Fund's portfolio. BISYS Fund Services has been retained by the Trust to act as transfer agent and dividend disbursing agent for the Funds. Under the Agency Agreement, BISYS Fund Services performs general transfer agency and dividend disbursing services. It maintains an account in the name of each shareholder of record in each Fund reflecting purchases, redemptions, daily dividend accruals and monthly dividend disbursements, processes purchase and redemption requests, issues and redeems shares of each Fund, addresses and mails all communications by each Fund to its shareholders, including financial reports, other reports to shareholders, dividend and distribution notices, tax notices and proxy material for its shareholder meetings, and maintains records for the foregoing services. Under the Agency Agreement, each Fund has agreed to pay BISYS Fund -24- Services $25.00 per account and subaccount per annum. In addition, the Funds have agreed to pay BISYS Fund Services certain transaction charges, wire charges and out-of-pocket expenses incurred by BISYS Fund Services. PFPC Inc. was paid $35,052 from the Growth and Income Fund for transfer agency services for the fiscal year ending December 31, 1995. PFPC Inc. and its predecessor, HSBC Americas, were paid $22,291 in the aggregate from the Growth and Income Fund for transfer agency services for the fiscal year ended December 31, 1994. For the year ended December 31, 1993, HSBC Americas waived its entire fee of $8,885 and incurred no expenses payable by the Growth and Income Fund for transfer agency and sub-transfer agency services. For the year ended December 31, 1995, PFPC Inc.'s predecessor, HSBC Americas, was paid $14,619 in the aggregate by the Small Cap Fund for transfer agency services. PFPC Inc.'s predecessor, HSBC Americas, was paid $12,045 in the aggregate from the Small Cap Fund for transfer agency services for the year ended December 31, 1994. For the period January 4, 1993 (commencement of operations) through December 31, 1993, HSBC Americas waived its entire transfer agency fee totalling approximately $6,207 with respect to the Small Cap Fund. INDEPENDENT AUDITORS Ernst & Young LLP serves as the independent auditors for the Funds. Ernst & Young LLP provides audit services, tax return preparation and assistance and consultation in connection with review of Securities and Exchange Commission filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York 10019. EXPERTS The financial statements audited by Ernst & Young LLP have been included in this Statement of Additional Information for the year ended December 31, 1995 with respect to the Growth and Income Fund and the Small Cap Fund in reliance on their reports, given on the authority of that firm as experts in auditing and accounting. -25- ================================================================================ HSBC Mutual Funds Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ International Equity Fund 3435 Stelzer Road, Columbus, Ohio 43219 Information: (800) 634-2536 HSBC ASSET MANAGEMENT AMERICAS INC. --Investment Adviser and Co-Administrator BISYS FUNDS SERVICES--Distributor - -------------------------------------------------------------------------------- HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust (the "Trust") was organized in Massachusetts on November 1, 1989 as a Massachusetts business trust and is an open-end, management investment company with multiple investment portfolios, including the diversified International Equity Fund (the "Fund"). The Fund's investment objective is to seek to provide investors with long-term capital appreciation by investing at least 80% of its total assets in equity securities (including American and European Depositary Receipts) issued by companies based outside of the United States. The balance of the Fund's assets will be invested in equity and debt securities of companies based in the United States and outside of the United States including bonds and money market instruments. Dividend income is expected to be incidental to the Fund's investment objective. The Fund may also use other investment practices to enhance return or to hedge against fluctuations in the value of portfolio securities. See "Investment Objectives and Policies -- Other Investment Practices" in this Prospectus. The Fund's investment adviser is HSBC Asset Management Americas Inc. ("HSBC Americas" or the "Adviser"), the North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation) and Marine Midland Bank (the "HSBC Group"). See "Management of the Fund" in this Prospectus. Prospective investors should be aware that shares of the Fund are not an obligation of or guaranteed or endorsed by the HSBC Group or its affiliates. In addition, such shares are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency and may involve investment risks, including the possible loss of principal. Shares of the Fund are offered for sale primarily through its distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain banks, broker-dealers, financial institutions and corporations (the "Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at these Participating Organizations and to perform certain services for the Fund. The International Equity Fund offers and the Prospectus relates to two classes of shares -- the Institutional Class and Service Class. The Institutional Class of shares are available to customers of financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit sharing or other benefit plan for such customers or employees. The Service Class of shares are available to all other investors. The Institutional Class shares and Service Class shares are identical in all respects, with the exception that Institutional Class shares are not subject to a sales load and do not impose any shareholder servicing or Rule 12b-1 fees. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information (the "SAI"), dated April 24, 1996, containing additional detailed information about the Fund, has been filed with the Securities and Exchange Commission and is hereby incorporated by reference into this Prospectus. A copy is available without charge and can be obtained by writing the Trust at the above address, or calling the telephone number listed above. ---------- This Prospectus should be read and retained for ready reference to information about the Fund. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. April 24, 1996
TABLE OF CONTENTS Summary of Annual Fund Operating Expenses .............................................................. 2 Financial Highlights ...................................................... 4 Investment Objective, Policies and Risk Factors ............................................................... 5 Investment Restrictions ................................................... 11 Management of the Fund .................................................... 12 Transactions with Affiliates .............................................. 16 Determination of Net Asset Value .......................................... 16 Purchase of Shares ........................................................ 17 Redemption of Shares ...................................................... 20 Exchange Privilege ........................................................ 22 Dividends, Distributions and Taxes ........................................ 22 Account Services .......................................................... 24 Transfer and Dividend Disbursing Agent and Custodian ......................................................... 25 Performance Information ................................................... 25 Shares of Beneficial Interest ............................................. 25
----------------------- SUMMARY OF ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) The purpose of the following information is to assist an investor in understanding the costs and expenses that an investor in the Fund would bear directly or indirectly in connection with the purchase of Service Class and Institutional Class shares. The information provided is based on estimated expenses for the Fund for the fiscal year ended December 31, 1995, as adjusted for estimated operating expenses and voluntary reductions of investment advisory, co-administration and 12b-1 fees.
Service Institutional Shareholder Transaction Expenses Shares Shares ------- ------------- Maximum sales charge imposed on purchases of shares of the Funds (as a percentage of offering price)...................................... 5.00% 0.00% ---- ---- Certain investors will not be subject to the sales charge. See "Purchase of Shares" in this Prospectus.) Annual Fund Operating Expenses Management Fees (net of fees not imposed)*.................................... 0.50% 0.50% 12b-1 Fees (net of fees not imposed)**........................................ 0.05% 0.00% Other Expenses Administrative Services Fee***........................................... 0.10% 0.10% Co-Administrative/Shareholder Services Fee****........................... 0.00% 0.00% Other Operating Expenses+................................................ 2.72% 2.72% ---- ---- Total Fund Operating Expenses (net of fees and expenses not imposed)*****..... 3.37% 3.32% ==== ==== Total Fund Operating Expenses Before Non-Imposition of Fees and Expense Reimbursements.......................................... 4.19% 3.80% ==== ====
Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual shareholder's own investment in the Fund. Rather, the table has been provided only to assist investors in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. 2 THE FOLLOWING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. THE EXPENSES SET FORTH ABOVE AND EXAMPLE SET FORTH BELOW REFLECT THE NON-IMPOSITION OF CERTAIN FEES AND EXPENSES. THE ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE FOLLOWING EXAMPLE ASSUMES A 5% ANNUAL RETURN; HOWEVER, THE FUND'S ACTUAL RETURN WILL VARY AND MAY BE GREATER OR LESS THAN 5%. Example: You would pay the following expenses on a $1,000 investment assuming a 5% annual return and the reinvestment of all dividends and distributions:+
Service Institutional Shares Shares ------- ------------- 1 year ................................... $ 82 $ 33 3 years .................................. $148 $102 5 years .................................. $217 $173 10 years ................................. $397 $361
- ---------- * Reflects advisory fees not imposed as a result of a voluntary waiver by the Adviser. If these fees had been imposed the Service Class and Institutional Class shares would have paid .90% for advisory fees. ** The fee under the Fund's Distribution Plan and Agreement is calculated on the basis of the average daily net assets of the Fund's Service Shares at an annual rate not to exceed 0.35%. See "Management of the Funds--Distribution Plan and Agreement". *** Reflects administrative fees not imposed as a voluntarily waiver by BISYS Fund Services of 0.05% for both share classes. See "Management of the Fund--Administrator and Shareholder Servicing Agent". **** Reflects co-administrative fees of 0.03% for both share classes and shareholder servicing fees of 0.04% for Service Shares voluntarily waived by HSBC Americas. See "Management of the Fund--Shareholder Servicing Agent, and Administrator". ***** Investors who purchase and redeem shares of the Fund through a customer account maintained at a Participating Organization may be charged additional fees by such Participating Organization related to services it provides for such Investors. See "Management of the Fund--Servicing Agreements" for additional information. + Includes a maximum sales charge for the Service Class Shares from which certain shareholders may be exempt. See "Purchase of Shares" in this Prospectus. 3 FINANCIAL HIGHLIGHTS The following supplementary financial information has been audited by Ernst & Young LLP, whose report thereon is contained in the SAI. This information should be read in conjunction with the financial statements and notes thereto which are included in the SAI and may be obtained by shareholders. Selected data for a share outstanding throughout each period:
Institutional Service Shares Shares ----------------------------------- ------------------ Period from Period from April 25, 1994 March 1, 1995 For the (Commencement of (Commencement of year ended of Operations) to of Distribution) to December 31, 1995 December 31, 1994 December 31, 1995 ----------------- ----------------- ----------------- Net asset value, beginning of period .............................. $ 9.55 $ 10.00 $ 8.81 ---------- ---------- ---------- Income From Investment Operation:** Net investment loss .......................................... (0.07) -- (0.03) Net realized and unrealized gain (loss) on investments and foreign currency transactions ........................ 0.49 (0.43) 1.20 ---------- ---------- ---------- Total from investments operations ................................. 0.42 (0.43) 1.17 ---------- ---------- ---------- Less Distributions: - ------------------ In excess of net realized loss on investments ................ -- (0.02) -- Total distributions ............................................... -- (0.02) -- Net asset value, end of period .................................... $ 9.97 $ 9.55 $ 9.98 ========== ========== ========== Total Return (a) .................................................. 4.40% (4.30)%(b) 13.28%(b) Ratios/Supplemental Data - ------------------------ Net assets (000), end of period .............................. $ 658 16,819 $ 15,253 Ratio of expenses (with fee waivers) to average net assets ............................................... 1.98% 2.16%* 2.62%* Ratio of expenses (without fee waivers) to average net assets ............................................... 3.66% 2.50%* 3.12%* Ratio of net investment loss (with fee waivers) to average net assets .................................... (1.01)% (0.04)%* (0.34)%* Ratio of net investment loss (without fee waivers) to average net assets .................................... (2.69)% (0.39)%* (0.84)%* Portfolio turnover rate ...................................... 90.31% 29.37%(b) 90.31%
- ---------- (a) Excludes sales charge. (b) Not annualized. * Annualized. ** Based on average shares outstanding. 4 INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS Investment Objective The investment objective of the Fund is to seek to provide investors with long-term capital appreciation by investing at least 80% of its total assets in equity securities (including American and European Depositary Receipts) issued by companies based outside of the United States. The balance of the Fund's assets will be invested in equity and debt securities of companies based in the United States and outside of the United States including bonds and money market instruments. Dividend income is expected to be incidental to the Fund's investment objective. There is no assurance that the Fund's objective will be achieved. Investment Policies The Fund seeks to achieve its investment objective by investing in a diversified portfolio of equity investments in a variety of non-U.S. markets with a focus on equity investments that have the potential for favorable price appreciation and currency movements. The Fund invests primarily in appreciation oriented equity securities of seasoned companies located outside the United States. The Fund will invest its assets in securities traded on as many as sixty foreign stock markets, including but not limited to Japan, the United Kingdom, Germany, France, Switzerland, the Netherlands, Sweden, Australia, Hong Kong and Singapore. Up to 20% of the Fund's total assets may be invested in "emerging markets", including but not limited to Mexico, Hong Kong, Indonesia, Malaysia, Thailand, South Africa and Peru. The Adviser believes that both the selection of individual stocks and the allocation of the Fund's assets across foreign stock markets are important in managing an international equity portfolio. Within each country, criteria for selecting particular securities are expected to include among other things, as determined by the Adviser, the issuer's managerial strength, competitive market position, prospects for profits and earnings growth, underlying asset value and relative valuation. Risk Factors Investment in securities of foreign issuers may subject the Fund to risks of foreign political, economic and legal conditions and developments that an investor would not encounter investing in equity securities issued by U.S. domestic companies. Such conditions or developments might include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation of assets of companies in which the Fund invests, nationalization of such companies, imposition of withholding taxes on dividend or interest payments, and possible difficulty in obtaining and enforcing judgments against a foreign issuer. Also, foreign securities may not be as liquid as, and may be more volatile than, comparable domestic common stocks. In addition, foreign securities markets are generally not as developed or efficient as those in the United States. There is generally less government supervision and regulation of foreign securities exchanges, brokers and companies than in the United States. Furthermore, issuers of foreign securities are subject to different, often less comprehensive, accounting, reporting and disclosure requirements than domestic issuers. The Fund, in connection with its purchases and sales of foreign securities, other than securities denominated in United States Dollars, is influenced by the returns on the currencies in which the securities are denominated. Currency risk is the risk that changes in foreign exchange rates will affect, favorably or unfavorably, the value of foreign securities held by the Fund. In a period when the U.S. Dollar generally rises against foreign currencies, the value of foreign stocks for a U.S. investor will be diminished. By contrast, in a period when the U.S. Dollar generally declines, the value of foreign securities will be enhanced. Further, brokerage costs in purchasing and selling securities in foreign securities markets generally are higher than such costs in comparable transactions in domestic securities markets, and foreign custodial costs relating to the Fund's portfolio securities are higher than domestic custodial costs. 5 Investment in emerging market countries presents risks in greater degree than, and in addition to, those presented by investment in foreign issuers in general. A number of emerging market countries restrict, to varying degrees, foreign investment in stocks. Repatriation of investment income, capital, and the proceeds of sales of foreign investors may require governmental registration and/or approval in some emerging market countries. A number of the currencies of developing countries have experienced significant declines against the U.S. dollar in recent years, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effect on the economies and securities markets of certain emerging market countries. Other Investment Practices Investment Company Securities. The Fund may invest up to 10% of its total assets in securities issued by other investment companies. Such securities will be acquired by the Fund within the limits prescribed by the Investment Company Act of 1940, as amended (the "1940 Act"), which include a prohibition against the Fund investing more than 10% of the value of its total assets in such securities. Investors should recognize that the purchase of securities of other investment companies results in duplication of expenses such that investors indirectly bear a proportionate share of the expenses of such companies including operating costs, and investment advisory and administrative services fees. Long-Term and Short-Term Corporate Debt Obligations. The Fund may invest up to 20% of its total assets in U.S. dollar-denominated debt obligations issued or guaranteed by U.S. corporations or U.S. commercial banks, U.S. dollar-denominated obligations of foreign issuers and debt obligations of foreign issuers denominated in foreign currencies. Such debt obligations include, among others, bonds, notes, debentures, commercial paper and variable rate demand notes. The bank obligations in which the Fund may invest are certificates of deposit, bankers' acceptances, and fixed time deposits. The Adviser, in choosing corporate debt securities on behalf of the Fund will evaluate each issuer based on (i) general economic and financial conditions; (ii) the specific issuer's (a) business and management, (b) cash flow, (c) earnings coverage of interest and dividends, (d) ability to operate under adverse economic conditions, (e) fair market value of assets, and (f) in the case of foreign issuers, unique political, economic or social conditions applicable to such issuer's country; and, (iii) other considerations the Adviser deems appropriate. The Fund will not purchase corporate debt securities rated below Baa by Moody's Investors Service ("Moody's") or BBB by Standard &Poor's Corporation ("S&P") or to the extent certain U.S. or foreign debt obligations are unrated or rated by other rating agencies, result in comparable quality. While "Baa"/"BBB" and comparable unrated securities may produce a higher return than higher rated securities, they are subject to a greater degree of market fluctuation and credit risk than the higher quality securities in which the Fund may invest and may be regarded as having speculative characteristics as well. Convertible Securities. The Fund may invest in convertible securities which have characteristics similar to both fixed income and equity securities. Convertible securities pay a stated rate of interest and generally are convertible into the issuer's Common Stock at a stated conversion price prior to call or redemption. Because of the conversion feature, the market value of convertible securities tends to move together with the market value of the underlying stock. As a result, the Fund's selection of convertible securities is based, to a great extent, on the potential for capital appreciation that may exist in the underlying stock. The value of convertible securities is also affected by prevailing interest rates, the credit quality of the issuer and any call provisions. 6 Depositary Receipts. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-United States banks and trust companies that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and EDRs and CDRs in bearer form are designed for use in Europe. The Fund may invest in ADRs, EDRs and CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. Repurchase Agreements. The Fund may invest in securities pursuant to repurchase agreements, whereby the seller agrees to repurchase such securities at the Fund's cost plus interest within a specified time (generally one day). While repurchase agreements involve certain risks not associated with direct investments in the underlying securities, the Fund will follow procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well-capitalized banks and registered broker-dealers having creditworthiness determined by the Adviser to be substantially equivalent to that of issuers of debt securities rated investment grade. In addition, the Fund's repurchase agreements will provide that the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement, and that the Fund's custodian will take possession of such collateral. In the event of a default or bankruptcy by the seller, the Fund will seek to liquidate such collateral. The Adviser will continually monitor the value of the underlying securities to ensure that their value always equals or exceeds the repurchase price plus accrued interest. However, the exercise of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. Repurchase agreements are considered to be loans by an investment company under the 1940 Act. It is the current policy of the Fund not to enter into repurchase agreements exceeding in the aggregate 10% of the market value of the Fund's total assets. When-Issued and Delayed-Delivery Securities. The Fund may purchase securities on a when-issued or delayed-delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the transaction. The securities so purchased are subject to market fluctuation during this period and no income is credited to the Fund until settlement takes place. To facilitate such acquisitions, the Fund will maintain with the custodian a separate account with a segregated portfolio of securities in an amount at least equal to such commitments. On the delivery dates for such transactions, the Fund will meet its obligations from maturities or sales of the securities held in the separate account and/or from cash flow. It is the current policy of the Fund not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Fund's total assets, less liabilities other than the obligations created by when-issued commitments. Forward Currency Contracts. The Fund may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or through entering into forward currency contracts to protect against uncertainty in the level of future exchange rates between a particular foreign currency and the U.S. Dollar or between foreign currencies in which the Fund's securities are or may be 7 denominated. A forward contract involves an obligation to purchase or sell a specific currency amount at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Under normal circumstances, consideration of the prospect for changes in currency exchange rates will be incorporated into the Fund's long-term investment strategies. However, the Adviser believes that it is important to have the flexibility to enter into forward currency contracts when it determines that the best interests of the Fund will be served. The Fund will convert currency on a spot basis from time to time, and investors should be aware of the transaction costs of currency conversion. When the Adviser believes that the currency of a particular country may suffer a significant decline against the U.S. Dollar or against another currency, the Fund may enter into a currency contract to sell, for a fixed amount of U.S. Dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. At the maturity of a forward contract, the Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader, obligating it to purchase, on the same maturity date, the same amount of the foreign currency. The Fund may realize a gain or loss from currency transactions. Generally, the Fund will enter into forward currency contracts only as a hedge against foreign currency exposure affecting the Fund. If the Fund enters into forward currency contracts to cover activities which are essentially speculative, the Fund will segregate cash or readily marketable securities with its custodian, or a designated sub-custodian, in an amount at all times equal to or exceeding the Fund's commitment with respect to such contracts. Options on Currencies. The Fund will purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchange or over-the-counter markets) to manage the Fund's exposure to changes in dollar exchange rates. Call options on foreign currency written by the Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by the Fund, the Fund will establish a segregated account with its custodian bank consisting of cash, U.S. government securities or other high grade liquid debt securities in an amount equal to the amount the Fund would be required to pay upon exercise of the put. Options on Securities. The Fund may write (sell) covered put and call options and purchase put and call options with a value of up to 25% of its total assets. The Fund will engage in options trading principally for hedging purposes. The Fund may write call options on a covered basis only, and will not engage in option writing strategies for speculative purposes. The Fund may purchase call options, but only to effect a "closing transaction" -- i.e., to offset an obligation pursuant to a previously written call option to prevent an underlying security from being called, or to permit the sale of the underlying security or the writing of a new option on the security prior to the outstanding option's expiration. The Fund may also purchase securities with put options, sometimes referred to as stand-by commitments, which are otherwise eligible for investment in amounts not exceeding 10% of its total assets, when the Fund anticipates a decline in the market value of securities in the Fund's portfolio. The Fund will incur costs, in the form of premiums, on options it purchases and may incur transaction costs on options that it exercises. The Fund will ordinarily realize a gain from a put option it has purchased if the value of the securities subject to the option decreases sufficiently below the exercise price to cover both the premium and the transaction costs. 8 Interest Rate Futures Contracts. The Fund may, to a limited extent, enter into interest rate futures contracts i.e., contracts for the future delivery of securities or index-based futures contracts -- that are, in the opinion of -- the Fund, sufficiently correlated with the Fund's portfolio. These investments will be made primarily in an attempt to protect the Fund against the effects of adverse changes in interest rates (i.e., "hedging"). When interest rates are increasing and portfolio values are falling, the sale of futures contracts can offset a decline in the value of the Fund's current portfolio securities. The Fund will engage in such transactions solely for bona fide hedging purposes and not for the purpose of engaging in speculative trading practices. The SAI describes these investments in greater detail. Options on Interest Rate Futures Contracts. The Fund may purchase put and call options on interest rate futures contracts, which give the Fund the right to sell or purchase the underlying futures contract for a specified price upon exercise of the option at any time during the option period. The Fund may also write (sell) put and call options on such futures contracts. For options on interest rate futures that the Fund writes, the Fund will receive a premium in return for granting to the buyer the right to sell to the Fund or to buy from the Fund the underlying futures contract for a specified price at any time during the option period. As with futures contracts, the Fund will purchase or sell options on interest rate futures contracts solely for bona fide hedging purposes and not as a means of speculative trading. Futures, Related Options and Options on Stock Indices. The Fund may attempt to reduce the risk of investment in equity securities by hedging a portion of its portfolio through the use of certain futures transactions, options on futures traded on a board of trade and options on stock indices traded on national securities exchanges. In addition, the Fund may hedge a portion of its portfolio by purchasing such instruments during a market advance or when the Adviser anticipates an advance. In attempting to hedge its portfolio, the Fund may enter into contracts for the future delivery of securities and futures contracts based on a specific security, class of securities or an index, purchase or sell options on any such futures contracts, and engage in related closing transactions. The Fund will not engage in transactions in futures contracts or options for speculation. The Fund will use these instruments only as a hedge against changes resulting from market conditions in the values of securities held in its portfolio or which it intends to purchase. A stock index assigns relative weightings to the common stocks in the index, and the index generally fluctuates with changes in the market values of these stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. The Fund will sell stock index futures only if the amount resulting from the multiplication of the then current level of the indices upon which such futures contracts are based, and the number of futures contracts which would be outstanding, do not exceed one-third of the value of the Fund's net assets. When a futures contract is executed, each party deposits with a broker or in a segregated custodial account up to 5% of the contract amount, called the "initial margin", and during the term of the contract, the amount of the deposit is adjusted based on the current value of the futures contract by payments of variation margin to or from the broker or segregated account. In the case of options on stock index futures, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to assume the option writer's position in a stock index futures contract. If the option is exercised by the holder before the last trading day during the option period, the option writer delivers the futures position, as well as any balance in the writer's futures margin account. 9 If it is exercised on the last trading day, the option writer delivers to the option holder cash in an amount equal to the difference between the option exercise price and the closing level of the relevant index on the date the option expires. In the case of options on stock indexes, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to receive cash equal to the dollar amount of the difference between the closing price of the relevant index and the option exercise price times a specified multiple, call the "multiplier." During a market decline or when the Adviser anticipates a decline, the Fund may hedge a portion of its portfolio by selling futures contracts or purchasing puts on such contracts or on a stock index in order to limit exposure to the decline. This provides an alternative to liquidation of securities positions and the corresponding costs of such liquidation. Conversely, during a market advance or when the Adviser anticipates an advance, the Fund may hedge a portion of its portfolio by purchasing futures, options on these futures or options on stock indices. This affords a hedge against the Fund not participating in a market advance at a time when it is not fully invested and serves as a temporary substitute for the purchase of individual securities which may later be purchased in a more advantageous manner. The Fund will sell options on futures and on stock indices only to close out existing hedge positions. The Fund's successful use of stock index futures contracts, options on such contracts and options on indices depends upon the Adviser's ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the price of the futures contract and the price of the securities being hedged is imperfect and the risk from imperfect correlation increases in the case of stock index futures as the composition of the Fund's portfolio diverges from the composition of the relevant index. Such imperfect correlation may prevent the Fund from achieving the intended hedge or may expose the Fund to risk of loss. In addition, if the Fund purchases futures to hedge against market advances before it can invest in common stock in an advantageous manner and the market declines, the Fund might create a loss on the futures contract. Particularly in the case of options on stock index futures and on stock indices, the Fund's ability to establish and maintain positions will depend on market liquidity. The successful utilization of hedging and risk management transactions requires skills different from those needed in the selection of the Fund's portfolio securities. The Fund believes that the Adviser possesses the skills necessary for the successful utilization of hedging and risk management transactions. Positions in options, futures and options on futures may be closed out only on an exchange which provides a secondary market for such purposes. There can be no assurance that a liquid secondary market will exist for any particular option, futures contract or related option at any specific time. Thus, it may not be possible to close such an option or futures position which could have an adverse impact on the Fund's ability to effectively hedge its securities. The Fund will enter into an option or futures position only if there appears to be a liquid secondary market for such options or futures. Pursuant to undertakings with the Commodity Futures Trading Commission ("CFTC"), (i) the Fund has agreed to restrict the use of futures and related options only for the purpose of hedging, as such term is defined in the CFTC's rules and regulations; (ii) the Fund will not enter into futures and related transactions if, immediately thereafter, the sum of the margin deposits on the Fund's existing futures and related options positions and the premiums paid for related options would exceed 5% of the market value of Fund's total assets after taking into account unrealized profits and unrealized losses on any such contract; (iii) the Fund will not market, and is not marketing, itself as a commodity pool or otherwise as a vehicle for trading in commodity futures and related options; and (iv) the Fund will segregate assets to cover the futures and options. 10 Portfolio Turnover. The Fund generally will not engage in the trading of securities for the purpose of realizing short-term profits, but will adjust its portfolio as it deems advisable in view of prevailing or anticipated market conditions to accomplish its investment objective. For example, the Fund may sell portfolio securities in anticipation of an adverse market movement. Other than for tax purposes, frequency of portfolio turnover will not be a limiting factor if the Fund considers it advantageous to purchase or sell securities. The Fund does not anticipate that its annual portfolio turnover rate will exceed 200%. Illiquid Securities. The Fund will not invest in illiquid securities if immediately after such investment more than 15% of the Fund's net assets (taken at market value) would be invested in such securities. For this purpose, illiquid securities include (a) securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market, (b) participation interests in loans that are not subject to puts; and (c) repurchase agreements not terminable within seven days. See "Repurchase Agreements" above. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation. INVESTMENT RESTRICTIONS The SAI contains more information on the Fund's Investment Policies, and also identifies the restrictions on the Fund's investment activities, which provide among other things that the Fund may not: (1) with respect to 75% of its total assets, invest more than 5% of its total assets taken at market value in the securities of any one issuer (excluding U.S. Government securities but including securities subject to repurchase agreements) or purchase more than 10% of the outstanding voting securities of any single issuer. (2) purchase the securities of issuers conducting their principal business activity in the same industry immediately after the purchase and as a result thereof, the value of the investments of the Fund in that industry would exceed 25% of the current value of the total assets of the Fund, except that there is no limitation with respect to investments in obligations of the United States Government, its agencies or instrumentalities which are backed by the full faith and credit of the United States. (3) borrow money, except that it may borrow from banks as a temporary measure for emergency purposes where such borrowing would not exceed 5% of the total assets (including amount borrowed) taken at market value. The Fund shall not purchase securities while such borrowings are outstanding. * * * * * The investment restrictions referred to above are fundamental and may be changed only when permitted by law and approved by a majority of the outstanding voting securities of the Fund. As used in this Prospectus, such approval means approval by the lesser of (i) the holders of 67% or more the shares represented in a meeting if the holders of more than 50% of the outstanding shares are present in person or by proxy or (ii) the holders of more than 50% of the outstanding shares. 11 MANAGEMENT OF THE FUND The property, affairs and business of the Fund are managed by the Board of Trustees. The Trustees elect officers who are charged with the responsibility for the day-to-day operations of the Fund and the execution of policies formulated by the Trustees. Information about the Trustees as well as the Trust's executive officers may be found in the SAI under the heading "Management--Trustees and Officers." Investment Adviser The Trust retains HSBC Asset Management Americas Inc. to act as the investment adviser for the Fund. HSBC Asset Management Americas Inc. is the North American investment affiliate of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. At December 31, 1995, the Adviser managed over $3.7 billion of assets of individuals, pension plans, corporations and institutions. Mr. James B. McHugh, Director Client Investment Services, HSBC Americas, is responsible for the day-to-day management of the Fund's portfolio. Mr. McHugh is also responsible for setting the asset allocation for domestic balanced portfolios and several international equity portfolios. He chairs the Americas Asset Allocation Committee and is also a member of HSBC's Global Investment Strategy Group. Before joining the firm in late 1994, Mr. McHugh was Director of Portfolio Management at Prudential Diversified Investment Strategies ("PDI"). At PDI, Mr. McHugh was responsible for asset allocation on over $8 billion of institutional assets, including three mutual funds. Pursuant to the Advisory Contract, the Adviser furnishes continuous investment guidance to the Trust consistent with the Fund's investment objective and policies and provides administrative assistance in connection with the operation of the Fund. Information regarding the investment performance of the Fund is contained in the Fund's Annual Report dated December 31, 1995 and may be obtained, without charge, from the Trust Sub-Advisers The Adviser retains HSBC Asset Management Europe Ltd. ("HSBC Europe"), HSBC Asset Management Hong Kong Ltd. ("HSBC Hong Kong"), HSBC Asset Management (Japan) KK ("HSBC Japan"), HSBC Asset Management Singapore ("HSBC Singapore") and HSBC Asset Management Australia Limited ("HSBC Australia") to act as sub-advisers (the "Sub-Advisers") to the Fund. HSBC Europe, HSBC Hong Kong, HSBC Japan, HSBC Singapore and HSBC Australia along with the Adviser are all investment advisory affiliates of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation). HSBC Europe is the European investment arm of HSBC Asset Management and manages equity and balanced portfolios with an emphasis on the markets of the United Kingdom and other major European securities markets. HSBC Europe also manages global fixed income portfolios. HSBC Europe manages separate accounts for pension plans, corporations, bank trust divisions, endowments and foundations and provides continuous supervision for the entire James Capel family of Unit Investment Trusts. Total assets managed by HSBC Europe amount to approximately U.S. $16.3 billion. Its principal offices are located at 6 Bevies Marks, London, EC3A 7QP, England. 12 HSBC Hong Kong is the Asia Pacific investment arm of HSBC Asset Management. HSBC Hong Kong manages approximately U.S. $10.1 billion of equity portfolios dedicated to the Pacific Rim, Pacific Basin and the emerging markets of Southeast Asia. HSBC Hong Kong was founded in 1973 and has its principal business address at 10/F Citibank Tower, 3 Garden Road, Hong Kong. It is one of the largest investment managers in the Asia Pacific region, managing accounts for corporations, pension plans and the full-line of Wardley Unit Investment Trusts. HSBC Japan provides a full range of investment services to clients investing in Japanese securities and Japanese investors investing domestically or internationally. HSBC Japan manages approximately U.S. $151 million in assets. HSBC Japan has its principal office at 6/F No. 2 Tomoecho Annex. 3-8-27 Toranomon Minato-ku, Tokyo, Japan. HSBC Singapore is one of the largest fund managers in Singapore providing a full range of investment discretionary and advisory services to government and government related bodies, corporations, trusts, charities, insurance companies, and high-net-worth individuals. HSBC Singapore's investment management activities began in Singapore in 1982 and has its principal business address at 21 Collyer Quay, #20-02, Hongkong Bank Building, Singapore 049320. HSBC Australia is one of the largest fund managers in Australia offering a full range of investment services to superannuation funds, public bodies, corporations, trusts, charities, high-net-worth individuals and unit trusts for smaller investors. HSBC Australia manages U.S. $2.72 billion in assets. HSBC Australia has its principal address at P.O. Box 291, Market Street, Melbourne, Victoria 3000, Australia. Under its Sub-Advisory Contract with the Adviser, each Sub-Adviser will undertake at its own expense to furnish the Fund and the Adviser with micro- and macro-economic research, advice and recommendations, and economic and statistical data, with respect to the Fund's investments, subject to the overall review by the Adviser and the Board of Trustees. Banking Laws Counsel to the Trust and special counsel to the Adviser, have advised HSBC Americas that HSBC Americas may perform the services for the Fund contemplated by the Advisory Contract without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Such counsel has pointed out, however, that this question has not been authoritatively determined and that judicial or administrative decisions or interpretations of present Federal or state statutes and regulations relating to the permissible activities of banks or trust companies and their subsidiaries or affiliates, as well as future changes in Federal or state statutes and regulations and judicial or administrative decisions or interpretations thereof, could prevent HSBC Americas from continuing to perform such services for the Fund. If HSBC Americas were prohibited from performing any of its services for the Trust, it is expected that the Board of Trustees would recommend to the Fund's shareholders that they approve new agreements with another entity or entities qualified to perform such services and selected by the Board. Distributor BISYS Fund Services, the Distributor (the "Distributor"), has its principal office at 3435 Stelzer Road, Columbus, Ohio 43219. The Distributor will receive orders for, sell, and distribute shares of the Fund. 13 Shareholder Servicing Agent The Trust retains HSBC Americas to act as Shareholder Servicing Agent of the Service Class of the Fund in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third parties who deliver prospectuses and Fund applications, (ii) assists and trains third parties who assist customers with completing Fund applications, (iii) performs customer education, reviews Fund written communications and assists third parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of average daily Service Class net assets. Administrator The Trust retains BISYS Fund Services to act as the Administrator of the Fund in accordance with the terms of the Administrative Services Contract. Pursuant to the Administrative Services Contract, the Administrator, at its expense, generally supervises the operation of the Trust and the Fund by reviewing the expenses of the Fund monthly to ensure timing and accuracy of the Fund's operating expense budget and by providing administrative personnel, office space and administrative services reasonably necessary for the operation of the Trust and the Fund, other than those services which are provided by HSBC Americas pursuant to the Advisory Contract. The Trust also retains HSBC Americas as Co-Administrator. Pursuant to the Co-Administration Services Contract, HSBC America (i) manages the Funds' relationship with the Fund's Service Providers, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as a liaison with Fund trustees, and (iv) assists with general product management and oversight. For its services as Co-Administrator, HSBC Americas is paid an annual fee equal to 0.03% of the Fund's average daily net assets. Servicing Agreements The Fund may enter into agreements (the "Servicing Agreement") with certain banks, financial institutions and corporations (the "Participating Organizations") so that each Participating Organization handles recordkeeping and provides certain administrative services for its customers who invest in the Funds through accounts maintained at that Participating Organization. In such cases the Participating Organization or one of its nominees will be the shareholder of record as nominee for its customers and will maintain subaccounts for its customers. In addition, the Participating Organization will credit cash distributions to each customer account, process purchase and redemption requests, mail statements of all transactions with respect to each customer and, if required by law, distribute the Trust's shareholder reports and proxy statements. However, any customer of a Participating Organization may become the shareholder of record upon written requests to its Participating Organization or the Fund's Transfer Agent. Each Participating Organization will receive monthly payments which in some cases may be based upon expenses that the Participating Organization has incurred in the performance of its services under the Servicing Agreement. The payments will not exceed, on an annualized basis, an amount equal to 0.25% of the average daily value during the month of Fund shares in the subaccount of which the Participating Organization is record owner as nominee for its customers. Such payments will be separately negotiated with each Participating Organization and will vary depending upon such factors as the services provided and the costs incurred by each 14 Participating Organization. The payments may be more or less than the fees payable to BISYS for the services it provides pursuant to the Transfer Agency Agreement for similar services. The payments will be made by the Fund to the Participating Organizations pursuant to the Servicing Agreements. BISYS will not receive any compensation as transfer or dividend disbursing agent with respect to the subaccounts maintained by Participating Organizations. The Board of Trustees will review, at least quarterly, the amounts paid and the purposes for which such expenditures were made pursuant to the Servicing Agreements. Under separate agreements, HSBC Americas (not the funds) may make supplementary payments from its own revenues to a Participating Organization that agrees to perform services such as advising customers about the status of their subaccounts, the current yield and dividends declared to date and providing related services a shareholder may request. Such payments will vary depending upon such factors as the services provided and the cost incurred by each Participating Organization. Distribution Plan and Agreement The Board of Trustees of the Trust has adopted a Distribution Plan and Agreement (the "Plan") for the Service Class shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as amended, after having concluded that there is a reasonable likelihood that the Plan will benefit the Fund and the Service Class shareholders. The Plan provides with respect to the Service Class shares only for a monthly payment by the Fund to reimburse the Distributor in such amounts that they may request for expenses such as the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses associated with media advertisements and telephone services and other direct and indirect distribution-related expenses, including the payment of a monthly fee to broker-dealers for rendering distribution-related asset introduction and asset retention services. The Fund may also make payments to other broker-dealers or financial institutions for their assistance in distributing shares of the Fund and otherwise promoting the sale of the Fund's shares. The total monthly payment is based on the Fund's Service Class shares average daily net assets value during the preceding month and is calculated at an annual rate not to exceed 0.35%. The Plan provides for the Distributor to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plan may not be amended to increase materially the amount spent for distribution expenses without approval by a majority of the Fund's outstanding shares subject to the Plan and approval of a majority of the non-interested Trustees. Distribution expenses incurred in one year will not be carried forward into and reimbursed in the next year for actual expenses incurred in the previous year. Fees and Expenses The Fund pays HSBC Americas as compensation for its advisory services a monthly fee equal to an annual rate of 0.90% of the Fund's average daily net assets. As compensation for its administrative services, BISYS receives from the Fund a monthly fee equal to an annual rate of 0.15% of the Fund's average daily net assets. The Distributor is not paid a fee by the Fund, but is reimbursed for certain distribution expenses described above under "Distribution Plan and Agreement" in this Prospectus. As compensation for their services, the Sub-Advisers collectively receive fees from HSBC Americas at an annual rate not to exceed 0.45% of the Fund's average daily net assets. HSBC Americas and the Sub-Advisers may agree in advance not to impose a portion of their fees in the future. 15 Investors who purchase and redeem shares of the Fund through a customer account maintained at a Participating Organization may be charged one or more of the following types of fees by Participating Organizations, as agreed upon by the Participating Organization and the investor, with respect to the customer services provided by the Participating Organization: account fees (a fixed amount per month or per year); transaction fees (a fixed amount per transaction processed); compensating balance requirements (a minimum dollar amount a customer must maintain in order to obtain the services offered); or account maintenance fees (a periodic charge based upon a percentage of the assets in the account or of the dividends paid on those assets). TRANSACTIONS WITH AFFILIATES Broker-dealers which are affiliates of HSBC Americas may act as brokers for the Fund. At all times, however, their commissions, fees or other charges must be reasonable and fair in comparison with those that would be paid to unaffiliated firms for comparable transactions. The Fund will not do business with nor pay commissions to affiliates of HSBC Americas in any portfolio transactions where they act as principal. In placing orders for the purchase and sale of portfolio securities, the Fund seeks the best execution at the most favorable price, considering all of the circumstances. The Advisor may consider sales of shares of the Fund and of other HSBC Funds as a factor in selecting a broker. The Adviser may cause a Fund to pay commissions higher than another broker-dealer would have charged if the Adviser believes the commission paid is reasonable in relation to the value of the research services incurred by the Adviser. DETERMINATION OF NET ASSET VALUE The Fund's net asset value per share for the purpose of pricing purchase and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the Fund's transfer agent is open for business. The net asset value will not be computed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per share of each class is computed by dividing the value of the net assets of each class (i.e., the value of the assets less the liabilities) by the total number of shares outstanding of each class. All expenses, including the management, advisory, sub-advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. Portfolio securities are valued at the last quoted sales price as of the close of business on the day the valuation is made, or lacking any sales, at the mean between closing bid and asked prices. Price information on listed securities is taken from the exchange where the security is primarily traded. The value for each unlisted security is based on the last trade price for that security on a day in which the security is traded. The value of each security for which readily available market quotations exist will be based on a decision as to the broadest and most representative market for such security. Options on stock indices traded on national securities exchanges are valued at the close of options trading on such exchanges (which is currently 4:10 p.m., Eastern time). Stock index futures and related options, which are traded on commodities exchanges, are valued at their last sale price as of the close of such exchanges (which is currently 4:15 p.m., Eastern time). Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Short-term investments are valued at amortized cost, which approximates market value. The Board of Trustees has determined in good faith that amortized cost equals fair market value. All assets and liabil- 16 ities initially expressed in foreign currencies will be translated into U.S. Dollars at the bid price of such currencies against U.S. Dollars last quoted by a major bank or broker. If such quotations are not available as of the close of the New York Stock Exchange, the rate of exchange will be determined in accordance with policies established in good faith by the Board of Trustees. PURCHASE OF SHARES Shares of the Fund are offered on a continuous basis at net asset value, plus any applicable sales charge, by the Distributor as an investment vehicle for institutions, corporations, fiduciaries and individuals. Prospectuses and accompanying sales material can be obtained from the Transfer Agent or Distributor. The minimum initial investment requirement for the Fund is $1,000. The minimum subsequent investment requirement is $50. There are no minimum investment requirements with respect to investments effected through certain automatic purchase and redemption arrangements on behalf of customer accounts maintained at Participating Organizations. The minimum investment requirements may be waived or lowered for investments effected on a group basis by certain other institutions and their employees, such as pursuant to a payroll deduction plan. All funds will be invested in full and fractional shares. The Trust reserves the right to reject any purchase order. Compensation to salespersons may vary depending upon whether Service Class or Institutional Class shares are sold. Orders for shares of the Fund will be executed at the net asset value per share next determined after receipt of an order by the dealer, plus a sales charge (Service Class shares only) varying with the amount invested in accordance with the following schedule:
Reallowance to Service Total Sales Load Organizations ------------------------------ ------------- As a % of As a % of Net Asset As a % of Offering Price Value Per Offering Price Per Share Share Per Share -------------- --------- -------------- Less than $50,000..................................... 5.00% 5.26% 4.50% $50,000 but less than $100,000........................ 4.50% 4.71% 4.00% $100,000 but less than $250,000....................... 3.75% 3.90% 3.40% $250,000 but less than $500,000....................... 2.50% 2.56% 2.25% $500,000 but less than $1 million..................... 2.00% 2.04% 1.75% $1 million and above.................................. 1.00% 1.01% 0.90%
The sales charge applicable to the purchase of Service Class shares will be waived on the following purchases: (1) by Trustees and officers of the Trust and of HSBC Funds Trust, and members of their immediate families (parents, spouses, children, brothers and sisters), (2) by directors, employees and retirees of Marine Midland Bank and its affiliates, and members of their immediate families, (3) by financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit-sharing or other benefit plan for such customers or employees, (4) by directors and employees of the Distributor, selected broker-dealers and affiliates and members of their immediate families, (5) by charitable organizations as defined in Section 501(c)(3) of 17 the Internal Revenue Code ("Charitable Organizations") or for charitable remainder trusts or life income pools established for the benefit of Charitable Organizations, (6) by registered representatives of selling brokers and members of their immediate families, (7) by individuals who have terminated their Employee Benefit Trust ("EBT") Plan or have retired and are purchasing shares in the Fund with the proceeds of their benefits checks (the EBT Plan must currently own shares of the Fund at the time of the individual's purchase), (8) by corporations, their officers or directors, partnerships, and their partners which are customers or prospective customers of Marine Midland Bank when authorized by an officer of Marine Midland Bank, and (9) by individuals who, as determined by an officer of the Fund in accordance with guidelines established by the Fund's Trustees, have purchased shares under special circumstances not involving sales expenses to dealers or the Distributor. Eligible investors should contact HSBC Americas for details. The sales load does not apply in any instance to reinvested dividends. From time to time dealers who receive dealer discounts and broker commissions from the Distributor may reallow all or a portion of such dealer discounts and broker commissions to other dealers or brokers. The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of shares of the Fund. Such compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more Funds of the Trust, and/or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold a significant number of such shares. Compensation will include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Compensation may also include the following types of non-cash compensation offered through sales contests: (1) vacation trips, including the provision of travel arrangements and lodging at luxury resorts at an exotic location, (2) tickets for entertainment events (such as concerts, cruises and sporting events) and (3) merchandise (such as clothing, trophies, clocks and pens). Dealers may not use sales of a Fund's Shares to qualify for the compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned compensation is paid for by any Fund or its shareholders. Stock certificates will not be issued with respect to the shares. The Transfer Agent shall keep accounts upon the book of the Trust for recordholders of such shares. Right of Accumulation The Fund offers to all shareholders a right of accumulation under which any shareholder may purchase shares of the Fund at the offering price applicable to the total of (a) the dollar amount then being purchased plus (b) an amount equal to the offering price of the shareholder's combined holdings of the shares of the Fund. For the right of accumulation to be exercised, a shareholder must provide at the time of purchase confirmation of the total number of shares of the Fund owned by such shareholder. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time on sixty days notice to shareholders. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares held in the name of such nominee or custodian for other plans to qualify for the right of accumulation. 18 Letter of Intent By initially investing at least $1,000 and submitting a Letter of Intent to the transfer agent, a "single purchaser" may purchase shares of the Fund and other eligible HSBC Funds (other than Money Market Funds) during a 13-month period at the reduced sales charge rates applying to the aggregate amount of the intended purchases stated in the Letter of Intent. The Letter of Intent may apply to purchases made up to 90 days before the date of submission of the Letter. Dividends and distributions of capital gains paid in shares of the Fund at net asset value will not apply towards the completion of the Letter of Intent. The Letter of Intent does not obligate a shareholder to buy the amount indicated in the Letter of Intent; however, if the intended purchases are not completed during the Letter of Intent period, the shareholder will be obligated to pay the Distributor an amount equal to the difference between the regular sales charge applicable to a single purchase of the number of shares purchased and the sales charge actually paid. For further details, including escrow provisions, see the Letter of Intent. The Fund reserves the right to amend, suspend or cease offering this program at any time. PROSPECTIVE INVESTORS WHO WISH TO OBTAIN ADDITIONAL INFORMATION CONCERNING INVESTMENT PROCEDURES SHOULD CONTACT THE TRANSFER AGENT AT: (800) 634-2536. New Account Purchase By Wire 1. Telephone: The Transfer Agent at (800) 634-2536 for instructions. Please note your bank will normally charge a fee for handling this transaction. New Account Purchase By Mail 1. Complete a Purchase Application. Indicate the services to be used. 2. Mail the Purchase Application and a check for $1,000 or more, payable to HSBC Family of Funds to the Transfer Agent at: HSBC Mutual Funds Trust, c/o BISYS, P.O. Box 163850, Columbus OH 43216-3850 Third-party checks will not be accepted. Checks must be in U.S. dollars. Please include the Fund name and your account number on all checks. Additional Purchases By Wire and Mail Additional purchases of shares may be made by wire by telephoning the Transfer Agent at (800) 634-2536 and then instructing the wiring bank to transmit the amount ($50 or more) of any additional purchase in Federal funds. Additional purchases may also be made by mail by making a check ($50 or more) payable to the HSBC Family of Funds indicating your fund account number on the check and mailing it to the Transfer Agent at the address set forth above. Purchase through Customer Accounts Purchases of shares also may be made through customer accounts maintained at Participating Organizations, including qualified Individual Retirement and Keogh Plan accounts. Purchases will be made through a customer's account only as directed by or on behalf of the customer on a direction form executed prior to the customer's first 19 purchase of shares of the Fund. For example, a customer with an account at a Participating Organization may instruct the Participating Organization to invest money in excess of a level agreed upon between the customer and the Participating Organization in shares of the Fund periodically or give other instructions to the Participating Organization within limits prescribed by that Participating Organization. Automatic Investment Plan Investors may make regular monthly investments of $50 or more in shares automatically from a checking or savings account if their bank is a member of automated clearing house (ACH). Upon written authorization, the Transfer Agent will electronically debit the investor's checking or savings account each month and use the proceeds to purchase shares for the investor's account. Approval by the investor's bank is required, so that establishment of a program may require at least 30 days. The authorized amount and/or bank information may be changed or the program terminated at any time by writing to the Transfer Agent. A reasonable period (usually up to 15 days) may be required after receipt of such instructions to implement them. The purchase application contains the requirements applicable to this plan. The Trust reserves the right to amend, suspend or cease offering this program at any time without prior notice. REDEMPTION OF SHARES Upon receipt by the Transfer Agent of a redemption request in proper form ($50 minimum), shares of the Fund will be redeemed at their next determined net asset value. See "Determination of Net Asset Value" in this Prospectus. For the shareholder's convenience, the Trust has established several different direct redemption procedures. Redemptions of shares purchased by check will be effected immediately upon clearance of the purchase check, which may take up to 15 days after those shares have been credited to the shareholder's account. A redemption of shares is a taxable transaction on which gain or loss may be recognized for tax purposes. The Fund reserves the right to redeem (on 30 days' notice) accounts whose values shareholders have reduced to $500 or less. Redemption By Mail 1. Complete a letter of instruction indicating the Fund, the account number and either the dollar amount or number of shares to be redeemed. 2. Sign the letter of instruction in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, the signature(s) must be guaranteed by a bank, trust company, broker, dealer, credit union, securities exchange or association, clearing agency or savings association. Signature guarantees by notaries public are not acceptable. Further documentation, such as copies of corporate resolution and instruments of authority, may be requested from corporations, administrators, executors, personal representatives, trustees or custodians to evidence the authority of the person or entity making the redemption request. 4. If shares to be redeemed are held in certificate form, enclose the certificates with the letter. Do not sign the certificates and for your protection use registered mail. 20 5. Mail the letter to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. Checks for redemption proceeds will normally be mailed within seven days to the shareholder's address of record. Upon request, the proceeds of a redemption amounting to $1,000 or more will be sent by wire to the shareholder's predesignated bank account. Please note a wire transfer fee will normally be charged. When proceeds of a redemption are to be paid to someone other than the shareholder, either by wire or check, the signature(s) on the letter of instruction must be guaranteed regardless of the amount of the redemption. Redemption By Expedited Redemption Service If shares are held in book credit form and the Expedited Redemption Service has been elected on the Purchase Application on file with the Trust's Transfer Agent, redemption of shares may be requested on any day the Transfer Agent is open for business by telephone or letter. A signature guarantee is not required. 1. Telephone the request to the Transfer Agent at (800) 634-2536; or 2. Mail the request to the Transfer Agent at the address set forth under "Purchase of Shares" in this Prospectus. Proceeds of Expedited Redemptions of $1,000 or more will be wired to the shareholder's bank indicated in the Purchase Application. If an Expedited Redemption request is received by the Trust's transfer agent by 4:00 p.m. (Eastern time) on a day the transfer agent is open for business, the redemption proceeds will be transmitted to the shareholder's bank on the next business day. A check for proceeds of less than $1,000 will be mailed to the shareholder's address of record. The Fund's Transfer Agent employs reasonable procedures to confirm that instructions communicated by telephone are genuine. If the Transfer Agent fails to employ such reasonable procedures, the Transfer Agent may be liable for any loss, damage or expense arising out of any telephone transactions purporting to be on a shareholder's behalf. In order to assure the accuracy of instructions received by telephone, the transfer agent requires some form of personal identification prior to acting upon instructions received by telephone, records telephone instructions and provides written confirmation to investors of such transactions. Systematic Withdrawal Plan An owner of $10,000 or more of shares of the Fund may elect to have periodic redemptions from his account to be paid on a monthly basis. The minimum periodic payment is $50. A sufficient number of shares to make the scheduled redemption will be redeemed on the first or the fifteenth day of the month. Redemptions for the purpose of making such payments may reduce or even exhaust the account if your monthly checks exceed the dividend, interest and capital appreciation, if any, on your shares. A shareholder may request that these payments be sent to a predesignated bank or other designated party. Shareholders holding share certificates are not eligible to establish a Systematic Withdrawal Plan because share certificates must accompany all withdrawal requests. Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a return on your investment. Payments to you pursuant to the Systematic Withdrawal Plan are derived from the redemption of shares in your account and is a taxable transaction on which gain or loss may be recognized for Federal, state and local income tax purposes. 21 Reinstatement Privilege A shareholder in the Fund who has redeemed shares may reinvest, without a sales charge, up to the full amount of such redemption at the net asset value determined at the time of the reinvestment within 60 days of the original redemption. This privilege must be effected within 60 days of the redemption and the investor at the time of purchase must provide the number of shares redeemed within the 60 day period. The shareholder must reinvest in the same Fund and account from which the shares were redeemed. A redemption is a taxable transaction and gain or loss may be recognized for Federal income tax purposes even if the reinstatement privilege is exercised. Any loss realized upon the redemption will not be recognized as to the number of shares acquired by reinstatement, except through an adjustment in the tax basis of the shares so acquired. Redemption through Customer Accounts Investors who purchase shares through customer accounts maintained at Participating Organizations may redeem those shares only through the Participating Organization. In some cases, a customer may instruct the Participating Organization which maintains the account through which the customer purchases shares to redeem shares periodically as required to bring the customer's account balance up to a level agreed upon between the customer and the Participating Organization. If a redemption request with respect to such an automatic redemption arrangement is received by the transfer agent by 4:00 p.m. (Eastern time) on a day the Transfer Agent is open for business, the redemption proceeds will be transmitted on the next business day to the investor's customer account (unless otherwise specified by the Participating Organization). EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in a Fund for at least seven days may exchange shares of one Fund for shares of any of the other portfolios of the Trust and the Mariner Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will be subject only to that portion of the sales load of the Fund into which the shareholder is exchanging which exceeds the sales load originally paid by the shareholder. The Transfer Agent must be advised of the applicability of the sales charge differential when the exchange order is placed. Shareholders of any of the HSBC Money Market Funds who exchange shares of any such Money Market Funds for shares of any of the Funds of HSBC Mutual Funds Trust are charged the sales load applicable to such Funds as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal and New York State and City income tax purposes and, depending on the circumstances, a gain or loss may be recognized. The Trust reserves the right to change the terms or terminate the Exchange Privilege at any time upon at least 60 days prior written notice to shareholders. DIVIDENDS, DISTRIBUTIONS AND TAXES The Fund intends to distribute annually substantially all of its net investment income in the form of dividends. The Fund pays dividends and distributes net capital gains, if any, at least once annually. The Fund's dividend and capital gains distributions may be reinvested in additional shares or received in cash. In order to satisfy certain annual distribution requirements of the Internal Revenue Code of 1986 (the "Code"), the Fund may declare special dividend and capital gains distributions during October, November or December as of a record date in such a month. Such distributions, if paid to shareholders in the following January, 22 are deemed for Federal income tax purposes to have been paid by the Fund and received by shareholders on December 31 of the prior year. The Fund will be treated as a separate entity for Federal income tax purposes, notwithstanding that it is one of multiple series of the Trust. The Fund has elected to be treated, and has qualified and intends to continue to qualify to be treated as a regulated investment company for each taxable year by complying with the provisions of the Code applicable to regulated investment companies so that it will not be liable for Federal income tax with respect to its net investment income and net realized capital gains distributed to shareholders in accordance with the timing requirements of the Code. The Fund intends to distribute substantially all of its net investment income and net realized capital gains to its shareholders for each taxable year. Dividends derived from the Fund's taxable net investment income (if any) and the excess of net short-term capital gain over net long-term capital loss will be taxable to the Fund's shareholders as ordinary income, whether such dividends are invested in additional shares or received in cash. Distributions of the excess of net long-term capital gain over net short-term capital loss designated by the Fund as capital gain dividends will be taxable as long-term capital gains, regardless of how long a shareholder has held his Fund shares, whether they are invested in additional shares or received in cash. Dividends and distributions will generally not qualify for the dividends-received deduction for corporations. Any gain or loss realized on the redemption or exchange of Fund shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares have been held for more than one year, and otherwise as short-term capital gain or loss. However, any loss realized by a shareholder upon the redemption or exchange of shares in the Fund held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain distributions received by the shareholder with respect to such shares. Foreign exchange gains and losses realized by the Fund in connection with certain transactions involving foreign currency denominated debt securities or payables or receivables denominated in a foreign currency are subject to Section 988 of the Code which causes such gains and losses to be treated as ordinary income and losses rather than capital gains and losses and may affect the amount, timing and character of distributions to shareholders. If the Fund invests in certain "passive foreign investment companies" ("PFICs") which do not distribute their income on a regular basis, it could be subject to Federal income tax (and possibly additional interest charges) on a portion of any "excess distribution" or gain from the disposition of such shares even if it distributes such income to its shareholders. If the Fund elects to treat the PFIC as a "qualified electing fund" ("QEF") and the PFIC furnishes the Fund certain financial information in the required form, the Fund would instead be required to include in income each year a portion of the ordinary earnings and net capital gains of the QEF, regardless of whether received, and such amounts would be subject to the various distribution requirements described above. It is expected that dividends and interest from non-U.S. sources received by the Fund will be subject to non-U.S. withholding taxes. Such withholding taxes may be reduced or eliminated under the terms of applicable United States income tax treaties, and the Fund intends to undertake any procedural steps required to claim the benefits of such treaties. With respect to any non-U.S. taxes (including withholding taxes) actually paid by the Fund, if more than 50% in value of the Fund's total assets at the close of any taxable year consists of stocks or securities of any non-U.S. corporations, the Fund may elect to treat any non-U.S. taxes paid by it as paid by its sharehold- 23 ers. If the Fund does not make the election permitted under Section 853, any foreign taxes paid or accrued will represent an expense to the Fund which will reduce its investment company taxable income. Absent this election, shareholders will not be able to claim either a credit or a deduction for their pro rata portion of such taxes paid by the Fund, nor will shareholders be required to treat as part of the amounts distributed to them their pro rata portion of such taxes paid. In the event the Fund makes the election described above to pass through non-U.S. taxes to shareholders, shareholders will be required to include in income (in addition to any distributions received) their proportionate portion of the amount of non-U.S. taxes paid by the Fund and will be entitled to claim either a credit or deduction for their portion of such taxes in computing their U.S. Federal income tax liability. Availability of such a credit or deduction is subject to certain limitations. Shareholders will be informed each year in which the Fund makes the election regarding the amount and nature of foreign taxes to be included in their income for U.S. Federal income tax purposes. Each year the Fund will notify shareholders of the character of its dividends and distributions for federal income tax purposes. Depending on the residence of the shareholder for tax purposes, such dividends and distributions may also be subject to state, local or foreign tax consequences of ownership of Fund shares in their particular circumstances. Shareholders who are not U.S. persons under the Code should also consult their tax advisers as to the possible application of U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on dividends. ACCOUNT SERVICES All transactions in shares of the Fund will be reflected in confirmations for each shareholder and a quarterly shareholder statement. In those cases where a Participating Organization or its nominee is shareholder of record of shares purchased for its customer, the Trust has been advised that the statement may be transmitted to the customer in the discretion of the Participating Organization. Shareholders can write or call the Trust's transfer agent at P.O. Box 163850, Columbus, OH 43216-3850, or telephone: (800) 634-2536 with any questions relating to their investments in Fund shares. Participating Organizations or their nominees may be the shareholders of record as nominees for their customers, and may maintain subaccounts for those customers. Any such customer may become the shareholder of record upon written request to the Participating Organization, or Transfer Agent. As transfer agent, BISYS will transmit promptly to each of its customers for whom it processes purchases and redemptions of shares and to each Participating Organization copies of all reports to shareholders, proxy statements and other Trust communications. The Trust's arrangements with the transfer agent and the subtransfer agent arrangements require Participating Organizations to grant investors who purchase shares through customer accounts the opportunity to vote their shares by proxy at all shareholder meetings of the Trust. In certain cases, a customer of a Participating Organization may have given his Participating Organization the power to vote shares on his behalf. Customers with accounts at Participating Organizations should consult their Participating Organization for information concerning their rights to vote shares. 24 TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN Pursuant to an Agency Agreement, BISYS Fund Services (the "Transfer Agent") acts as the Fund's transfer and dividend disbursing agent and is responsible for maintaining account records detailing ownership of Fund shares and for crediting income, capital gains and other changes in share ownership to investors' accounts. For its services the Transfer Agent receives from the Fund an annual base fee of $25 per shareholder account plus additional transaction costs. State Street Bank and Trust Company ("State Street") is the Fund's custodian. Pursuant to the Custodian Agreement, State Street is responsible for holding the Fund's cash and portfolio securities. State Street may enter into sub-custodian agreements with certain qualified banks. PERFORMANCE INFORMATION The Fund's total return may be included in advertisements or mailings to prospective investors. The Fund may occasionally cite statistical reports concerning its performance. The Fund may also from time to time compare its performance to various unmanaged indices, such as the Morgan Stanley Capital International Index (EAFE). (See the SAI for more details concerning the various indices which might be used.) The Fund's "total return" refers to the average annual compounded rates of return over one, five and ten year periods or for the life of the Fund (which periods will be stated in the advertisement) that would equate an initial amount invested at the beginning of a stated period to the ending redeemable value of the investment, assuming the deduction of the maximum sales charge and the reinvestment of all dividend and capital gains distributions. The Fund calculates its total return by adding the total dividends paid for the period to the Fund's ending net asset value per share for that period and dividing that sum by the net asset value per share of the Fund at the beginning of the period. The Fund may also furnish total return calculations based on investments at various sales charge levels or at net asset value. Any performance data which is based on the Fund's net asset value per share would be reduced if a sales charge were taken into account. Total return figures are based on historical earnings and are not intended to indicate future performance. Shareholders of the Service Class of shares will experience a lower net return on their investment than shareholders of the Institutional Class of shares because of the sales load, Rule 12b-1 fee and shareholder servicing charge to which Service Class shareholders will be subject. Investors who purchase and redeem shares of the Fund through a customer account maintained at a Participating Organization may be charged by such Participating Organization certain fees, as agreed upon by the Participating Organization and the investor, with respect to the customer services provided by the Participating Organization. Such fees will have the effect of reducing the return for those investors. See "Management of the Funds -- Servicing Agreements" in the Prospectus. SHARES OF BENEFICIAL INTEREST The authorized capital stock of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Trust's Board of Trustees has authorized the issuance of multiple series representing shares in corresponding investment portfolios of the Trust. All shares of the Trust have equal voting rights and will be voted in the aggregate, and not by class, except where voting by class is required by law or where the matter involved affects only one class. The International Equity Fund offers and the Prospectus relates to two classes of shares -- the Institutional Class and Service Class. The Institutional Class of shares are available to customers of financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, 25 pension, profit sharing or other benefit plan for such customers or employees. The Service Class of shares are available to all other investors. The Institutional Class shares and Service Class shares are identical in all respects, with the exception that Institutional Class shares are not subject to a sales load and do not impose any shareholder servicing or Rule 12b-1 fees. All shares of the Trust issued and outstanding are fully paid and nonassessable. The Trust is not required by law to hold annual shareholder meetings and does not intend to hold such meetings; however, the Trustees are required to call a meeting for the purpose of considering the removal of persons serving as Trustee if requested to do so in writing by the holders of not less than 10% of the outstanding shares of the Trust. The Fund will be treated as a separate entity for Federal income tax purposes. For more details concerning the voting rights of shareholders, see the SAI. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing Trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Under Massachusetts law, it is possible that shareholders of a Massachusetts business trust might, under certain circumstances, be held personally liable for acts or obligations of the Trust. The Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's assets for all loss and expense of any shareholder held personally liable by reason of being or having been a shareholder of the Trust. Thus, the risk that a shareholder of the Fund could incur financial loss on account of shareholder liability is considered remote since it is limited to circumstances in which the disclaimer is inoperative and the Fund itself would be unable to meet its obligations. 26 [This page intentionally left blank] 27 ================================================================================ HSBC Mutual Funds Trust - -------------------------------------------------------------------------------- HSBC Fund Group - -------------------------------------------------------------------------------- HSBC Asset Management [LOGO] ================================================================================ HSBC(SM) Mutual Funds Trust 3435 Stelzer Road Columbus OH 43219 Information: (800) 634-2536 Investment Adviser and Co-Administrator HSBC Asset Management Americas Inc. 250 Park Avenue New York, New York 10177 Distributor Administrator Transfer Agent and Dividend Disbursing Agent BISYS Fund Services 3435 Stelzer Road Columbus OH 43219 Custodian Prospectus April 24, 1996 State Street Bank and Trust Company P.O. Box 1713 --------------------------------------- Boston, Massachusetts 02105 Fund: International Equity Fund Independent Auditors Ernst & Young LLP --------------------------------------- 787 Seventh Avenue Managed by: New York, New York 10019 HSBC Asset Management Americas Inc. Legal Counsel --------------------------------------- Baker & McKenzie Sponsored and Distributed by: 805 Third Avenue BISYS Funds Services New York, New York 10022 --------------------------------------- No dealer, salesman, or other person has been authorized to give any information or to make any representations, other than those contained in the Prospectus, in connection with the offer contained in this Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Trust, the Distributor or the Investment Adviser. This Prospectus does not constitute an offering in any state in which such offering may not lawfully be made. HSBC MUTUAL FUNDS TRUST INTERNATIONAL EQUITY FUND 3435 Stelzer Road Columbus, Ohio 43219 Information: (800) 634-2536 STATEMENT OF ADDITIONAL INFORMATION HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust (the "Trust"), is an open-end, management investment company with multiple portfolios, including the diversified International Equity Fund (the "Fund"). The investment objective of the Fund is to seek to provide investors with long-term capital appreciation by investing at least 80% of its total assets in equity securities (including American and European Depositary Receipts) issued by companies based outside of the United States. The balance of the Fund's assets will be invested in securities of companies based in the United States and outside of the United States including bonds and money market instruments. Dividend income is expected to be incidental to the Fund's investment objective. The Fund offers two classes of shares - the Institutional Class and Service Class shares. The Institutional Class shares are available to financial institutions while the Service Class shares are available to all other investors. The Institutional Class and Service Class shares are identical in all respects except that Institutional Class shares are not subject to a sales load and do not impose any shareholder servicing or Rule 12b-1 fees. See "Shares of Beneficial Interest" herein. There is no assurance that the Fund's investment objective will be achieved. Shares of the Fund are primarily offered for sale by BISYS Fund Services, the Sponsor and Distributor, as an investment vehicle for institutions, corporations, fiduciaries and individuals. Certain banks, broker-dealers, financial institutions and corporations ("Participating Organizations") have agreed to act as shareholder servicing agents for investors who maintain accounts at the Participating Organizations and to perform certain services for the Fund. This Statement of Additional Information (the "SAI") is not a prospectus and is only authorized for distribution when preceded or accompanied by the Fund Prospectus dated April 18, 1996. This SAI contains additional and more detailed information than that set forth in the Prospectus and should be read in conjunction with the Prospectus, additional copies of which may be obtained without charge from the Trust. April 18, 1996 TABLE OF CONTENTS
Page ---- Investment Policies and Risk Factors...................... 1 Investment Restrictions................................... 6 Management................................................ 8 Service Organizations..................................... 12 Performance Information................................... 13 Determination of Net Asset Value.......................... 14 Portfolio Transactions.................................... 15 Portfolio Turnover........................................ 15 Expense Limitations....................................... 16 Exchange Privilege........................................ 16 Redemptions............................................... 16 Federal Income Taxes...................................... 17 Shares of Beneficial Interest............................. 20 Custodian, Transfer Agent and Dividend Disbursing Agent... 21 Independent Auditors...................................... 21 Financial Statements.........................................
-ii- INVESTMENT POLICIES AND RISK FACTORS The following information supplements the discussion of the investment objective and policies of the Fund found under "Investment Objectives, Policies and Risk Factors" in the Prospectus. SHORT-TERM TRADING. Although the Fund will not make a practice of short- term trading, purchases and sales of securities will be made whenever necessary in the management's view to achieve the investment objective of the Fund. The management does not expect that in pursuing the Fund's investment objective unusual portfolio turnover will be required and intends to keep turnover to a minimum consistent with such investment objective. The management believes unsettled market economic conditions during certain periods require greater portfolio turnover in pursuing the Fund's investment objective than would otherwise be the case. A higher incidence of portfolio turnover will result in greater transaction costs to the Fund. During periods of relatively stable market and economic conditions, management expects that the portfolio turnover of the Fund will not exceed 200% annually. LOANS OF PORTFOLIO SECURITIES. The Fund may make loans of portfolio securities to brokers, dealers and financial institutions if cash or cash equivalent collateral, including letters of credit, equal to at least 102% of the current market value of the securities loaned (including accrued dividends and interest thereon) plus the interest payable with respect to the loan is maintained by the borrower with the Fund in a segregated account. In determining whether to lend a security to a particular broker, dealer or financial institution, the Adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. The Fund will not enter into any portfolio security lending arrangement having a duration of longer than one year. Any securities which the Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund will, if permitted by law, dispose of such collateral except for such part thereof which is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay the Fund an amount equal to any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed upon fee from a borrower which has delivered cash equivalent collateral. The Fund will not loan securities having a value which exceeds 10% of the current value of such Fund's total assets. Loans of securities will be subject to termination at the lender's or the borrower's option. The Fund may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Fund, or the Adviser. DEPOSITARY RECEIPTS. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs"), European Depository Receipts ("EDRs") and other depositary receipts. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-United States banks and trust companies that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and EDRs and CDRs in bearer form are designed for use in Europe. The Fund may invest in ADRs, EDRs and CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. There are certain risks associated with investments in unsponsored ADR and EDR programs. Because the non-U.S. company does not actively participate in the creation of the ADR or EDR program, the underlying agreement for service and payment will be between the depositary and the shareholder. The company issuing the stock underlying the ADRs or EDRs pays nothing to establish the unsponsored facility, as fees for ADR or EDR issuance and cancellation are paid by brokers. Investors directly bear the expenses associated with certificate transfer, custody and dividend payment. In an unsponsored ADR or EDR program, there also may be several depositaries with no defined legal obligations to the non-U.S. company. The duplicate depositaries may lead to marketplace confusion because there would be no central source of information to buyers, sellers and intermediaries. The efficiency of centralization gained in a sponsored program can greatly reduce the delays in delivery of dividends and annual reports. In addition, with respect to all ADRs and EDRs, there is always the risk of loss due to currency fluctuations. WRITING COVERED CALLS. The Fund may engage in the writing of covered call options (options on securities which the Fund owns) provided the options are listed on a national securities exchange. The Fund, as the writer of the option, forgoes the opportunity to profit from an increase in the market price of the underlying security above the exercise price except insofar as the premium represents such a profit. The Fund retains the risk of loss should the price of the underlying security decline below the purchase price of the underlying security minus the premium. To the extent permitted in the Prospectus, the Fund may engage in transactions for the purchase and sale of stock index options, stock index futures contracts and options on stock index futures. STOCK INDEX OPTIONS. The Fund may purchase and write put and call options on stock indexes listed on national securities exchanges for the purpose of hedging its portfolio. A stock index fluctuates with changes in the market values of the stocks included in the index. Some stock index options are based on a broad market index such as the New York Stock Exchange Composite Index, or a narrower market index such as the Standard & Poor's 100. Indexes are also based on an industry or market segment such as the American Stock Exchange Oil & Gas Index or the Computer and Business Equipment Index. Options on stock indexes are similar to options on stock, except that (a) the expiration cycles of stock index options are monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier". Receipt of this cash amount will depend upon the difference between the closing level of the stock index upon which the option is based and the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. STOCK INDEX FUTURES CONTRACTS. The Fund may enter into stock index futures contracts in order to protect the value of its common stock investments. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. As the aggregate market value of the stocks in the index changes, the value of the index also will change. In the event that the index level rises above the level at which the stock index futures contract was sold, the seller of the stock index futures contract will realize a loss determined by the difference between the two index levels at the time of expiration of the stock index futures contract, and the purchaser will realize a gain in that amount. In the event the index level falls below the level at which the stock index futures contract was sold, the seller of the stock index futures contract will realize a loss determined by the difference between the two index levels at the time of expiration of the stock index futures contract, and the purchaser will realize a gain in that amount. In the event the index level falls below the level at which the stock index futures contract was sold, the seller will recognize a gain determined by the difference between -2- the two index levels at the expiration of the stock index futures contract, and the purchaser will realize a loss. Stock index futures contracts expire on a fixed date, currently one to seven months from the date of the contract, and are settled upon expiration of the contract. The Fund intends to utilize stock index futures contracts only for the purpose of attempting to protect the value of its common stock portfolio in the event of a decline in stock prices and, therefore, usually will be the seller of stock index futures contracts. This risk management strategy is an alternative to selling securities in a portfolio and investing in money market instruments. Also, stock index futures contracts may be purchased to protect the Fund against an increase in prices of stocks which the Fund intends to purchase. If the Fund is unable to invest its cash (or cash equivalents) in stock in an orderly fashion, the Fund could purchase a stock index futures contract which may be used to offset any increase in the price of the stock. However, it is possible that the market may decline instead, resulting in a loss on the stock index futures contract. If the Fund then concludes not to invest in stock at that time, or if the price of the securities to be purchased remains constant or increases, the Fund will realize a loss on the stock index futures contract that is not offset by a reduction in the price of securities purchased. The Fund also may buy or sell stock index futures contracts to close out existing futures positions. OPTIONS ON STOCK INDEX FUTURES. The Fund may purchase and write call and put options on stock index futures contracts which are traded on a United States or foreign exchange or board of trade. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time during the option period. Upon exercise of the option, the writer of the option is obligated to convey the appropriate futures position to the holder of the option. If an option is exercised on the last trading day before the expiration date of the option, a cash settlement will be made in an amount equal to the difference between the closing price of the futures contract and the exercise price of the option. The Fund may use options on stock index futures contracts solely for bona fide hedging or other appropriate risk management purposes. If the Fund purchases a call (put) option on a futures contract, it benefits from any increase (decrease) in the value of the futures contract, but is subject to the risk of decrease (increase) in value of the futures contract. The benefits received are reduced by the amount of the premium and transaction costs paid by the Fund for the option. If market conditions do not favor the exercise of the option, the Fund's loss is limited to the amount of such premium and transaction costs paid by the Fund for the option. If the Fund writes a call (put) option on a stock index futures contract, the Fund receives a premium but assumes the risk of a rise (decline) in value in the underlying futures contract. If the option is not exercised, the Fund gains the amount of the premium, which may partially offset unfavorable changes due to interest rate or currency exchange rate fluctuations in the value of securities held or to be acquired for the Fund's portfolio. If the option is exercised, the Fund will incur a loss, which will be reduced by the amount of the premium it receives. However, depending on the degree of correlation between changes in the value of its portfolio securities (or the currency in which they are denominated) and changes in the value of futures positions, the Fund's losses from writing options on futures may be partially offset by favorable changes in the value of portfolio securities or in the cost of securities to be acquired. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. The Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. Writing of options involves the risk that there will be no market in which to effect a closing transaction. An exchange-traded option may be closed out only on an exchange that provides a secondary market for an option of the same series. Over-the-counter ("OTC") options are not generally terminable at the option of the writer and may be closed out only by negotiation with the holder. There is also no assurance that a liquid secondary market on an exchange will exist. In addition, because OTC options are issued in privately negotiated transactions exempt from registration under the Securities Act of 1933, there is no assurance that the Fund will succeed in negotiating a closing -3- out of a particular OTC option at any particular time. If the Fund, as covered call option writer, is unable to effect a closing purchase transaction in the secondary market or otherwise, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. The staff of the United States Securities and Exchange Commission (the "SEC") has taken the position that purchased options not traded on registered domestic securities exchanges and the assets used as cover for written options not traded on such exchanges are generally illiquid securities. However, the staff has also opined that, to the extent a mutual fund sells an OTC option to a primary dealer that it considers creditworthy and contracts with such primary dealer to establish a formula price at which the fund would have the absolute right to repurchase the option, the fund would only be required to treat as illiquid the portion of the assets used to cover such option equal to the formula price minus the amount by which the option is in-the-money. Pending resolution of the issue, the Fund will treat such options and, except to the extent permitted through the procedure described in the preceding sentence, assets as subject to the Fund's limitation on investments in securities that are not readily marketable. FORWARD FOREIGN EXCHANGE CONTRACTS. The Fund may enter into forward foreign exchange contracts. A forward foreign exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and its customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. At the maturity of a forward contract, the Fund may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing purchase transaction involving the purchase or sale of an offsetting contract. Closing purchase transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. The Fund may enter into forward foreign exchange contracts in several circumstances. First, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Fund anticipates the receipt in a foreign currency of dividend or interest payments on such a security which it holds, the Fund may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying transactions, a Fund will attempt to protect itself against an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received. Additionally, when management of the Fund believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and date it matures. The precise projection of short- term currency market movements is not possible, and short-term hedging provides a means of fixing the dollar value of only a portion of the Fund's foreign assets. The Fund will not enter into forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency. The Fund's custodian will place cash or liquid high grade debt securities into a segregated account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of forward foreign exchange contracts requiring the Fund to purchase foreign currencies or forward contracts entered into for non-hedging purposes. If the value of the securities placed in -4- the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Fund's commitments with respect to such contracts. The Fund generally will not enter into forward contracts with a term of greater than one year. Using forward contracts to protect the value of the Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which the Fund can achieve at some future point in time. While the Fund will enter into forward contracts to reduce currency exchange rate risks, transactions in such contracts involve certain other risks and, while the Fund may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for a Fund than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between the Fund's portfolio holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving a complete hedge or may expose the Fund to risk of foreign exchange loss. RISKS INVOLVING FUTURES TRANSACTIONS. Transactions by the Fund in futures contracts and options thereon involve certain risks. One risk in employing futures contracts and options thereon to protect against cash market price volatility is the possibility that futures prices will correlate imperfectly with the behavior of the prices of the securities in the Fund's portfolio (the portfolio securities will not be identical to the securities underlying the futures contracts). In addition, commodity exchanges generally limit the amount of fluctuation permitted in futures contract and option prices during a single trading day, and the existence of such limits may prevent the prompt liquidation of futures and option positions in certain cases. Inability to liquidate positions in a timely manner could result in the Fund incurring larger losses than would otherwise be the case. OPTION PREMIUMS. In order to comply with certain state securities regulations, the Fund has agreed to limit maximum premiums paid on put and call options on other than futures contracts to less than 2% of the Fund's net assets at any one time. ILLIQUID SECURITIES. The Fund has adopted a fundamental policy with respect to investments in illiquid securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended ("Securities Act"), securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. The Fund may also invest in restricted securities issued under Section 4(2) of the Securities Act, which exempts from registration "transactions by an issuer not involving any public offering." Section 4(2) instruments are restricted in the sense that they can only be resold through the issuing dealer and only to institutional investors; they -5- cannot be resold to the general public without registration. Restricted securities issued under Section 4(2) of the Securities Act will be treated as illiquid and subject to the Fund's investment restriction on illiquid securities. The Commission has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act applicable to resales of certain securities to qualified institutional buyers. The Investment Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this new regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. (the "NASD"). Consequently, it is the intent of the Fund to invest, pursuant to procedures established by the Board of Trustees and subject to applicable investment restrictions, in securities eligible for resale under Rule 144A which are determined to be liquid based upon the trading markets for the securities. The Investment Adviser will monitor the liquidity of restricted securities in the Fund's portfolio under the supervision of the Trustees. In reaching liquidity decisions, the Investment Adviser will consider, inter alia, the following factors: (1) the frequency of trades and quotes for the security over the course of six months or as determined in the discretion of the Investment Adviser; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers over the course of six months or as determined in the discretion of the Investment Adviser; (3) dealer undertakings to make a market in the security; (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer); and (5) other factors, if any, which the Investment Adviser deems relevant. The Investment Adviser will also monitor the purchase of Rule 144A securities to assure that the total of all Rule 144A securities held by a Fund does not exceed 10% of the Fund's average daily net assets. Rule 144A securities which are determined to be liquid based upon their trading markets will not, however, be required to be included among the securities considered to be illiquid for purposes of Investment Restriction No. 8. INVESTMENT RESTRICTIONS The Fund observes the following fundamental investment restrictions which can be changed only when permitted by law and approved by a majority of the Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented in person or by proxies or (ii) more than 50% of the outstanding shares. Except as otherwise noted, the Fund may not: (1) purchase securities on margin (but may make margin payments in connection with financial futures contracts and related options) or purchase real estate or interests therein, commodities or commodity contracts (except financial futures contracts and related options), or make loans, except loans of portfolio securities and except that the Fund may purchase or hold short-term debt securities and enter into repurchase agreements with respect to its portfolio securities described in the Prospectus. For this purpose, repurchase agreements are considered loans; (2) engage in the underwriting of securities of other issuers, except to the extent that the Fund may be deemed to be an underwriter in selling, as part of an offering registered under the Securities Act of 1933, as amended, securities which it has acquired; or participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders with other -6- accounts under the management of the Adviser to save commissions or to average prices among them is not deemed to result in a securities trading account; (3) effect a short sale of any security (other than index options or hedging strategies), or issue senior securities except as permitted in paragraph (4). For purposes of this restriction, the purchase and sale of financial futures contracts and related options does not constitute the issuance of a senior security; (4) borrow money, except that the Fund may borrow from banks as a temporary measure for emergency purposes where such borrowings would not exceed 5% of its total assets (including the amount borrowed) taken at market value; or pledge, mortgage or hypothecate its assets, except to secure indebtedness permitted by this paragraph and then only if such pledging, mortgaging or hypothecating does not exceed 5% of the Fund's total assets taken at market value. The Fund has no present intention of engaging in transactions under this paragraph; (5) purchase securities of any company with a record of less than three years' continuous operation if such purchase would cause the Fund's investments in all such companies taken at cost to exceed 5% of such Fund's total assets taken at market value; (6) invest for the purpose of exercising control over or management of any company; (7) invest more than 10% of its total assets in the securities of other investment companies; (8) invest in any security, including repurchase agreements maturing in over seven days or other illiquid investments which are subject to legal or contractual delays on resale or which are not readily marketable, if as a result more than 15% of the market value of the Fund's assets would be so invested; (9) purchase interests in oil, gas, or other mineral exploration programs or real estate and real estate mortgage loans, or oil, gas or other mineral leases, or in real estate limited partnership interests; however, this policy will not prohibit the acquisition of securities of companies engaged in the production or transmission of oil, gas, other minerals or companies which purchase or sell real estate or real estate mortgage loans; (10) purchase or retain securities of any company if, to the knowledge of the Fund, officers and trustees of the Trust and officers and directors of the Adviser who individually own more than 1/2 of 1% of the securities of that company together own beneficially more than 5% of such securities; (11) have dealings on behalf of the Fund with officers and trustees of the Fund, except for the purchase or sale of securities on an agency or commission basis, or make loans to any officers, trustees or employees of the Fund; (12) purchase a security if, as a result, it would hold more than 10% of any class of securities of such issuer or more than 10% of the outstanding voting securities of the issuer. There is no limit on the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; (13) purchase a security if, as a result, more than 25% of the value of its total assets would be invested in securities of one or more issuers conducting their principal business activities -7- in the same industry, provided that (a) this limitation shall not apply to obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; (b) wholly-owned finance companies will be considered to be in the industries of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry; (14) invest in warrants in excess of 5% of net assets, provided that within that amount, investments in warrants which are listed on the New York or American Stock Exchanges shall not exceed 2% of net assets. There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in the market value of an investment, in the net or total assets of the Fund, in the securities rating of the investment, or any other later change. MANAGEMENT TRUSTEES AND OFFICERS The principal occupations for the past five years of the Trustees and executive officers of the Trust are listed below. The address of each, unless otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. Trustees deemed to be "interested persons" of the Fund for purposes of the Investment Company Act of 1940, as amended, are indicated by an asterisk. WILLIAM B. BLUNDIN, Chief Executive Officer and Trustee* - Executive ----------------------------------- Vice President BISYS Fund Services, Inc., March 1995 to Present; Vice Chairman of Concord Holding Corporation, July 1993 to March 1995; Director and President of Concord Holding Corporation, February 1987 to July 1993; Trustee, HSBC Funds Trust. WOLFE J. FRANKL, Trustee - 40 Gooseneck Lane, Charlottesville, ------- Virginia 22901. Trustee, Excelsior Funds, Inc. , Excelsior Tax-Exempt Funds, Inc. and Excelsior Institutional Funds, Inc., (mutual funds); Trustee, IP Capital Fund II (Deutsche Bank Capital Corp.); Director, Deutsche Bank Financial, Inc.; Director, The Harbus Corporation; Trustee, HSBC Funds Trust. WILLIAM L. KUFTA, Trustee - 97 Main Street, Chatham, New Jersey 07928. ------- Chief Investment Officer, Beacon Trust Company; Senior Vice President, Pitcairn Financial Management Group from 1987 to 1991; Trustee, HSBC Funds Trust. ROBERT A. ROBINSON, Trustee - 251 Laurel Road, New Canaan, Connecticut ------- 06840. Trustee, Henrietta and E. Frederick H. Bugher Foundation; Trustee, U.S.T. Master Funds, Inc. and U.S.T. Master Tax-Exempt Funds, Inc. (mutual funds); Trustee, HSBC Funds Trust. HARALD PAUMGARTEN, Trustee -330 Madison Avenue, New York, NY 10017. ------- Director, Corporate Finance, Auerbach and Grayson; President, Paumgarten and Company since 1991; Advisory Managing Director, Lepercq de Neuflize & Co. Incorporated 1993 to1995; Director, Price Waterhouse AG 1992 to 1993; Trustee, HSBC Funds Trust. JOHN P. PFANN, Chairman and Trustee - 43 Captains Walk, Marina Cove, -------------------- Palm Coast, Florida 32137. Chairman and President, JPP Equities, Inc., 1982 to 1995; Trustee, HSBC Funds Trust. -8- ANN E. BERGIN President - First Vice President of BISYS Fund Services, --------- Inc., March 1995 to Present; Senior Vice President, Administration, Concord Financial Group, August 1991 to March 1995; Assistant Vice President, Dreyfus Service Corporation, 1982 to August 1991. WILLIAM J. TOMKO, Vice President - Vice President, BISYS Fund -------------- Services, Inc. since 1987. MARK E. NAGLE, Treasurer - Senior Vice President, Fund Accounting --------- Services, BISYS Fund Services, Inc., September 1995 to present; Senior Vice President, Fidelity Institutional Retirement Services 1993 to September 1995; Senior Vice President, Fidelity Accounting & Custody Services 1981 to 1993. MARTIN R. DEAN, Assistant Treasurer - Manager, Mutual Fund Accounting, ------------------- BISYS Fund Services since 1994; Senior Manager, KPMG Peat Marwick 1989 to 1994. STEVEN R. HOWARD, Secretary - 805 Third Avenue, New York, New York --------- 10022. Partner, Baker & McKenzie since April 1991; Partner, Gaston & Snow from 1988 to 1991; Secretary, HSBC Funds Trust since 1987. ROBERT L. TUCH, Assistant Secretary - Senior Counsel of BISYS Fund ------------------- Services, Inc., June 1991 to Present; Vice President and Associate General Counsel with Nation Securities Research Corp., July 1990 to June 1991. ALAINA V. METZ, Assistant Secretary - Chief Administrator, ------------------- Administrator and Regulatory Services of BISYS Fund Services, Inc., June 1995 to Present; Supervisor of Mutual Fund Legal Department, Alliance Capital Management, May 1989 to June 1995. Trustees of the Fund receive from the Fund an annual fee and a fee for attending each meeting of the Trustees and each committee meeting and are reimbursed for all out-of-pocket expenses relating to attendance at meetings. COMPENSATION TABLE
Estimated Total Aggregate Pension or Retirement Annual Compensation Compensation Benefits Accrued as Part Benefits Upon from the Fund from the Funds of Fund Expenses Retirement complex* - ----------------------------------------------------------------------------------------------------------- Wolfe J. Frankl, Trustee $3,647 0 N/A $22,000 William L. Kufta, Trustee $3,481 0 N/A $20,000 Harald Paumgarten, Trustee $ 0 0 N/A $ 0 John P. Pfann, Trustee $3,647 0 N/A $22,000 Robert A. Robinson, Trustee $3,647 0 N/A $22,000
_____________________ * Represents the total compensation paid to such persons during the calendar year ending December 31, 1995 (and with respect to the Fund, estimated to be paid during a full calendar year). Mr. Paumgarten was appointed as a new Trustee subsequent to December 31, 1995, and, therefore, did not receive any compensation from the Trust. Trustees that are "interested persons" do not receive compensation from the Trust in connection with their role as Trustee. -9- As of the date of this SAI the Trustees and officers of the Fund as a group owned less than 1% of the outstanding shares of the Fund. INVESTMENT ADVISER. The Fund retains HSBC Asset Management Americas, Inc. ("HSBC Americas" or the "Adviser") to act as the adviser for the Fund. HSBC Americas is the North American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking corporation) and Marine Midland Bank and is located at 250 Park Avenue, New York, New York 10177. The Advisory Contract for the Fund provides that the Adviser will manage the portfolio of the Fund and will furnish to the Fund investment guidance and policy direction in connection therewith. The Adviser has agreed to provide to the Fund, among other things, information relating to portfolio composition. Pursuant to the Advisory Contracts the Adviser also furnishes to the Trust's Board of Trustees periodic reports on the investment performance of the Fund. The Adviser has also agreed in the Advisory Contract to provide administrative assistance in connection with the operation of the Fund. Administrative services provided by the Adviser include, among other things, (i) data processing, clerical and bookkeeping services required in connection with maintaining the financial accounts and records for the Fund, (ii) compiling statistical and research data required for the preparation of reports and statements which are periodically distributed to the Fund's officers and trustees, (iii) handling general shareholder relations with Fund investors, such as advice as to the status of their accounts, the dividends declared to date and assistance with other questions related to their accounts, and (iv) compiling information required in connection with the Fund's filings with the Securities and Exchange Commission. SUB-ADVISERS. The Adviser retains HSBC Asset Management Europe Ltd., ("HSBC Europe"), HSBC Asset Management Hong Kong Ltd.,("HSBC Hong Kong"), HSBC Asset Management (Japan) KK ("HSBC Japan"), HSBC Asset Management Australia Limited ("HSBC Australia") and HSBC Asset Management Singapore Ltd. (HSBC Singapore") to act as sub-advisers (the "Sub-Advisers") to the Fund. HSBC Europe, HSBC Hong Kong, HSBC Japan, HSBC Singapore, and HSBC Australia along with the Adviser are all parts of HSBC Holdings plc (Hongkong and Shanghai Banking Corporation). HSBC Europe is the European investment arm of HSBC Asset Management and manages equity and balanced portfolios with an emphasis on the markets of the United Kingdom and other major European securities markets, the Middle East and Africa. HSBC Europe also manages global fixed income portfolios, HSBC Europe manages separate accounts for pension plans, corporations, bank trust divisions, endowments and foundations and provides continuous supervision for the entire James Capel family of Unit Investment Trusts. Total assets managed by HSBC Europe amount to approximately U.S. $16.3 billion. Its principal offices are located at 6 Beview Marks, London, EC3A, 7QP, England. HSBC Hong Kong is the Asian Pacific investment arm of HSBC Asset Management. HSBC Hong Kong manages approximately U.S. $10.1 billion of equity portfolios dedicated to the Pacific Rim, Pacific Basin and the emerging markets of Southeast Asia. HSBC Hong Kong was founded in 1973 and has its principal business address at GPO Box 8983 Hong Kong, 12/F, Bank of America Tower, 12 Harcourt Road, Hong Kong. It is one of the largest investment managers in the Asia Pacific region, managing accounts for corporations, pension plans and the full-line of Wardley Unit Investment Trusts. HSBC Japan provides a full range of investment services to clients investing in Japanese securities and Japanese investors investing domestically or internationally. HSBC Japan manage approximately U.S. $151 million in assets. HSBC Japan has its principal office at 6/F No. 2 Tomoecho Annex. 3-8-27 Toranomon Minato-ku, Tokyo, Japan. HSBC Singapore is one of the largest fund managers in Singapore, providing a full range of investment discretionary and advisory services to government and government related bodies, corporations, trusts, charities, insurance companies, and high-net-worth individuals. HSBC Singapore's investment management activities began in Singapore in 1982 and has its principal business address at 21 Collyer Quay, #20-02, Hongkong Bank Building, Singapore 049320. -10- HSBC Australia is one of the largest fund managers in Australia offering a full range of investment services to superannuation funds, public bodies, corporations, trusts, charities, high-net-worth individuals and unit trusts for smaller investors. HSBC Australian manages U.S. $2.72 billion in assets. HSBC Australia has its principal address at P.O. Box 291, Market Street, Melbourne, Victoria 3000, Australia. Pursuant to the terms of their sub-advisory contracts, HSBC Europe and HSBC Hong Kong commenced their sub-advisory services from the commencement of Fund operations. HSBC Japan and HSBC Australia commenced their sub-advisory services on July 1, 1994. HSBC Singapore commenced their sub-advisory services on April 30, 1996. Under its Sub-Advisory Contract with the Adviser, each Sub-Adviser will undertake at its own expense to furnish the Fund and the Adviser with micro- and macroeconomic research, advice and recommendations, and economic and statistical data, with respect to the Fund's investments, subject to the overall review by the Adviser and the Board of Trustees. SHAREHOLDER SERVICING AGENT. The Trust retains HSBC Americas to act as Shareholder Servicing Agent of the Fund in accordance with the terms of the Shareholder Servicing Agreement. Pursuant to the Shareholder Servicing Agreement, HSBC Americas (i) assists and trains third-parties who deliver prospectuses and Fund applications, (ii) assists and trains third-parties who assist customers with completing Fund applications, (iii) conducts customer education programs, reviews Fund communications and assists third-parties who answer customer questions, (iv) organizes and conducts investment seminars to enhance understanding of the Fund and its objectives, (v) assists personnel who effect customer purchases and redemptions and (vi) assists and supervises the activities of Participating Organizations. For its services as Shareholder Servicing Agent, HSBC Americas is paid an annual fee equal to 0.04% of the Fund's daily average net assets. DISTRIBUTOR. Shares of the Fund are offered on a continuous basis through BISYS Fund Services ("BISYS"), the Distributor, pursuant to the Distribution Contract. The Distributor is not obligated to sell any specific amount of shares. ADMINISTRATOR. Pursuant to the Administrative Services Contract, BISYS: (i) provides administrative services reasonably necessary for the operation of the Fund, (other than those services which are provided by it pursuant to the Advisory Contract); (ii) provides the Fund with office space and office facilities reasonably necessary for the operation of the Fund; and (iii) employs or associates with itself such persons as it believes appropriate to assist it in performing its obligations under the Administrative Services Contract. Effective February 1, 1996, the Board of Trustees of the Trust approved a Co-Administration Services Contract between the Fund and HSBC Americas. Pursuant to the Co-Administration Services Contract, HSBC Americas (i) manages the Fund's relationship with BISYS, the Administrator to the Fund, (ii) assists with negotiation of contracts with service providers and supervises the activities of those service providers, (iii) serves as liaison with the Board of Trustees, and (iv) assists with general product management and oversight. HSBC is paid an annual fee equal to 0.03% of the Fund's average daily net assets pursuant to the Co-Administration Services Contract. FEES AND EXPENSES. The Fund pays HSBC Americas as compensation for its advisory services a monthly fee equal to an annual rate of 0.90% of average daily net assets. As compensation for its administrative services, BISYS receives from the Fund a monthly fee equal to an annual rate of 0.15% of the average daily net assets. As compensation for their services, the Sub-Advisers receive fees from HSBC Americas at an annual rate not to exceed 0.45% of the average net assets of the Fund. HSBC Americas and the Sub-Adviser may agree in advance not to impose a portion of their fees in the future. For the year ended December 31, 1995, as Adviser and Administrator, HSBC Americas earned $149,012 (net of fee waivers of $66,081) and $24,797, respectively. -11- For the period of April 25, 1994 (commencement of operations) to December 31, 1994, as Adviser and Administrator, HSBC Americas earned $85,631 and $14,569, respectively. Except for the expenses paid by the Adviser under the Advisory and Administrative Services Contract, the Fund bears all costs of its operations. Expenses attributable to the Fund are charged against the assets of the Fund. The Advisory Contract, Distribution Contract and Administrative Services Contract will continue in effect with respect to the Fund from year to year provided such continuance is approved annually (i) by the holders of a majority of the outstanding voting securities of the Fund or by the Trust's Trustees and (ii) by a majority of the Trustees who are not parties to such contracts or "interested persons" (as defined in the Investment Company Act of 1940) of any such party. Each contract may be terminated at any time, without payment of any penalty, by a vote of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940) or by a vote of a majority of the Trustees. The Advisory Contract, Administrative Services Contract and the Distribution Contract shall terminate automatically in the event of their assignment (as defined in the Investment Company Act of 1940). DISTRIBUTION PLANS AND EXPENSES. The Service Class shares of the Fund has adopted a Distribution Plan and Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940, after having concluded that there is a reasonable likelihood that the Plan will benefit the Fund and its Service Class shareholders. The Plan provides for a monthly payment by the Service Class Shares of the Fund to BISYS Fund Services for expenses incurred not to exceed an annual rate of 0.35 of 1%. BISYS will use all amounts received under the Plan for payments to broker- dealers or financial institutions for their assistance in distributing shares of the Fund and otherwise promoting the sale of Fund shares. BISYS may also use all or any portion of such fee to pay expenses such as the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and expenses associated with media advertisements and telephone services. The Plan provides for BISYS to prepare and submit to the Board of Trustees on a quarterly basis written reports of all amounts expended pursuant to the Plan and the purpose for which such expenditures were made. The Plan may not be amended to increase materially the amount spent for distribution expenses without approval by a majority of the Fund's outstanding Service Class shares and approval of a majority of the non-interested Trustees. The Plan will continue in effect with respect to the Fund from year to year provided such continuance is approved annually by a vote of the Board of Trustees of the Trust and of the Trustees who are not interested persons of the Trust and have no direct or indirect financial interest in the operation of the Plan or in any agreements related to the Plan, cast in person at a meeting called for the purpose of voting on such Plan. The Board of Trustees of the Trust approved the continuance of the Plan at a meeting of the Board of Trustees on January 23, 1996. The Service Class shares of the Fund made payments of $7,340 for the year ended December 31, 1995. Pursuant to the Plan for the period from April 25, 1994 (commencement of operations) to December 31, 1994, the Service Class Shares of the Fund made payments of $4,960 pursuant to the Plan. SERVICE ORGANIZATIONS The Trust also contracts with banks (including Marine Midland Bank), trust companies, broker-dealers or other financial organizations ("Service Organizations") on behalf of the Fund to provide certain administrative services for the Fund at a fee of up to an annual rate of 0.25%. Services provided by Service Organizations may include among other things: providing necessary personnel and facilities to establish and maintain certain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with shareholders orders to purchase or redeem shares; verifying and guaranteeing -12- client signatures in connection with redemption orders, transfers among and changes in shareholders designating accounts; providing periodic statements showing a shareholder's account balance and, to the extent practicable, integrating such information with other client transactions; furnishing periodic and annual statements and confirmations of all purchases and redemptions of shares in a shareholder's account; transmitting proxy statements, annual reports, and updating prospectuses and other communications from the Fund to shareholders; and providing such other services as the Fund or a shareholder reasonably may request, to the extent permitted by applicable statute, rule or regulation. Some Service Organizations may impose additional or different conditions on their clients, such as requiring their clients to invest more than the minimum initial or subsequent investments specified by the Fund or charging a direct fee for servicing. If imposed, these fees would be in addition to any amounts which might be paid to the Service Organization by the Fund. Each Service Organization has agreed to transmit to its clients a schedule of any such fees. Shareholders using Service Organizations are urged to consult them regarding any such fees or conditions. The Glass-Steagall Act and other applicable laws, among other things, prohibit banks from engaging in the business of underwriting, selling or distributing securities. There currently is no precedent prohibiting banks from performing administrative and shareholder servicing functions as Service Organizations. However, judicial or administrative decisions or interpretations of such laws, as well as changes in either Federal or state statutes or regulations relating to the permissible activities of banks and their subsidiaries or affiliates, could prevent a bank from continuing to perform all or a part of its servicing activities. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. If a bank were prohibited from so acting, its shareholder clients would be permitted to remain shareholders of the Trust and alternative means for continuing the servicing of such shareholders would be sought. In that event, changes in the operation of the Trust might occur and a shareholder serviced by such a bank might no longer be able to avail itself of any services then being provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these occurrences. PERFORMANCE INFORMATION The Fund from time to time may advertise total return and cumulative total return figures. Total return is the average annual compound rate of return for the periods of one year and the life of the Fund, where applicable, each ended on the last day of a recent calendar quarter. Total return quotations reflect the change in the price of the Fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in shares of the Fund. Total return is calculated by finding the average annual compound rates of return of a hypothetical investment over such periods, that would compare the initial amount to the ending redeemable value of such investment according to the following formula (total return is then expressed as a percentage): Where: P(1+T) to the nth power = ERV P = a hypothetical initial investment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. Total return will generally be lower for the Service and Institutional Shares due to the shareholder servicing and Rule 12b-1 fees on the Service shares. -13- The average annual total return information for shares of the Fund are as follows:
Service Class Shares Sales Charge* NAV - -------------------- -------------- ------ One year ended December 31, 1995 (0.85 %) 4.40% Inception (April 25, 1994) to December 31, 1995 (3.10 %) (0.08 %) Institutional Class Shares Sales Charge* NAV - -------------------------- -------------- ------ Inception (March 1, 1995) to December 31, 1995 N/A 13.28%
* Includes maximum sales charge. Past performance not predictive of future performance. Cumulative total return is the rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect the change in the price of the Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in shares of the Fund. Cumulative total return is calculated by finding the rate of return of a hypothetical investment over such period, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 C = Cumulative Total Return P = a hypothetical initial investment of $1,000 ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. From time to time, in marketing pieces and other Fund literature, the Fund's total performance may be compared to the performance of broad groups of comparable funds or unmanaged indices of comparable securities. Evaluations of Fund performance made by independent sources may also be used in advertisements concerning the Fund. Sources for Fund performance information may include, but are not limited to, the following: Barron's, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews mutual fund performance data. Business Week, a national business weekly that periodically reports the performance rankings and ratings of a variety of mutual funds investing abroad. -14- Changing Times, The Kiplinger Magazine, a monthly investment advisory publication that periodically features the performance of a variety of securities. Financial Times, Europe's business newspaper, which features from time to time articles on international or country-specific funds. Forbes, a national business publication that from time to time reports the performance of specific investment companies in the mutual fund industry. Fortune, a national business publication that periodically rates the performance of a variety of mutual funds. Global Investor, a European publication that periodically reviews the performance of U.S. mutual funds investing internationally. Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly publication of industry-wide mutual fund averages by type of fund. Money, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole. New York Times, a nationally distributed newspaper which regularly covers financial news. Personal Investor, a monthly investment advisory publication that includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings. Sylvia Porter's Personal Finance, a monthly magazine focusing on personal money management that periodically rates and ranks mutual funds by performance. Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly covers financial news. Wiesenberger Investment Companies Services, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges. DETERMINATION OF NET ASSET VALUE The Fund's net asset value per share for the purpose of pricing and redemption orders is determined at 4:15 p.m. (Eastern time) on each day the Fund's transfer agent is open for business. The net asset value will not be computed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. The net asset value per share of the Fund is computed by dividing the value of the net assets of each class (i.e. the value of the assets less the liabilities) by the total number of shares outstanding of each class of the Fund. All expenses, including the advisory and administrative fees, are accrued daily and taken into account for the purpose of determining the net asset value. The public offering price for the Service Class Shares of the Fund (net asset value of $9.97 plus maximum sales charge of 5.00% of the offering price) was $10.49 at December 31, 1995. -15- Portfolio securities are valued at the last quoted sales price as of the close of business on the day the valuation is made, or lacking any sales, at the mean between closing bid and asked prices. Price information on listed securities is taken from the exchange where the security is primarily traded. The value for each unlisted security is based on the last trade price for that security on a day in which the security is traded. The value for each unlisted security on a day such security is not traded shall be based on the mean of the bid and ask quotations for that day. The value of each security for which readily available market quotations exist will be based on a decision as to the broadest and most representative market for such security. Options on stock indices traded on national securities exchanges are valued at the close of options trading on such exchanges (which is currently 4:10 p.m., Eastern time). Stock index futures and related options, which are traded on commodities exchanges, are valued at their last sale price as of the close of such exchanges (which is currently 4:15 p.m., Eastern time). Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Short-term investments are valued at amortized cost, which approximates market value. The Board of Trustees has determined in good faith that amortized cost equals fair market value. PORTFOLIO TRANSACTIONS The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policy established by the Trustees, the Adviser is primarily responsible for portfolio decisions and the placing of portfolio transactions. In placing orders, it is the policy of the Fund to obtain the best results taking into account the dealer's general execution and operational facilities, the type of transaction involved and other factors such as the dealer's risk in positioning the securities involved. Brokerage may be allocated to the Distributor to the extent and in the manner permitted by applicable law, provided that in the judgment of the investment adviser the use of the Distributor is likely to result in an execution at least as favorable as that of other qualified brokers. While the Adviser generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available. Purchases and sales of securities will often be principal transactions in the case of debt securities and equity securities traded otherwise than on an exchange. The purchase or sale of equity securities will frequently involve the payment of a commission to a broker-dealer who effects the transaction on behalf of a Fund. Debt securities normally will be purchased or sold from or to issuers directly or to dealers serving as market makers for the securities at a net price. Generally, money market securities are traded on a net basis and do not involve brokerage commissions. Under the Investment Company Act of 1940, persons affiliated with Marine Midland, the Adviser, the Fund or BISYS Fund Services are prohibited from dealing with the Fund as a principal in the purchase and sale of securities except in accordance with regulations adopted by the SEC. The Fund may purchase Municipal Obligations from underwriting syndicates of which the Distributor or other affiliate is a member under certain conditions in accordance with the provisions of a rule adopted under the Investment Company Act of 1940. Under the Investment Company Act of 1940, persons affiliated with the Adviser, the Fund or BISYS Fund Services may act as a broker for the Fund. In order for such persons to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by such persons must be reasonable and fair compared to the commissions, fees or other remunerations paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliate to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arms-length transaction. The Trustees of the Trust regularly review the commissions paid by the Fund to affiliated brokers. The Adviser may, in circumstances in which two or more dealers are in a position to offer comparable results, give preference to a dealer which has provided statistical or other research services to the Adviser. By allocating transactions in this manner, the Adviser is able to supplement its research and analysis with the views and information of securities firms. -16- The aggregate brokerage commissions paid by the Fund for the year ended December 31, 1995 and for the period of April 25, 1994 (commencement of operations) to December 31, 1994 was $113,904 and $102,490, respectively. The Fund paid $0 and $1,065 in brokerage commissions to affiliated brokers during the same periods. PORTFOLIO TURNOVER A Fund's portfolio turnover rate measures the frequency with which a Fund's portfolio of securities is traded. The Fund will attempt to purchase securities with intent of holding them for investment but may purchase and sell portfolio securities whenever the adviser believes it to be warranted (e.g., the Fund may sell portfolio securities in anticipation of an adverse market movement). The purchase and sale of portfolio securities may involve dealer mark-ups, underwriting commissions or other transaction costs. Generally, the higher the portfolio turnover rate, the higher the transaction costs to the Fund, which will generally increase the Fund's total operating expenses. In order to qualify as a regulated investment company, less than 30% of the Fund's gross income must be derived from the sale or other disposition of stock, securities or certain other investments held for less than 3 months. Although increased portfolio turnover may increase the likelihood of additional capital gains for the Fund, the Fund expects to satisfy the 30% income test. The Fund's portfolio turnover rate for the year ended December 31, 1995 and for the period from April 25, 1994 (commencement of operations) to December 31, 1994, was 90.3% and 29.4% (not annualized), respectively. EXPENSE LIMITATIONS If expenses borne by the Fund in any fiscal year exceed limitations imposed by applicable state securities regulations, HSBC Americas, in its capacity as investment adviser to the Fund, will reimburse the Company for any such excess to the extent required by such regulations up to the amount of the fees payable to it for such period. Any such reimbursement would be made no less frequently than the payment of fees to such organization. California is the only state which currently imposes such an expense limitation. As of the date of this SAI, the limitation is 2.5% of the first $30 million of the average net assets, 2% of the next $70 million of the average net assets and 1.5% of the remaining average net assets of funds which have registered their shares in California. Such amount, if any, will be estimated, reconciled and paid on a monthly basis. EXCHANGE PRIVILEGE Shareholders who have held all or part of their shares in the Fund for at least seven days may exchange those shares for shares of the other portfolios of the Trust and the HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of a Fund will be subject only to that portion of the sales load of the Fund into which the shareholder is exchanging which exceeds the sales load originally paid by the shareholder. Shareholders of any of the HSBC Money Market Funds who exchange shares of any of such Money Market Funds for shares of any of such Funds of HSBC Funds Trust are charged the sales loads applicable to the Fund as stated in the Prospectus. Before effecting an exchange, shareholders should review the prospectuses. Exercise of the exchange privilege is treated as a redemption for Federal income tax purposes and, depending on the circumstances, a gain or loss may be recognized. See the Prospectus discussion of the federal tax treatment of load reductions or eliminations in an exchange. The exchange privilege may be modified or terminated upon sixty (60) days' written notice to shareholders. Although initially there will be no limit on the number of times a shareholder may exercise the exchange privilege, the Fund reserves the right to impose such a limitation. Call or write the Fund for further details. REDEMPTIONS -17- The proceeds of a redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for Federal and state and local income tax purposes. Any loss realized on the redemption of Fund shares held, or treated as held, for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividends received on the redeemed shares. A shareholder's account with the Fund remains open for at least one year following complete redemption and all costs during the period will be borne by the Fund. This permits an investor to resume investments in the Fund during the period in an amount of $50 or more. To be in a position to eliminate excessive shareholder expense burdens, the Fund reserve the right to adopt a policy pursuant to which it may redeem, upon not less than 30 days' notice, shares of the Fund in an account which has a value below a designated amount. However, any shareholder affected by the exercise of this right will be allowed to make additional investments prior to the date fixed for redemption to avoid liquidation of the account. The Fund may suspend the right of redemption during any period when (i) trading on the New York Stock Exchange is restricted or that Exchange is closed, other than customary weekend and holiday closings, (ii) the Securities and Exchange Commission has by order permitted such suspension or (iii) an emergency exists making disposal of portfolio securities or determination of the value of the net assets of the Fund not reasonably practicable. Although it would not normally do so, the Trust has the right to pay the redemption price in whole or in part in securities of the Fund's portfolio as prescribed by the Trustees. When a shareholder sells portfolio securities received in this fashion he would incur a brokerage charge. The Trust has, however, elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, as amended. Under that rule, the Trust must redeem its shares for cash except to the extent that the redemption payments to any shareholder during any 90-day period would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such period. FEDERAL INCOME TAXES The Fund has elected to be treated and has qualified and intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") in 1995. The Fund intends to continue to so qualify by complying with the provisions of the Code applicable to regulated investment companies so that it will not be liable for Federal income tax with respect to amounts distributed to shareholders in accordance with the timing requirements of the Code. In order to qualify as a regulated investment company for a taxable year, the Fund must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to loans of stock or securities and gains from the sale or other disposition of stock or securities or foreign currency gains related to investments in stock or securities or other income (including gains from options, futures or forward contracts) derived with respect to the business of investing in stock, securities or currency; (b) derive less than 30% of its gross income from the sale or other disposition of certain investments held less than three months (including stocks and securities and excluding some amounts included in income as a result of certain hedging transactions); and (c) diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash, cash items, U.S. Government securities, securities of other regulated investment companies and other stock and securities limited, in the case of other securities for purposes of this calculation, in respect of any one issuer, to an amount not greater than 5% of the Fund's assets or 10% of the voting stocks or securities of the issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government securities or stocks or securities of other regulated investment companies). As such, and by complying with the applicable provisions of the Code, the Fund will not be subject to Federal income tax on taxable income (including realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Compliance with the "30% test" -18- described in clause (b) above may, in particular, limit the Fund's ability to engage in some transactions involving options, short-term trading and stock index futures. The amount of capital gains, if any, realized in any given year will result from sales of securities made with a view to the maintenance of a portfolio believed by the Fund's management to be most likely to attain the Fund's investment objective. Such sales and any resulting gains or losses, may therefore vary considerably from year to year. Since at the time of an investor's purchase of shares, a portion of the per share net asset value by which the purchase price is determined may be represented by realized or unrealized appreciation in the Fund's portfolio or undistributed income of the Fund, subsequent distributions (or portions thereof) on such shares may be taxable to such investor even if the net asset value of his shares is, as a result of the distributions, reduced below his cost for such shares and the distributions (or portions thereof) represent a return of a portion of his investment. The Fund is required to report to the Internal Revenue Service (the "IRS") all distributions of taxable dividends and of capital gains, as well as the gross proceeds of share redemptions. The Fund may be required to withhold Federal income tax at a rate of 31% ("backup withholding") from taxable dividends (including capital gain dividends) and the proceeds of redemptions of shares paid to non-corporate shareholders who have not furnished the Fund with a correct taxpayer identification number and made certain required certifications or who have been notified by the IRS that they are subject to backup withholding. In addition, the Fund may be required to withhold Federal income tax at a rate of 31% if it is notified by the IRS or a broker that the taxpayer identification number is incorrect or that backup withholding applies because of under reporting of interest or dividend income. Distributions of taxable net investment income and net realized capital gains will be taxable as described in the Prospectus whether made in shares or in cash. In determining amounts of net realized capital gains to be distributed, any capital loss carryovers from prior years will be applied against capital gains. Shareholders receiving distributions in the form of additional shares will have a cost basis for Federal income tax purposes in each share so received equal to the net asset value of a share of the Fund on the reinvestment date. Fund distributions will also be included in individual and corporate shareholders' income on which the alternative minimum tax may be imposed. Any loss realized upon the redemption of shares held (or treated as held) for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gain dividend received on the redeemed shares. Any loss realized upon the redemption of shares within six months after receipt of an exempt-interest dividend will be disallowed. All or a portion of a loss realized upon the redemption of shares may be disallowed to the extent shares are purchased (including shares acquired by means of reinvested dividends) within 30 days before or after such redemption. Exchanges are treated as redemptions for Federal tax purposes. Different tax treatment is accorded to accounts maintained as IRAs, including a penalty on early distributions. Shareholders should consult their tax advisers for more information. Each portfolio within the Trust will be separate for investment and accounting purposes and will be treated as a separate taxable entity for Federal income tax purposes. Provided that the Fund qualifies as a regulated investment company under the Code, it will not be required to pay Massachusetts income or excise taxes. Gains or losses on sales of stock or securities by the Fund will ordinarily be long-term capital gains or losses if the stock or securities have been held by it for more than one year. However, if the Fund writes a covered call option which has an exercise price below the price of the underlying stock or security at the time the call is written, or if it acquires a put option with respect to stock or securities which have been held for less than the applicable capital gain holding period, the holding period of such stock or securities will be terminated or suspended for purposes of determining long-term capital gains treatment and will start again only when the Fund enters into a closing transaction with respect to such option or when such option expires. -19- The Fund will be required to treat stock index futures, options on such futures and options on the stock indices held at the end of each taxable year as having been sold at market value on the last business day of the year. For purposes of computing gain or loss, 60% of any gain or loss recognized on these deemed sales, on actual sales or on termination by closing transactions, delivery, exercise, lapse or otherwise will be treated as long-term capital gain or loss, and the remaining 40% will be treated as short-term capital gain or loss. However, under certain circumstances, the Fund may be able to make an election under which these provisions would not apply to such futures and options. Current federal income tax law requires that a holder of a zero coupon security report as income each year the portion of the original issue discount on such security that accrues that year, even though the holder receives no cash payments of interest during the year. The "straddle" rules of Section 1092 of the Code may require the Fund to defer the recognition of certain losses incurred on its transactions involving certain stock or securities, futures contracts or options. Section 1092 defines a "straddle" to include "offsetting positions" with respect to publicly traded stock or securities. A "position" is defined to include a futures contract and an option. In general, the Fund will be considered to hold offsetting positions if there is a substantial diminution of its risk of loss from holding one position by reason of its holding one or more other positions. Section 1092 generally provides that in the case of a straddle, any loss from the disposition of a position (the "loss position") in the straddle shall be recognized for any taxable year only to the extent that the amount of such loss exceeds the unrealized gains on any offsetting straddle position (the "gain position") and the unrealized gain on any successor position (which is a position that is itself offsetting to the gain position and is acquired during a period commencing 30 days prior to, and ending 30 days after, the disposition of the loss position). These special tax rules applicable to options and futures transactions could affect the amount, timing and character of capital gain distributions to shareholders by causing holding period adjustments, converting short-term capital losses into long-term capital losses, and accelerating the Fund's income or deferring its losses. For purposes of the dividends-received deduction available to corporations, dividends received by the Fund from taxable domestic corporations in respect of any share of stock treated as debt-financed under the Code or held by the Fund for 45 days or less (90 days or less in the case of certain preferred stock) will not be treated as qualifying dividends. To the extent applicable, for purposes of the dividends-received deduction, the holding period of any share of stock will not include any period during which the Fund has an option or a contractual obligation to sell, or has granted certain call options with respect to, substantially identical stock or securities or, under Treasury regulations to be promulgated, the Fund may diminish its risk of loss by holding one or more other positions with respect to substantially similar or related property. It is anticipated that these rules will operate so as to reduce the portion of distributions paid by the Fund that will be eligible for the dividends-received deduction available to corporate shareholders of such Fund. The dividends-received deduction is reduced to the extent the shares of the Fund with respect to which the dividends are received are treated as debt-financed under the Code and is eliminated if the shares are deemed to have been held for less than 46 days. Corporate shareholders should also note that their basis in shares of the Fund may be reduced by the untaxed portion (i.e., the portion qualifying for the dividends-received deduction) of an "extraordinary dividend" if the shares have not been held for at least two years prior to declaration of the dividend. Extraordinary dividends are dividends paid during a prescribed period which equal or exceed 10% of a corporate shareholder's basis in its Fund shares or which satisfy an alternative test based on the fair market value of the shares. To the extent dividend payments received by corporate shareholders of the Fund constitute extraordinary dividends, such shareholders' basis in their Fund shares will be reduced and any gain realized upon a subsequent disposition of such shares will therefore be increased. The untaxed portion of dividends received by such shareholders is also included in adjusted alternative minimum taxable income in determining shareholders' liability under the alternative minimum tax. -20- The Fund is subject to a 4% nondeductible excise tax to the extent that it fails to distribute to its shareholders during each calendar year an amount equal to at least the sum of (a) 98% of its taxable ordinary investment income (excluding long-term and short-term capital gain income) for the calendar year; plus (b) 98% of its capital gain net income for the one year period ending on October 31 of such calendar year; plus (c) any ordinary investment income or capital gain net income from the preceding calendar year which was neither distributed to shareholders nor taxed to the Fund during such year. The Fund intends to distribute to shareholders each year an amount sufficient to avoid the imposition of such excise tax. The Fund's use of equalization accounting, if such method of tax accounting is used for any taxable year, may affect the amount, timing and character of its distributions to shareholders. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge the shareholder would have owed upon purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. Special Tax Considerations. Certain foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies comprising the Fund. See the Prospectus for more information on foreign withholding taxes and foreign tax credits. Shareholders should consult their own tax advisers with respect to the tax status of distributions from the Fund, and redemptions of shares of the Fund, in their own states and localities. Shareholders who are not United States persons should also consult their tax advisers as to the potential application of foreign and U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on dividends representing ordinary income to them. SHARES OF BENEFICIAL INTEREST The authorized capitalization of the Trust consists of an unlimited number of shares of beneficial interest having a par value of $0.001 per share. The Trust's Board of Trustees has authorized the issuance of multiple series representing shares in corresponding investment portfolios of the Trust. All shares of the Trust have equal voting rights and will be voted in the aggregate, and not by class, except where voting by class is required by law or where the matter involved affects only one class. The Fund offers and the Prospectus relates to two classes of shares - the Institutional and Service classes of shares. The Institutional Shares are available to customers of financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit sharing or other benefit plan for such customers or employees. The Service Shares are available to all other investors. Institutional Shares of the Fund are not subject to a sales charge, Rule 12b-1 fee or a shareholder servicing fee. The Fund's Service Shares are subject to a sales charge, Rule 12b-1 fee and a shareholder servicing fee. All shares of the Trust issued and outstanding are fully paid and nonassessable. The Trust is not required by law to hold annual shareholder meetings and does not intend to hold such meetings; however, the Trustees are required to call a meeting for the purpose of considering the removal of persons serving as Trustee if requested to do so in writing by the holders of not less than 10% of the outstanding shares of the Trust. As used in the Prospectus and in this SAI, the term "majority", when referring to the approvals to be obtained from shareholders in connection with general matters affecting the Fund (e.g., election of Trustees and ratification of independent auditors), means the vote of a majority of the Fund's outstanding shares represented at a meeting. The term "majority", when referring to the approvals to be obtained from shareholders in connection with approval of the -21- Advisory Contract or changing the fundamental policies of the Fund, means the vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund. Shareholders are entitled to one vote for each full share held, and fractional votes for fractional shares held. Vacancies on the Board of Trustees are filled by the Board of Trustees if immediately after filling any such vacancy at least two-thirds of the Trustees then holding office have been elected to such office by shareholders at an annual or special meeting. In the event that at any time less than a majority of Trustees holding office were elected by shareholders, the Board of Trustees will cause to be held within 60 days a shareholders' meeting for the purpose of electing Trustees to fill any existing vacancies. Trustees are subject to removal with cause by two-thirds of the remaining Trustees or by a vote of a majority of the outstanding shares of the Trust. The Trustees are required to promptly call a shareholders' meeting for voting on the question of removal of any Trustee when requested to do so in writing by not less than 10% of the outstanding shares of the Trust. In connection with the calling of such shareholders' meetings, shareholders will be provided with communication assistance. Each share of the Fund represents an equal proportionate interest in the Fund with each other share of the Fund and is entitled to such dividends and distributions out of the income earned on the assets belonging to the Fund as are declared in the discretion of the Trustees. In the event of liquidation or dissolution, shares of the Fund are entitled to receive the assets belonging to the Fund which are available for distribution, and of any general assets not belonging to the Fund which are available for distribution. Shareholders are not entitled to any preemptive rights. All shares, when issued, will be fully paid and non-assessable by the Fund. As of March 31, 1996, no person owned of record or, to the knowledge of management, beneficially owned more than 5% of the outstanding shares of the Fund except as set forth below:
NAME AND ADDRESS OF HOLDER OF RECORD SHARES HELD AND PERCENT OF CLASS - ------------------------------------ -------------------------------- INSTITUTIONAL CLASS SHARES - -------------------------- 751,329 48.1% Marine Midland Bank Buffalo, NY 14240 Wabank & Company 799,281 51.2% Tulsa, OK 74101 Total Outstanding Shares: 1,562,341 SERVICE CLASS SHARES - -------------------- 7,500 12.7% Donaldson Lufkin & Jenrette Jersey City, NJ 07303 Marine Midland Bank 5,400 9.2% Buffalo, NY 14240 Paul M. Duongy 4,700 8.0% Steven Oaks Kent, England Ann B. Birmingham 3,185 5.4% Pittsford, NY 14534 Total Shares Outstanding: 58,956
-22- CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company ("State Street") has been retained to act as custodian for the Fund pursuant to a Custodian Contract. State Street's address is 225 Franklin Street, Boston, Massachusetts 02110. Under the Custodian Contract, the Custodian maintains a custody account or accounts in the name of the Fund; receives and delivers all assets upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions; receives and pays out cash for purchases and redemptions of shares of the Fund and pays out cash if requested for dividends on shares of the Fund; and maintains records for the foregoing services. Under the Custodian Contract, the Trust has agreed to pay State Street for furnishing Custodian Services to the Fund, certain transaction charges and out-of-pocket expenses. The Fund paid approximately $179,000 and $60,052, respectively, in custody fees for the year ended December 31, 1995 and the period ended December 31, 1994. The Board of Trustees has also authorized State Street Bank in its capacity as Custodian for the Fund to enter into Subcustodian Agreements with certain foreign banking institutions and foreign securities depositaries pursuant to rule 17f-5 of the Investment Company Act of 1940. Effective March 15, 1996, BISYS has been retained by the Trust to act as transfer agent and dividend agent for the Fund. Under the Transfer Agency Agreement, BISYS performs general transfer agency and dividend disbursing services. It maintains an account in the name of each shareholder of record in the Fund reflecting purchases, redemptions, daily dividend accruals and monthly dividend disbursements, processes purchase and redemption requests, issues and redeems shares of the Fund, addresses and mails all communications by the Fund to its shareholders, including financial reports, other reports to shareholders, dividend and distribution notices, tax notices and proxy material for its shareholder meetings, and maintains records for the foregoing services. Under the Agency Agreement, the Fund have agreed to pay BISYS $ 16,000 per annum. In addition, the Fund has agreed to pay BISYS certain account based fees and out- of-pocket expenses incurred by BISYS. For the year ended December 31, 1995 and the period ended December 31, 1994, PFPC earned $12,067 and $5,313, respectively, in transfer agency fees from the Fund. INDEPENDENT AUDITORS Ernst & Young LLP serves as the independent auditors for the Fund. Ernst & Young LLP provides audit services, tax return preparation and assistance and consultation in connection with review of Securities and Exchange Commission filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York 10019. FINANCIAL STATEMENTS The financial statements of the Fund audited by Ernst & Young LLP have been included in this SAI for the year ended December 31, 1995 in reliance on their report, given on the authority of that firm as experts in auditing and accounting. -23- PART C. OTHER INFORMATION Item 24. Financial Statements -------------------- (a) Financial Statements: Financial Statements included in Part A: --------------------------------------- ALL FUNDS Financial Highlights Financial Information included in Part B: ---------------------------------------- ALL FUNDS Statements of Net Assets at December 31, 1995 Statements of Operations for the year ended December 31, 1995. With the exception of the Short-Term U.S. Government Fund which presents a Statement of Assets and Liabilities and a Statement of Investments. Statements of Changes in Net Assets for each of the two years ended December 31, 1994 and December 31, 1995. Notes to Financial Statements Financial Highlights Reports of Independent Auditors, dated February 5, 1996
Exhibit Number Description - ------- ----------- 1 -- Amended and Restated Declaration of Trust. 2 -- By-Laws of Registrant. 3 -- None. *4 -- Form of Specimen Certificates of Shares. +5(a) -- Advisory Contract between Registrant and HSBC Asset Management Americas Inc. (Also Previously filed with Post-Effective Amendment No. 1 to Registration Statement on March 4, 1991.) 5(b) -- Management and Administration Agreement between Registrant and BISYS Fund Services. ***5(c) -- Form of Advisory Contract between Mariner U.S. Government Securities Fund and Marine Midland Bank, N.A. ++5(d) -- Accounting Services Agreement between Registrant and BISYS Fund Services 5(e) -- Co-Administration Services Contract between HSBC Asset Management Americas Inc. and Registrant dated July 1, 1994 5(f) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. and HSBC Asset Management Europe Ltd. with respect to the Mariner International Equity Fund dated April 25, 1995 5(g) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. and HSBC Asset Management Australia Limited with respect to the Mariner International Equity Fund dated April 25, 1995 5(h) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. and HSBC Asset Management Japan (KK) with respect to the Mariner International Equity Fund dated April 25, 1995 5(i) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. and HSBC Asset Management Hong Kong Ltd. with respect to the Mariner International Equity Fund dated April 25, 1995 5(j) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. (formerly Marinvest Inc.) and Investment Concepts, Inc. with respect to the Mariner Small Cap Fund dated September 22, 1992 5(k) -- Sub-Advisory Contract between HSBC Asset Management Americas, Inc. and HSBC Asset Management Singapore Limited with respect to the HSBC International Equity Fund dated April 30, 1996.
C-2 6 -- Distribution Agreement between Registrant and BISYS Fund Services. 7 -- None. 8(a) -- Custodian Agreement between Registrant and The Bank of New York. 8(b) -- Custodian Agreement between Registrant and State Street Bank and Trust Company 9(a) -- Transfer Agency Agreement between Registrant and BISYS Fund Services **9(b) -- Agreement concerning the name "Mariner." ++++9(c) -- Shareholder Servicing Agreement between Registrant and HSBC Asset Management Americas Inc. dated November 1, 1994 9(d) -- Service Organization Agreement between Bank of Oklahoma and Registrant, dated October 25, 1994 9(e) -- Fund Accounting Agreement between Registrant and BISYS Fund Services ++9(f) -- Fund Accounting Agreement between Registrant and State Street Bank and Trust on behalf of International Equity Fund 10 -- Consent of Baker & McKenzie, counsel to Registrant. 11 -- Consent of Ernst & Young LLP, independent auditors 12 -- None. *13 -- Subscription Agreement. 14 -- None. 15(a) -- Rule 12b-1 Distribution Plan and Agreement between Registrant and BISYS Fund Services. +15(b) -- Distributor's Selected Dealer Agreement dated August 1, 1992. +++16 -- Schedule for Computation of Performance Quotations. 17 -- Financial Data Schedule 18 -- Form of Rule 18f-3 Plan
C-3 Other Exhibits -------------- (a) -- Power of Attorney for William B. Blundin, Wolfe J. Frankl, William L. Kufta, John P. Pfann, Robert A. Robinson, Harald Paumgarten. - ----------------------- * Filed with the Trust's Registration Statement dated March 2, 1990. ** Filed with Post-Effective Amendment No. 1 and 3 to the Trust's Registration Statement on March 4, 1991 and January 23, 1992, respectively. *** Filed with Post-Effective Amendment No. 9 on July 12, 1993. + Filed with Post-Effective Amendment No. 6 to the Trust's Registration Statement on November 6, 1992. ++ To be filed by Amendment. +++ Filed with Post-Effective Amendment No. 4 to Trust Registration Statement on May 1, 1992. ++++ Filed with Post-Effective Amendment No. 14 to Trust Registration Statementon April 28, 1995. Item 25. Persons Controlled by or under Common Control with Registrant. -------------------------------------------------------------- None. Item 26. Number of Holders of Securities at March 31, 1996. -------------------------------------------------- Growth & Income Fund 514 New York Tax-Free Bond Fund 1,498 Small Cap Fund 197 Short-Term U.S. Government Fund 40 Fixed Income Fund 125 International Equity Fund- Service Class Shares 120 International Equity Fund - Institutional Shares. 4 Item 27. Indemnification. --------------- Reference is made to Article IV of Registrant's By-Laws and paragraphs 9 and 10 of the Distribution Contract. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant understands that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or C-4 controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant, has in force a Directors and Officers Liability Policy which covers all present and future directors and officers of Registrant against loss arising from any civil claim or claims by reason of "any breach of duty, neglect, error, misstatement, misleading statement, omission or act done or wrongfully attempted" while acting as trustees or officers of the Registrant. The period of insurance under the present policy is for the period ending August 1, 1996. The policy covers 100% of the excess of $100,000 up to an annual aggregate limit of $10,000,000 of any losses including legal and other expenses in connection with any claim. Item 28. Business and Other Connections of Investment Adviser ---------------------------------------------------- HSBC Asset Management Americas Inc. also serves as investment adviser to HSBC Funds Trust. Item 29. Principal Underwriter --------------------- (a) BISYS Fund Services is also Distributor for Mariner Funds Trust. BISYS Fund Services also acts as Distributor to a number of other registered companies not affiliated with the HSBC Funds. (b) Officers and Directors Name and Positions and Positions and Principal Business Address Offices Offices with Registrant with Underwriter - ------------------------------ --------------- -------------------- BISYS Fund Service, Inc. None Sole General Partner 3435 Stelzer Road Columbus, OH 43219 WC Subsidiary Corporation None Sole Limited Partner 150 Clove Road Little Falls, New Jersey 07424 The BISYS Group, Inc. None Sole Shareholder 150 Clove Road Little Falls, New Jersey 07424 (c) Not applicable. C-5 Item 30. Location of Accounts and Records -------------------------------- All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are maintained at the offices of HSBC Asset Management Americas Inc., the Registrant's Investment Adviser at 250 Park Avenue, New York, New York, 10177, and at the offices of BISYS Fund Services, the Registrant's Administrator, Distributor, Transfer Agent and Dividend Disbursing Agent, at 3435 Stelzer Road Columbus, OH 43219 and at The Bank of New York, the Registrant's Custodian, at 90 Washington Street, New York, New York 10286. For the International Equity Fund, accounts, books and other documents are also maintained at State Street Bank, at P.O. Box 1713, Boston, Massachusetts 02105. Item 31. Management Services ------------------- Not applicable. Item 32. Undertakings ------------ (a) Registrant undertakes to call a meeting of shareholders for the purpose of voting upon the removal of a Trustee if requested to do so by the holders of at least 10% of the Registrant's outstanding shares. (b) Registrant undertakes to provide the support to shareholders specified in Section 16(c) of the 1940 Act as though that Section applied to the Registrant. (c) Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders upon request without charge. C-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all of the requirements for effectiveness of this Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed in its behalf by the undersigned, thereunto duly authorized, in the City of New York, on April 24, 1996. HSBC MUTUAL FUNDS TRUST (Registrant) By: /s/ ANN E. BERGIN ------------------------- Ann E. Bergin, President C-7 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Trustee, Chief Executive April 24, 1996 -------------------------- Officer William B. Blundin President April 24, 1996 -------------------------- Ann E. Bergin Vice President April 24, 1996 -------------------------- William J. Tomko Treasurer (Principal Finan- April 24, 1996 -------------------------- cial & Accounting Officer) Mark E. Nagle * WOLFE J. FRANKL Trustee April 24, 1996 -------------------------- Wolfe J. Frankl * WILLIAM L. KUFTA Trustee April 24, 1996 -------------------------- William L. Kufta * HARALD PAUMGARTEN Trustee April 24, 1996 -------------------------- Harald Paumgarten * JOHN P. PFANN Trustee and April 24, 1996 -------------------------- Chairman John P. Pfann * ROBERT A. ROBINSON Trustee April 24, 1996 -------------------------- Robert A. Robinson
C-8 * Pursuant to Power of Attorney filed with this Post-Effective Amendment 17 to Registration Statement Nos. 33-33734 and 811-6057. C-9 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- EXHIBITS to POST-EFFECTIVE AMENDMENT NO. 17 to FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940 - -------------------------------------------------------------------------------- HSBC MUTUAL FUNDS TRUST EXHIBIT INDEX - HSBC MUTUAL FUNDS TRUST Exhibit 1 Amended and Restated Declaration of Trust Exhibit 2 By-Laws Exhibit 5(b) Management and Administration Agreement between Registrant and BISYS Fund Services Exhibit 5(e) Co-Administration Services Contract between HSBC Asset Management Americas Inc. and Registrant, dated July 1, 1994 Exhibit 5(f) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Europe Ltd. with respect to the Mariner International Equity Fund dated April 25, 1995 Exhibit 5(g) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Australia Limited with respect to the Mariner International Equity Fund dated April 25, 1995 Exhibit 5(h) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Japan (KK) with respect to the Mariner International Equity Fund dated April 25, 1995 Exhibit 5(i) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Hong Kong Ltd. with respect to the Mariner International Equity Fund dated April 25, 1995 Exhibit 5(j) Sub-Advisory Contract between HSBC Asset Management Americas Inc. (formerly Marinvest Inc.) and Investment Concepts, Inc. with respect to the Mariner Small Cap Fund dated September 22, 1992 Exhibit 5(k) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Singapore Limited with respect to the HSBC International Equity Fund dated April 30, 1996 Exhibit 6 Distribution Agreement between Registrant and BISYS Fund Services Exhibit 8(a) Custodian Agreement between Registrant and The Bank of New York Exhibit 9(a) Transfer Agency Agreement between Registrant and BISYS Fund Services
Exhibit 9(d) Service Organization Agreement between Bank of Oklahoma and Registrant, dated October 25, 1994 Exhibit 9(e) Fund Accounting Agreement between Registrant and BISYS Fund Services Exhibit 10 Consent of Baker & McKenzie, counsel to Registrant Exhibit 11 Consent of Ernst & Young LLP, independent auditors Exhibit 15(a) Rule 12b-I Distribution Plan and Agreement between Registrant and BISYS Fund Services Exhibit 17 Financial Data Schedule Exhibit 18 Form of Rule 18f-3 Plan Other Exhibits (a) Power of Attorney for William B. Blundin, Wolfe J. Frankl, William L. Kufta, John P. Pfann, Robert A. Robinson, and Harald Paumgarten
EX-27.1 2 FINANCIAL DATA SCHEDULE S-T FIXED
6 0000861106 HSBC MUTUAL FUNDS TRUST 2 SHORT-TERM U.S. GOVERNMENT SECURITIES 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 10,638,133 10,745,098 235,516 23,447 0 11,004,061 0 0 96,252 96,252 0 11,213,541 1,094,435 1,542,887 0 0 (412,697) 0 106,965 10,907,809 0 836,356 0 132,604 703,752 10,304 619,944 1,334,000 0 703,752 0 0 708,797 1,390,378 9,196 (3,733,951) 0 0 0 0 69,957 0 183,298 10,907,809 9.49 .54 .48 1.02 .54 0 9.97 1.44 0 0
EX-27.2 3 FINANCIAL DATA SCHEDULE FIXED INCOME
6 0000861106 HSBC MUTUAL FUNDS TRUST 4 FIXED INCOME FUND 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 84,301,262 86,731,582 13,692,139 33,445 0 100,457,166 0 0 515,121 515,121 0 98,621,639 9,718,065 9,069,614 0 0 (1,109,914) 0 2,430,320 99,942,045 0 5,874,281 0 784,971 5,089,310 (89,155) 8,168,553 13,168,708 0 5,089,310 0 0 4,636,901 3,914,258 25,095 15,167,899 0 (1,020,759) 0 0 464,374 0 805,901 49,942,045 9.35 .59 .93 1.52 .59 0 10.28 .96 0 0
EX-27.3 4 FINANCIAL DATA SCHEDULE NY TAX FREE BOND
6 0000861106 HSBC MUTUAL FUNDS TRUST 3 NEW YORK TAX FREE BOND FUND 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 46,302,244 49,816,837 1,019,823 5,651 0 50,842,311 0 0 165,547 165,547 0 50,264,823 4,538,498 4,971,702 0 0 0 (3,079,663) 3,491,604 50,676,764 0 3,125,148 0 510,451 2,614,697 842,141 3,785,950 7,242,788 0 (2,614,697) 0 0 1,191,650 2,345,463 414,503 (34,599) 0 (3,921,804) 0 0 232,105 0 620,422 50,676,764 10.20 .54 .97 1.51 .54 0 11.17 1.20 0 0
EX-27.4 5 FINANCIAL DATA SCHEDULE INCOME & GROWTH
6 0000861106 HSBC MUTUAL FUNDS TRUST 5 GROWTH AND INCOME FUND 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 58,743,753 72,296,303 4,456,125 6,400 0 76,758,828 5,016,137 0 5,680,633 10,696,770 0 52,510,329 4,474,227 5,816,247 5,770 0 (6,591) 0 13,552,550 66,062,058 2,005,943 0 0 629,250 1,376,693 4,058,707 13,600,231 19,035,631 0 1,372,062 3,645,492 0 826,333 2,411,589 21,812 1,063,193 0 0 0 0 367,306 0 646,376 66,062,058 11.93 .30 3.64 3.94 1.10 0 14.77 .97 0 0
EX-27.5 6 FINANCIAL DATA SCHEDULE SMALL CAP
6 0000861106 HSBC MUTUAL FUNDS TRUST 6 SMALL CAP FUND 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 19,703,928 27,405,055 10,378 203,637 0 27,619,070 528,408 0 1,054,970 1,583,378 0 18,648,578 1,800,980 2,043,503 0 0 (314,013) 0 7,701,127 26,035,692 123,461 0 0 340,371 (216,911) 2,920,761 2,875,059 5,578,909 0 0 1,004,447 0 1,031,816 668,276 225 1,728,113 0 (2,230,327) 0 0 179,340 0 346,714 26,035,692 11.90 .12 3.24 3.12 .56 0 14.46 1.35 0 0
EX-27.6 7 FINANCIAL DATA SCHEDULE INT'L EQUITY
6 0000861106 HSBC MUTUAL FUNDS TRUST 1 INTERNATIONAL EQUITY 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 15,083,245 15,902,562 63,180 214,240 0 16,179,982 225,463 0 44,125 267,588 0 15,865,922 1,528,095 1,761,154 0 0 (776,197) 0 920,665 15,910,394 244,012 58,997 0 353,687 (70,658) (584,588) 1,487,280 88,994 0 0 0 0 4,005,308 2,411,276 142 (908,630) 0 (222,321) 0 0 149,012 0 464,112 15,910,394 9.55 (0.07) .49 0 0 0 9.97 1.98 0 0
EX-99.1 8 AMEND AND RESTATED DECLAR. OF TRUST EXHIBIT 99.1 Exhibit 1 Amended and Restated Declaration of Trust - -------------------------------------------------------------------------------- FIRST RESTATED AND AMENDED DECLARATION OF TRUST OF MARINER MUTUAL FUNDS TRUST DATED AS OF APRIL 3, 1996 - -------------------------------------------------------------------------------- 600 W. Hillsboro Blvd. Suite 300 Deerfield Beach, Florida 33441 Table of Contents
Page ---- ARTICLE I -- NAME AND DEFINITIONS.................................................................................2 Section 1.1 Name...................................................................................2 Section 1.2 Definitions............................................................................2 ARTICLE II -- TRUSTEES............................................................................................3 Section 2.1 Powers.................................................................................3 Section 2.2 Legal Title............................................................................7 Section 2.3 Number of Trustees; Term of Office.....................................................8 Section 2.4 Qualification of Trustees..............................................................8 Section 2.5 Election of Trustees...................................................................8 Section 2.6 Resignation and Removal................................................................8 Section 2.7 Vacancies..............................................................................9 Section 2.8 Committees; Delegation.................................................................9 Section 2.9 Action Without a Meeting; Participation by Conference Telephone.......................10 Section 2.10 By-Laws...............................................................................10 Section 2.11 No Bond Required......................................................................10 Section 2.12 Reliance on Experts, Etc..............................................................10 ARTICLE III -- CONTRACTS.........................................................................................11 Section 3.1 Distribution Contract.................................................................11 Section 3.2 Advisory or Management Contract.......................................................11 Section 3.3 Affiliations of Trustees or Officers, Etc.............................................11 ARTICLE IV -- LIMITATION OF LIABILITY; INDEMNIFICATION...........................................................12 Section 4.1 No Personal Liability of Shareholders, Trustees, Etc..................................12 Section 4.2 Execution of Documents; Notice; Apparent Authority....................................12 Section 4.3 Indemnification of Trustees, Officers, Etc............................................12 Section 4.4 Indemnification of Shareholders.......................................................13 ARTICLE V -- SHARES OF BENEFICIAL INTEREST.......................................................................14 Section 5.1 Beneficial Interest...................................................................14 Section 5.2 Rights of Shareholders................................................................14 Section 5.3 Trust Only............................................................................14 Section 5.4 Issuance of Shares....................................................................15
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Section 5.4.1 General......................................................................15 Section 5.4.2 Price........................................................................15 Section 5.4.3 On Merger or Consolidation...................................................15 Section 5.4.4 Fractional Shares............................................................15 Section 5.5 Register of Shares....................................................................15 Section 5.6 Share Certificates....................................................................15 Section 5.6.1 General......................................................................15 Section 5.6.2 Loss of Certificates.........................................................16 Section 5.6.3 Issuance of New Certificates to Pledgee......................................16 Section 5.6.4 Discontinuance of Issuance of Certificates...................................16 Section 5.7 Transfer of Shares....................................................................16 Section 5.8 Voting Powers.........................................................................16 Section 5.9 Transfer of Shares....................................................................17 Section 5.10 Action Without a Meeting..............................................................17 ARTICLE VI -- REDEMPTION AND REPURCHASE OF SHARES................................................................17 Section 6.1 Redemption of Shares..................................................................17 Section 6.2 Price.................................................................................18 Section 6.3 Payment...............................................................................18 Section 6.4 Effect of Suspension of Right of Redemption...........................................18 Section 6.5 Repurchase by Agreement...............................................................18 Section 6.6 Suspension of Right of Redemption.....................................................18 Section 6.7 Involuntary Redemption of Shares; Disclosure of Holding...............................19 ARTICLE VII -- DETERMINATION OF NET ASSET VALUE; DISTRIBUTIONS...................................................20 Section 7.1 By Whom Determined....................................................................20 Section 7.2 When Determined.......................................................................20 Section 7.3 Computation of Per Share Net Asset Value..............................................20 Section 7.3.1 Net Asset Value Per Share....................................................20 Section 7.3.2 Value of the Net Assets of the Trust.........................................20 Section 7.4 Interim Determinations................................................................21 Section 7.5 Outstanding Shares....................................................................22 Section 7.6 Distributions to Shareholders.........................................................22 Section 7.7 Power to Modify Foregoing Procedures..................................................23
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ARTICLE VIII -- CUSTODIAN........................................................................................23 Section 8.1 Appointment and Duties................................................................23 Section 8.2 Action Upon Termination of Custodian Agreement........................................24 Section 8.3 Central Certificate System, Etc.......................................................24 Section 8.4 Acceptance of Receipts in Lieu of Certificates........................................24 ARTICLE IX --DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC...................................................................................24 Section 9.1 Duration and Termination..............................................................24 Section 9.2 Amendment Procedure...................................................................25 Section 9.3 Merger, Consolidation and Sale of Assets..............................................26 Section 9.4 Incorporation.........................................................................26 Section 9.5 Series Vote...........................................................................26 ARTICLE X -- REPORTS TO SHAREHOLDERS.............................................................................26 ARTICLE XI -- MISCELLANEOUS......................................................................................27 Section 11.1 Filing................................................................................27 Section 11.2 Governing Law.........................................................................27 Section 11.3 Counterparts..........................................................................27 Section 11.4 Reliance by Third Parties.............................................................27 Section 11.5 Provisions in Conflict with Law or Regulations........................................27 Section 11.6 Section Headings; Interpretation......................................................28 Section 11.7 Registered Agent......................................................................28
- iii - -------------------------------- FIRST RESTATED AND AMENDED DECLARATION OF TRUST OF MARINER MUTUAL FUNDS TRUST DATED AS OF APRIL 3, 1996 -------------------------------- FIRST RESTATED AND AMENDED DECLARATION OF TRUST dated as of April 3, 1996 by the trustees (the "Trustees") of the Mariner Mutual Funds Trust (the "Trust"). WHEREAS, the Trustees desire to establish a Massachusetts business trust for the investment and reinvestment of funds contributed thereto; and WHEREAS, the Trustees desire that the beneficial interest in the trust assets be divided into transferable shares of beneficial interest, as hereinafter provided; WHEREAS, the Trustees desire to restate and amend the Declaration of Trust, dated November 1, 1989, and to file such First Restated and Amended Declaration of Trust with the Secretary of State of the Commonwealth of Massachusetts and with the Clerk of the City of Boston, and WHEREAS, pursuant to Section 9.2(c) of the Declaration of Trust, dated November 1, 1989, the Trustees have resolved and unanimously voted to restate and amend such Declaration as herein provided; and WHEREAS, the Trustees desire the Mariner Mutual Funds Trust to be renamed HSBC Mutual Funds Trust; NOW THEREFORE, the Trustees hereby declare that the Declaration of Trust of this trust be herein provided and that all money and property contributed to the trust established hereunder and all proceeds thereof shall be held and managed in trust for the pro rata benefit of the holders, from time to time, of the shares of beneficial interest issued hereunder and subject to the provisions hereof. ARTICLE I NAME AND DEFINITIONS Section 1.1 Name. The name of the trust created hereby is the "Mariner Mutual Funds Trust", and as far as may be practicable the Trustees shall conduct the business and activities of the trust created hereby and execute all documents and take all actions under that name or any other name they may from time to time determine, which name (and the word "Trust" whenever used in this Declaration, except where the context requires otherwise) shall refer to the Trustees in their capacity as Trustees, and not individually or personally, and shall not refer to the officers, agents, employees or shareholders of the trust created hereby or of such Trustees. Section 1.2 Definitions. Wherever they are used herein, the following terms have the following meanings: "Affiliated Person" shall have the meaning set forth in Section 2(a)(3) of the 1940 Act. "By-Laws" shall mean the By-Laws, if any, adopted pursuant to Section 2.10 hereof, as from time to time amended. "Commission" shall mean the Securities and Exchange Commission. "Custodian" shall mean any Person other than the Trustees who has custody of any Trust Property as required by Section 17(f) of the 1940 Act. "Declaration" shall mean this Declaration of Trust as amended from time to time. "Distributor" shall have the meaning set forth in Section 3.1 hereof. "Interested Person" shall have the meaning set forth in Section 2(a)(19) of the 1940 Act. "Investment Adviser" shall have the meaning set forth in Section 3.2 hereof. "Investment Sub-Adviser" shall have the meaning set forth in Section 3.2 hereof. "Majority Shareholder Vote" shall mean the vote Of a majority of the outstanding voting securities, as defined in Section 2(a)(42) of the 1940 Act. "1940 Act" shall mean the Investment Company Act of 1940, as amended from time to time. "Person" shall mean an individual, a company, a corporation, partnership, trust, or association, a joint venture, an organization, a business, a firm or other entity, whether or not a - 2 - legal entity, or a country, state, municipality or other political subdivision or any governmental agency or instrumentality. "Portfolio" shall mean the assets and liabilities of the Trust which relate to a Series of Shares. "Principal Underwriter" shall have the meaning set forth in Section 2(a)(29) of the 1940 Act. "Series" shall mean a class of Shares. "Series Majority Shareholder Vote" shall mean the vote of a majority of the outstanding voting securities of a Series, as defined in Section 2(a)(42) of the 1940 Act. "Shareholder" shall mean a record owner of Shares. "Shares" shall mean the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares. "Transfer Agent" shall mean any Person other than the Trustees who maintains the Shareholder records of the Trust, such as the list of Shareholders, the number of Shares credited to each account, and the like. "Trust" shall mean the Massachusetts business trust, Mariner Mutual Fund Trust, 600 W. Hillsboro Blvd., Suite 300, Deerfield Beach, Florida 33441, established by this Declaration of Trust, as from time to time amended. "Trust Property" shall mean any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust or the Trustees. "Trustees" shall mean the individuals who have signed this Declaration of Trust, so long as they shall continue in office in accordance with the terms hereof, and all other individuals who may from time to time be duly elected or appointed, qualified and serving as Trustees in accordance with the provisions of Article II hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in his or her capacity or their capacities as trustees hereunder. ARTICLE II TRUSTEES Section 2.1 Powers. The Trustees, subject only to the specific limitations contained in this Declaration, shall have exclusive and absolute power, control and authority over the Trust Property and over the business of the Trust to the same extent as if the Trustees were - 3 - the sole owners of the Trust Property and business in their own right, including such power, control and authority to do all such acts and things as in their sole judgment and discretion are necessary, incidental, convenient or desirable for the carrying out of or conducting of the business of the Trust or in order to promote the interests of the Trust, but with such powers of delegation as may be permitted by this Declaration. The enumeration of any specific power, control or authority herein shall not be construed as limiting the aforesaid power, control and authority or any other specific power, control or authority. The Trustees shall have power to conduct and carry on the business of the Trust, or any part thereof, to have one or more offices and to exercise any or all of its trust powers and rights, in the Commonwealth of Massachusetts, in any other states, territories, districts, colonies and dependencies of the United States and in any foreign countries. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. Such powers of the Trustees may be exercised without order of or resort to any court. Without limiting the foregoing, the Trustees shall have the power: (a) To operate as and to carry on the business of an investment company, and to exercise all the powers necessary and appropriate to the conduct of such operations. (b) To subscribe for and to invest and reinvest funds in, and hold for investment, the securities (including but not limited to bonds, debentures, time notes, certificates of deposit, commercial paper, bankers' acceptances and all other evidences of indebtedness and shares, stock, subscription rights, profit-sharing interests or participations and all other contracts for or evidences of equity interests) of any Person and to hold cash uninvested. (c) To acquire (by purchase, subscription or otherwise), to trade in and deal in, to sell or otherwise dispose of, to enter into repurchase agreements and firm commitment agreements with respect to, and to lend and to pledge any such securities. (d) To acquire (by purchase, subscription or otherwise), to trade in and deal in, to sell or otherwise dispose of, options or futures. (e) To exercise all rights, powers and privileges of ownership or interest in all securities included in the Trust Property, including the right to vote, give assent, execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper and otherwise act with respect thereto and to do all acts for the preservation, protection, improvement and enhancement in value of all such securities and to delegate, assign, waive or otherwise dispose of any of such rights, powers or privileges. (f) To exercise powers and rights of subscription or otherwise which in any manner arise out of the Trust's ownership of securities. - 4 - (g) To declare (from interest, dividends or other income received or accrued, from accruals of original issue or other discounts on obligations held, from capital or other profits whether realized or unrealized and from any other lawful sources) dividends and distributions on the Shares and to credit the same to the account of Shareholders, or at the election of the Trustees to accrue income to the account of Shareholders, on such dates (which may be as frequently as every day) as the Trustees may determine. Such dividends, distributions or accruals shall be payable in cash, property or Shares at such intervals as the Trustees may determine at any time in advance of such payment, whether or not the amount of such dividend, distribution or accrual can at the time of declaration or accrual be determined or must be calculated subsequent to declaration or accrual and prior to payment by reference to amounts or other factors not yet determined at the time of declaration or accrual (including but not limited to the amount of a dividend or distribution to be determined by reference to what is sufficient to enable the Trust to qualify as a regulated investment company under the United States Internal Revenue Code or to avoid liability for Federal income tax). The power granted by this Subsection (g) shall include, without limitation, and if otherwise lawful, the power (A) to declare dividends or distributions or to accrue income to the account of Shareholders by means of a formula or other similar method of determination whether or not the amount of such dividend or distribution can be calculated at the time of such declaration; (B) to establish record or payment dates for dividends or distributions on any basis, including the power to establish a number of record or payment dates subsequent to the declaration of any dividend or distribution; (C) to establish the same payment date for any number of dividends or distributions declared prior to such date; (D) to provide for payment of dividends or distributions declared and as yet unpaid, or unpaid accrued income, to Shareholders redeeming Shares prior to the payment date otherwise applicable; and (E) to provide in advance for conditions under which any dividend or distribution may be payable in Shares to all or less than all of the Shareholders. (h) To acquire (by purchase, lease or otherwise) and to hold, use, maintain, develop and dispose of (by sale, lease or otherwise) any property, real or personal, and any interest therein. (i) To borrow money, and in this connection to issue notes or other evidences of indebtedness; to secure borrowings by mortgaging, pledging or otherwise subjecting to security interests the Trust Property; and to lend Trust Property. (j) To aid by further investment any Person, if any obligation of or interest in such Person is included in the Trust Property or if the Trustees have any direct or indirect interest in the affairs of such Person; to do anything designed to preserve, protect, improve or enhance the value of such obligation or - 5 - interest; and to endorse or guarantee or become surety on any or all of the contracts, stocks, bonds, notes, debentures and other obligations of any such Person; and to mortgage the Trust Property or any part thereof to secure any of or all such obligations. (k) To promote or aid the incorporation of any organization or enterprise under the law of any country, state, municipality or other political subdivision, and to cause the same to be dissolved, wound up, liquidated, merged or conslidated. (l) To enter into joint ventures, general or limited partnerships and any other combinations or association. (m) To purchase and pay for entirely out of Trust Property insurance policies insuring the Shareholders, Trustees, officers, employees and agents of the Trust, the Investment Adviser, the Distributor and dealers or independent contractors of the Trust against all claims and liabilities of every nature arising by reason of holding or having held any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, to the extent the Trust would have the power, under provisions of applicable law, to indemnify such Person against such liability. (n) To establish and carry out pension, profit-sharing, share purchase, share bonus, savings, thrift and other retirement, incentive and benefit plans for any Trustees, officers, employees or agents of the Trust. (o) To the extent permitted by law and determined by the Trustees, to indemnify any Person with whom the Trust has dealings, including, without limitation, the Shareholders, the Trustees, the officers, employees and agents of the Trust, the Investment Adviser, the Distributor, the Transfer Agent, the Custodian and dealers. (p) To incur and pay any charges, taxes and expenses which in the opinion of the Trustees are necessary or incidental to or proper for carrying out any of the purposes of this Declaration, and to pay from the funds of the Trust Property to themselves as Trustees reasonable compensation and reimbursement for expenses. (q) To prosecute or abandon and to compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including but not limited to claims for taxes. (r) To foreclose any security interest securing any obligations owed to the Trust. - 6 - (s) To exercise the right to consent, and to enter into releases, agreements and other instruments, including, but not limited to, the right to consent or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer any security of which is or was held by the Trust; to consent to any contract, lease, mortgage, purchase or sale of such property by said corporation or issuer and to pay calls or subscriptions with respect to securities held by the Trust. (t) To employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust. (u) To determine and change the fiscal year of the Trust and the method in which its accounts shall be kept. (v) To adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust. (w) To take such actions as are authorized or required to be taken by the Trustees pursuant to other provisions of this Declaration. (x) In general to carry on any other business in connection with or incidental to any of the objects and purposes of the Trust, to do everything necessary, suitable or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power herein set forth, either alone or in association with others, and to take any action incidental or appurtenant to or growing out of or connected with the business, purposes, objects or powers of the Trustees. The foregoing clauses shall be construed both as objects and as powers, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Trustees. The Trustees shall not be limited by any law now or hereafter in effect limiting the investments which may be made or retained by fiduciaries, but they shall have full power and authority to make any and all investments within the limitation of this Declaration that they, in their sole and absolute discretion, shall determine, and without liability for loss even though such investments do not or may not produce income or are of a character or in an amount not considered proper for the investment of trust funds. Section 2.2 Legal Title. Legal title to all the Trust Property shall as far as may be practicable be vested in the name of the Trust, which name shall refer to the Trustees in their capacity as Trustees, and not individually or personally, and shall not refer to the officers, agents, employees or Shareholders of the Trust or of the Trustees, provided that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees with suitable reference to their Trustee status, or in the name of the Trust, or in a form - 7 - not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of a custodian or sub-custodian or a nominee or nominees or otherwise. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee. Upon the termination of the term of office of a Trustee, whether upon such Trustee's resignation or removal, or upon the due election and qualification of his successor or upon the occurrence of any of the events specified in the first sentence of Section 2.7 hereof or otherwise, such Trustee shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing of documents have been executed and delivered. Section 2.3 Number of Trustees; Term of Office. The number of Trustees shall be six, which number may be increased and thereafter decreased from time to time by a written instrument signed by a majority of the Trustees, provided, that the number of Trustees shall not be less than two nor more than 15. The Trustees shall hold office until the next Shareholders' meeting and until their successors are elected and qualified or until the earlier occurrence of any events specified in the first sentence of Section 2.7 hereof. Section 2.4 Qualification of Trustees. Of the total number of Trustees, at least 40% shall be persons who are not Interested Persons of the Trust or of the Distributor. Section 2.5 Election of Trustees. Except as otherwise provided in Section 2.7 hereof, the Trustees shall be elected at a special Shareholders' meeting. Trustees may succeed themselves in office. Trustees shall be elected by a plurality of the votes validly cast. The election of any Trustee (other than an individual who was serving as a Trustee immediately prior thereto) shall not become effective, however, until the individual named shall have accepted in writing such election and agreed in writing to be bound by the terms of this Declaration. Trustees need not own Shares. Section 2.6 Resignation and Removal. Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered to the Chairman of the Board, or the Secretary or any Assistant Secretary, and such resignation shall be effective upon such delivery, or at any later date specified in the instrument. The Trustees shall promptly call a special Shareholders' meeting for voting on the question of removal of any Trustee when requested in writing to do so by not less than 10% of the outstanding shares of the Trust. Any of the Trustees may be removed (provided the aggregate number of Trustees after such removal shall not be less than two) with cause by the affirmative vote of two-thirds of the remaining Trustees. Upon the resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. - 8 - Section 2.7 Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, retirement, resignation or removal (whether pursuant to Section 2.6 hereof or otherwise), bankruptcy, adjudication of incompetence or other incapacity to perform the duties of the office of a Trustee. No vacancy shall operate to annul this Declaration or to revoke any existing agency created pursuant to the terms of the Declaration. In the case of an existing vacancy, including a vacancy existing by reason of an increase in the authorized number of Trustees, the remaining Trustees shall, subject to the requirement of Section 2.4 hereof, fill such vacancy by the appointment of such individual as they in their sole and absolute discretion shall see fit, made by a written instrument signed by a majority of the Trustees then in office, provided that immediately after filling any such vacancy at least two-thirds of the Trustees then holding office shall have been elected to such office by the Shareholders. In the event that at any time less than a majority of the Trustees holding office at that time were elected by the Shareholders, a meeting of the Shareholders shall be held promptly and in any event within 60 days (unless the Commission shall by order extend such period) for the purpose of electing Trustees to fill any existing vacancies. No such appointment or election shall become effective, however, until the person named shall have accepted in writing such appointment or election and agreed in writing to be bound by the terms of this Declaration. Whenever a vacancy is filled as provided in this Section 2.7, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. Section 2.8 Committees; Delegation. The Trustees shall have the power to appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including an executive committee which may exercise some or all of the power and authority of the Trustees as the Trustees may determine (including but not limited to the power to determine net asset value and net income), subject to any limitations contained in the By-Laws, and in general to delegate from time to time to one or more of their number or to officers, employees or agents of the Trust such power an authority and the doing of such things and the execution of such instruments, either in the name of the Trust or the names of the Trustees or otherwise, as the Trustees may deem expedient, provided, that no committee shall have the power (a) to change the principal office of the Trust; (b) to amend the By-Laws; (c) to issue Shares; (d) to elect or remove from office any Trustee or the Chairman of the Board, the President, the Treasurer, or the Secretary of the Trust; (e) to increase or decrease the number of Trustees; (f) to declare a dividend or other distribution of the Shares; - 9 - (g) to authorize the repurchase of Shares; or (h) to authorize any merger, consolidation or sale, lease or exchange of all or substantially all of the Trust Property. Section 2.9 Action Without a Meeting; Participation by Conference Telephone. Unless the 1940 Act requires that a particular action must be taken only at a meeting of Trustees, any action required or permitted to be taken at any meeting of the Trustees (or of any committee of the Trustees) may be taken without a meeting if written consents thereto are signed by a majority of the Trustees then in office (or by a majority of the members of such committees) and such written consents are filed with the records of the meetings. Unless the 1940 Act requires that Trustees must be present in person at a meeting of Trustees, Trustees may participate in a meeting of the Trustees (or of any committee of the Trustees) by means of a conference telephone or similar communications equipment if all individuals participating can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 2.10 By-Laws. The Trustees may adopt By-Laws not inconsistent with this Declaration or law to provide for the conduct of the business of the Trust, and may amend or repeal such By-Laws. Section 2.11 No Bond Required. No Trustee shall be obligated to give any bond or other security for the performance of any of his duties hereunder. Section 2.12 Reliance on Experts, Etc. Each Trustee, officer, agent and employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected in relying in good faith upon the books of account or other records of the Trust, or upon reports made to the Trustees (a) by any of the officers or employees of the Trust, (b) by the Investment Adviser, the Investment Sub-Adviser, the Distributor, the Custodian or the Transfer Agent, or (c) by any accountants, selected dealers or appraisers or other agents, experts or consultants selected with reasonable care by the Trustees, regardless of whether such agent, expert of consultant may also be a Trustee. The Trustees, officers, agents and employees of the Trust may take advice of counsel with respect to the meaning and operation of this Declaration, and shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. The exercise by the Trustees of their powers and discretion hereunder and the construction in good faith by the Trustees of the meaning or effect of any provision of this Declaration shall be binding upon everyone interested. A Trustee, officer, agent or employee shall be liable for his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. - 10 - ARTICLE III CONTRACTS Section 3.1 Distribution Contract. The Trustees may from time to time enter into a distribution contract with another Person (the "Distributor") providing for the sale of Shares, pursuant to which the Trustees may agree to sell the Shares to the Distributor or appoint the Distributor their sales agent for the Shares. Such contract may also provide for the repurchase of Shares by the Distributor as agent of the Trustees and shall contain such terms and conditions, if any, as may be prescribed in the By-Laws and such further terms and conditions not inconsistent with the provisions of this Article III or of the By-Laws as the Trustees may in their discretion determine. Section 3.2 Advisory or Management Contract. Subject to approval by a Series Majority Shareholder Vote, the Trustees may from time to time enter into an investment advisory or management contract with other Persons (the "Investment Advisers") pursuant to which such Investment Advisers shall agree to furnish to the Trustees management, investment advisory, statistical and research facilities and services, with respect to one or more of the Portfolios of the Trust, such contracts to contain such other terms and conditions, if any, as may be prescribed in the By-Laws and such further terms and conditions not inconsistent with the provisions of this Article III, the By-Laws or applicable law as the Trustees may in their discretion determine, including the grant of authority to the Investment Adviser to determine what securities shall be purchased or sold by the Portfolios of the Trust and what portion of its assets shall be uninvested and to implement its determinations by making changes in the Portfolio's investments. Such contracts may also provide for the Trust and such Investment Advisers to enter into contracts with Persons ("Investment Sub-Advisers") pursuant to which management, investment advisory, statistical and research facilities may be supplied to the Trust and Investment Adviser. Section 3.3 Affiliations of Trustees or Officers, Etc. The fact that any Shareholder, Trustee, officer, agent or employee of the Trust is a shareholder, member, director, officer, partner, trustee, employee, manager, adviser or distributor of or for any Person or of or for any parent or affiliate of any Person with which an investment advisory or management contract, principal underwriter or distributor contract or custodian, transfer agent, disbursing agent or similar agency contract may have been or may hereafter be made, or that any such Person, or any parent or affiliate thereof, is a Shareholder of or has any other interest in the Trust, or that any such person also has any one or more similar contracts with one or more other such Persons, or has other businesses on interests, shall not affect the validity of any such contract made or that may hereafter be made with the Trustees or disqualify any Shareholder, Trustee, officer, agent or employee of the Trust from voting upon or executing the same or create any liability or accountability to the Trustees, the Trust or the Shareholders. - 11 - ARTICLE IV LIMITATION OF LIABILITY; INDEMNIFICATION Section 4.1 No Personal Liability of Shareholders, Trustees, Etc. No Shareholder shall be subject to any personal liability whatsoever in connection with Trust Property or the acts, obligations or affairs of the Trust. All Persons extending credit to, contracting with or having any claim against the Trust shall look only to the assets of the Trust for payment under such credit, contract or claim, and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, employee or agent (including, without limitation, the Investment Advisor, any Investment Sub-Adviser, the Distributor, the Custodian and the Transfer Agent) of the Trust, nor shall any Trustee be responsible or liable for the act or omission of any other Trustee. Nothing in this Declaration shall, however, protect any Trustee, officer, employee or agent of the Trust against any liability to which such Person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Section 4.2 Execution of Documents; Notice; Apparent Authority. Every note, bond, contract, instrument, certificate or undertaking any every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon. Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall give notice that this Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts and shall recite that the obligations of such instruments are not binding upon any of the Trustees, Shareholders, officers, employees or agents of the Trust individually but are binding only upon the assets and property of the Trust, but the omission thereof shall not operate to bind any Trustees, Shareholders or officers, employees and agents of the Trust individually. No purchaser, lender, Transfer Agent or other Person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by such officer, employee or agent or make inquiry concerning or be liable for the application of money or property paid, loaned or delivered to or on the order of the Trustees or of such officer, employee or agent. Section 4.3 Indemnification of Trustees, Officers, Etc. The Trust shall indemnify each of its Trustees, officers, employees and agents (including any individual who serves at its request as director, officer, partner, trustee or the like of another organization in which it has any interest as a shareholder, creditor or otherwise) against all liabilities and expenses, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties and counsel fees reasonably incurred by him or her in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body in which he or she may be or may have - 12 - been involved as a party or otherwise or with which he or she may be or may have been threatened, while acting as Trustee or as an officer, employee or agent of the Trust or the Trustees, as the case may be, or thereafter, by reason of his or her being or having been such a Trustee, officer, employee or agent, except with respect to any matter as to which he or she shall have been adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best interests of the Trust, provided that no individual shall be indemnified hereunder against any liability to the Trust or the Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office, and provided further that as to any matter disposed of by settlement or a compromise payment by such Trustee, officer, employee or agent, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such compromise is in the best interests of the Trust and that such Person appears to have acted in good faith in the reasonable belief that his or her action was in the best interests of the Trust and did not engage in willful misfeasance, bad faith, gross negligence reckless disregard of the duties involved in the conduct of his or her office. All determinations that the applicable standards of conduct have been met for indemnification hereunder shall be made by (a) a majority vote of a quorum consisting of disinterested Trustees who are not parties to the proceeding relating to indemnification, or (b) if such a quorum is not obtainable or, even if obtainable, if a majority vote of such quorum so directs, by independent legal counsel in a written opinion, or (c) a Majority Shareholder Vote (excluding Shares owned of record or beneficially by such individual); and provided that as to any matter disposed of without a court determination (i) on the merits that such Trustee, officer, employee or agent was not liable or (ii) that such Person was not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office, no indemnification shall be provided hereunder unless there has been a determination by independent legal counsel in a written opinion that such Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. The Trustees may make advance payments in connection with the expense of defending any action with respect to which indemnification might be sought under this Section 4.3; provided that the indemnified Trustee, officer, employee or agent shall have given a written undertaking to reimburse the Trust in the event it is subsequently determined that he or she is not entitled to such indemnification and provided further that (a) the indemnified Trustee, officer, employee or agent shall provide security for his or her undertaking or (b) the Trust shall be insured against losses arising by reason of lawful advances or (c) a majority of a quorum of disinterested Trustees or an independent legal counsel in a written opinion shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that an indemnitee ultimately will be found entitled to indemnification. The rights accruing to any Trustee, officer, employee or agent under these provisions shall not exclude any other right to which he or she may be lawfully entitled and shall inure to the benefit of his or her heirs, executors, administrators or other legal representatives. Section 4.4 Indemnification of Shareholders. In case any Shareholder or former Shareholder shall be held to be personally liable solely by reason of his or her being or having been a Shareholder and not because of acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal - 13 - representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets of the Trust to be held harmless from and indemnified against all loss and expense, including legal expenses reasonably incurred, arising from such liability. The rights accruing to a Shareholder under this Section 4.4 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything contained herein restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. ARTICLE V SHARES OF BENEFICIAL INTEREST Section 5.1 Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable shares of beneficial interest, of $0.001 par value per share ("Shares"). The Trustees shall have the power to classify and reclassify, as the case may be, any unissued Shares into Series relating to portfolios (the "Portfolios") of assets in which the Trust may invest. Each Series of Shares shall be one class, none having preference or priority with each other Share of that Series, and shall represent an equal proportionate interest in the Portfolio to which the Shares relate. The Trustees may from time to time divide or combine the Shares in each Series into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. The number of shares of beneficial interest authorized hereunder is unlimited. Section 5.2 Rights of Shareholders. Shares shall be deemed to be personal property giving only the rights provided in this Declaration. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. The ownership of the Trust Property and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the same nor to entitle the legal representative of such Shareholder to an accounting or to take any action in any court or otherwise against other Shareholders or the Trustees or the Trust Property, but only to the rights of such Shareholder hereunder. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights. Section 5.3 Trust Only. The Trust shall be of the type commonly termed a Massachusetts business trust. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. - 14 - Section 5.4 Issuance of Shares. Section 5.4.1 General. The Trustees may from time to time without vote of the Shareholders issue and sell or cause to be issued and sold Shares, except that only Shares previously contracted to be sold may be issued during any period when the right of redemption is suspended pursuant to the provisions of Section 6.6 hereof. All such Shares, when issued in accordance with the terms of this Section 5.4, shall be fully paid and nonassessable. Section 5.4.2 Price. No Shares shall be issued or sold by the Trustees for less than an amount which would result in proceeds to the Trust, before taxes and other expenses payable by the Trust in connection with such transaction, of at least the net asset value per share next determined as set forth in Article VII hereof after receipt of a purchase order for such Shares. For this purpose, the time of receipt of an order shall be the time it is first received in proper form at such office or agency as may be designated for the purpose. Section 5.4.3 On Merger or Consolidation. In connection with the acquisition of assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities), businesses or stock of another Person, the Trustees may issue or cause to be issued Shares and accept in payment therefor, in lieu of cash, such assets or businesses at their market value (as determined by the Trustees) or such stock at the market value (as determined by the Trustees) of the assets held by such other Person, either with or without adjustment for contingent costs or liabilities, provided that the funds of the Trust are permitted by law to be invested in such assets, businesses or stock. Section 5.4.4 Fractional Shares. The Trustees may issue and sell fractions of Shares, to two decimal places, having pro rata all the rights of full Shares, including, without limitation, the right to vote and to receive dividends and distributions. Section 5.5 Register of Shares. A register shall be kept at the principal office of the Trust or an office of the Transfer Agent which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein or in the By-Laws provided, until he has given his address to the Transfer Agent or such other officer or agent of the Trust as shall keep the said register for entry thereon. Section 5.6 Share Certificates. Section 5.6.1 General. Each shareholder shall be entitled to a certificate stating the number of Shares he or she owns, in such form as shall be prescribed from time to time by the Trustees. Such certificates shall be signed by the Chairman of the Board, President or Vice President and by the Treasurer or Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent, or by a registrar, other than a Trustee, officer or - 15 - employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall cease to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if he or she were such officer at the time of its issue. In lieu of issuing certificates for shares, the Trustees or the transfer agent may either issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such shares, who shall in either case be deemed, for all purposes hereunder, to be the holders of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. Section 5.6.2 Loss of Certificates. In case of the alleged loss or destruction or the mutilation of a share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees shall prescribe. Section 5.6.3 Issuance of New Certificates to Pledgee. A pledge of shares transferred as collateral security shall be entitled to a new certificate if the instrument of transfer substantially describes the debt or duty that is intended to be secured thereby. Such new certificate shall express on its face that it is held as collateral security, and the name of the pledgor shall be stated thereon, who alone shall be liable as a shareholder and entitled to vote thereon. Section 5.6.4 Discontinuance of Issuance of Certificates. The Trustees may at any time discontinue the issuance of share certificates and may, by written notice to each shareholder, require the surrender of share certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of Shares in the Trust. Section 5.7 Transfer of Shares. Shares shall be transferable on the records of the Trust upon delivery to the Trust or the Transfer Agent or Agents of appropriate evidence of assignment, transfer, succession or authority to transfer accompanied by any certificate or certificates representing such Shares previously issued to the transferor. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Trustees, the Transfer Agent, and the officers, employees and agents of the Trust shall not be entitled or required to treat the assignee or transferee of any Share as the absolute owner thereof for any purpose, and accordingly shall not be bound to recognize any legal, equitable or other claim or interest in such Share on the part of any Person, other than the holder of record, whether or not any of them shall have express or other notice of such claim or interest. Section 5.8 Voting Powers. The Shareholders shall have power to vote only: (a) for the election of Trustees as provided in Sections 2.5 and 2.7 hereof; (b) with respect to any investment advisory or management contract entered into pursuant to Section 3.2 hereof; (c) with respect to any termination of the Trust, as provided in Section 9.1 hereof; (d) with respect to any amendment of this Declaration to the extent and as provided in Section 9.2 hereof; (e) with respect to any merger, consolidation or sale of assets of the Trust as provided in Section 9.3 hereof; (f) with respect to incorporation of the Trust to the extent and as provided in Section 9.4 hereof; (g) to the same extent as the stockholders of a Massachusetts business corporation as to - 16 - whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the shareholders; and (h) with respect to such additional matters relating to the Trust as may be required by this Declaration or the By-laws or by reason of the registration of the Trust or the Shares with the Commission or any State or by any applicable law or any regulation or order of the Commission or any State or as the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which Shareholders are entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. On any matter submitted to a vote of Shareholders, all Shares issued and outstanding small be voted in the aggregate and not by Series except (i) when required by the 1940 Act or (ii) when the matter does not affect any interest of a particular Series, only Shareholders of affected Series shall be entitled to vote thereon. A majority of the Shares voted shall decide any questions, except when a different vote is specified by applicable law, any provision of the By-Laws or this Declaration. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by Proxy. Until Shares are issued, the Trustees may exercise all rights of Shareholders (including the right to authorize an amendment to this Declaration under Section 9.2 hereof) and may take any action required by law, the By-Laws or this Declaration to be taken by Shareholders. The By-Laws may include further provisions for Shareholders' votes and related matters. Section 5.9 Transfer of Shares. Special meeting of the Shareholders shall be held for the purpose of reelecting Trustees or electing new Trustees in place of and to succeed those in office at that time or to fill vacancies and for such other purposes as may be specified by the Trustees. Special meetings of the Shareholders may be called at any time by the Chairman of the Board, the President or any Vice President of the Trust, or by a majority of the Trustees for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or upon any other matters deemed to be necessary or desirable. A special meeting of Shareholders may also be called at any time upon the written request of a holder or the holders of not less than 25% of all of the Shares entitled to be voted at such meeting, provided that the Shareholder or Shareholders requesting such meeting shall have paid to the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such Shareholder or Shareholders. Section 5.10 Action Without a Meeting. Any action which may be taken by Shareholders may be taken without a meeting if such proportion of Shareholders as is required to vote for approval of the matter by law, the Declaration or the By-Laws consents to the action in writing and the written consents are filed with the records of Shareholders' meeting. Such consents shall be treated for all purposes as a vote taken at a Shareholders' meeting. ARTICLE VI REDEMPTION AND REPURCHASE OF SHARES Section 6.1 Redemption of Shares. The Trustees shall redeem Shares, subject to the conditions and at the price determined as herein set forth, upon proper application of the record holder thereof at such office or agency as may be designated from time to time for that - 17 - purpose by the Trustees. The Trustees shall have power to determine from time to time the form and the other accompanying documents which shall be necessary to constitute a proper application for redemption. Section 6.2 Price. Such Shares shall be redeemed for an amount not exceeding the net asset value of such Shares next determined as set forth in Article VII hereof after receipt of a proper application for redemption. Section 6.3 Payment. Payment for such Shares redeemed shall be made to the Shareholder of record within 7 days after the date upon which proper application is received, subject to the Trustees or their designated agent being satisfied that the purchase price of such Shares has been collected and to the provisions of Section 6.4 hereof. Such payment shall be made in cash or other assets of the Trust or both, as the Trustees shall prescribe. For the purposes of such payment for Shares redeemed, the value of assets delivered shall be determined as set forth in Article VII hereof as of the same time as of which the per share net asset value of such Shares is determined. Section 6.4 Effect of Suspension of Right of Redemption. If, pursuant to Section 6.6 hereof, the Trustees shall declare a suspension of the right of redemption, the rights of Shareholders (including those who shall have applied for redemption pursuant to Section 6.1 hereof but who shall not yet have received payment) to have Shares redeemed and paid for by the Trust shall be suspended until the time specified in Section 6.6. Any record holder who shall have his redemption right so suspended may, during the period of such suspension, by appropriate written notice of revocation at the office or agency where application was made, revoke any application for redemption not honored. The redemption price of Shares for which redemption applications have not been revoked shall not exceed the net asset value of such Shares next determined as set forth in Article VII hereof after the termination of such suspension, and payment shall be made within 7 days after the date upon which the application was made plus the period after such application during which the determination of net asset value was suspended. Section 6.5 Repurchase by Agreement. The Trust may repurchase Shares directly, or through the Distributor or another agent designated for the purpose, by agreement with the owner thereof at a price not exceeding the net asset value per share next determined as set forth in Article VII hereof after the time when the contract of purchase is made. Section 6.6 Suspension of Right of Redemption. The Trustees may declare a suspension of the right of redemption or postpone the date of payment or redemption for the whole or any part of any period (a) during which the New York Stock Exchange is closed, other than customary weekend and holiday closings, (b) during which trading on the New York Stock Exchange is restricted, (c) during which an emergency exists as a result of which disposal by the Trustees of securities owned by them is not reasonably practicable or it is not reasonably practicable for the Trustees fairly to determine the value of the net assets of the Trust, or (d) during which the Commission may for the protection of security holders of the Trust by order permit suspension of the right of redemption or postponement of the date of payment or - 18 - redemption. Such suspension shall take effect at such time as the Trustees shall specify, which shall not be later than the close of business on the business day next following the declaration, and thereafter there shall be no determination of net asset value until the Trustees shall declare the suspension at an end, except that the suspension shall terminate in any event on the first day on which (i) the condition giving rise to the suspension shall have ceased to exist and (ii) no other condition exists under which suspension is authorized under this Section 6.6. Each declaration by the Trustees pursuant to this Section 6.6 shall be consistent with such applicable rules and regulations, if any, relating to the subject matter thereof as shall have been promulgated by the Commission or any other governmental body having jurisdiction over the Trust and as shall be in effect at the time. To the extent not inconsistent with such rules and regulations, the determination of the Trustees shall be conclusive. Section 6.7 Involuntary Redemption of Shares; Disclosure of Holding. (a) If the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares or other securities of the Trust has or may become concentrated in any Person to an extent which would disqualify the Trust as a regulated investment company under the United States Internal Revenue Code, then the Trustees shall have the power by lot or other means deemed equitable by them (i) to call for redemption a number, or principal amount, of Shares sufficient in the opinion of the Trustees to maintain or bring the direct or indirect ownership of Shares into conformity with the requirements for such qualification and (ii) to refuse to transfer or issue Shares to any Person whose acquisition of the Shares in question would in the opinion of the Trustees result in such disqualification. Any redemption pursuant to this Section 6.7(a) shall be effected at a redemption price determined in accordance with Section 6.2 hereof. (b) The holders of Shares shall upon request disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares as the Trustees deem necessary to comply with the provisions of the United States Internal Revenue Code, or to comply with the requirements of any other taxing authority. (c) The Trustees shall have the power to redeem Shares in any account at a redemption price determined in accordance with Section 6.2 hereof if at any time the total number of Shares held in such account is fewer than 100, in which event Shareholders shall be notified that the number of their Shares is fewer than 100 and allowed 30 days to purchase additional Shares before their Shares are redeemed. - 19 - ARTICLE VII DETERMINATION OF NET ASSET VALUE; DISTRIBUTIONS Section 7.1 By Whom Determined. The Trustees shall have the power and duty to determine from time to time the net asset value per share of the Shares. They may appoint one or more Persons to assist them in the determination of the value of securities in the Trust's portfolio and to make the actual calculations pursuant to their directions. Any determination made pursuant to this Article VII shall be binding on all parties concerned. Section 7.2 When Determined. The net asset value shall be determined at such times as the Trustees shall prescribe in accordance with the applicable provisions of the 1940 Act and regulations and orders from time to time in effect thereunder. The Trustees may suspend the daily determination of net asset value to the extent permitted by the 1940 Act or the regulations and orders from time to time in effect thereunder. Section 7.3 Computation of Per Share Net Asset Value. Section 7.3.1 Net Asset Value Per Share. The net asset value of each Share as of any particular time shall be the quotient obtained by dividing the value of the net assets of the Trust (determined in accordance with Section 7.3.2) by the total number of outstanding Shares. Section 7.3.2 Value of the Net Assets of the Trust. The value of the net assets of the Trust as of any particular time shall be the value of the Trust's assets less its liabilities, determined and computed as follows: (1) Trust's Assets. The Trust's assets shall be deemed to include: (A) all cash on hand or on deposit, including any interest accrued thereon, (B) all bills and demand notes and accounts receivable, (C) all securities owned or contracted for by the Trustees, (D) all stock and cash dividends and cash distributions payable to but not yet received by the Trustees (when the valuation of the underlying security is being determined ex-dividend), (E) all interest accrued on any interest-bearing securities owned by the Trustees (except accrued interest included in the valuation of the underlying security) and (F) all other property of every kind and nature, including prepaid expenses. (2) Valuation of Assets. The value of such assets is to be determined as follows: (i) Cash and Prepaid Expenses. The value of any cash on hand and of any prepaid expenses shall be deemed to be their full amount. (ii) Other Current Assets. The value of any accounts receivable and cash dividends and interest declared or accrued as aforesaid and not - 20 - yet received shall be deemed to be the full amount thereof, unless the Trustees shall determine that any such item is not worth its full amount. In such case the value of the item shall be deemed to be its reasonable value, as determined by the Trustees. (iii) Securities and Other Property. A security for which market quotations are readily available which is not subject to restrictions against sale and has a remaining maturity of more than 60 days from the date of valuation may be valued on the basis of such quotations. Any security which has a remaining maturity of 60 days or less may be valued at cost plus earned discount; if such security was acquired with a remaining maturity of more than 60 days, the cost thereof for purposes of such valuation shall be deemed to be the value on the sixty-first day prior to maturity. Any security for which market quotations are not readily available and any other property the valuation of which is not provided for above, shall be valued at its fair market value as determined in such manner as the Trustees shall from time to time prescribe by resolution. For the purposes of this Article VII, market quotations shall not be deemed to be readily available if in the judgment of the Trustees such quotations, if any, do not afford a fair and adequate basis for valuing holdings of securities of a size normally held by the Trust, whether due to the infrequency or size of the transactions represented by such quotations or otherwise. (3) Liabilities. The Trust's liabilities shall not be deemed to include any Shares and surplus, but they shall be deemed to include: (A) all bills And accounts payable, (B) all administrative expenses accrued and unpaid, (C) all contractual obligations for the payment of money or property, including the amount of any declared but unpaid dividends upon Shares and the amount of all income accrued but not paid to Shareholders, (D) all reserves authorized or approved by the Trustees for taxes or contingencies and (E) all other liabilities of whatsoever kind and nature except any liabilities represented by Shares and surplus. (4) Series of Shares. When the Trust has more than one Series of Shares outstanding relating to separate Portfolios of assets and liabilities, the net asset value of the Shares as determined in Section 7.3.2 hereof shall be determined as if each such Portfolio were the Trust as referred to in such computation, but with its assets limited to the assets belonging to such Portfolio, its liabilities limited to the liabilities belonging to such Portfolio and the total number of Shares deemed to be outstanding limited to the outstanding Shares of such Series. Section 7.4 Interim Determinations. Any determination of net asset value other than as of the close of trading on the New York Stock Exchange may be made either by - 21 - appraisal or by calculation or estimate. Any such calculation or estimate shall be based on changes in the market value of representative or selected securities or on changes in recognized market averages since the last closing appraisal and made in a manner which in the opinion of the Trustees will fairly reflect the changes in the net asset value. Section 7.5 Outstanding Shares. For the purposes of this Article VII, outstanding Shares shall mean those Shares shown from time to time on the books of the Trust or the Transfer Agent as then issued and outstanding, adjusted as follows: (a) Shares sold shall be deemed to be outstanding Shares from the time when the sale is reported to the Trustees or their agents for determining net asset value, but not before (i) an unconditional purchase order therefor has been received by the Trustees (directly or through one of their agents) or by the Principal Underwriter of the Shares and the sale price in currency has been determined and (ii) receipt by the Trustees (directly or through one of their agents) of Federal funds in the amount of the sale price; and such sale price (net of commission, if any, and any stamp or other tax payable by the Trust in connection with the issue and sale of the Shares sold) shall be thereupon deemed to be an asset of the Trust. (b) Shares distributed pursuant to Section 7.6 shall be deemed to be outstanding as of the time that Shareholders who shall receive the distribution are determined. (c) Shares for which a proper application for redemption has been made or which are subject to repurchase by the Trustees shall be deemed to be outstanding Shares up to and including the time as of which the redemption or repurchase price is determined. After such time, they shall be deemed to be no longer outstanding Shares and the redemption or purchase price until paid shall be deemed to be a liability of the Trust. Section 7.6 Distributions to Shareholders. Without limiting the powers of the Trustees under Subsection (f) of Section 2.1 of Article II hereof, the Trustees may at any time and from time to time, as they may determine, allocate or distribute to Shareholders of each Series such income and capital gains of the Portfolio related to the Series, accrued or realized, as the Trustees may determine, after providing for actual, accrued or estimated expenses and liabilities (including such reserves as the Trustees may establish) determined in accordance with generally accepted accounting practices. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Such distributions shall be made in cash, property or Shares or any combination thereof as determined by the Trustees. Any such distribution paid in Shares shall be paid at the net asset value thereof as determined pursuant to this Article VII. The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans or related plans as the Trustees shall deem appropriate. Inasmuch as the computation of net income and gains for Federal income tax purposes may vary from the - 22 - computation thereof on the books of the Trust, the above provisions shall be interpreted to give the Trustees the power in their discretion to allocate or distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes. Section 7.7 Power to Modify Foregoing Procedures. Notwithstanding any of the foregoing provisions of this Article VII, the Trustees may prescribe, in their absolute discretion, such other bases and times for the determination of the per share net asset value of Shares as may be permitted by, or as they may deem necessary or desirable to enable the Trust to comply with, any provision of the 1940 Act, any rule or regulation thereunder (including any rule or regulation adopted pursuant to Section 22 of the 1940 Act by the Commission or any securities association or exchange registered under the Securities Exchange Act of 1934, as amended) or any order of exemption issued by the Commission, all as in effect now or as hereafter amended or modified. ARTICLE VIII CUSTODIAN Section 8.1 Appointment and Duties. Subject to the 1940 Act and such rules, regulations and orders as the Commission may adopt, the Trustees shall employ a bank or trust company having a capital, surplus and undivided profits of at least $2,000,000 as custodian with authority as the agent of the Trust, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-laws of the Trust: (a) to hold the securities owned by the Trust and deliver the same upon written order; (b) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; and (c) to disburse such funds upon orders or vouchers. The Trustees may authorize such custodian as the agent of the Trust (x) to keep the books and accounts of the Trust and furnish clerical and accounting services and (y) to compute the net income and the value of the net assets of the Trust. The Trustees may also authorize the Investment Adviser or an affiliate of the Investment Adviser to be the custodian. The acts and services of the custodian shall be performed upon such basis of compensation as may be agreed upon by the Trustees and the custodian. If so directed by a - 23 - Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank or trust company organized under the laws of the United States of one of the states thereof and having capital, surplus and undivided profits of at least $2,000,000. ' Section 8.2 Action Upon Termination of Custodian Agreement. Upon termination of a custodian agreement or inability of any custodian to continue to serve, the Trustees shall promptly appoint a successor custodian, but in the event that no successor custodian can be found who has the required qualifications and is willing to serve, the Trustees shall call as promptly as possible a special Shareholders' meeting to determine whether the Trust shall function without a Custodian or shall be liquidated. If so directed by vote of the holders of a majority of the Shares outstanding and entitled to vote, the custodian shall deliver and pay over all Trust Property held by it as specified in such vote. Section 8.3 Central Certificate System, Etc. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust. Section 8.4 Acceptance of Receipts in Lieu of Certificates. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to accept written receipts or other written evidences indicating purchases of securities held in book-entry form in the Federal Reserve System in accordance with regulations promulgated by the Board of Governors of the Federal Reserve System and the local Federal Reserve Banks in lieu or receipt of certificates representing such securities. ARTICLE IX DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC Section 9.1 Duration and Termination. (a) Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated by the affirmative vote of at least 66 2/3% of the Shares outstanding or, when authorized by a Majority - 24 - Shareholder Vote, by an instrument in writing signed by a majority of the Trustees. Upon the termination of the Trust, (i) the Trust shall carry on no business except for the purpose of winding up its affairs. (ii) the Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business, provided that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all the Trust Property that requires Shareholder approval under Section 9.3 hereof shall receive the approval so required. (iii) after paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among the Shareholders according to their respective rights. (b) After termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall there, cease. Section 9.2 Amendment Procedure. (a) This Declaration may be amended from time to time by an instrument in writing signed by a majority of the Trustees when authorized by a Majority Shareholder Vote, provided that any amendment having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision shall not require authorization by the Shareholders. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (b) A certificate signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted as aforesaid, or a copy of this Declaration as amended, executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. - 25 - (c) Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust shall become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees. Section 9.3 Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property, including its good will, upon such terms and conditions and for such consideration when and as authorized at any Shareholders' meeting called for the purpose by a Majority Shareholder Vote. Section 9.4 Incorporation. With the approval of a Majority Shareholder Vote, the Trustees may cause to be organized or assist in organizing under the laws of any jurisdiction a corporation or corporations or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and may sell, convey and transfer the Trust Property to any such corporation, trust, partnership, association or other organization in exchange for the shares or securities thereof or otherwise, and may lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or other organization, or any corporation, partnership, trust, association or other organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring less than all or substantially all of the Trust Property to such organization or entities. Section 9.5 Series Vote. When the 1940 Act so requires, the actions permitted under this Article IX shall be authorized by a Series Majority Shareholder Vote. ARTICLE X REPORTS TO SHAREHOLDERS The Trustees shall at least semi-annually submit to the Shareholders a written financial report of the transactions of the Trust, including financial statements which shall at least annually be accompanied by a report thereon of independent public accountants. - 26 - ARTICLE XI MISCELLANEOUS Section 11.1 Filing. This Declaration and any amendment hereto shall be filed with the Secretary of the Commonwealth of Massachusetts and in such other places as may be required under the laws of the Commonwealth of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Unless any such amendment sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its filing with the Secretary of the Commonwealth of Massachusetts. A restated Declaration, integrating into a single instrument all of the provisions of this Declaration which are then in effect and operative, may be executed from time to time by a majority of the Trustees and shall, upon filing with the Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may hereafter be referred to in lieu of the original Declaration and the various amendments thereto. Section 11.2 Governing Law. This Declaration is executed by the Trustees and delivered in the Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said Commonwealth. Section 11.3 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instruments, which shall be sufficiently evidenced by any such original counterpart. Section 11.4 Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust, appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees and their successors. Section 11.5 Provisions in Conflict with Law or Regulations. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with requirements of the 1940 Act, would be inconsistent with any of the conditions necessary for qualification of the Trust as a regulated investment company under the United States Internal Code or is inconsistent with other applicable laws and regulations, such provision shall be deemed never to have constituted a part of this Declaration, provided that such determination shall not affect any of the remaining - 27 - provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provisions of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. Section 11.6 Section Headings; Interpretation. Section headings in this Declaration are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof. References in this Declaration to "this Declaration" shall be deemed to refer to this Declaration as from time to time amended, and all expressions such as "thereof", "herein"' and "hereunder" shall be deemed to refer to this Declaration and not exclusively to the article or section in which such words appear. Section 11.7 Registered Agent. The registered agent for the Trust is Pamela J. Wilson, Esq., Gaston Snow, One Federal Street, Boston, Massachusetts 02110. - 28 - IN WITNESS WHEREOF, the undersigned have executed this instrument this _____, day of November, 1989. ------------------------------ John P. Pfann, as Trustee and not individually The name and address of the sole Trustee is: John P. Pfann J.P.P. Equities, Inc. 3 Hollis Drive HoHoKus, New Jersey 07423 STATE OF NEW JERSEY State of New Jersey, City of HoHoKus,, to wit: I hereby certify, that on this _____ day of November, in the year 1989, before the subscriber, _____________________, personally appeared John P. Pfann and acknowledged the foregoing document to be his free act and deed. Before me, ------------------------------ Notary Public My commission expires: - 29 - MARINER MUTUAL FUNDS TRUST CERTIFICATE OF INCUMBENCY Trustee Principal Address - ------- ----------------- John P. Pfann 600 W. Hillsboro Blvd. Suite 300 Deerfield Beach, Florida 33441 EX-99.2 9 BY-LAWS Exhibit 2 By-Laws BY-LAWS OF MARINER MUTUAL FUNDS TRUST As adopted on November 1, 1989 Table of Contents
Page ---- ARTICLE I -- Definitions..........................................................................................1 ARTICLE II -- Offices and Seal....................................................................................1 Section 2.1 Principal Office.......................................................................1 Section 2.2 Registered Office......................................................................1 Section 2.3 Other Offices..........................................................................1 Section 2.4 Seal...................................................................................1 ARTICLE III -- Shareholders.......................................................................................2 Section 3.1 Meetings...............................................................................2 Section 3.2 Place of Meeting.......................................................................2 Section 3.3 Notice of Meetings.....................................................................2 Section 3.4 Shareholders Entitled to Vote..........................................................3 Section 3.5 Quorum.................................................................................3 Section 3.6 Adjournment............................................................................3 Section 3.7 Proxies................................................................................4 Section 3.8 Inspection of Records..................................................................4 Section 3.9 Record Dates...........................................................................4 ARTICLE IV -- Meetings of Trustees................................................................................5 Section 4.1 Regular Meetings.......................................................................5 Section 4.2 Special Meetings.......................................................................5 Section 4.3 Notice.................................................................................5 Section 4.4 Waiver of Notice.......................................................................5 Section 4.5 Quorum, Adjournment and Voting.........................................................6 Section 4.6 Compensation...........................................................................6 ARTICLE V -- Executive Committee and Other Committees.............................................................6 Section 5.1 How Constituted........................................................................6 Section 5.2 Powers of the Executive Committee......................................................6 Section 5.3 Other Committees of Trustees...........................................................7 Section 5.4 Proceedings, Quorum and Manner of Acting...............................................7 Section 5.5 Other Committees.......................................................................7
i
ARTICLE VI -- Officers............................................................................................8 Section 6.1 General................................................................................8 Section 6.2 Election, Term of Office and Qulifications.............................................8 Section 6.3 Resignations and Removals..............................................................8 Section 6.4 Vacancies and Newly Created Offices....................................................9 Section 6.5 Chairman of the Board..................................................................9 Section 6.6 President..............................................................................9 Section 6.7 Vice President........................................................................10 Section 6.8 Treasurer and Assistant Treasurers....................................................10 Section 6.9 Secretary and Assistant Secretaries...................................................10 Section 6.10 Subordinate Officers..................................................................11 Section 6.11 Remuneration..........................................................................11 Section 6.12 Surety Bonds..........................................................................11 ARTICLE VII -- Execution of Instruments, Voting of Securities ...................................................12 Section 7.1 Execution of Instruments..............................................................12 Section 7.2 Voting of Securities..................................................................12 ARTICLE VIII -- Fiscal Year, Accountants.........................................................................13 Section 8.1 Fiscal Year...........................................................................13 Section 8.2 Accountants...........................................................................13 ARTICLE IX -- Amendments.........................................................................................14 Section 9.1 General...............................................................................14
ii BY-LAWS OF MARINER MUTUAL FUNDS TRUST ARTICLE I Definitions The terms "Affiliated Person", "Commission", "Declaration", "Interested Person", "Investment Adviser", "Majority Shareholder Vote", "1940 Act", Principal Underwriter", "Series", "Series Majority Shareholder Vote, "Shareholder", "Shares", "Trust", "Trust Property" and "Trustees" have the meanings given them in the Declaration of Trust (the "Declaration") of Mariner Mutual Funds Trust (the "Trust"), dated November 1, 1989, as amended from time to time. ARTICLE II Offices and Seal Section 2.1 Principal Office. The principal office of the Trust shall be located in the City of New York, State of New York. Section 2.2 Registered Office. The Trust shall maintain a registered office in the City of Boston, Commonwealth of Massachusetts. Section 2.3 Other Offices. The Trust may establish and maintain such other offices and places of business within or without the Commonwealth of Massachusetts as the Trustees may from, time to time determine. Section 2.4 Seal. The seal of the Trust shall be circular in form and shall bear the name of the Trust, the year of its organization, and the words "Common Seal" and "A Massachusetts Voluntary Association". The form of the seal shall be subject to alteration by the Trustees and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Trustee of the Trust shall have authority to affix the seal of the Trust to any document requiring the same but, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and its absence shall not impair the validity, of any document, instrument or other paper executed and delivered by or on behalf of the Trust. ARTICLE III Shareholders Section 3.1 Meetings. A Shareholders' meeting for the election of Trustees and the transaction of other proper business shall be held when authorized under or required by the Declaration. Section 3.2 Place of Meeting. All Shareholders' meetings shall be held at such place within or without the Commonwealth of Massachusetts as the Trustees shall designate. Section 3.3 Notice of Meetings. Notice of all Shareholders' meetings, stating the time, place and purpose of the meeting, shall be given by the Secretary or an Assistant Secretary of the Trust by mail to each Shareholder entitled to notice of and to vote at such meeting at his address as recorded on the register of the Trust mailed at least 10 days and not more than 60 days before the meeting. Such notice shall be deemed to be given when deposited in the United States mail, with postage thereon prepaid. Any adjourned meeting may be held as adjourned without further notice. No notice need be given (a) to any Shareholder if a written waiver of notice, executed before or after the meeting by such Shareholder or his attorney thereunto duly authorized, is filed with the records of the meeting, or (b) to any Shareholder who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A waiver of notice need not specify the purposes of the meeting. - 2 - Section 3.4 Shareholders Entitled to Vote. If, pursuant to Section 3.9 hereof, a record date has been fixed for the determination of Shareholders entitled to notice of and to vote at any Shareholders' meeting, each Shareholder of the Trust shall be entitled to vote, in person or by proxy, each Share or fraction thereof standing in his name on the register of the Trust at the time of determining net asset value on such record date. If the Declaration or the 1940 Act require that Shares be voted by Series, each Shareholder shall only be entitled to vote, in person or by proxy, each Share or fraction thereof of such Series standing in his name on the register of the Trust at the time of determining net asset value on such record date. If no record date has been fixed for the determination of Shareholders so entitled, the record date for the determination of Shareholders entitled to notice of and to vote at a Shareholders' meeting shall be at the close of business on the day on which notice of the meeting is mailed or, if notice is waived by all Shareholders, at the close of business on the tenth day next preceding the day on which the meeting is held. Section 3.5 Quorum. The presence at any Shareholders' meeting in person or by proxy, of Shareholders entitled to cast a majority of the votes thereat shall be a quorum for the transaction of business. Section 3.6 Adjournment. The holders of a majority of the Shares entitled to vote at the meeting and present thereat in person or by proxy, whether or not constituting a quorum, or, if no Shareholder entitled to vote is present thereat in person or by proxy, any Trustee or officer present thereat entitled to preside or act as Secretary of such meeting, may adjourn the meeting sine die or from time to time. Any business that might have been transacted at the meeting originally called may be transacted at any such adjourned meeting at which a quorum is present. - 3 - Section 3.7 Proxies. Shares may be voted in person or by proxy. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Share unless at or prior to exercise of the vote the trustees receive a specific written notice to the contrary from any one of them, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote cast, such vote shall not be received in respect of such Share. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Section 3.8 Inspection of Records. The records of the Trust shall be open to inspection by Shareholders to the same extent as is permitted shareholders of a Massachusetts business corporation. Section 3.9 Record Dates. The Trustees may fix in advance a date as a record date for the purpose of determining the Shareholders who are entitled to notice of and to vote at any meeting or any adjournment thereof, or to express consent in writing without a meeting to any action of the Trustees, or who shall receive payment of any dividend or of any other distribution, or for the purpose of any other lawful action, provided that such record date shall be not more than 60 days before the date on which the particular action requiring such determination of Shareholders is to be taken. In such case, subject to the provisions of Section 3.4, each eligible Shareholder of record on such record date shall be entitled to notice of, and to vote at, such meeting or adjournment, or to express such consent, or to receive payment of such dividend or distribution or to take such other action, as the case may be, notwithstanding any transfer of Shares on the register of the Trust after the record date. - 4 - ARTICLE IV Meetings of Trustees Section 4.1 Regular Meetings. The Trustees from time to time shall provide by resolution for the holding of regular meetings for the election of officers and the transaction of other proper business and fix their time and place within or without the Commonwealth of Massachusetts. Section 4.2 Special Meetings. Special meetings of the Trustees shall be held whenever called by the Chairman of the Board, the President (or, in the absence or disability of the President, by any Vice President), the Treasurer, the Secretary or two or more Trustees, at the time and place within or without the Commonwealth of Massachusetts specified in the respective notices or waivers of notice of such meetings. Section 4.3 Notice. Notice of regular and special meetings, stating the time and place, shall be (a) mailed to each Trustee at his residence or regular place of business at least five days before the day on which the meeting is to be held or (b) caused to be delivered to him personally or to be transmitted to him by telegraph, cable or wireless at least two days before the day on which the meeting is to be held. Unless otherwise required by law, such notice need not include a statement of the business to be transacted at, or the purpose of, the meeting. No notice of adjournment of a meeting of the Trustees to another time or place need be given if such time and place are announced at such meeting. Section 4.4 Waiver of Notice. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior - 5 - thereto or at its commencement the lack of notice to him. A waiver of notice need not specify the purposes of the meeting. Section 4.5 Quorum, Adjournment and Voting. At all meetings of the Trustees, the presence of a majority of the total number of Trustees authorized, but not less than two, shall constitute a quorum for the transaction of business. A majority of the Trustees present, whether or not constituting a quorum, may adjourn the meeting, from time to time. The action of a majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Trustees unless the concurrence of a greater proportion is required for such action by law, by the Declaration or by these By-Laws. Section 4.6 Compensation. Each Trustee may receive such remuneration for his services as such as shall be fixed from time to time by resolution of the Trustees. ARTICLE V Executive Committee and Other Committees Section 5.1 How Constituted. The Trustees may, by resolution, designate one or more committees, including an Executive Committee, an Audit Committee, a Nominating Committee and a Committee on Administration, each consisting of at least two Trustees. The Trustees may, by resolution, designate one or more alternate members of any committee to serve in the absence of any member or other alternate member of such committee. Each member and alternate member of a committee shall be a Trustee and shall hold office at the pleasure of the Trustees. The Chairman of the Board and the President shall be members of the Executive Committee. Section 5.2 Powers of the Executive Committee. Unless otherwise provided by resolution of the Trustees, the Executive Committee shall have and may exercise all of the - 6 - power and authority of the Trustees, provided that the power and authority of the Executive Committee shall be subject to the limitations contained in the Declaration. Section 5.3 Other Committees of Trustees. To the extent provided by resolution of the Trustees, other committees shall have and may exercise any of the power and authority that may lawfully be granted to the Executive Committee. Section 5.4 Proceedings, Quorum and Manner of Acting. In the absence of appropriate resolution of the Trustees' each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be less than two Trustees. In the absence of any member or alternate member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a Trustee to act in the place of such absent member or alternate member. Members and alternate members of a committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5.5 Other Committees. The Trustees may appoint other committees, each consisting of one or more persons who need not be Trustees. Each such committee shall have such powers and perform such duties as may be assigned to it from time to time by the Trustees, but shall not exercise any power which may lawfully be exercised only by the Trustees or a committee thereof. - 7 - ARTICLE VI Officers Section 6.1 General. The officers of the Trust shall be a Chairman of the Board, a President, a Secretary, and a Treasurer, and may include one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 6.10 of this Article VI. Section 6.2 Election, Term of Office and Qualifications. The officers of the Trust (except those appointed pursuant to Section 6.10) shall be elected by the Trustees at their first meeting. If any officer or officers are not elected at any such meeting, such officer or officers may be elected at any subsequent regular or special meeting of the Trustees. Each officer elected by the Trustees shall hold office subject to Sections 6.3 and 6.4 of this Article VI and until his successor shall have been chosen and qualified. No person shall hold more than one office of the Trust, except that the President may hold the office of Chairman of the Board and any Treasurer, Assistant Treasurer, Secretary or Assistant Secretary of the Trust may also hold the office of Vice President. The Chairman of the Board and the President shall be selected from among the Trustees of the Trust and may hold such offices only so long as they continue to be Trustees. Any Trustee or officer may be but need not be a Shareholder of the Trust. Section 6.3 Resignations and Removals. Any officer may resign his office at any time by delivering a written resignation to the Trustees, the President, the Secretary or any Assistant Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any officer may be removed from office with or without cause by the vote of a majority of the Trustees at any regular meeting or any special meeting. Except to the extent expressly provided in a written agreement with the Trust, no officer resigning and no officer - 8 - removed shall have any right to any compensation for any period following his resignation or removal, or any right to damages on account of such removal. Section 6.4 Vacancies and Newly Created Offices. If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification or other cause, or if any new office shall be created, such vacancies or newly created offices may be filled by the Trustees at any regular or special meeting or, in the case of any office created pursuant to Section 6.10 of this Article VI, by any officer upon whom such power shall have been conferred by the Trustees. Section 6.5 Chairman of the Board. The Chairman of the Board shall be the chief executive officer of the Trust, shall preside at all Shareholders' meetings and at all meetings of the Trustees and shall be ex officio a member of all committees of the Trustees, except the Audit Committee. Subject to the supervision of the Trustees, he shall have general charge of the business of the Trust, the Trust Property and the officers, employees and agents of the Trust. He shall have such other powers and perform such other duties as may be assigned to him from time to time by the Trustees. Section 6.6 President. The President shall be the chief operating officer of the Trust and, at the request of or in the absence or disability of the Chairman of the Board, he shall preside at all Shareholders' meetings and at all meetings of the Trustees and shall in general exercise the powers and perform the duties of the Chairman of the Board. Subject to the supervision of the Trustees and such direction and control as the Chairman of the Board may exercise, he shall have general charge of the operations of the Trust and its officers, employees and agents. He shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the Trustees. - 9 - Section 6.7 Vice President. The Trustees may, from time to time, designate and elect one or more Vice Presidents who shall have such powers and perform such duties as from time to time may be assigned to them by the Trustees or the President. At the request or in the absence or disability of the President, the Vice President (or, if there are two or more Vice Presidents, the Vice President designated by the Trustees) may perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 6.8 Treasurer and Assistant Treasurers. The Treasurer shall be the principal financial and accounting officer of the Trust and shall have general charge of the finances and books of account of the Trust. Except as otherwise provided by the Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the Custodian appointed pursuant to Section 8.1 of the Declaration of its duties with respect thereto. The Treasurer shall render a statement of condition of the finances of the Trust to the Trustees as often as they shall require the same and he shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Trustees. Any Assistant Treasurer may perform such duties of the Treasurer as the Treasurer or the Trustees may assign, and, in the absence of the Treasurer, he may perform all the duties of the Treasurer. Section 6.9 Secretary and Assistant Secretaries. The Secretary shall attend to the giving and serving of all notices of the Trust and shall record all proceedings of the meetings of the Shareholders and Trustees in one or more books to be kept for that purpose. He shall keep in safe custody the seal of the Trust, and shall have charge of the records of the Trust, including - 10 - the register of shares and such other books and papers as the Trustees may direct and such books, reports, certificates and other documents required by law to be kept, all of which shall at all reasonable times be open to inspection by any Trustee. He shall perform such other duties as appertain to his office or as may be required by the Trustee. Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Trustees may assign, and, in the absence of the Secretary, he may perform all the duties of the Secretary. Section 6.10 Subordinate Officers. The Trustees from time to time may appoint such other subordinate officers or agents as they may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Trustees may determine. The Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Section 6.11 Remuneration. The salaries or other compensation of the officers of the Trust shall be fixed from time to time by resolution of the Trustees, except that the Trustees may by resolution delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 6.10 hereof. Section 6.12 Surety Bonds. The Trustees may require any officer or agent of the Trust to execute a bond (including, without limitation, any bond required by the 1940 Act and the rules and regulations of the Commission) to the Trustees in such sum and with such surety or sureties as the Trustees may determine, conditioned, upon the faithful performance of his duties to the Trust, including responsibility for negligence and for the accounting of any of - 11 - the Trust Property that may come into his hands. In any such case, a new bond of like character shall be given at least every six years, so that the date of the new bond shall not be more than six years subsequent to the date of the bond immediately preceding. ARTICLE VII Execution of Instruments, Voting of Securities Section 7.1 Execution of Instruments. All deeds, documents, transfers, contracts, agreements, requisitions or orders, promissory notes, assignments, endorsements, checks and drafts for the payment of money by the Trust, and other instruments requiring execution either in the name of the Trust or the names of the Trustees or otherwise may be signed by the Chairman, the President, a Vice President or the Secretary and by the Treasurer or an Assistant Treasurer, or as the Trustees may otherwise, from time to time, authorize, provided that instructions in connection with the execution of portfolio securities transactions may be signed by one such officer. Any such authorization may be general or confined to specific instances. Section 7.2 Voting of Securities. Unless otherwise ordered by the Trustees, the Chairman, the President or any Vice President shall have full power and authority on behalf of the Trustees to attend and to act and to vote, or in the name of the Trustees to execute proxies to vote, at any meeting of stockholders of any company in which the Trust may hold stock. At any such meeting such officer shall possess and may exercise (in person or by proxy) any and all rights, powers and privileges incident to the ownership of such stock. The Trustees may by resolution from time to time confer like powers upon any other person or persons. - 12 - ARTICLE VIII Fiscal Year, Accountants Section 8.1 Fiscal Year. The fiscal year of the Trust shall be established by resolution of the Trustees. Section 8.2 Accountants. (a) The Trustees shall employ an independent public accountant or firm of independent public accountants as their accountant to examine the accounts of the Trust and to sign and certify at least annually financial statements filed by the Trust. The accountant's certificates and reports shall be addressed both to the Trustees and to the Shareholders. (b) A majority of the Trustees who are not Interested Persons of the Trust shall select the accountant at any meeting held before the first Shareholders' meeting, and thereafter shall select the accountant annually by votes, cast in person, at a meeting held within 30 days before or after the beginning of the fiscal year of the Trust. Such selection shall be submitted for ratification or rejection at the next succeeding Shareholders' meeting. If such meeting shall reject such selection, the accountant shall be selected by a Majority Shareholder Vote, either at the meeting at which the rejection occurred or at a subsequent Shareholders' meeting called for the purpose. (c) Any vacancy occurring due to the death or resignation of the accountant, may be filled at a meeting called for the purpose by the vote, cast in person, of a majority of those Trustees who are not Interested Persons of the Trust. - 13 - ARTICLE IX Amendments Section 9.1 General. These By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such a majority. - 14 - EX-99.5B 10 MANAGEMENT AND ADMIN. AGREEMENT Exhibit 5(b) Management and Administration Agreement between Registrant and BISYS Fund Services MANAGEMENT AND ADMINISTRATION AGREEMENT AGREEMENT made this day of , 1996, between MARINER MUTUAL FUNDS TRUST (the "Trust"), a Massachusetts business trust having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS FUND SERVICES LIMITED PARTNERSHIP d/b/a BISYS FUND SERVICES ("Administrator"), having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219. WHEREAS, the Trust is an open-end management investment company, organized as a Massachusetts business trust and registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940 (the "1940 Act"); and WHEREAS, the Trust desires to retain Administrator to furnish management and administration services to each of the investment portfolios of the Trust (individually referred to herein as a "Fund" and collectively referred to herein as the "Funds"); and NOW, THEREFORE, in consideration of the mutual premises and covenants herein set forth, the parties agree as follows: 1. Services as Manager and Administrator Subject to the direction and control of the Board of Trustees of the Trust, Administrator will assist in supervising all aspects of the operations of the Funds except those performed by the investment adviser for the Funds under its Investment Advisory Agreement, the custodian for the Funds under its Custodian Agreement, the transfer agent for the Funds under its Transfer Agency Agreement and the fund accountant for the Funds under its Fund Accounting Agreement. Administrator will maintain office facilities (which may be in the offices of Administrator or an affiliate but shall be in such location as the Trust shall reasonably determine) and shall perform the services that are set forth in Schedule A hereto. In compliance with the requirements of Rule 31a-3 under the 1940 Act, Administrator hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon the Trust's request. Administrator further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. Administrator may delegate some or all of its responsibilities under this Agreement. Administrator may, at its expense, subcontract with any entity or person concerning the provision of the services contemplated hereunder; provided, however, that Administrator shall not be relieved of any of its obligations under this Agreement by the appointment of such subcontractor and provided further, that Administrator shall be responsible, to the extent provided in Section 4 hereof, for all acts of such subcontractor as if such acts were its own. 2. Fees; Expenses; Expense Reimbursement In consideration of services rendered and expenses assumed pursuant to this Agreement, each of the Funds will pay Administrator on the first business day of each month, or at such time(s) as Administrator shall request and the parties hereto shall agree, a fee computed daily and paid as specified below calculated at the applicable annual rate set forth on Schedule B hereto. The fee for the period from the day of the month this Agreement is entered into until the end of that month shall be prorated according to the proportion which such period bears to the full monthly period. Upon any termination of this Agreement before the end of any month, the fee for such part of a month shall be prorated according to the proportion which such period bears to the full monthly period and shall be payable upon the date of termination of this Agreement. For the purpose of determining fees payable to Administrator, the value of the net assets of a particular Fund shall be computed in the manner described in the Trust's Declaration of Trust or in the Prospectus or Statement of Additional Information respecting that Fund as from time to time is in effect for the computation of the value of such net assets in connection with the determination of the liquidating value of the shares of such Fund. Administrator will from time to time employ or associate with itself such person or persons as Administrator may believe to be particularly fitted to assist it in the performance of this Agreement. Such person or persons may be partners, officers, or employees who are employed by both Administrator and the Trust. The compensation of such person or persons shall be paid by Administrator and no obligation may be incurred on behalf of the Funds in such respect. Other expenses to be incurred in the operation of the Funds including taxes, interest, brokerage fees and commissions, if any, fees of Trustees who are not partners, officers, directors, shareholders or employees of Administrator or the investment adviser or distributor for the Funds, Commission fees and state Blue Sky qualification and renewal fees and expenses, investment advisory fees, custodian fees, transfer and dividend disbursing agents' fees, fund accounting fees including pricing of portfolio securities, service organization fees, certain insurance premiums, outside and, to the extent authorized by the Trust, inside auditing and legal fees and expenses, costs of maintenance of corporate existence, typesetting and printing prospectuses for regulatory purposes and for distribution to current shareholders of the Funds, costs of shareholders' and Trustees' reports and meetings and any extraordinary expenses will be borne by the Funds; provided, however, that the Funds will not bear, directly or indirectly, the cost of any activity which is primarily intended to result in the distribution of shares of the Funds, except for expenses incurred pursuant to a Rule 12b-1 plan adopted by the Trust. If in any fiscal year the aggregate expenses of a particular Fund (as defined under the securities regulations of any state having jurisdiction over the Trust) exceed the expense limitations of any such State, Administrator will reimburse such Fund for a portion of such excess expenses equal to such excess times the ratio of the fees respecting such Fund otherwise payable to 2 Administrator hereunder to the aggregate fees respecting such Fund otherwise payable to Administrator hereunder and to HSBC Asset Management Americas, Inc. ("the Adviser") under the Investment Advisory Agreements between the Adviser and the Trust. The expense reimbursement obligation of Administrator is limited to the amount of its fees hereunder for such fiscal year, provided, however, that notwithstanding the foregoing, Administrator shall reimburse a particular Fund for such proportion of such excess expenses regardless of the amount of fees paid to it during such fiscal year to the extent that the securities regulations of any state having jurisdiction over the Trust so require. Such expense reimbursement, if any, will be estimated daily and reconciled and paid on a monthly basis. 3. Proprietary and Confidential Information Administrator agrees on behalf of itself and its partners and employees to treat confidentially and as proprietary information of the Trust all records and other information relative to the Trust and prior, present, or potential shareholders, and not to use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Trust, which approval shall not be unreasonably withheld and may not be withheld where Administrator may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Trust. 4. Limitation of Liability Administrator shall not be liable for any loss suffered by the Funds in connection with the matters to which this Agreement relates, except for a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. Any person, even though also a partner, employee, or agent of Administrator, who may be or become an officer, Trustee, employee, or agent of the Trust or the Funds shall be deemed, when rendering services to the Trust or the Funds, or acting on any business of that party, to be rendering such services to or acting solely for that party and not as a partner, employee, or agent or one under the control or direction of Administrator even though paid by it. 5. Term 5.01 Initial Term; Renewal Terms This Agreement shall become effective as of the date first written above and shall continue until March 1, 1999, and thereafter shall be renewed automatically for successive one-year terms, unless (i) it is terminated for cause pursuant to paragraph 5.03 below, (ii) it is terminated pursuant to paragraph 5.04 below, or (iii) written notice not to renew is given by the non-renewing party to the other party at least 120 days prior to the expiration of the then-current term; provided that such continuance is specifically reviewed and approved at least annually (i) by the vote of a 3 majority of the Trust's Board of Trustees or by the vote of a majority of the outstanding voting securities of the Trust and (ii) by the majority of the Trust's Trustees who are not parties to this Agreement or interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The scope of such review shall be whether there is any "cause" (as defined below) that would justify terminating the Agreement. 5.02 Termination of Agreement This Agreement is terminable with respect to a particular Fund (i) upon provision of written notice not to renew in accordance with paragraph 5.01, (ii) upon mutual agreement of the parties hereto, (iii) for cause by the party alleging cause pursuant to paragraph 5.03, or (iv) upon provision of written notice to terminate in accordance with paragraph 5.04. Written notice not to renew may be given for any reason, with or without "cause" (as defined in paragraph 5.03). Upon termination of this Agreement, if Administrator, with the written consent of the Trust, in fact continues to perform any one or more of the services contemplated by this Agreement or any schedule or exhibit hereto, the provisions of this Agreement, including without limitation the provisions dealing with indemnification, shall continue in full force and effect. Compensation due and payable to Administrator and unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. Administrator shall be entitled to collect from the Trust, in addition to the compensation described under Section 2 hereof, the amount of all of Administrator's cash disbursements for services in connection with Administrator's activities in effecting such termination, including without limitation, the delivery to the Trust and/or its designees of the Trust's property, records, instruments and documents, or any copies thereof. Subsequent to such termination, for a reasonable fee, Administrator will provide the Trust with reasonable access to any Trust documents or records remaining in its possession. 5.03 Termination for Cause This Agreement may be terminated for cause in accordance with this paragraph 5.03. In the event cause, as defined below, is alleged, the party alleging cause shall provide written notice to the other party specifying the event or events constituting cause and demanding that such other party cure the same. If appropriate corrective action is not taken within 30 days following receipt of such notice, the party alleging cause may terminate this Agreement by the provision of 60 days' written notice. For purposes of this Agreement, "cause" shall mean (a) willful misfeasance, bad faith, gross negligence or reckless disregard on the part of the party to be terminated with respect to its obligations and duties set forth herein; (b) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (c) financial difficulties on the part of the party to be terminated which is evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent, or acquiescence in, a voluntary or involuntary case under Title 11 of the United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the 4 modification or alteration of the rights of creditors. Notwithstanding the foregoing, the absence of either or both an annual review or ratification of this Agreement by the Board of Trustees shall not, in and of itself, constitute "cause" as used herein. 5 5.04 Termination in the Event of a Fund Liquidation or Fund Merger, or an Assignment of the Investment Advisory Contract If, during the initial term of this Agreement (as set forth in paragraph 5.01), (i) a Fund is liquidated or is merged into a mutual fund portfolio that is not part of the Trust or Mariner Funds Trust, or (ii) the investment advisory agreement between HSBC Asset Management Americas, Inc. ("HSBC") and the Trust is assigned (excluding any technical assignment based solely upon a change in control of HSBC) such that HSBC ceases to be the investment adviser to the Trust, this Agreement may be terminated by the Trust with respect to each liquidated or merged Fund (or, in the case of the assignment of the investment advisory agreement as described above, with respect to all of the Funds) by the provision of 60 days' written notice; provided, however, that upon such termination, the Trust shall make a one-time cash payment, as liquidated damages, to Administrator equal to the fees payable to Administrator hereunder for the shorter of (i) the eighteen-month period commencing on the termination date or (ii) the remainder of the initial term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the termination date will remain constant for the balance of such initial term. 5.05 Termination Without Cause In the event (i) the Trust terminates this Agreement for any reason other than (A) "cause" pursuant to paragraph 5.03 or (B) the reasons described in paragraph 5.04, (ii) Administrator is otherwise replaced as fund manager and administrator or (iii) a third party is added to perform all or a part of the services provided by Administrator under this Agreement (excluding any sub-administrator appointed by Administrator as provided in Section 1 hereof), then the Trust shall make a one-time cash payment, as liquidated damages, to Administrator equal to the balance due Administrator for the remainder of the term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the date Administrator is replaced, or a third party is added will remain constant for the balance of the contract term. 6. Governing Law and Matters Relating to the Trust as a Massachusetts Business Trust This Agreement shall be governed by the law of the Commonwealth of Massachusetts. It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Trustees, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Trust's Agreement and Declaration of Trust. 6 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first written above. MARINER MUTUAL FUNDS TRUST BISYS FUND SERVICES LIMITED PARTNERSHIP By: BISYS Fund Services, Inc., General Partner By: _________________________ By:____________________________ Title: ______________________ Title:_________________________ Date: _______________________ Date:__________________________ 7 SCHEDULE A TO THE MANAGEMENT AND ADMINISTRATION AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES LIMITED PARTNERSHIP MANAGEMENT AND ADMINISTRATION SERVICES Administration 1. Maintain calendar and files of all Board and shareholder meeting materials 2. Maintain and manage annual regulatory filing calendar and follow up with responsible parties 3. Obtain insurance coverage (i.e., fidelity bonds and professional liability policies), including annual insurance renewals, on behalf of the Trust 4. Maintain insurance files for the Trust 5. Review registration statements, including prospectuses, SAIs and proxy statements prepared by counsel to the Trust 6. Review periodic supplements to prospectuses, as prepared by counsel to the Trust (Administrator may, from time to time, prepare certain prospectus supplements that require limited disclosure, with the consent of counsel to the Trust) 7. Prepare portfolio compliance training manual for the Trust 8. Review materials and reports prepared by Fund auditors and materials prepared by counsel to the Trust that are submitted to BISYS 9. Communicate all income breakdown data to client services and transfer agent and coordinate printing/mailing of state income letters 10. Review and coordinate all registration statement filings 11. Coordinate printing and distribution of prospectuses, annual reports, semi-annual reports and prospectus supplements 12. Coordinate printing, distribution and tabulation of proxies 13. Review and file Form N-SAR 14. Prepare and file Rule 24f-2 Notices (subject to review by counsel to the Trust) within 60 days following fiscal year-end 15. Coordinate Rule 17f-2 audits with custodians (if applicable) 16. Apply for all portfolio tax identification numbers 17. Coordinate all Fund NRSRO rating meetings 18. Coordinate NASDAQ Fund registration 19. Coordinate distribution of trustee/officer questionnaires prepared by Fund Counsel and respond to Trustees'/officers' questions relating thereto 20. Coordinate seed money and establish control accounts for new Funds 21. Maintain open file summary, authorized signers list and Fund compliance calendars A-1 Compliance 1. Review monthly compliance reports prepared by the Adviser 2. Perform independent monthly portfolio compliance testing 3. Prepare quarterly tax compliance letters to assist Fund portfolio managers 4. Notify appropriate officers of mark-to-market issues 5. Monitor compliance by the Funds with various conditions imposed by exemptive order, if applicable, relating to multiple classes of shares 6. Quarterly review of securities transactions by persons designated as access persons by the investment adviser for purposes of determining compliance with the Trust's Code of Ethics 7. Respond to SEC Fund audits and coordinate SEC inspections 8. Respond to Fund audit requests from independent fund accountants 9. Consult with and provide compliance advice to portfolio managers 10. Coordinate brokerage allocation reports 11. Monitor fidelity bond coverage for the Funds 12. Perform initial on-site compliance training based on Fund-specific compliance manuals prepared by BISYS Board Process and Meetings 1. Prepare quarterly Board meeting responsibility chart 2. Provide at least one person to attend Board meetings 3. Prepare Board agendas and BISYS sections of Board materials 4. Review all Board minutes and agendas 5. Prepare special Board meeting materials (including Lipper information that may be appropriate for annual contract renewals) 6. Review, as requested, investment adviser's reports to be submitted to the Board pursuant to applicable Fund procedures 7. Coordinate Board book production and distribution Legal Services 1. Provide support to Fund Administration, broker/dealer compliance and blue sky personnel 2. Review broker/dealer agreements, bank agreements and service agreements 3. Review Fund agreements to which BISYS is a party 4. Maintain files of registration statements, Fund contracts, Fund proxies and other Fund documents 5. Prepare for and manage shareholder meetings 6. Assist in preparing for and complying with any regulatory examinations of or involving the Trust 7. Provide advice concerning product development issues 8. Conduct research and provide advice concerning applicable Federal and state securities laws, Internal Revenue Code provisions and related regulations, and bank regulatory issues 9. Prepare Fund Serv/NSCC reporting 10. Respond to state registration comment letters when necessary A-2 11. Respond to regulatory agency (i.e. NASD, SEC, IRS, bank regulatory) proposals Fund Officers 1. Make available personnel to serve as officers for the Trust Blue Sky 1. Register the Funds and their shares with appropriate state blue sky authorities 2. Respond to state comments during the registration process 3. Obtain all sales permits required by relevant state authorities 4. Amend and renew sales permits, as required from time to time 5. Monitor the sales of shares in individual states on a daily basis and report required sales to appropriate states 6. File all registration statements, prospectuses, proxy statements, Rule 24f-2 Notices and other Fund reports and documents as required by applicable state laws and regulations 7. Maintain Fund blue sky calendars 8. Respond to all blue sky audit and examination issues 9. File all renewal registrations for the Funds 10. Conduct requested blue sky fee analysis 11. Implement SRD electronic filings A-3 Dated:_________________ SCHEDULE B TO THE MANAGEMENT AND ADMINISTRATION AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES LIMITED PARTNERSHIP Compensation* Annual Rate of: Fifteen one-hundredths of one percent (.15%) of each such Fund's average daily net assets up to $200,000,000 Twelve and one-half one-hundredths of one percent (.125%) of each such Fund's average daily net assets in excess of $200,000,000 up to $400,000,000 Ten one-hundredths of one percent (.10%) of each such Fund's average daily net assets in excess of $400,000,000 up to 600,000,000 Eight one-hundredths of one percent (.08%) of each such Fund's average daily net assets in excess of $600,000,000 MARINER MUTUAL FUNDS TRUST By:_________________________________ BISYS FUND SERVICES LIMITED PARTNERSHIP By: BISYS Fund Services, Inc., General Partner - -------- * All fees are computed daily and paid periodically. All Funds that are created after the date set forth above shall be subject to a per Fund annual minimum of $60,000. The compensation set forth above represents (i) compensation payable to Administrator for services rendered and expenses assumed pursuant to the Management and Administration Agreement to which this Schedule B is attached and (ii) compensation payable to BISYS Fund Services, Inc. ("BFSI"), an affiliate of Administrator, for services rendered and expenses assumed pursuant to the Fund Accounting Agreement between BFSI and the Trust dated March 1, 1996. Administrator has agreed to receive the compensation payable under the Fund Accounting Agreement on behalf of BFSI and to remit such compensation to BFSI immediately upon receipt. B-1 By:_________________________________ B-2 EX-99.5E 11 CO-ADMIN. SERVICES CONTRACT Exhibit 5(e) Co-Administration Services Contract between HSBC Asset Management Americas Inc. and Registrant, dated July 1, 1994 CO-ADMINISTRATION SERVICES CONTRACT MARINER MUTUAL FUNDS TRUST 370 17th Street Denver,Colorado November 1, 1994 HSBC Asset Management Americas Inc. 250 Park Avenue New York, New York 10017 Dear Sirs or Madams: This will confirm the agreement between the undersigned (the "Trust") and you (the "Co-Administrator") as follows: 1. The Trust is an open-end investment company organized as a Massachusetts business trust, and consists of one or more separate investment portfolios, as may be established and designated by the Trustees from time to time (the "Funds"). This contract shall pertain to any Fund currently in existence and any additional Funds as shall be designated in a Supplement to this contract ("Supplement"), as further agreed by the Trust and the Co-Administrator. A separate class of shares of beneficial interest in the Trust is offered to investors with respect to each Fund. The Trust engages in the business of investing and reinvesting the assets of the Funds in the manner and in accordance with the investment objective and restrictions specified in the Prospectus or Prospectuses (the "Prospectus") relating to the Trust and the Fund included in the Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). The Fund has retained PFPC, Inc. to act as Fund administrator. Copies of the documents referred to in the preceding sentence have been furnished to the Co-Administrator. Any amendments to those documents shall be furnished to the Co- Administrator promptly. 2. (a) The Co-Administrator shall (i) manage the Funds' relationship with PFPC Inc. or any successor administrator, (ii) assist with negotiation of contracts with Fund service providers and supervise the activities of those service providers, (iii) serve as a liaison with Fund trustees, and (iv) provide general product management and oversight. The Co-Administrator shall make periodic reports to the Trust's Board of Trustees on the performance of its obligations under this Contract. (b) The Co-Administrator shall, at its expense, employ or associate with itself such persons as it believes appropriate to assist it in performing its obligations under this contract. 3. The Co-Administrator shall give the Trust the benefit of the Co-Administrator's best judgment and efforts in rendering services under this contract. As an inducement to the Co-Administrator's undertaking to render these services, the Trust agrees that the Co-Administrator shall not be liable under this contract for any mistake in judgment or in any other event whatsoever except for lack of good faith, provided that nothing in this contract shall be deemed to protect or purport to protect the Co-Administrator against any liability to the Trust or its shareholders to which the Co-Administrator would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Co-Administrator's duties under this contract or by reason of the Co-Administrator's reckless disregard of its obligations and duties hereunder. 4. In consideration of the services to be rendered by the Co-Administrator under this contract, the Trust shall pay the Co-Administrator a monthly fee with respect to each Fund on the first business day of each month, at an annual rate of 0.03% of the average daily value of the net assets of the Fund during the preceding month. If the fees payable to the Co-Administrator pursuant to this paragraph 4 begin to accrue before the end of any month or if this contract terminates before the end of any month, the fees 2 for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion that the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. For purposes of this contract, "business day" means each weekday except those holidays on which the Federal Reserve Bank of New York, the New York Stock Exchange (the "Exchange") or the investment adviser is closed. Currently, those holidays include: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. 5. This contract and any Supplement shall become effective with respect to a Fund only if they have been approved by vote of a majority of (i) the Board of Trustees of the Trust, and (ii) the trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in this contract, cast in person at a meeting called for the purpose of voting on such approval. This contract, and any Supplement, shall continue in effect with respect to a Fund until the last day of the calendar year next following the date of effectiveness specified in a Supplement to the contract, and thereafter shall continue automatically for successive annual periods ending on the last day of each calendar year, subject to the immediately following sentence, and provided such continuance is specifically approved at least annually by a vote of a majority of (i) the Trust's Board of Trustees and (ii) the trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the contract, by vote cast in person at a meeting called for the purpose of voting on such approval. This contract may be terminated with respect to a Fund at any time, without payment of any penalty, by a vote of a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act) or by a vote of a majority of the Trust's Board of Trustees on 60 days' written notice to the Co-Administrator or by the Co- Administrator on 60 days' written notice to the Trust. If this contract is terminated with respect to any Fund, it shall nonetheless remain in effect with respect to any remaining Funds. This contract shall terminate automatically in the event of its 3 assignment (as defined in the 1940 Act). 6. Except to the extent necessary to perform the Co- Administrator's obligations under this contract, nothing herein shall be deemed to limit or restrict the right of the Co- Administrator, or any affiliate of the Co-Administrator, or any employee of the Co-Administrator, to engage in any other business or to devote time and attention to the management or other aspects of any other business, whether of a similar or dissimilar nature, or to render services of any kind to any other corporation, firm, individual or association. 7. The Certificate of Trust, establishing the Trust, dated as of May 1, 1988, together with all amendments thereto (the "Certificate"), is on file in the Office of the Secretary of the State of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, any of the Trustees, shareholders, officers, employees, or agents of the Trust, but only the Trust's property shall be bound. 8. This contract shall be construed and its provisions interpreted in accordance with the laws of the State of New York. If the foregoing correctly sets forth the agreement between the Trust and the Co-Administrator, please so indicate by signing and returning to the Trust the enclosed copy hereof. Very truly yours, MARINER MUTUAL FUNDS TRUST By __________________________ Title: ACCEPTED: HSBC ASSET MANAGEMENT AMERICAS INC. By __________________________ Title: 4 EX-99.5F 12 SUB ADVIS. CONTRACT - AMERICA AND EUROPE Exhibit 5(f) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Europe Ltd. with respect to the Mariner International Equity Fund dated April 25, 1994 MARINER INTERNATIONAL EQUITY FUND SUB-ADVISORY CONTRACT April 25, 1995 HSBC Asset Management Europe Ltd. 6 Bevies Marks London, EC3A 7QP England Dear Sirs: The Mariner International Equity Fund (the "Fund") is one of the investment portfolios of Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub- Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf HSBC Asset Management Americas, Inc. ("the Adviser") enters into this Contract. The Trustees of the Trust have selected HSBC Asset Management Americas, Inc. (the "Adviser") to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract between the Trust and the Adviser (the "Advisory Contract"). The Adviser and the Trustees have selected HSBC Asset Management Europe Ltd. (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below and the Sub-Adviser is willing to provide the Adviser and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. Accordingly, the Adviser agrees with the Sub-Adviser as follows: 1 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references herein to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub-Adviser. Any amendments to those documents shall be furnished to the Sub-Adviser promptly. 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of a portion the Fund designated by the Adviser under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program in the Sub-Advisor's region consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable law and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and the Adviser with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; 2 (b) subject to such consultation as the Adviser may request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish the Adviser with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of the Adviser, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to the Adviser. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to the Adviser via facsimile transmission no later than trade date plus one; and (f) cooperate generally with the Trust and the Adviser so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement 3 of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however, that the approval required in subsection (a) above, shall be evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on the Adviser's behalf or commit the Adviser to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this Contract to act for more than one client collectively (including the Adviser) in any one transaction or series of transactions without prior reference to the Adviser. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for the Adviser and shall be entitled to instruct such brokers and other agents as it may decide. The Sub-Adviser may (and any such broker or sub-agent may) execute transactions on the Adviser's behalf without prior disclosure to the Adviser of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub- Adviser will not do business with nor pay commissions to any 4 affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers or employees will act as principal or agent or receive any commissions; and (c) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub-Adviser shall not be under any duty to account to the Adviser for any profits or other benefits received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtained before the transaction is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom it has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance in providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of the Adviser) with that person. All such transactions effected for the Adviser will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issue in which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses in writing to the Investment Adviser the nature of its financial interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial interests. (v) the Adviser authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment is acquired. 5 (vi) Nothing herein contained shall prevent the Sub- Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified in Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and the Adviser. (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay; (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers, and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; 6 (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub-Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. (i) The Sub-Adviser enters into this Contract for itself. the Adviser includes the Adviser's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and the Adviser shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of the Adviser. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. The Sub-Adviser will not hold any client money on behalf of the Adviser. The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by the Adviser in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. the Adviser shall give written instructions to the Sub-Adviser at its Registered Office. The Sub-Adviser shall 7 communicate with the Adviser in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub- Adviser shall communicate with the Adviser at the address last notified to the Sub-Adviser. the Adviser shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless the Adviser had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, the Adviser shall pay the Sub-Adviser a monthly fee at the annual rate of up to 0.45% of the average net assets of the Fund managed by the Sub-Adviser. If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub-Adviser, the Adviser determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund the Adviser is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract. the Adviser will reduce its fee or reimburse the Fund and notify the Sub-Adviser will likewise reduce 8 its fe or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by the Adviser as such amounts bear in relation to the sum of all fees to be paid to the Adviser under the Advisory Contract and to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, the Adviser and the Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint ventures or impose any liability as such on any of them. 11. TERMINATION. (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only as so long as the continuance is specifically approved at least annually by (a) a majority of the Trustees of the Trust who are not interested persons of the Adviser, the Sub- Adviser or the Trust (other than as Trustees), cast in person at meeting called for the purpose of voting on such approval, and (b) either (i) the Trustees of the Trust, or (ii) a majority of the outstanding voting securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by the Adviser or by the Sub-Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior 9 to the date of termination or any warranty or indemnity given by the Adviser under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from the Adviser all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If the Adviser terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "Mariner Mutual Fund Trust" and "Mariner International Equity Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the names "Mariner" or "Mariner International Equity Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and the Adviser may use the name of the Sub-Adviser or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust the Adviser will (to the extent they lawfully can) cease to use the name of the Sub- Adviser or any other name indicating that the Fund or the Adviser is advised by or otherwise connected with the Sub-Adviser. 10 14. GOVERNING LAW. This Contract shall be construed in accordance with laws of the State of New York and the applicable provision for the Investment Company Act of 1940, as amend (the "1940 Act") and the Advisers Act. As used herein the Terms "affiliated person", "assignment", "interested person", and "vote of majority of the outstanding voting securities" shall have the meaning set forth in the 1940 Act. 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, andy of the Trustees, shareholders, officers, employee or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, HSBC ASSET MANAGEMENT AMERICAS, INC. By: ----------------------- Title: The foregoing Contract is hereby agreed to as of the date hereof By: _____________________ Title: President 11 SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meaning unless the context otherwise requires: "Applicable Law" means shall applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of the Adviser pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf the Adviser has entered into this Sub- Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means 6 Bevies Marks, London, EC3A 7QP, England, Telephone: ____________. Facsimile: ___________. Telex: N/A_. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. 12 April 25, 1995 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub-Adviser to the Adviser: Name Signature Position 13 EX-99.5G 13 SUB ADVIS. CONTRACT - AMERICAS AND AUSTRALIA Exhibit 5(g) Sub-Advisory Contract betweenl HSBC Asset Management Americas Inc. and HSBC Asset Management Australia Limited with respect to the Mariner International Equity Fund dated April 25, 1995 MARINER INTERNATIONAL EQUITY FUND SUB-ADVISORY CONTRACT April 25, 1995 HSBC Asset Management Australia Limited P.O.Box 291 Market Street, Melbourne Victoria 3000, Australia Dear Sirs: The Mariner International Equity Fund (the "Fund") is one of the investment portfolios of Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub- Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf HSBC Asset Management Americas, Inc. ("the Adviser") enters into this Contract. The Trustees of the Trust have selected HSBC Asset Management Americas, Inc. (the "Adviser") to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract between the Trust and the Adviser (the "Advisory Contract"). The Adviser and the Trustees have selected HSBC Asset Management Australia Limited (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below and the Sub-Adviser is willing to provide the Adviser and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. Accordingly, the Adviser agrees with the Sub-Adviser as follows: 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references herein to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub-Adviser. Any amendments to those documents shall be furnished to the Sub-Adviser promptly. 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of a portion the Fund designated by the Adviser under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program in the Sub-Advisor's region consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable law and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and the Adviser with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; (b) subject to such consultation as the Adviser may request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish the Adviser with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of the Adviser, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to the Adviser. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to the Adviser via facsimile transmission no later than trade date plus one; and (f) cooperate generally with the Trust and the Adviser so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however, that the approval required in subsection (a) above, shall be evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on the Adviser's behalf or commit the Adviser to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this Contract to act for more than one client collectively (including the Adviser) in any one transaction or series of transactions without prior reference to the Adviser. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for the Adviser and shall be entitled to instruct such brokers and other agents as it may decide. The Sub-Adviser may (and any such broker or sub-agent may) execute transactions on the Adviser's behalf without prior disclosure to the Adviser of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub- Adviser will not do business with nor pay commissions to any affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers or employees will act as principal or agent or receive any commissions; and (c) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub-Adviser shall not be under any duty to account to the Adviser for any profits or other benefits received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtained before the transaction is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom it has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance in providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of the Adviser) with that person. All such transactions effected for the Adviser will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issue in which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses in writing to the Investment Adviser the nature of its financial interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial interests. (v) the Adviser authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment is acquired. (vi) Nothing herein contained shall prevent the Sub- Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified in Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and the Adviser. (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay; (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers, and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub-Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. (i) The Sub-Adviser enters into this Contract for itself. the Adviser includes the Adviser's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and the Adviser shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of the Adviser. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. The Sub-Adviser will not hold any client money on behalf of the Adviser. The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by the Adviser in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. the Adviser shall give written instructions to the Sub-Adviser at its Registered Office. The Sub-Adviser shall communicate with the Adviser in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub- Adviser shall communicate with the Adviser at the address last notified to the Sub-Adviser. the Adviser shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless the Adviser had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, the Adviser shall pay the Sub-Adviser a monthly fee at the annual rate of up to 0.45% of the average net assets of the Fund managed by the Sub-Adviser. If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub-Adviser, the Adviser determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund the Adviser is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract. the Adviser will reduce its fee or reimburse the Fund and notify the Sub-Adviser will likewise reduce its fe or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by the Adviser as such amounts bear in relation to the sum of all fees to be paid to the Adviser under the Advisory Contract and to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, the Adviser and the Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint ventures or impose any liability as such on any of them. 11. TERMINATION. (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only as so long as the continuance is specifically approved at least annually by (a) a majority of the Trustees of the Trust who are not interested persons of the Adviser, the Sub- Adviser or the Trust (other than as Trustees), cast in person at meeting called for the purpose of voting on such approval, and (b) either (i) the Trustees of the Trust, or (ii) a majority of the outstanding voting securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by the Adviser or by the Sub-Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior to the date of termination or any warranty or indemnity given by the Adviser under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from the Adviser all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If the Adviser terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "Mariner Mutual Fund Trust" and "Mariner International Equity Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the names "Mariner" or "Mariner International Equity Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and the Adviser may use the name of the Sub-Adviser or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust the Adviser will (to the extent they lawfully can) cease to use the name of the Sub- Adviser or any other name indicating that the Fund or the Adviser is advised by or otherwise connected with the Sub-Adviser. 14. GOVERNING LAW. This Contract shall be construed in accordance with laws of the State of New York and the applicable provision for the Investment Company Act of 1940, as amend (the "1940 Act") and the Advisers Act. As used herein the Terms "affiliated person", "assignment", "interested person", and "vote of majority of the outstanding voting securities" shall have the meaning set forth in the 1940 Act. 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, andy of the Trustees, shareholders, officers, employee or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, HSBC ASSET MANAGEMENT AMERICAS, INC. By: ----------------------- Title: The foregoing Contract is hereby agreed to as of the date hereof By: _____________________ Title: President SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meaning unless the context otherwise requires: "Applicable Law" means shall applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of the Adviser pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf the Adviser has entered into this Sub- Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means P.O. Box 291, Market Street, Melbourne, Victoria 3000, Australia, Telephone: ____________. Facsimile: ___________. Telex: N/A_. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. April 25, 1995 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub-Adviser to the Adviser: Name Signature Position EX-99.5H 14 SUB ADVIS. CONTRACT - AMERICAS AND JAPAN Exhibit 5(h) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Japan (KK) with respect to the Mariner International Equity Fund dated April 25, 1995 MARINER INTERNATIONAL EQUITY FUND SUB-ADVISORY CONTRACT April 25, 1995 HSBC Asset Management Japan (KK) 6/F No. 2 Tomoecho Annex 3-8-27 Toranomon Minato-ku Tokyo, Japan Dear Sirs: The Mariner International Equity Fund (the "Fund") is one of the investment portfolios of Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub-Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf HSBC Asset Management Americas, Inc. ("the Adviser") enters into this Contract. The Trustees of the Trust have selected HSBC Asset Management Americas, Inc. (the "Adviser") to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract between the Trust and the Adviser (the "Advisory Contract"). The Adviser and the Trustees have selected HSBC Asset Management Japan (KK) (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below and the Sub- Adviser is willing to provide the Adviser and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. Accordingly, the Adviser agrees with the Sub-Adviser as follows: 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references herein to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub- Adviser. Any amendments to those documents shall be furnished to the Sub- Adviser promptly. 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of a portion the Fund designated by the Adviser under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program in the Sub-Advisor's region consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable law and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and the Adviser with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; (b) subject to such consultation as the Adviser may request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish the Adviser with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of the Adviser, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to the Adviser. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to the Adviser via facsimile transmission no later than trade date plus one; and (f) cooperate generally with the Trust and the Adviser so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Adviser, of the Sub- Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however, that the approval required in subsection (a) above, shall be evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on the Adviser's behalf or commit the Adviser to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this Contract to act for more than one client collectively (including the Adviser) in any one transaction or series of transactions without prior reference to the Adviser. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for the Adviser and shall be entitled to instruct such brokers and other agents as it may decide. The Sub- Adviser may (and any such broker or sub-agent may) execute transactions on the Adviser's behalf without prior disclosure to the Adviser of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub-Adviser will not do business with nor pay commissions to any affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers or employees will act as principal or agent or receive any commissions; and (c) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub-Adviser shall not be under any duty to account to the Adviser for any profits or other benefits received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtained before the transaction is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom it has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance in providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of the Adviser) with that person. All such transactions effected for the Adviser will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issue in which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses in writing to the Investment Adviser the nature of its financial interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial interests. (v) the Adviser authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment is acquired. (vi) Nothing herein contained shall prevent the Sub-Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified in Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and the Adviser. (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay; (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers, and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub- Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. (i) The Sub-Adviser enters into this Contract for itself. the Adviser includes the Adviser's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and the Adviser shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of the Adviser. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. The Sub-Adviser will not hold any client money on behalf of the Adviser. The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by the Adviser in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. the Adviser shall give written instructions to the Sub-Adviser at its Registered Office. The Sub- Adviser shall communicate with the Adviser in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub- Adviser shall communicate with the Adviser at the address last notified to the Sub-Adviser. the Adviser shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless the Adviser had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, the Adviser shall pay the Sub-Adviser a monthly fee at the annual rate of up to 0.45% of the average net assets of the Fund managed by the Sub-Adviser. If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub- Adviser, the Adviser determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund the Adviser is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract. the Adviser will reduce its fee or reimburse the Fund and notify the Sub-Adviser will likewise reduce its fe or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by the Adviser as such amounts bear in relation to the sum of all fees to be paid to the Adviser under the Advisory Contract and to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, the Adviser and the Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint ventures or impose any liability as such on any of them. 11. TERMINATION. (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only as so long as the continuance is specifically approved at least annually by (a) a majority of the Trustees of the Trust who are not interested persons of the Adviser, the Sub-Adviser or the Trust (other than as Trustees), cast in person at meeting called for the purpose of voting on such approval, and (b) either (i) the Trustees of the Trust, or (ii) a majority of the outstanding voting securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by the Adviser or by the Sub- Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior to the date of termination or any warranty or indemnity given by the Adviser under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from the Adviser all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If the Adviser terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "Mariner Mutual Fund Trust" and "Mariner International Equity Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the names "Mariner" or "Mariner International Equity Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and the Adviser may use the name of the Sub-Adviser or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust the Adviser will (to the extent they lawfully can) cease to use the name of the Sub-Adviser or any other name indicating that the Fund or the Adviser is advised by or otherwise connected with the Sub-Adviser. 14. GOVERNING LAW. This Contract shall be construed in accordance with laws of the State of New York and the applicable provision for the Investment Company Act of 1940, as amend (the "1940 Act") and the Advisers Act. As used herein the Terms "affiliated person", "assignment", "interested person", and "vote of majority of the outstanding voting securities" shall have the meaning set forth in the 1940 Act. 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, andy of the Trustees, shareholders, officers, employee or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, HSBC ASSET MANAGEMENT AMERICAS, INC. By: _______________________ Title: The foregoing Contract is hereby agreed to as of the date hereof By: _____________________ Title: President SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meaning unless the context otherwise requires: "Applicable Law" means shall applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of the Adviser pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf the Adviser has entered into this Sub-Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means 6/F No. 2 Tomoecho, Annex 3-8-27, Toranomon Minato-ku, Tokyo, Japan, Telephone: ____________. Facsimile: ___________. Telex: N/A_. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. April 25, 1995 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub- Adviser to the Adviser: NAME SIGNATURE POSITION ---- --------- -------- EX-99.5I 15 SUB ADVIS. CONTRACT AMERICAS AND HONG KONG Exhibit 5(i) Sub-Advisory Contract between HSBC Asset Management Americas Inc. and HSBC Asset Management Hong Kong Ltd. with respect to the Mariner International Equity Fund dated April 25, 1995 MARINER INTERNATIONAL EQUITY FUND SUB-ADVISORY CONTRACT April 25, 1995 HSBC Asset Management Hong Kong Ltd. 10/F Citibank Tower 3 Garden Road, Hong Kong Dear Sirs: The Mariner International Equity Fund (the "Fund") is one of the investment portfolios of Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub- Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf HSBC Asset Management Americas, Inc. ("the Adviser") enters into this Contract. The Trustees of the Trust have selected HSBC Asset Management Americas, Inc. (the "Adviser") to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract between the Trust and the Adviser (the "Advisory Contract"). The Adviser and the Trustees have selected HSBC Asset Management Hong Kong Ltd. (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below and the Sub-Adviser is willing to provide the Adviser and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. Accordingly, the Adviser agrees with the Sub-Adviser as follows: 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references herein to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub-Adviser. Any amendments to those documents shall be furnished to the Sub-Adviser promptly. 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of a portion the Fund designated by the Adviser under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program in the Sub-Advisor's region consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable law and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and the Adviser with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; (b) subject to such consultation as the Adviser may request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish the Adviser with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of the Adviser, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to the Adviser. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to the Adviser via facsimile transmission no later than trade date plus one; and (f) cooperate generally with the Trust and the Adviser so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however, that the approval required in subsection (a) above, shall be evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on the Adviser's behalf or commit the Adviser to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this Contract to act for more than one client collectively (including the Adviser) in any one transaction or series of transactions without prior reference to the Adviser. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for the Adviser and shall be entitled to instruct such brokers and other agents as it may decide. The Sub-Adviser may (and any such broker or sub-agent may) execute transactions on the Adviser's behalf without prior disclosure to the Adviser of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub- Adviser will not do business with nor pay commissions to any affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers or employees will act as principal or agent or receive any commissions; and (c) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub-Adviser shall not be under any duty to account to the Adviser for any profits or other benefits received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtained before the transaction is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom it has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance in providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of the Adviser) with that person. All such transactions effected for the Adviser will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issue in which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses in writing to the Investment Adviser the nature of its financial interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial interests. (v) the Adviser authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment is acquired. (vi) Nothing herein contained shall prevent the Sub- Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified in Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and the Adviser. (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay; (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers, and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub-Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. (i) The Sub-Adviser enters into this Contract for itself. the Adviser includes the Adviser's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and the Adviser shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of the Adviser. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. The Sub-Adviser will not hold any client money on behalf of the Adviser. The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by the Adviser in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. the Adviser shall give written instructions to the Sub-Adviser at its Registered Office. The Sub-Adviser shall communicate with the Adviser in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub- Adviser shall communicate with the Adviser at the address last notified to the Sub-Adviser. the Adviser shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless the Adviser had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, the Adviser shall pay the Sub-Adviser a monthly fee at the annual rate of up to 0.45% of the average net assets of the Fund managed by the Sub-Adviser. If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub-Adviser, the Adviser determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund the Adviser is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract. the Adviser will reduce its fee or reimburse the Fund and notify the Sub-Adviser will likewise reduce its fe or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by the Adviser as such amounts bear in relation to the sum of all fees to be paid to the Adviser under the Advisory Contract and to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, the Adviser and the Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint ventures or impose any liability as such on any of them. 11. TERMINATION. (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only as so long as the continuance is specifically approved at least annually by (a) a majority of the Trustees of the Trust who are not interested persons of the Adviser, the Sub- Adviser or the Trust (other than as Trustees), cast in person at meeting called for the purpose of voting on such approval, and (b) either (i) the Trustees of the Trust, or (ii) a majority of the outstanding voting securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by the Adviser or by the Sub-Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior to the date of termination or any warranty or indemnity given by the Adviser under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from the Adviser all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If the Adviser terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "Mariner Mutual Fund Trust" and "Mariner International Equity Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the names "Mariner" or "Mariner International Equity Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and the Adviser may use the name of the Sub-Adviser or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust the Adviser will (to the extent they lawfully can) cease to use the name of the Sub- Adviser or any other name indicating that the Fund or the Adviser is advised by or otherwise connected with the Sub-Adviser. 14. GOVERNING LAW. This Contract shall be construed in accordance with laws of the State of New York and the applicable provision for the Investment Company Act of 1940, as amend (the "1940 Act") and the Advisers Act. As used herein the Terms "affiliated person", "assignment", "interested person", and "vote of majority of the outstanding voting securities" shall have the meaning set forth in the 1940 Act. 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, andy of the Trustees, shareholders, officers, employee or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, HSBC ASSET MANAGEMENT AMERICAS, INC. By: ----------------------- Title: The foregoing Contract is hereby agreed to as of the date hereof By: _____________________ Title: President SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meaning unless the context otherwise requires: "Applicable Law" means shall applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of the Adviser pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf the Adviser has entered into this Sub- Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means 10/F Citibank Tower, 3 Garden Road, Hong Kong, Telephone: ____________. Facsimile: ___________. Telex: N/A_. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. April 25, 1995 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub-Adviser to the Adviser: Name Signature Position EX-99.5J 16 SUB ADVIS. CONTRACT - AMERICAS AND INVEST. Exhibit 5(j) Sub-Advisory Contract between HSBC Asset Mangement Americas Inc. (formerly Marinvest Inc.) and Investment Concepts, Inc. with respect to the Mariner Small Cap Fund dated September 22, 1992 MARINER SMALL CAP FUND SUB-ADVISORY CONTRACT September 22, 1992 Investment Concepts, Inc. One Williams Center Bancoklahoma Tower 10th Floor Tulsa, Oklahoma 74192 Dear Sirs: The Mariner Small Cap Fund (the "Fund") is one of the investment portfolios of Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub-Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf Marinvest Inc. ("Marinvest") enters into this Contract. The Trustees of the Trust have selected Marinvest to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract, dated May 1, 1990, between the Trust and Marinvest (the "Advisory Contract"). Marinvest and the Trustees have selected Investment Concepts, Inc. (the "Sub-Adviser") to provide Marinvest and the Fund with the advice and services set forth below and the Sub-Adviser is willing to provide Marinvest and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of Marinvest, under the terms and condition hereinafter set forth. Accordingly, Marinvest agrees with the Sub-Adviser as follows: 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references hereinto to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's Declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub-Adviser. Any amendments to those documents shall be furnished to the Sub-Adviser promptly. - 1 - 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Acts"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of the Fund under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable laws and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and Marinvest with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; (b) subject to such consultation as Marinvest may request, including a request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish Marinvest with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of Marinvest, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to Marinvest. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to Marinvest via facsimile transmission no later than trade date plus one; and - 2 - (f) cooperate generally with the Trust and Marinvest so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities end with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waiver, discharged or terminated orally, but only by an instrument in writing signet by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of Marinvest, of the Sub-Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however that the approval required in subsection (a) above, shall e evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of Marinvest, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on Marinvest's behalf or commit Marinvest to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this contract to act for more than one client collectively (including Marinvest) in any one transaction or series of transactions without prior reference to Marinvest. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for Marinvest and shall be entitled to instruct such brokers and other agents as it may decide. The Sub-Adviser may (and any such broker or sub-agent may) execute transactions on Marinvest's behalf without prior disclosure to Marinvest of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub-Adviser will not do business with nor pay commissions to any affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers - 3 - or employees will act as principal or agent or receive any commissions; and (e) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub-Adviser shall not be under any duty to account to Marinvest for any profits or other benefit received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtainer before the transaction Is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom It has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance In providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of Marinvest) with that person. All such transactions effected for Marinvest will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issuer In which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses In writing to the Investment Adviser the nature of his financial Interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial Interests. (v) Marinvest authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment Is acquired. (vi) Nothing herein contained shall prevent the Sub-Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified In Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and Marinvest. - 4 - (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay: (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub-Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. (i) The Sub-Adviser enters into this Contract for itself. Marinvest includes Marinvest's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and Marinvest shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of Marinvest. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. The Sub-Adviser will not hold any client money on behalf of Marinvest. - 5 - The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by Marinvest in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. Marinvest shall give written instructions to the Sub-Adviser at its Registered Office. The Sub-Adviser shall communicate with Marinvest in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub-Adviser shall communicate with Marinvest at the address last notified to the Sub-Adviser. Marinvest shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless Marinvest had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, Marinvest shall pay the Sub-Adviser a monthly fee at the following annual rates: Portion of Average Daily Sub- Value of Net Assets of the Fund Advisory Fee ------------------------------- ------------ Not exceeding $400 million... 0.500% In excess of $400 million but not exceeding $800 million... 0.460% In excess of $800 million but not exceeding $1.2 billion... 0.420% In excess of $1.2 billion but not exceeding $1.6 billion... 0.380% In excess of $1.6 billion but not exceeding $2 billion... 0.340% In excess of $2 billion... 0.290% - 6 - If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub-Adviser, Marinvest determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund Marinvest is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract, Marinvest will reduce its fee or reimburse the Fund and notify the Sub-Adviser of such reduction or reimbursement. The Sub-Adviser will likewise reduce its fee or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by Marinvest as such amounts bear in relation to the sum of all fees to be paid to {Marinvest under the Advisory Contract ant to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, Marinvest and the Sub-Adviser are not partners of or Joint venturers with each other ant nothing herein shall be construed so as to make them such partners or Joint venturers or impose any liability as such on any of them. 11. TERMINATION. (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only so long as the continuance is specifically approved at least annually by (a) a majority of the trustees of the Trust Who are not interested persons of Marinvest, the Sub-Adviser or the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) either (i) the trustees of the Trust, or (ii) a majority of the outstanding voting - 7 - securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by Marinvest or by the Sub-Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior to the date of termination or any warranty or indemnity given by Marinvest under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from Marinvest all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If Marinvest terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "Mariner Mutual Funds Trust" and "Mariner Small Cap Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the names "Mariner" or "Mariner Small Cap Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and Marinvest may use the name "Investment Concepts, Inc." or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials and materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust and Marinvest will (to the extent they lawfully can) cease to use the name "Investment Concepts, Inc." or any other name indicating that the Fund or Marinvest is advised by or otherwise connected with the Sub-Adviser. 14. GOVERNING LAW. This Contract shall be construed in accordance with the laws of the State of New York and the applicable provisions of the Investment Company Act of 1940, as amend (the "1940 Acts") and the Advisers Act. As used herein the terms "affiliated person", "assignment", "interested person", and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the 1940 Act. - 8 - 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The Obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of any of the Trustees, shareholders, officers, employees or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, MARINVEST INC. By: _________________________ Title: Managing Director The foregoing Contract is hereby agreed to as of the date hereof INVESTMENT CONCEPTS, INC. By:______________________ Title: President - 9 - SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meanings unless the context otherwise requires: "Applicable Law" means all applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the.United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of Marinvest pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf Marinvest has entered into this Sub-Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means One Williams Center, Bancoklahoma Tower, 10th Floor, Tulsa, Oklahoma 74192 Telephone: 918-588-6317. Facsimile 918-588-6939. Telex: N/A_. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. - 10 - September 22, 1992 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub-Adviser to Marinvest: Name Signature Position - ---- --------- -------- Rudy M. Thomas President Brian K. Hayes Principal Jim L. Huntzinger Principal Grafton M. Potter Principal Forrest L. Armstrong Portfolio Manager William C. Bequette Portfolio Manager Joe P. Sing Portfolio Manager Robin D. Basolo Equity Trader Patti S. Robertson Trader - 11 - EX-99.5K 17 SUB ADVIS. CONTRACT - AMERICAS AND SINGAPORE Exhibit 5(k) Sub-Advisory Contract between HSBC Asset Management Americas and HSBS Asset Management Singapore Limited with respect to HSBC International Equity Fund HSBC MUTUAL FUNDS TRUST INTERNATIONAL EQUITY FUND SUB-ADVISORY CONTRACT April 30, 1996 HSBC Asset Management Singapore Limited 21 Collyer Quay 02 #20-02 Hongkong Bank Building Singapore 049320 Dear Sirs: The International Equity Fund (the "Fund") is one of the investment portfolios of HSBC Mutual Funds Trust, formerly Mariner Mutual Funds Trust (the "Trust"), an open-end management investment company, which was organized as a business trust under the laws of the Commonwealth of Massachusetts. The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. This Sub-Advisory Contract regards certain services to be provided in connection with the management of the Fund, on whose behalf HSBC Asset Management Americas, Inc. ("the Adviser") enters into this Contract. The Trustees of the Trust have selected HSBC Asset Management Americas, Inc. (the "Adviser") to provide overall investment advice and management for the Fund and to provide certain other services, under the terms and conditions provided in the Master Advisory Contract between the Trust and the Adviser (the "Advisory Contract"). The Adviser and the Trustees have selected HSBC Asset Management Singapore Ltd. (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below and the Sub- Adviser is willing to provide the Adviser and the Fund with the advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. Accordingly, the Adviser agrees with the Sub-Adviser as follows: 1. DEFINITIONS AND DELIVERY OF DOCUMENTS. All references herein to this Contract shall be deemed to be references to this Contract as it may from time to time be amended. The Trust engages in the business of investing and reinvesting the assets of the Fund in the manner and in accordance with the investment objective and restrictions specified in the Trust's declaration of Trust, dated November 1, 1989 (the "Declaration of Trust"), and the currently effective Prospectus (the "Prospectus") relating to the Fund included in the Trust's Registration Statement, as amended from time to time (the "Registration Statement"), filed by the Trust under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Copies of the documents referred to in the preceding sentence have been furnished to the Sub-Adviser. Any amendments to those documents shall be furnished to the Sub-Adviser promptly. 2. REPRESENTATIONS. The Sub-Adviser is registered with the Securities and Exchange Commission (the "SEC") as an investment adviser pursuant to Section 203 of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and agrees to maintain such registration during the term of this agreement. 3. SUB-ADVISORY SERVICES. (i) The Sub-Adviser shall act as sub-adviser of a portion the Fund designated by the Adviser under the terms of this Contract and will use its best efforts to provide to the Fund a continuing and suitable investment program in the Sub-Advisor's region consistent with the investment policies, objectives and restrictions of the Fund, as set forth in the Trust's Declaration of Trust, the Registration Statement, the applicable law and provisions of the Internal Revenue Code of 1986, as amended, relating to regulated investment companies, subject to policy decisions adopted by the Trust's Board of Trustees, and will take any such actions as it may in its opinion deem necessary or desirable for or incidental to any such purposes. (ii) The Sub-Adviser will also, at its own expense: (a) furnish the Trust and the Adviser with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund; (b) subject to such consultation as the Adviser may request for a written response, determine which Investments of the Fund should be purchased, held or disposed of and what portion of such Assets, if any, should be held in cash or cash equivalents, and the rationale for those determinations; (c) furnish the Adviser with a monthly commentary and a quarterly report concerning market overview, performance analysis and trading activity; (d) subject to the supervision of the Adviser, maintain and preserve certain records including this Sub-Advisory Contract and any research provided to the Adviser. The Sub-Adviser agrees that such Trust records are the property of the Trust and that such Trust records or copies thereof will be surrendered to the Trust promptly upon request therefor; (e) give instructions in the form of trade tickets representing purchases and sales of the Fund's portfolio securities to the Adviser via facsimile transmission no later than trade date plus one; and (f) cooperate generally with the Trust and the Adviser so far as the Sub-Adviser is able to provide information necessary for the preparation of registration statements and periodic reports to be filed with the SEC, including Forms N-1A and N-SAR, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States and foreign agencies responsible for tax matters, and other reports and filings of like nature. (iii) No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Contract shall be effective until approved by (a) the Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees), cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund; provided, however, that the approval required in subsection (a) above, shall be evidenced by a resolution of the entire Board of Trustees and of the Trustees who are not interested persons of the Adviser, of the Sub-Adviser or of the Trust (other than as Trustees); and provided further that such resolutions shall be sent to the Sub-Adviser by facsimile and confirmed in writing by letter. (iv) All transactions in Investments shall be subject to the rules, regulations and customs of the exchange or market and/or clearing house through which the transactions are executed and to all Applicable Law, and, if there is any conflict between any such rules, customs, law and the provisions of this Contract the former shall prevail. (v) The Sub-Adviser may not, without specific instruction in writing (and compliance applicable policies and restrictions of the Fund set forth in its Registration Statement), borrow on the Adviser's behalf or commit the Adviser to a contract (other than a trade ticket). (vi) The Sub-Adviser has the right under this Contract to act for more than one client collectively (including the Adviser) in any one transaction or series of transactions without prior reference to the Adviser. 4. THE SUB-ADVISER. (i) The Sub-Adviser shall act as agent for the Adviser and shall be entitled to instruct such brokers and other agents as it may decide. The Sub- Adviser may (and any such broker or sub-agent may) execute transactions on the Adviser's behalf without prior disclosure to the Adviser of the fact that in doing so, it is or may be dealing with or in circumstances involving an affiliate of the Sub-Adviser; provided, however, that (a) the Sub-Adviser will not do business with nor pay commissions to any affiliate in any portfolio transaction where an affiliate acts as principal; (b) in purchasing Investments for the Funds, neither the Sub-Adviser nor any of its directors, officers or employees will act as principal or agent or receive any commissions; and (c) the Sub-Adviser shall use its best efforts to obtain execution and pricing within the policy guidelines, if any, determined by the Trustees and set forth in the Prospectus and Statement of Additional Information of the Funds. The Sub- Adviser shall not be under any duty to account to the Adviser for any profits or other benefits received by the Sub-Adviser or any affiliate as a result of such transactions. (ii) Should the Sub-Adviser deem it appropriate to match one client's order with that of another client by acting as agent for each party, prior written consent from both parties will be obtained before the transaction is effected. (iii) The Sub-Adviser may effect transactions with or through the agency of another person with whom it has an arrangement under which that person will from time to time provide to, or procure for, the Sub-Adviser services or other benefits the nature of which are such that their provision results, or is designed to result, in an improvement of the Sub-Adviser's performance in providing services for its clients and for which the Sub-Adviser makes no direct payment but instead undertakes to place business (including business on behalf of the Adviser) with that person. All such transactions effected for the Adviser will, however, secure best execution, disregarding any benefit which might accrue to the Sub-Adviser from the arrangement. (iv) The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issue in which the Sub-Adviser or any of its affiliated persons has a financial interest, except in instances in which the Sub-Adviser fully discloses in writing to the Investment Adviser the nature of its financial interest prior to purchase, sale or retention. It shall be the duty of the Investment Adviser to notify the Trustees of the Fund of these financial interests. (v) the Adviser authorizes the Sub-Adviser to disclose any information which it may be required to disclose under this Contract, the Applicable Law, the rules and regulations of the SEC or of any market on which an Investment is acquired. (vi) Nothing herein contained shall prevent the Sub-Adviser or any of its affiliated persons or associates from engaging in any other business or from acting as investment adviser or Sub-Adviser for any other person or entity, whether or not having investment policies similar to the Fund. (vii) The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Contract, the expenses of office rent, telephone and other facilities it is obligated to provide in order to perform the services specified in Sections 3 and 4 and any other expenses incurred by it in connection with the performance of its duties hereunder, including, but not limited to, attendance in person at a minimum of one meeting each year with the Board of Trustees of the Trust and the Adviser. (viii) The Sub-Adviser will not be required to pay any expenses which this Contract does not expressly state shall be payable by it. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 4(vii), the Sub-Adviser will not be required to pay; (a) the compensation and expenses of Trustees of the Trust, and of independent advisers, independent contractors, consultants, managers, and other agents employed by the Trust other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Fund; (c) the fees or disbursements of the custodian, the transfer agent and the dividend disbursing agent; (d) stamp and other duties, taxes, impositions, governmental fees, and fiscal charges of any nature whatsoever, assessed against the Fund's assets and payable by the Trust; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders, except that the Sub- Adviser shall bear the costs of providing the services referred to in Sections 3 and 4; (f) brokers' commissions and underwriting fees; and (g) the expense of periodic calculations of the net asset value of the Fund's shares. 5. FURTHER PROVISIONS. ------------------ (i) The Sub-Adviser enters into this Contract for itself. The Adviser includes the Adviser's successors in title or personal representatives as the case may be. (ii) This Contract shall automatically terminate in the event of its assignment or upon the termination of the Advisory Contract with the Fund, and the Adviser shall immediately notify the Sub-Adviser of such termination. No assignment of this Contract shall be made by the Sub-Adviser without the consent of the Adviser. (iii) If any provision of this Contract is or becomes invalid or contravenes any applicable law, the remaining provisions shall remain in full force and effect. 6. CLIENT MONEY AND CUSTODY. ------------------------ The Sub-Adviser will not hold any client money on behalf of the Adviser. The Sub-Adviser shall not be the registered holder, or custodian, of Investments or documents of title relating thereto. 7. INSTRUCTIONS AND COMMUNICATIONS. Instructions may be given by ------------------------------- the Adviser in writing (by letter or facsimile or telex with correct answerback) or by telephone unless it is required under an express provision of this Contract for instructions to be given in writing. the Adviser shall give written instructions to the Sub-Adviser at its Registered Office. The Sub- Adviser shall communicate with the Adviser in writing or by telephone except when it is required to communicate in writing (by letter or facsimile or telex with correct answerback) either under this Contract or in accordance with applicable law. The Sub-Adviser shall be required to communicate instructions in the form of trade tickets by facsimile in accordance with Section 3(ii)(e) hereof. The Sub-Adviser shall communicate with the Adviser at the address last notified to the Sub-Adviser. the Adviser shall be entitled to rely on the instructions of any person who is listed on Appendix I and may assume the genuineness of all signatures and the authenticity of all instructions and communications unless the Adviser had reason to know such signatures, instructions or communications were unauthorized. All trade tickets representing purchases and sales of the Fund's portfolio securities shall be signed by at least two such persons listed on Appendix I. 8. FEES AND EXPENSES. In consideration of the services to be ----------------- rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser under this Contract, the Adviser shall pay the Sub-Adviser a monthly fee at the annual rate of up to 0.45% of the average net assets of the Fund managed by the Sub-Adviser. If the fees payable to the Sub-Adviser pursuant to this paragraph 8 begin to accrue before the end of any month or if this Contract terminates before the end of any month, the fees for the period from that date to the end of that month or from the beginning of that month to the date of termination, as the case may be, shall be prorated according to the proportion which the period bears to the full month in which the effectiveness or termination occurs. For purposes of calculating the monthly fees, the value of the net assets of the Fund shall be computed in the manner specified in the Prospectus for the computation of net asset value. Notwithstanding the foregoing, if, after consultation with the Sub- Adviser, the Adviser determines to waive any part of the fee paid to it by the Fund, the fee paid to the Sub-Adviser hereunder may be reduced proportionately. If in any month of the fiscal year of the Fund the Adviser is required by the law of any state in the United States to reduce its fee or to reimburse expenses of the Fund pursuant to the terms of the Advisory Contract. the Adviser will reduce its fee or reimburse the Fund and notify the Sub-Adviser will likewise reduce its Fe or reimburse the Fund, within 30 days after receipt of such notice, in an amount proportionately equal to the amount of reduction or reimbursement being made by the Adviser as such amounts bear in relation to the sum of all fees to be paid to the Adviser under the Advisory Contract and to the Sub-Adviser under this Contract. 9. FORCE MAJEURE. The Sub-Adviser shall not be in breach of this ------------- Contract if there is any total or partial failure of performance of its duties and obligations occasioned by any act of God, fire, act of government or state, war, civil commotion, insurrection, embargo, inability to communicate with market makers for whatever reason, failure of any computer dealing system, prevention from or hindrance in obtaining any raw materials, energy or other supplies, labor disputes of whatever nature or any other reason (whether or not similar in kind to any of the above) beyond the Sub-Adviser's control, provided the Sub-Adviser has made every reasonable effort to overcome such difficulties. 10. NO PARTNERSHIP OR JOINT VENTURE. The Trust, the Adviser and the ------------------------------- Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint ventures or impose any liability as such on any of them. 11. TERMINATION. ----------- (i) This Contract shall become effective upon the above date, and shall thereafter continue in effect; provided that this Contract shall continue in effect for a period of more than two years only as so long as the continuance is specifically approved at least annually by (a) a majority of the Trustees of the Trust who are not interested persons of the Adviser, the Sub-Adviser or the Trust (other than as Trustees), cast in person at meeting called for the purpose of voting on such approval, and (b) either (i) the Trustees of the Trust, or (ii) a majority of the outstanding voting securities of the Fund. This Contract may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by vote of a majority of the outstanding voting securities of the Trust, by the Adviser or by the Sub- Adviser. Termination shall not affect any action taken by the Sub-Adviser permitted under this Contract prior to the date of termination or any warranty or indemnity given by the Adviser under this Contract or implied by law. (ii) On termination by either party the Sub-Adviser shall be entitled to receive from the Adviser all fees, costs, charges and expenses accrued or incurred under this Contract up to the date of termination including any additional expenses or losses necessarily incurred in settling outstanding obligations or terminating this Contract, whether they occur before or after the date of termination. (iii) If the Adviser terminates this Contract, it shall be subject to a proportion of the annual fee corresponding to the proportion of the year that has expired when this Contract is terminated. 12. CAPTIONS. The captions in this Contract are included for -------- convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Contract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. RESERVATION OF NAMES. The names "HSBC Mutual Fund Trust" and -------------------- "HSBC International Equity Fund" are the designation of the Trustees under the Declaration of Trust. The Sub-Adviser may not use the name "HSBC International Equity Fund" without prior written authorization by the Trustees and officers of the Trust. The Trust and the Adviser may use the name of the Sub-Adviser or any name derived from or similar to that name in reports, filings, shareholder communications, registration statements, advertising materials of like nature, only for so long as this Contract or any extension, renewal of amendment hereof remains in effect and only upon the prior written consent of the Sub-Adviser. At such time as this Contract shall no longer be in effect, the Trust the Adviser will (to the extent they lawfully can) cease to use the name of the Sub- Adviser or any other name indicating that the Fund or the Adviser is advised by or otherwise connected with the Sub-Adviser. 14. GOVERNING LAW. This Contract shall be construed in accordance ------------- with laws of the State of New York and the applicable provision for the Investment Company Act of 1940, as amend (the "1940 Act") and the Advisers Act. As used herein the Terms "affiliated person", "assignment", "interested person", and "vote of majority of the outstanding voting securities" shall have the meaning set forth in the 1940 Act. 15. PERSONAL LIABILITY. The Trust's Declaration of Trust is on file ------------------ with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, and of the Trustees, shareholders, officers, employee or agents of the Trust, but only the Trust's property shall be bound. Yours very truly, HSBC ASSET MANAGEMENT AMERICAS, INC. By: _______________________ Title: The foregoing Contract is hereby agreed to as of the date hereof HSBC ASSET MANAGEMENT SINGAPORE LIMITED By: _____________________ Title: President SCHEDULE 1 DEFINITIONS In this Contract the following expressions shall have the following meaning unless the context otherwise requires: "Applicable Law" means shall applicable laws and regulations of the jurisdiction in which the Sub-Adviser is domiciled and of the Securities and Exchange Commission of the United States of America, and of any governmental or self-regulatory organization of which the Sub-Adviser is a member, each as from time to time amended; "Assets" means Investments of the Fund deposited by or on behalf of the Adviser pursuant to which this Sub-Advisory Contract relates; "Fund" means the separate portfolio of Assets of the Trust on whose behalf the Adviser has entered into this Sub-Advisory Contract; "Investment" means any asset, right or interest in respect of property of any kind held by the Fund; "Registered Office" means 21 Collyer Quay 02, #20-02 Hongkong Bank Building, Singapore 049320, Telephone: 65-530-2828. Facsimile: 65-225-4324. Telex: N/A. "Series" means the series of shares of beneficial interest representing undivided interests in the Trust's investment portfolios, including the Fund. April 30, 1996 APPENDIX I AUTHORIZED SIGNATORY LIST The following persons are authorized to give instructions on behalf of the Sub- Adviser to the Adviser: NAME SIGNATURE POSITION ---- --------- -------- EX-99.6 18 DIST. AGREEMENT - REGIST. AND BISYS FUND SRVS Exhibit 6 Distribution Agreement between Registrant and BISYS Fund Services EXHIBIT 99.6 DISTRIBUTION AGREEMENT ---------------------- AGREEMENT made this _____ day of __________________, 1996, between MARINER MUTUAL FUNDS TRUST (the "Trust"), a Massachusetts business trust having its principal place of business at 125 West 55th Street, New York, New York 10019, and BISYS FUND SERVICES LIMITED PARTNERSHIP d/b/a BISYS FUND SERVICES ("Distributor"), having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219. WHEREAS, the Trust is an open-end management investment company, organized as a Massachusetts business trust and registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, it is intended that Distributor act as the distributor of the units of beneficial interest ("Shares") of each of the investment portfolios of the Trust (such portfolios being referred to individually as a "Fund" and collectively as the "Funds"). NOW, THEREFORE, in consideration of the mutual premises and covenants herein set forth, the parties agree as follows: 1. Services as Distributor. ------------------------ 1.1 Distributor will act as agent for the distribution of the Shares covered by the registration statement and prospectus of the Trust then in effect under the Securities Act of 1933, as amended (the "Securities Act"). As used in this Agreement, the term "registration statement" shall mean Parts A (the prospectus), B (the Statement of Additional Information) and C of each registration statement that is filed on Form N-1A, or any successor thereto, with the Commission, together with any amendments thereto. The term "prospectus" shall mean each form of prospectus and Statement of Additional Information used by the Funds for delivery to shareholders and prospective shareholders after the effective dates of the above referenced registration statements, together with any amendments and supplements thereto. 1.2 Distributor agrees to use appropriate efforts to solicit orders for the sale of the Shares and will undertake such advertising and promotion as it believes reasonable in connection with such solicitation. The Trust understands that Distributor is now and may in the future be the distributor of the shares of several investment companies or series (together, "Companies") including Companies having investment objectives similar to those of the Trust. The Trust further understands that investors and potential investors in the Trust may invest in shares of such other Companies. The Trust agrees that Distributor's duties to such Companies shall not be deemed in conflict with its duties to the Trust under this paragraph 1.2. Distributor shall, at its own expense, finance appropriate activities which it deems reasonable, which are primarily intended to result in the sale of the Shares, including, but not limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing and mailing of prospectuses to other than current Shareholders, and the printing and mailing of sales literature. 1.3 In its capacity as distributor of the Shares, all activities of Distributor and its partners, agents, and employees shall comply with all applicable laws, rules and regulations, including, without limitation, the 1940 Act, all rules and regulations promulgated by the Commission thereunder and all rules and regulations adopted by any securities association registered under the Securities Exchange Act of 1934. 1.4 Distributor will provide one or more persons, during normal business hours, to respond to telephone questions with respect to the Trust. 1.5 Distributor will transmit any orders received by it for purchase or redemption of the Shares to the transfer agent and custodian for the Funds. 1.6 Whenever in their judgment such action is warranted by unusual market, economic or political conditions, or by abnormal circumstances of any kind, the Trust's officers may decline to accept any orders for, or make any sales of, the Shares until such time as those officers deem it advisable to accept such orders and to make such sales. 1.7 Distributor will act only on its own behalf as principal if it chooses to enter into selling agreements with selected dealers or others. 1.8 The Trust agrees at its own expense to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the qualification of the Shares for sale in such states as Distributor may designate. 1.9 The Trust shall furnish from time to time, for use in connection with the sale of the Shares, such information with respect to the Funds and the Shares as Distributor may reasonably request; and the Trust warrants that the statements contained in any such information shall fairly show or represent what they purport to show or represent. The Trust shall also furnish Distributor upon request with: (a) unaudited semi-annual statements of the Funds' books and accounts prepared by the Trust, (b) a monthly itemized list of the securities in the Funds, (c) monthly balance sheets as soon as practicable after the end of each month, and (d) from time to time such additional information regarding the financial condition of the Funds as Distributor may reasonably request. 1.10 The Trust represents to Distributor that, with respect to the Shares, all registration statements and prospectuses filed by the Trust with the Commission under the Securities Act have been carefully prepared in conformity with requirements of said Act and rules and 2 regulations of the Commission thereunder. The registration statement and prospectus contain all statements required to be stated therein in conformity with said Act and the rules and regulations of said Commission and all statements of fact contained in any such registration statement and prospectus are true and correct. Furthermore, neither any registration statement nor any prospectus includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading to a purchaser of the Shares. The Trust may, but shall not be obligated to, propose from time to time such amendment or amendments to any registration statement and such supplement or supplements to any prospectus as, in the light of future developments, may, in the opinion of the Trust's counsel, be necessary or advisable. If the Trust shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Trust of a written request from Distributor to do so, Distributor may, at its option, terminate this Agreement. The Trust shall not file any amendment to any registration statement or supplement to any prospectus without giving Distributor reasonable notice thereof in advance; provided, however, that nothing contained in this Agreement shall in any way limit the Trust's right to file at any time such amendments to any registration statement and/or supplements to any prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional. 1.11 The Trust authorizes Distributor and dealers to use any prospectus in the form furnished from time to time in connection with the sale of the Shares. The Trust shall indemnify, defend and hold harmless Distributor, its partners and employees and any person who controls Distributor within the meaning of the Securities Act, from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which Distributor, its partners and employees or any such controlling person, may incur under the Securities Act, the 1940 Act, the common law or otherwise arising out of or based upon any alleged untrue statement of a material fact contained in the registration statement or any prospectus or arising out of or based upon any alleged omission by the Trust to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished in writing to the Trust by or on behalf of Distributor for use in the preparation of the registration statement or the prospectuses. Notwithstanding the foregoing, this indemnity agreement, to the extent that it might require indemnity of any person who is a partner or employee of Distributor and who is also a Trustee of the Trust, shall not inure to the benefit of such partner or employee unless a court of competent jurisdiction shall determine, or it shall have been determined by controlling precedent, that such result would not be against public policy as expressed in the Securities Act or the 1940 Act. This Agreement shall not be construed to protect Distributor against any liability to the Trust or its shareholders to which Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement. This indemnity agreement shall not inure to the benefit of Distributor, its partners or employees or any controlling person as aforesaid if any untrue statement or omission made in any prospectus delivered to a purchaser of shares is corrected in any amendment or supplement to such prospectus and such amended or supplemented prospectus shall 3 not have been delivered or sent to such purchaser within the time required by the Securities Act and the rules promulgated thereunder, provided that the Trust has delivered such amended or supplemented prospectus to Distributor in requisite quantity on a timely basis to permit such delivery or sending. This indemnity agreement is expressly conditioned upon the Trust's being notified of any action brought against Distributor, its partners or employees or any such controlling person, which notification shall be given by letter or by telegram addressed to the Trust at its principal office in New York, New York and sent to the Trust by the person against whom such action is brought within 10 days after the summons or other first legal process shall have been served. The failure to notify the Trust of any such action shall not relieve the Trust from any liability which it may have to the person against whom such action is brought by reason of any such alleged untrue statement or omission otherwise than on account of the indemnity agreement contained in this paragraph. The Trust shall be entitled to assume the defense of any suit brought to enforce any such claims, demand or liability, but, in such case, the defense shall be conducted by counsel chosen by the Trust and reasonably approved by Distributor. If the Trust elects to assume the defense of any such suit and retain counsel approved by Distributor, Distributor, its partners and employees and controlling persons named as the defendant, or defendants in such suit shall bear the fees and expenses of any additional counsel retained by any of them, but in case the Trust does not elect to assume the defense of any such suit, or in case Distributor does not approve of counsel chosen by the Trust, the Trust will reimburse such person or persons named as defendant or defendants in such suit, for the reasonable fees and expenses of any counsel retained by Distributor or such other persons. In addition, Distributor shall have the right to employ counsel to represent it, its partners and employees and any such controlling person who may be subject to liability arising out of any claim in respect of which indemnity may be sought by Distributor against the Trust hereunder if any such indemnified party shall have been advised by its counsel that representation of such indemnified party and the Trust by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them, in which event the reasonable fees and expenses of such separate counsel shall be borne by the Trust. Notwithstanding the preceding two sentences, the Trust shall, in connection with any such suit and any separate but substantially similar or related suits, actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all persons entitled to indemnity under this paragraph. The Trust shall not be liable to indemnify any person for any settlement of any suit or claim effected without the Trust's written consent. This indemnity agreement and the Trust's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of Distributor, its partners and employees or any such controlling person. This indemnity agreement shall inure exclusively to the benefit of Distributor, its partners and employees and any such controlling persons and their respective successors and estates. The Trust shall promptly notify Distributor of the commencement of any litigation or proceedings against it in connection with the issue and sale of any Shares. 1.12 Distributor agrees to indemnify, defend and hold harmless the Trust, its officers and Trustees and any person who controls the Trust within the meaning of the Securities Act, from and 4 against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Trust, its officers or Trustees or any such controlling person may incur under the Securities Act, the 1940 Act, the common law or otherwise, but only to the extent that such liability or expense incurred by the Trust, its officers or Trustees or such controlling person results from such claims or demands as shall arise out of or be based upon (a) any alleged untrue statement of a material fact contained in information furnished in writing by Distributor to the Trust specifically for use in the registration statement or any prospectus or shall arise out of or be based upon any alleged omission to state a material fact required to be stated therein or necessary to make such statement therein not misleading and (b) any alleged act or omission on Distributor's part as the Trust's agent that has not been expressly authorized by the Trust in writing. This indemnity agreement is expressly conditioned upon Distributor's being notified of any action brought against the Trust, its officers or Trustees or any such controlling person, which notification shall be given by letter or telegram addressed to Distributor at its principal office in Columbus, Ohio, and sent to Distributor by the person against whom such action is brought, within 10 days after the summons or other first legal process shall have been served. The failure to notify Distributor of any such action shall not relieve Distributor from any liability which it may have to the Trust, its officers or Trustees or such controlling person by reason of any such alleged misstatement, act or omission on Distributor's part otherwise than on account of the indemnity agreement contained in this paragraph. Distributor shall have a right to control the defense of such action with counsel of its own choosing and reasonably approved by the Trust if such action is based solely upon such alleged misstatement, act or omission on Distributor's part, in which event (except as stated below) the Trust, its officers and Trustees or such controlling person shall each have the right to participate in the preparation of the defense of such action at their own expense. If the Trust does not approve of counsel chosen by Distributor, and therefore Distributor does not control the defense of such action, Distributor will reimburse the Trust, its officers and Trustees and controlling person named as defendant or defendants in such action, for the reasonable fees and expenses of any counsel retained by the Trust or such other persons. In addition, the Trust shall have the right to employ counsel to represent it, its officers and Trustees and any such controlling person who may be the subject of liability arising out of any claim in respect of which indemnity may be sought by the Trust or any such other person against Distributor hereunder if any such indemnified party shall have been advised by its counsel that representation of such indemnified party and Distributor by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them, in which event the reasonable fees and expenses of such separate counsel shall be borne by Distributor. Notwithstanding the preceding two sentences, Distributor shall, in connection with any such action and any separate but substantially similar or related suits, actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all persons entitled to indemnity under this paragraph. This indemnity agreement and Distributor's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Trust, its officers and Trustees or any such controlling person. This indemnity agreement shall inure exclusively to the benefit of the Trust, its officers and Trustees and any such controlling persons and 5 their respective successors and estates. Distributor shall promptly notify the Trust of the commencement of any litigation or proceedings against it in connection with the issue and sale of any shares. 1.13 No Shares shall be offered by either Distributor or the Trust under any of the provisions of this Agreement and no orders for the purchase or sale of Shares hereunder shall be accepted by the Trust if and so long as the effectiveness of the registration statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the Securities Act or if and so long as a current prospectus as required by Section 10(b)(2) of said Act is not on file with the Commission; provided, however, that nothing contained in this paragraph 1.13 shall in any way restrict or have an application to or bearing upon the Trust's obligation to repurchase Shares from any Shareholder in accordance with the provisions of the Trust's prospectus, Agreement and Declaration of Trust, or Bylaws. 1.14 The Trust agrees to advise Distributor as soon as reasonably practical by a notice in writing delivered to Distributor or its counsel: (a) of any request by the Commission for amendments to the registration statement or prospectus then in effect or for additional information; (b) in the event of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or prospectus then in effect or the initiation by service of process on the Trust of any proceeding for that purpose; (c) of the happening of any event that makes untrue any statement of a material fact made in the registration statement or prospectus then in effect or which requires the making of a change in such registration statement or prospectus in order to make the statements therein not misleading; and (d) of all action of the Commission with respect to any amendment to any registration statement or prospectus which may from time to time be filed with the Commission. For purposes of this section, informal requests by or acts of the Staff of the Commission shall not be deemed actions of or requests by the Commission. 1.15 Distributor agrees on behalf of itself and its partners and employees to treat confidentially and as proprietary information of the Trust all records and other information relative to the Trust and its prior, present or potential Shareholders, and not to use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except, after prior notification to and approval in writing by the Trust, which approval shall not be 6 unreasonably withheld and may not be withheld where Distributor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Trust. 1.16 This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 2. Appointment of Agent. -------------------- Distributor may enter into a written agreement with another party qualified to perform distribution services to carry out some or all of its responsibilities under this Agreement, provided, however, that the Trust agrees in writing to the retention of the party chosen and the written agreement related thereto; and provided further, that the party chosen shall be the agent of Distributor and not the agent of the Trust, and that Distributor shall be fully responsible for the acts of such party and shall not be relieved of any of its responsibilities hereunder. 3. Fee. ---- Distributor shall receive from the Funds identified in the Distribution and Shareholder Service Plan attached as Schedule A hereto (the "Distribution Plan Funds") a distribution fee at the rate and upon the terms and conditions set forth in such Plan. The distribution fee shall be accrued daily and shall be paid on the first business day of each month, or at such time(s) as the Distributor shall reasonably request. 4. Sale and Payment. ----------------- Shares of a Fund may be subject to a sales load and may be subject to the imposition of a distribution fee pursuant to the Distribution and Service Plan referred to above. To the extent that Shares of a Fund are sold at an offering price which includes a sales load or at net asset value subject to a contingent deferred sales load with respect to certain redemptions (either within a single class of Shares or pursuant to two or more classes of Shares), such Shares shall hereinafter be referred to collectively as "Load Shares" (in the case of Shares that are sold with a front-end sales load or Shares that are sold subject to a contingent deferred sales load), "Front-End Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall hereinafter be referred to collectively as "Load Funds" or "Front-End Load Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund that contains CDSL Shares shall hereinafter be referred to collectively as "Load Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund." Under this Agreement, the following provisions shall apply with respect to the sale of, and payment for, Load Shares. 4.1 Distributor shall have the right to purchase Load Shares at their net asset value and to sell such Load Shares to the public against orders therefor at the applicable public offering 7 price, as defined in Section 4 hereof. Distributor shall also have the right to sell Load Shares to dealers against orders therefor at the public offering price less a concession determined by Distributor, which concession shall not exceed the amount of the sales charge or underwriting discount, if any, referred to in Section 4 below. 4.2 Prior to the time of delivery of any Load Shares by a Load Fund to, or on the order of, Distributor, Distributor shall pay or cause to be paid to the Load Fund or to its order an amount in Boston or New York clearing house funds equal to the applicable net asset value of such Shares. Distributor may retain so much of any sales charge or underwriting discount as is not allowed by Distributor as a concession to dealers. 5. Public Offering Price. ---------------------- The public offering price of a Load Share shall be the net asset value of such Load Share, plus any applicable sales charge, all as set forth in the current prospectus of the Load Fund. The net asset value of Shares shall be determined in accordance with the provisions of the Agreement and Declaration of Trust and Bylaws of the Trust and the then-current prospectus of the Load Fund. 6. Issuance of Shares. ------------------- The Trust reserves the right to issue, transfer or sell Load Shares at net asset value (a) in connection with the merger or consolidation of the Trust or the Load Fund(s) with any other investment company or the acquisition by the Trust or the Load Fund(s) of all or substantially all of the assets or of the outstanding shares of any other investment company; (b) in connection with a pro rata distribution directly to the holders of Shares in the nature of a stock dividend or split; (c) upon the exercise of subscription rights granted to the holders of Shares on a pro rata basis; (d) in connection with the issuance of Load Shares pursuant to any exchange and reinvestment privileges described in any then-current prospectus of the Load Fund; and (e) otherwise in accordance with any then-current prospectus of the Load Fund. 7. Term, Duration and Termination. ------------------------------- This Agreement shall become effective with respect to each Fund as of the date first written above and, unless sooner terminated as provided herein, shall continue with respect to a particular Fund automatically for successive one-year terms, provided that such continuance is specifically approved at least annually by (a) by the vote of a majority of those members of the Trust's Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting for the purpose of voting on such approval and (b) by the vote of the Trust's Board of Trustees or the vote of a majority of the outstanding voting securities of such Fund. This Agreement is terminable without penalty, on not less than sixty days' prior written notice, by the Trust's Board of Trustees, by vote of a majority of the outstanding voting securities of the Trust or by the Distributor. This Agreement will also terminate automatically in the event of 8 its assignment. (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" shall have the same meanings as ascribed to such terms in the 1940 Act.) 8. Limitation of Liability of the Trustees and Shareholders. --------------------------------------------------------- It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Trustees, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Trust's Agreement and Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first written above. MARINER MUTUAL FUNDS TRUST BISYS FUND SERVICES LIMITED PARTNERSHIP By: BISYS Fund Services, Inc., General Partner By: ____________________________ By: ____________________________ Title: _________________________ Title: _________________________ Date: __________________________ Date: __________________________ 9 Dated: ______________ SCHEDULE A TO THE DISTRIBUTION AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES LIMITED PARTNERSHIP DISTRIBUTION AND SHAREHOLDER SERVICE PLAN A-1 EX-99.8A 19 CUSTODIAN AGREEMENT Exhibit 8(a) Custodian Agreement between Registrant and BISYS Fund Services CUSTODY AGREEMENT Agreement made as of this 25th day of September, 1995, between MARINER MUTUAL FUNDS TRUST, a Massachusetts business trust organized and existing under the laws of the Commonwealth of Massachusetts, having its principal office and place of business at 250 Park Avenue, New York, New York 10177 (hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a banking business, having its principal office and place of business at 48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian"). W I T N E S S E T H: That for and in consideration of the mutual promises hereinafter set forth, the Fund and the Custodian agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: 1. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry system for United States and federal agency securities, its successor or successors and its nominee or nominees. 2. "Call Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities. 3. "Certificate" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to the Custodian which is actually received by the Custodian and signed on behalf of the Fund by any two Officers, and the term Certificate shall also include instructions by the Fund to the Custodian communicated by a Terminal Link. 4. "Clearing Member" shall mean a registered broker-dealer which is a clearing member under the rules of O.C.C. and a member of a national securities exchange qualified to act as a custodian for an investment company, or any broker-dealer reasonably believed by the Custodian to be such a clearing member. 5. "Collateral Account" shall mean a segregated account so denominated which is specifically allocated to a Series and pledged to the Custodian as security for, and in consideration of, the Custodian's issuance of (a) any Put Option guarantee letter or similar document described in paragraph 8 of Article V herein, or (b) any receipt described in Article V or VIII herein. 6. "Covered Call Option" shall mean an exchange traded option entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities (excluding Futures Contracts) which are owned by the writer hereof and subject to appropriate restrictions. 7. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing agency registered with the Securities and Exchange Commission, its successor or successors and its nominee or nominees. The term "Depository" shall further mean and include any other person authorized to act as a depository under the Investment Company Act of 1940, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Fund's Board of Trustees specifically approving deposits therein by the Custodian . 8. "Financial Futures Contract" shall mean the firm commitment to buy or sell fixed income securities including, without limitation, U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit, and Eurodollar certificates of deposit, during a specified month at an agreed upon price. 9. "Futures Contract" shall mean a Financial Futures Contract and/or Stock Index Futures Contracts. 10. "Futures Contract Option" shall mean an option with respect to a Futures Contract. 11. "Margin Account" shall mean a segregated account in the name of a broker, dealer, futures commission merchant, or a Clearing Member, or in the name of the Fund for the benefit of a broker, dealer, futures commission merchant, or Clearing Member, or otherwise, in accordance with an agreement between the Fund, the Custodian and a broker, dealer, futures commission merchant or a Clearing Member (a "Margin Account Agreement"), separate and distinct from the custody account, in which certain Securities and/or money of the Fund shall be deposited and withdrawn from time to time in connection with such transactions as the Fund may from time to time determine. Securities held in the Book-Entry System or the Depository shall be deemed to have been deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting an appropriate entry in its books and records. 12. "Money Market Security" shall be deemed to include, without limitation, certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as to interest and principal by the government of the United States or agencies or instrumentalities thereof, any tax, bond or revenue anticipation note issued by any state or municipal government or public authority, commercial paper, certificates of deposit and bankers' acceptances, repurchase agreements with respect to the same and bank time deposits, where the purchase and sale of such securities normally requires settlement in federal funds on the same day as such purchase or sale. - 2 - 13. "O.C.C." shall mean the options clearing corporation, a clearing agency registered under Section 17A of the Securities Exchange Act of 1934, its successor or successors, and its nominee or nominees. 14. "Officers" shall be deemed to include the President, and Vice President, the Secretary, the Clerk, the Treasurer, the Controller, any Assistant Secretary, any Assistant Clerk, any Assistant Treasurer, and any other person or persons, whether or not any such other person is an officer of the Fund, duly authorized by the Board of Trustees of the Fund to execute any Certificate, instruction, notice or other instrument on behalf of the Fund and listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time. 15. "Option" shall mean a Call Option, Covered Call Option, Stock Index Option and/or a Put Option. 16. "Oral Instructions" shall mean verbal instructions actually received by the Custodian from an Officer or from a person reasonably believed by the Custodian to be an Officer. 17. "Put Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and tender of the specified underlying Securities, to sell such Securities to the writer thereof for the exercise price. 18. "Reverse Repurchase Agreement" shall mean an agreement pursuant to which the Fund sells Securities and agrees to repurchase such Securities at a described or specified date and price. 19. "Security" shall be deemed to include, without Limitation, Money Market Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures Contracts, Stock Index Futures Contract Options, Financial Futures Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks and other securities having characteristics similar to common stocks, preferred stocks, debt obligations issued by state or municipal governments and by public authorities (including, without limitation, general obligation bonds, revenue bonds, industrial bonds and industrial development bonds), bonds, debentures, notes, mortgages or other obligations, and any certificates, receipts, warrants or other instruments representing rights to receive, purchase, sell or subscribe for the same, or evidencing or representing any other rights or interest therein, or any property or assets. 20. "Senior Security Account" shall mean an account maintained and specifically allocated to a Series under the terms of this Agreement as a segregated account, by recordation or otherwise, within the custody account in which certain securities and/or other assets of the Fund specifically allocated to such Series shall be deposited and withdrawn from time to time in accordance with Certificates received by the Custodian in connection with such transactions as the Fund may from time to time determine. - 3 - 21. "Series" shall mean the various portfolios, it any, of the Fund as described from time to time in the current and effective prospectus for the Fund and listed on Appendix B hereto as amended from time to time. 22. "Shares" shall mean the shares of beneficial interest of the Fund, each of which is, in the case of a Fund having Series, allocated to a particular Series. 23. "Stock Index Futures Contract" shall mean a bilateral agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the value of a particular stock index at the close of the last business day of the contract and the price at which the futures contract is originally struck. 24. "Stock Index Option" shall mean an exchange traded option entitling the holder, upon timely exercise, to receive an amount of cash determined by reference to the difference between the exercise price and the value of the index on the late of exercise. 25. "Terminal Link" shall mean an electronic data transmission link between the Fund and the Custodian requiring in connection with each use of the Terminal Link by or on behalf of the Fund use of an authorization code provided by the Custodian and at least two access codes established by the Fund. ARTICLE II APPOINTMENT OF CUSTODIAN 1. The Fund hereby constitutes and appoints. Custodian as custodian of the Securities and moneys at time owned by the Fund during the period of this Agreement. 2. The Custodian hereby accepts appointment as such custodian and agrees to perform the duties thereto hereinafter set forth. ARTICLE III CUSTODY OF CASH AND SECURITIES 1. Except as otherwise provided in paragraph 7 of this Article and in Article VIII, the Fund will deliver or cause to be delivered to the Custodian all Securities and all moneys owned by it, at any time during the period of this Agreement, and shall specify with respect to such Securities and money the Series to which the same are specifically allocated. The Custodian shall segregate, keep and maintain the assets of the Series separate and apart. The Custodian will not be responsible for any Securities and moneys not actually received by it. The Custodian will be entitled to reverse any credits made on the Fund's behalf where such credits have been previously made and moneys are not finally collected. The Fund shall deliver to the Custodian a certified resolution of the Board of Trustees of the Fund, substantially in the form of Exhibit A hereto, approving, authorizing - 4 - and instructing the Custodian on a continuous and on-going basis to deposit in the Book-Entry System all Securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated and to utilize the Book-Entry System to the extent possible in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities and deliveries and returns of Securities collateral. Prior to a deposit of Securities specifically allocated to a Series in the Depositary, the Fund shall deliver to the Custodian a certified resolution of the Board of Trustees of the Fund, substantially in the form of Exhibit B hereto, approving, authorizing and instructing the Custodian on a continuous and ongoing basis until instructed to the contrary by a Certificate actually received by the Custodian to deposit in the Depository all Securities specifically allocated to such Series eligible for deposit therein, and to utilize the Depository to the extent possible with respect to such Securities in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities, and deliveries and returns of Securities collateral. Securities and moneys deposited in either the Book-Entry System or the Depository will be represented in accounts which include only assets held by the Custodian for customers, including, but not limited to, accounts in which the Custodian acts in a fiduciary or representative capacity and will be specifically allocated on the Custodian's books to the separate account for the applicable Series. Prior to the Custodian's accepting, utilizing and acting with respect to Clearing Member confirmations for Options and transactions in Options for a Series as provided in this Agreement, the Custodian shall have received a certified resolution of the Fund's Board of Trustees, substantially in the form of Exhibit C hereto, approving, authorizing and instructing the Custodian on a continuous and on-going basis, until instructed to the contrary by a Certificate actually received by the Custodian, to accept, utilize and act in accordance with such confirmations as provided in this Agreement with respect to such Series. 2. The Custodian shall establish and maintain separate accounts, in the name of each Series, and shall credit to the separate account for each Series all moneys received by it for the account of the Fund with respect to such Series. Money credited to a separate account for a Series shall be disbursed by the Custodian only: (a) As hereinafter provided; (b) Pursuant to Certificates setting forth the name and address of the person to whom the payment is to be made, the Series account from which payment is to be made and the purpose for which payment is to be made; or (c) In payment of the fees and in reimbursement of the expenses and liabilities of the Custodian attributable to such Series. 3. Promptly after the close of business on each day, the Custodian shall furnish the Fund with confirmations and a summary, on a per Series basis, of all transfers to or from the account of the Fund for a Series, either hereunder or with any co-custodian or sub-custodian appointed in accordance with this Agreement during said day. Where Securities are transferred to the account of the Fund for a Series, the Custodian shall also by book-entry or otherwise identify as belonging to such Series a quantity of Securities in a fungible bulk of Securities registered in the - 5 - name of the Custodian (or its nominee) or shown on the Custodian's account on the books of the Book-Entry System or the Depository. At least monthly and from time to time, the Custodian shall furnish the Fund with a detailed statement, on a per Series basis, of the Securities and moneys held by the Custodian for the Fund. 4. Except as otherwise provided in paragraph 7 or this Article and in Article VIII, all Securities held by the Custodian hereunder, which are issued or issuable only in bearer form, except such Securities as are held in the Book-Entry System, shall be held by the Custodian in that Form; all other Securities held hereunder may be registered in the name of the Fund, in the name of any duly appointed registered nominee of the Custodian as the Custodian may from time to time determine, or in the name of the Book-Entry System or the Depository or their successor or successors, or their nominee or nominees. The Fund agrees to furnish to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of its registered nominee or in the name of the Book-Entry System or the Depository any Securities which it may hold hereunder and which may from time to time be registered in the name of the Fund. The Custodian shall hold all such Securities specifically allocated to a Series which are not held in the Book-Entry System or in the Depository in a separate account in the name of such Series physically segregated at all times from those of any other person or persons. 5. Except as otherwise provided in this Agreement and unless otherwise instructed to the contrary by a Certificate, the Custodian by itself, or through the use of the Book-Entry System or the Depository with respect to Securities held hereunder and therein deposited, shall with respect to all Securities held for the Fund hereunder in accordance with preceding paragraph 4: (a) Collect all income due or payable; (b) Present for payment and collect the amount payable upon such Securities which are called, but only if either (i) the Custodian receives a written notice of such call, or (ii) notice of such call appears in one or more of the publications listed in Appendix C annexed hereto, which may be amended at any time by the Custodian without the prior notification or consent of the Fund; (c) Present for payment and collect the amount payable upon all Securities which mature; (d) Surrender Securities in temporary form for definitive Securities; (e) Execute, as custodian, any necessary declarations or certificates of ownership under the Federal Income Tax Laws or the laws or regulations of any other taxing authority now or hereafter in effect; and (f) Hold directly, or through the Book-Entry System or the Depository with respect to Securities therein deposited, for the account of a Series, all rights and similar securities issued with respect to any Securities held by the Custodian for such Series hereunder. - 6 - 6. Upon receipt of a Certificate and not otherwise, the Custodian, directly or through the use of the Book-Entry System or the Depository, shall: (a) Execute and deliver to such persons as may be designated in such Certificate proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any Securities held by the Custodian hereunder for the Series specified in such Certificate may be exercised; (b) Deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate in exchange for other Securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege and receive and hold hereunder specifically allocated to such Series any cash or other Securities received in exchange; (c) Deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold hereunder specifically allocated to such Series such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery; (d) Make such transfers or exchanges of the assets of the Series specified in such Certificate, and take such other steps as shall be stated in such Certificate to be for the purpose of effectuating any duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund; and (e) Present for payment and collect the amount payable upon Securities not described in preceding paragraph 5(b) of this Article which may be called as specified in the Certificate. 7. Notwithstanding any provision elsewhere contained herein, the Custodian shall not be required to obtain possession of any instrument or certificate representing any Futures Contract, any Option, or any Futures Contract Option until after it shall have determined, or shall have received a Certificate from the Fund stating, that any such instruments or certificates are available. The Fund shall deliver to the Custodian such a Certificate no later than the business day preceding the availability of any such instrument or certificate. Prior to such availability, the Custodian shall comply with Section 17(f) of the Investment Company Act of 1940, as amended, in connection with the purchase, sale, settlement, closing out or writing of Futures Contracts, Options, or Futures Contract Options by making payments or deliveries specified in Certificates received by the Custodian in connection with any such purchase, sale, writing, settlement or closing out upon its receipt from a broker, dealer, or futures commission merchant of a statement or confirmation reasonably believed by the Custodian to be in the form customarily used by brokers, dealers, or future commission merchants with respect to such Futures Contracts, Options, or Futures Contract Options, as the case may be, confirming that such Security is held by such broker, dealer or futures commission merchant, in book-entry form or otherwise, in the name of the Custodian (or - 7 - any nominee of the Custodian) as custodian for the Fund, provided, however, that notwithstanding the foregoing, payments to or deliveries from the Margin Account and payments with respect to Securities to which a Margin Account relates, shall be made in accordance with the terms and conditions of the Margin Account Agreement. Whenever any such instruments or certificates are available, the Custodian shall, notwithstanding any provision in this Agreement to the contrary, make payment for any Futures Contract, Option, or Futures Contract Option for which such instruments or such certificates are available only against the delivery to the Custodian of such instrument or such certificate, and deliver any Futures Contract, Option or Futures Contract Option for which such instruments or such certificates are available only against receipt by the Custodian of payment therefor. Any such instrument or certificate delivered to the Custodian shall be held by the Custodian hereunder in accordance with, and subject to, the provisions of this Agreement. ARTICLE IV PURCHASE AND SALE OF INVESTMENTS OF THE FUND OTHER THAN OPTIONS, FUTURES CONTRACTS AND FUTURES CONTRACT OPTIONS 1. Promptly after each purchase of Securities by the Fund, other than a purchase of an Option, a Futures Contract, or a Futures Contract Option, the Fund shall deliver to the Custodian (i) with respect to each purchase of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each purchase of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such purchase: (a) the Series to which such Securities are to be specifically allocated; (b) the name of the issuer and the title of the Securities; (c) the number of shares or the principal amount purchased and accrued interest, if any; (d) the date of purchase and settlement; (e) the purchase price per unit; (I) the total amount payable upon such purchase; (g) the name of the person from whom or the broker through whom the purchase was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom payment is to be made. The Custodian shall, upon receipt of Securities purchased by or for the Fund, pay to the broker specified in the Certificate out of the moneys held for the account of such Series the total amount payable upon such purchase, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions. 2. Promptly after each sale of Securities by the Fund, other than a sale of any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect to each sale of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each sale of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such sale: (a) the Series to which such Securities were specifically allocated; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest, if any; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the Clearing Member through whom the sale was made. The Custodian shall consent to the delivery of the Option sold by the Clearing Member which previously supplied the confirmation described in the preceding paragraph 1 of this Article with respect to such Option against payment - 8 - to the Custodian of the total amount payable to the Fund, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions. ARTICLE V OPTIONS 1. Promptly after the purchase of any Option by the Fund, the Fund shall deliver to the Custodian a Certificate specifying with respect to each Option purchased: (a) the Series to which such Option is specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options purchased; (d) the expiration date; (e) the exercise price; (f) the dates of purchase and settlement; (g) the total amount payable by the Fund in connection with such purchase; (h) the name of the Clearing Member through whom such Option was purchased; and (i) the name of the broker to whom payment is to be made. The Custodian shall pay, upon receipt of a Clearing Member's statement confirming the purchase of such Option held by such Clearing Member for the account of the Custodian (or any duly appointed and registered nominee of the Custodian) as custodian for the Fund, out of moneys held for the account of the Series to which such Option is to be specifically allocated, the total amount payable upon such purchase to the Clearing Member through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Certificate. 2. Promptly after the sale of any Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to each such sale: (a) the Series to which such Option was specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options sold; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the Clearing Member through whom the sale was made. The Custodian shall consent to the delivery of the Option sold by the Clearing Member which previously supplied the confirmation described in preceding paragraph 1 of this Article with respect to such Option against payment to the Custodian of the total amount payable to the Fund, provided that the same conforms to the total amount payable as set forth in such Certificate. 3. Promptly after the exercise by the Fund or any Call Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Call Option: (a) the Series to which such Call Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Call Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid by the Fund upon such exercise; and (g) the name of the Clearing Member through whom such Call Option was exercised. The Custodian shall, upon receipt of the Securities underlying the Call Option which was exercised, pay out of the moneys held for the account of the - 9 - Series to which such Call Option was specifically allocated the total amount payable to the Clearing Member through whom the Call Option was exercised, provided that the same conforms to the total amount payable as set forth in such Certificate. 4. Promptly after the exercise by the Fund of any Put Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Put Option: (a) the Series to which such Put Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Put Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid to the Fund upon such exercise; and (g) the name of the Clearing Member through whom such Put Option was exercised. The Custodian shall, upon receipt of the amount payable upon the exercise of the Put Option, deliver or direct the Depository to deliver the Securities specifically allocated to such Series, provided the same conforms to the amount payable to the Fund as set forth in such Certificate. 5. Promptly after the exercise by the Fund of any Stock Index Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the series to which such Stock Index Option was specifically allocated; (b) the type of Stock Index Option (put or call); (c) the number of Options being exercised; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the total amount to be received by the Fund in connection with such exercise; and (h) the Clearing Member from whom such payment is to be received. 6. Whenever the Fund writes a Covered Call Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Covered Call Option: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares for which the Covered Call Option was written and which underlie the same; (c) the expiration date; (d) the exercise price; (e) the premium to be received by the Fund; (f) the date such Covered Call Option was written; and (g) the name of the Clearing Member through whom the premium is to be received. The Custodian shall deliver or cause to be delivered, in exchange for receipt of the premium specified in the Certificate with respect to such Covered Call Option, such receipts as are required in accordance with the customs prevailing among Clearing Members dealing in Covered Call Options and shall impose, or direct the Depository to impose, upon the underlying Securities specified in the Certificate specifically allocated to such Series such restrictions as may be required by such receipts. Notwithstanding the foregoing, the Custodian has the right, upon prior written notification to the Fund, at any time to refuse to issue any receipts for Securities in the possession of the Custodian and not deposited with the Depository underlying a Covered Call Option. 7. Whenever a Covered Call Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall promptly deliver to the Custodian a Certificate instructing the Custodian to deliver, or to direct the Depository to deliver, the Securities subject to such Covered Call Option and specifying: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares subject to the Covered Call Option; (c) the Clearing Member to whom the underlying Securities are to be - 10 - delivered; and (d) the total amount payable to the Fund upon such delivery. Upon the return and/or cancellation of any receipts delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver, or direct the Depository to deliver, the underlying Securities as specified in the Certificate against payment of the amount to be received as set forth in such Certificate. 8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Put Option: (a) the Series for which such Put Option was written; (b) the name of the issuer and the title and number of shares for which the Put Option is written and which underlie the same; (c) the expiration date; (d) the exercise price; (e) the premium to be received by the Fund; (f) the date such Put Option is written; (g) the name of the Clearing Member through whom the premium is to be received and to whom a Put Option guarantee letter is to be delivered; (h) the amount of cash, and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Senior Security Account for such Series; and (i) the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be deposited into the Collateral Account for such Series. The Custodian shall, after making the deposits into the Collateral Account specified in the Certificate, issue a Put Option guarantee letter substantially in the form utilized by the Custodian on the date hereof, and deliver the same to the Clearing Member specified in the Certificate against receipt of the premium specified in said Certificate. Notwithstanding the foregoing, the Custodian shall be under no obligation to issue any Put Option guarantee letter or similar document if it is unable to make any of the representations contained therein. 9. Whenever a Put Option written by the Fund and described in the preceding paragraph is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Put Option was written; (b) the name of the issuer and title and number of shares subject to the Put Option; (c) the Clearing Member from whom the underlying Securities are to be received; (d) the total amount payable by the Fund upon such delivery; (e) the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be withdrawn from the Collateral Account for such Series and (f) the amount of cash and/or the amount and kind of Securities, specifically allocated to such Series, if any, to be withdrawn from the Senior Security Account. Upon the return and/or cancellation of any Put Option guarantee letter or similar document issued by the Custodian in connection with such Put Option, the Custodian shall pay out of the moneys held for the account of the Series to which such Put Option was specifically allocated the total amount payable to the Clearing Member specified in the Certificate as set forth in such Certificate against delivery of such Securities, and shall make the withdrawals specified in such Certificate. 10. Whenever the Fund writes a Stock Index Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the series to which such Stock Index Option was written; (a) Whether such Stock Index Option is a put or a call; (c) the number of options written; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the Clearing Member through whom such Option was written; (h) the premium to be received by the Fund; (i) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Senior Security Account for such Series; (j) the amount of cash and/or the amount and kind of Securities, if any, - 11 - specifically allocated to such Series to be deposited in the Collateral Account for such Series; and (k) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Margin Account, and the name in which such account is to be or has been established. The Custodian shall, upon receipt of the premium specified in the Certificate, make the deposits, if any, into the Senior Security Account specified in the Certificate, and either (1) deliver such receipts, if any, which the Custodian has specifically agreed to issue, which are in accordance with the customs prevailing among Clearing Members in Stock Index Options and make the deposits into the Collateral Account specified in the Certificate, or (2) make the deposits into the Margin Account specified in the Certificate. 11. Whenever a Stock Index Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series for which such Stock Index Option was written; (b) such information as may be necessary to identify the Stock Index Option being exercised; (c) the Clearing Member through whom such Stock Index Option is being exercised; (d) the total amount payable upon such exercise, and whether such amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Senior Security Account for such Series; and the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Collateral Account for such Series. Upon the return and/or cancellation of the receipt, if any, delivered pursuant to the preceding paragraph of this Article, the Custodian shall pay out of the moneys held for the account of the Series to which such Stock Index Option was specifically allocated to the Clearing Member specified in the Certificate the total amount payable, if any, as specified therein. 12. Whenever the Fund purchases any Option identical to a previously written Option described in paragraphs, 6, 8 or 10 of this Article in a transaction expressly designated as a "Closing Purchase Transaction" in order to liquidate its position as a writer of an Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to the Option being purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the Series for which the Option was written; (c) the name of the issuer and the title and number of shares subject to the Option, or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Options held; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the expiration date; (g) the type of Option (put or call); (h) the date of such purchase; (i) the name of the Clearing Member to whom the premium is to be paid; and (j) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Collateral Account, a specified Margin Account, or the Senior Security Account for such Series. Upon the Custodian's payment of the premium and the return and/or cancellation of any receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with respect to the Option being liquidated through the Closing Purchase Transaction, the Custodian shall remove, or direct the Depository to remove, the previously imposed restrictions on the Securities underlying the Call Option. 13. Upon the expiration, exercise or consummation of a Closing Purchase Transaction with respect to any Option purchased or written by the Fund and described in this Article, the Custodian shall delete such Option from the statements delivered to the Fund pursuant - 12 - to paragraph 3 Article III herein, and upon the return and/or cancellation of any receipts issued by the Custodian, shall make such withdrawals from the Collateral Account, and the Margin Account and/or the Senior Security Account as may be specified in a Certificate received in connection with such expiration, exercise, or consummation. ARTICLE VI FUTURES CONTRACTS 1. Whenever the Fund shall enter into a Futures Contract, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Futures Contract, (or with respect to any number of identical Futures Contract(s)): (a) the Series for which the Futures Contract is being entered; (b) the category of Futures Contract (the name of the underlying stock index or financial instrument); (c) the number of identical Futures Contracts entered into; (d) the delivery or settlement date of the Futures Contract(s); (e) the date the Futures Contract(s) was (were) entered into and the maturity date; (f) whether the Fund is buying (going long) or selling (going short) on such Futures Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Senior Security Account for such Series; (h) the name of the broker, dealer, or futures commission merchant through whom the Futures Contract was entered into; and (i) the amount of fee or commission, if any, to be paid and the name of the broker, dealer, or futures commission merchant to whom such amount is to be paid. The Custodian shall make the deposits, if any, to the Margin Account in accordance with the terms and conditions of the Margin Account Agreement. The Custodian shall make payment out of the moneys specifically allocated to such Series of the fee or commission, if any, specified in the Certificate and deposit in the Senior Security Account for such Series the amount of cash and/or the amount and kind of Securities specified in said Certificate. 2. (a) Any variation margin payment or similar payment required to be made by the Fund to a broker, dealer, or futures commission merchant with respect to an outstanding Futures Contract, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. (b) Any variation margin payment or similar payment from a broker, dealer, or futures commission merchant to the Fund with respect to an outstanding Futures Contract, shall be received and dealt with by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 3. Whenever a Futures Contract held by the Custodian hereunder is retained by the Fund until delivery or settlement is made on such Futures Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a) the Futures Contract and the Series to which the same relates; (b) with respect to a Stock Index Futures Contract, the total cash settlement amount to be paid or received, and with respect to a Financial Futures Contract, the Securities and/or amount of cash to be delivered or received; (c) the broker, dealer, or futures commission merchant to or from whom payment or delivery is to be made or received; and (d) the amount of cash and/or Securities to be withdrawn from the Senior Security Account for such Series. The Custodian shall make the payment - 13 - or delivery specified in the Certificate, and delete such Futures Contract from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein. 4. Whenever the Fund shall enter into a Futures Contract to offset a Futures Contract held by the Custodian hereunder, the Fund shall deliver to the Custodian a Certificate specifying: (a) the items of information required in a Certificate described in paragraph 1 of this Article, and (b) the Futures Contract being offset. The Custodian shall make payment out of the money specifically allocated to such Series of the fee or commission, if any, specified in the Certificate and delete the Futures Contract being offset from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein, and make such withdrawals from the Senior Security Account for such Series as may be specified in such Certificate. The withdrawals, if any, to be made from the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. ARTICLE VII FUTURES CONTRACT OPTIONS 1. Promptly after the purchase of any Futures Contract Option by the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Futures Contract Option: (a) the Series to which such Option is specifically allocated; (b) the type of Futures Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the expiration date; (e) the exercise price; (f) the dates of purchase and settlement; (g) the amount of premium to be paid by the Fund upon such purchase; (h) the name of the broker or futures commission merchant through whom such option was purchased; and (i) the name of the broker, or futures commission merchant, to whom payment is to be made. The Custodian shall pay out of the moneys specifically allocated to such Series, the total amount to be paid upon such purchase to the broker or futures commissions merchant through whom the purchase was made, provided the same conforms to the amount set forth in such Certificate. 2. Promptly after the sale of any Futures Contract Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such sale: (a) Series to which such Futures Contract Option was specifically allocated; (b) the type of Future Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the broker of futures commission merchant through whom the sale was made. The Custodian shall consent to the cancellation of the Futures Contract Option being closed against payment to the Custodian of the total amount payable to the Fund, provided the same conforms to the total amount payable as set forth in such Certificate. - 14 - 3. Whenever a Futures Contract Option purchased by the Fund pursuant to paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option (put or call) being exercised; (c) the type of Futures Contract Option; (d) the date of exercise; (e) the name of the broker or futures commission merchant through whom the Futures Contract Option is exercised; (f) the net total amount, if any, payable by the Fund; (g) the amount, if any, to be received by the Fund; and (h) the amount of cash and/or the amount and kind of Securities to be deposited in the Senior Security Account for such Series. The Custodian shall make, out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 4. Whenever the Fund writes a Futures Contract Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Futures Contract Option: (a) the Series for which such Futures Contract Option was written; (b) the type of Futures Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the expiration date; (e) the exercise price; (f) the premium to be received by the Fund; (g) the name of the broker or futures commission merchant through whom the premium is to be received; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Senior Security Account for such Series. The Custodian shall, upon receipt of the premium specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series the deposits into the Senior Security Account, if any, as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 5. Whenever a Futures Contract Option written by the Fund which is a call is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying the Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option was exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount of cash and/or the amount and kind of Securities to be deposited in the Senior Security Account for such Series. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in such Certificate make the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 6. Whenever a Futures Contract Option which is written by the Fund and which is a put is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying such Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option is exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable - 15 - by the Fund upon such exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn from or deposited in, the Senior Security Account for such Series, if any. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 6. Whenever a Futures Contract Option which is written by the Fund and which is a put is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying such Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option is exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn from or deposited in, the Senior Security Account for such Series, if any. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Senior Security Account as specified in the Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 7. Whenever the Fund purchases any Futures Contract Option identical to a previously written Futures Contract Option described in this Article in order to liquidate its position as a writer of such Futures Contract Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to the Futures Contract Option being purchased: (a) the Series to which such Option is specifically allocated; (b) that the transaction is a closing transaction; (c) the type of Future Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Option Contract; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the expiration date; (g) the name of the broker or futures commission merchant to whom the premium is to be paid; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Senior Security Account for such Series. The Custodian shall effect the withdrawals from the Senior Security Account specified in the Certificate. The withdrawals, if any, to be made from the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. 8. Upon the expiration, exercise, or consummation of a closing transaction with respect to, any Futures Contract Option written or purchased by the Fund and described in this Article, the Custodian shall (a) delete such Futures Contract Option from the statements delivered to the Fund pursuant to paragraph 3 of Article III and herein, (b) make such withdrawals from and/or in the case of an exercise such deposits into the Senior Security Account as may be specified in a Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement. - 16 - 9. Futures Contracts acquired by the Fund through the exercise of a Futures Contract Option described in this Article shall be subject to Article VI hereof. ARTICLE VIII SHORT SALES 1. Promptly after any short sales by any Series of the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series for which such short sale was made; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest or dividends, if any; (d) the dates of the sale and settlement; (e) the sale price per unit; (f) the total amount credited to the Fund upon such sale, if any, (g) the amount of cash and/or the amount and kind of Securities, if any, which are to be deposited in a Margin Account and the name in which such Margin Account has been or is to be established; (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in a Senior Security Account, and (i) the name of the broker through whom such short sale was made. The Custodian shall upon its receipt of a statement from such broker confirming such sale and that the total amount credited to the Fund upon such sale, if any, as specified in the Certificate is held by such broker for the account of the Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a receipt or make the deposits into the Margin Account and the Senior Security Account specified in the Certificate. 2. In connection with the closing-out of any short sale, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such closing out: (a) the Series for which such transaction is being made; (b) the name of the issuer and the title of the Security; (c) the number of shares or the principal amount, and accrued interest or dividends, if any, required to effect such closing-out to be delivered to the broker; (d) the dates of closing-out and settlement; (e) the purchase price per unit; (f) the net total amount payable to the Fund upon such closing-out; (g) the net total amount payable to the broker upon such closing-out; (h) the amount of cash and the amount and kind of Securities to be withdrawn, if any, from the Margin Account; (i) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Senior Security Account; and (j) the name of the broker through whom the Fund is effecting such closing-out. The Custodian shall, upon receipt of the net total amount payable to the Fund upon such closing-out, and the return and/or cancellation of the receipts, if any, issued by the Custodian with respect to the short sale being closed-out, pay out of the moneys held for the account of the Fund to the broker the net total amount payable to the broker, and make the withdrawals from the Margin Account and the Senior Security Account, as the same are specified in the Certificate. ARTICLE IX REVERSE REPURCHASE AGREEMENTS 1. Promptly after the Fund enters a Reverse Repurchase Agreement with respect to Securities and money held by the Custodian hereunder, the Fund shall deliver to the Custodian a Certificate, or in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions specifying: (a) the Series for which the Reverse Repurchase - 17 - Agreement is entered; (b) the total amount payable to the Fund in connection with such Reverse Repurchase Agreement and specifically allocated to such Series; (c) the broker or dealer through or with whom the Reverse Repurchase Agreement is entered; (d) the amount and kind of Securities to be delivered by the Fund to such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and (f) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Senior Security Account for such Series in connection with such Reverse Repurchase Agreement. The Custodian shall, upon receipt of the total amount payable to the Fund specified in the Certificate or Oral Instructions make the delivery to the broker or dealer, and the deposits, if any, to the Senior Security Account, specified in such Certificate or Oral Instructions. 2. Upon the termination of a Reverse Repurchase Agreement described in preceding paragraph 1 of this Article, the Fund shall promptly deliver a Certificate or, in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions to the Custodian specifying: (a) the Reverse Repurchase Agreement being terminated and the Series for which same was entered; (b) the total amount payable by the Fund in connection with such termination; (c) the amount and kind of Securities to be received by the Fund and specifically allocated to such Series in connection with such termination; (d) the date of termination; (e) the name of the broker or dealer with or through whom the Reverse Repurchase Agreement is to be terminated; and (f) the amount of cash and/or the amount and kind of Securities to be withdrawn from the Senior Securities Account for such Series. The Custodian shall, upon receipt of the amount and kind of Securities to be received by the Fund specified in the Certificate or Oral Instructions, make the payment to the broker or dealer, and the withdrawals, if any, from the Senior Security Account, specified in such Certificate ARTICLE X LOAN OF PORTFOLIO SECURITIES OF THE FUND 1. Promptly after each loan of portfolio Securities specifically allocated to a Series held by the Custodian hereunder, the Fund shall deliver or cause to be delivered to the Custodian a Certificate specifying with respect to each such loan: (a) the Series to which the loaned Securities are specifically allocated; (b) the name of the issuer and the title of the Securities, (c) the number of shares or the principal amount loaned, (d) the date of loan and delivery, (e) the total amount to be delivered to the Custodian against the loan of the Securities, including the amount of cash collateral and the premium, if any, separately identified, and (f) the name of the broker, dealer, or financial institution to which the loan was made. The Custodian shall deliver the Securities thus designated to the broker, dealer or financial institution to which the loan was made upon receipt of the total amount designated as to be delivered against the loan of Securities. The Custodian may accept payment in connection with a delivery otherwise than through the Book-Entry System or Depository only in the form of a certified or bank cashier's check payable to the order of the Fund or the Custodian drawn on New York Clearing House funds and may deliver Securities in accordance with the customs prevailing among dealers in securities. 2. Promptly after each termination of the loan of Securities by the Fund, the Fund shall deliver or cause to be delivered to the Custodian a Certificate specifying with respect to each such loan termination and return of Securities: (a) the Series to which the loaned Securities are - 18 - specifically allocated; (b) the name of the issuer and the title of the Securities to be returned, (c) the number of shares or the principal amount to be returned, (d) the date of termination, (e) the total amount to be delivered by the Custodian (including the cash collateral for such Securities minus any offsetting credits as described in said Certificate), and (f) the name of the broker, dealer, or financial institution from which the Securities will be returned. The Custodian shall receive all Securities returned from the broker, dealer, or financial institution to which such Securities were loaned and upon receipt thereof shall pay, out of the moneys held for the account of the Fund, the total amount payable upon such return of Securities as set forth in the Certificate. ARTICLE XI CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY ACCOUNTS, AND COLLATERAL ACCOUNTS 1. The Custodian shall, from time to time, make such deposits to, or withdrawals from, a Senior Security Account as specified in a Certificate received by the Custodian. Such Certificate shall specify the Series for which such deposit or withdrawal is to be made and the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be deposited in, or withdrawn from, such Senior Security Account for such Series. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and the number of shares or the principal amount of any particular Securities to be deposited by the Custodian into, or withdrawn from, a Senior Securities Account, the Custodian shall be under no obligation to make any such deposit or withdrawal and shall so notify the Fund. 2. The Custodian shall make deliveries or payments from a Margin Account to the broker, dealer, futures commission merchant or Clearing Member in whose name, or for whose benefit, the account was established as specified in the Margin Account Agreement. 3. Amounts received by the Custodian as payments or distributions with respect to Securities deposited in any Margin Account shall be dealt with in accordance with the terms and conditions of the Margin Account Agreement. 4. The Custodian shall have a continuing lien and security interest in and to any property at any time held by the Custodian in any Collateral Account described herein. In accordance with applicable law the Custodian may enforce its lien and realize on any such property whenever the Custodian has made payment or delivery pursuant to any Put Option guarantee letter or similar document or any receipt issued hereunder by the Custodian. In the event the Custodian should realize on any such property net proceeds which are less than the Custodian's obligations under any Put Option guarantee letter or similar document or any receipt, such deficiency shall be a debt owed the Custodian by the Fund within the scope of Article XIV herein. 5. On each business day the Custodian shall furnish the Fund with a statement with respect to each Margin Account in which money or Securities are held specifying as of the close of business on the previous business day: (a) the name of the Margin Account; (b) the amount and kind of Securities held therein; and (c) the amount of money held therein. The Custodian shall make available upon request to any broker, dealer, or futures commission merchant specified in the name - 19 - of a Margin Account a copy of the statement furnished the Fund with respect to such Margin Account. 6. Promptly after the close of business on each business day in which cash and/or Securities are maintained in a Collateral Account for any Series, the Custodian shall furnish the Fund with a statement with respect to such Collateral Account specifying the amount of cash and/or the amount and kind of Securities held therein. No later than the close of business next succeeding the delivery to the Fund of such statement, the Fund shall furnish to the Custodian a Certificate specifying the then market value of the Securities described in such statement. In the event such then market value is indicated to be less than the Custodian's obligation with respect to any outstanding Put Option guarantee letter or similar document, the Fund shall promptly specify in a Certificate the additional cash and/or Securities to be deposited in such Collateral Account to eliminate such deficiency. ARTICLE XII PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 1. The Fund shall furnish to the Custodian a copy of the resolution of the Board of Trustees of the Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, either (i) setting forth with respect to the Series specified therein the date of the declaration of a dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on the payment date, or (ii) authorizing with respect to the Series specified therein the declaration of dividends and distributions on a daily basis and authorizing the Custodian to rely on Oral Instructions or a Certificate setting forth the date of the declaration of such dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Dividend Agent on the payment date. 2. Upon the payment date specified in such resolution, Oral Instructions or Certificate, as the case may be, the Custodian shall pay out of the moneys held for the account of each Series the total amount payable to the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with respect to such Series. ARTICLE XIII SALE AND REDEMPTION OF SHARES 1. Whenever the Fund shall sell any Shares, it shall deliver to the Custodian a Certificate duly specifying: (a) The Series, the number of Shares sold, trade date, and price; and - 20 - (b) The amount of money to be received by the Custodian for the sale of such Shares and specifically allocated to the separate account in the name of such Series. 2. Upon receipt of such money from the Transfer Agent, the Custodian shall credit such money to the separate account in the name of the Series for which such money was received. 3. Upon issuance of any Shares of any Series described in the foregoing provisions of this Article, the Custodian shall pay, out of the money held for the account of such Series, all original issue or other taxes required to be paid by the Fund in connection with such issuance upon the receipt of a Certificate specifying the amount to be paid. 4. Except as provided hereinafter, whenever the Fund desires the Custodian to make payment out of the money held by the Custodian hereunder in connection with a redemption of any Shares, it shall furnish to the Custodian a Certificate specifying: (a) The number and Series of Shares redeemed; and (b) The amount to be paid for such Shares. 5. Upon receipt from the Transfer Agent of an advice setting forth the Series and number of Shares received by the Transfer Agent for redemption and that such Shares are in good form for redemption, the Custodian shall make payment to the Transfer Agent out of the moneys held in the separate account in the name of the Series the total amount specified in the Certificate issued pursuant to the foregoing paragraph 4 of this Article. 6. Notwithstanding the above provisions regarding the redemption of any Shares, whenever any Shares are redeemed pursuant to any check redemption privilege which may from time to time be offered by the Fund, the Custodian, unless otherwise instructed by a Certificate, shall, upon receipt of an advice from the Fund or its agent setting forth that the redemption is in good form for redemption in accordance with the check redemption procedure, honor the check presented as part of such check redemption privilege out of the moneys held in the separate account of the Series of the Shares being redeemed. ARTICLE XIV OVERDRAFTS OR INDEBTEDNESS 1. If the Custodian, should in its sole discretion advance funds on behalf of any Series which results in an overdraft because the moneys held by the Custodian in the separate account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate or Oral Instructions, or which results in an overdraft in the separate account of such Series for some other reason, or if the Fund is for any other reason indebted to the Custodian with respect to a Series, including any indebtedness to The Bank of New York under the Fund's Cash Management and Related Services Agreement, (except a borrowing for investment or for temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of paragraph - 21 - 2 of this Article), such overdraft or indebtedness shall be deemed to be a loan made by the Custodian to the Fund for such Series payable on demand and shall bear interest from the date incurred at a rate per annum (based on a 360-day year for the actual number of days involved) equal to 1/2% over Custodian's prime commercial lending rate but in no event to be less than 6% per annum. In addition, the Fund hereby agrees that the Custodian shall have a continuing lien and security interest in and to any property specifically allocated to such Series at any time held by it for the benefit of such Series or in which the Fund may have an interest which is then in the Custodian's possession or control or in possession or control of any third party acting in the Custodian's behalf. The Fund authorizes the Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of accounting standing to such Series' credit on the Custodian's books. The Custodian shall notify the Fund of any such charge on the same day on which it is made. In addition, the Fund hereby covenants that on each Business Day on which either it intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a third party, or which next succeeds a Business Day on which at the close of business the Fund had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian, in writing, of each such borrowing, shall specify the Series to which the same relates, and shall not incur any indebtedness not so specified other than from the Custodian. 2. The Fund will cause to be delivered to the Custodian by any bank (including, if the borrowing is pursuant to a separate agreement, the Custodian) from which it borrows money for investment or for temporary or emergency purposes using Securities held by the Custodian hereunder as collateral for such borrowings, a notice or undertaking in the form currently employed by any such bank setting forth the amount which such bank will loan to the Fund against delivery of a stated amount of collateral. The Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates; (b) the name of the bank, (c) the amount and terms of the borrowing, which may be set forth by incorporating by reference an attached promissory note, duly endorsed by the Fund, or other loan agreement, (d) the time and date, if known, on which the loan is to be entered into, (e) the date on which the loan becomes due and payable, (f) the total amount payable to the Fund on the borrowing date, (g) the market value of Securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (h) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the Investment Company Act of 1940 and the Fund's prospectus. The Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral and the executed promissory note, if any, against delivery by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate. The Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. The Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this paragraph. The Fund shall cause all Securities released from collateral status to be returned directly to the Custodian, and the Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by the Custodian, the Custodian shall not be under any obligation to deliver any Securities. - 22 - ARTICLE XV TERMINAL LINK 1. At no time and under no circumstances shall the Fund be obligated to have or utilize the Terminal Link, and the provisions of this Article shall apply if, but only if, the Fund in its sole and absolute discretion elects to utilize the Terminal Link to transmit Certificates to the Custodian. 2. The Terminal Link shall be utilized by the Fund only for the purpose of the Fund providing Certificates to the Custodian with respect to transactions involving Securities or for the transfer of money to be applied to the payment of dividends, distributions or redemptions of Fund Shares, and shall be utilized by the Custodian only for the purpose of providing notices to the Fund. Such use shall commence only after the Fund shall have delivered to the Custodian a Certificate substantially in the form of Exhibit D and shall have established access codes. Each use of the Terminal Link by the Fund shall constitute a representation and warranty that the Terminal Link is being used only for the purposes permitted hereby, that at least two Officers have each utilized an access code, that such safekeeping procedures have been established by the Fund, and that such use does not contravene the Investment Company Act of 1940, as amended, or the rules or regulations thereunder. 3. The Fund shall obtain and maintain at its own cost and expense all equipment and services, including, but not limited to communications services, necessary for it to utilize the Terminal Link, and the Custodian shall not be responsible for the reliability or availability of any such equipment or services. 4. The Fund acknowledges that any data bases made available as part of, or through the Terminal Link and any proprietary data, software, processes, information and documentation (other than any such which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of the Custodian. The Fund shall, and shall cause others to which it discloses the Information, to keep the Information confidential by using the same care and discretion it uses with respect to its own confidential property and trade secrets, and shall neither make nor permit any disclosure without the express prior written consent of the Custodian. 5. Upon termination of this Agreement for any reason, the Fund shall return to the Custodian any and all copies of the Information which are in the Fund's possession or under its control, or which the Fund distributed to third parties. The provisions of this Article shall not affect the copyright status of any of the Information which may be copyrighted and shall apply to all Information whether or not copyrighted. 6. The Custodian reserves the right to modify the Terminal Link from time to time without notice to the Fund except that the Custodian shall give the Fund notice not less than 75 days in advance of any modification which would materially adversely affect the Fund's operation, and the Fund agrees that the Fund shall not modify or attempt to modify the Terminal Link without the Custodian's prior written consent. The Fund acknowledges that any software or procedures provided the Fund as part of the Terminal Link are the property of the Custodian and, accordingly, the Fund agrees that any modifications to the Terminal Link, whether by the Fund, or - 23 - by the Custodian and whether with or without the Custodian's consent, shall become the property of the Custodian. 7. Neither the Custodian nor any manufacturers and suppliers it utilizes or the Fund utilizes in connection with the Terminal Link makes any warranties or representations, express or implied, in fact or in law, including but not limited to warranties of merchantability and fitness for a particular purpose. 8. The Fund will cause its Officers and employees to treat the authorization codes and the access codes applicable to Terminal Link with extreme care, and irrevocably authorizes the Custodian to act in accordance with and rely on Certificates received by it through the Terminal Link. The Fund acknowledges that it is its responsibility to assure that only its Officers use the Terminal Link on its behalf, and that a Custodian shall not be responsible nor liable for use of the Terminal Link on the Fund's behalf by persons other than such persons or Officers, or by only a single Officer, nor for any alteration, omission, or failure to promptly forward. 9. (a) Except as otherwise specifically provided in Section 9(b) of this Article, the Custodian shall have no liability for any losses, damages, injuries, claims, costs or expenses arising out of or in connection with any failure, malfunction or other problem relating to the Terminal Link except for money damages suffered as the direct result of the negligence of the Custodian in an amount not exceeding for any incident $25,000 provided, however, that the Custodian shall have no liability under this Section 9 if the Fund fails to comply with the provisions of Section ll. (b) The Custodian's liability for its negligence in executing or failing to execute in accordance with a Certificate received through Terminal Link shall be only with respect to a transfer of funds which is not made in accordance with such Certificate after such Certificate shall have been duly acknowledged by the Custodian, and shall be contingent upon the Fund complying with the provisions of Section 12 of this Article, and shall be limited to (i) restoration of the principal amount mistransferred, if and to the extent that the Custodian would be required to make such restoration under applicable law, and (ii) the lesser of (A) a Fund's actual pecuniary loss incurred by reason of its loss of use of the mistransferred funds or the funds which were not transferred, as the case may be, or (B) compensation for the loss of the use of the mistransferred funds or the funds which were not transferred, as the case may be, at a rate per annum equal to the average federal funds rate as computed from the Federal Reserve Bank of New York's daily determination of the effective rate for federal funds, for the period during which a Fund has lost use of such funds. In no event shall the Custodian have any liability for failing to execute in accordance with a Certificate a transfer of funds where the Certificate is received by the Custodian through Terminal Link other than through the applicable transfer module for the particular instructions contained in such Certificate. 10. Without limiting the generality of the foregoing, in no event shall the Custodian or any manufacturer or supplier of its computer equipment, software or services relating to the Terminal Link be responsible for any special, indirect, incidental or consequential damages which the Fund may incur or experience by reason of its use of the Terminal Link even if the Custodian or any manufacturer or supplier has been advised of the possibility of such damages, nor with respect to the use of the Terminal Link shall the Custodian or any such manufacturer or supplier be liable for acts of God, or with respect to the following to the extent beyond such person's - 24 - reasonable control: machine or computer breakdown or malfunction, interruption or malfunction of communication facilities, labor difficulties or any other similar or dissimilar cause. 11. The Fund shall notify the Custodian of any errors, omissions or interruptions in, or delay or unavailability of, the Terminal Link as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, (ii) the Business Day on which discovery should have occurred through the exercise of reasonable care and (iii) in the case of any error, the date of actual receipt of the earliest notice which reflects such error, it being agreed that discovery and receipt of notice may only occur on a business day. The Custodian shall promptly advise the Fund whenever the Custodian learns of any errors, omissions or interruption in, or delay or unavailability of, the Terminal Link. 12. The Custodian shall verify to the Fund, by use of the Terminal Link, receipt of each Certificate the Custodian receives through the Terminal Link, and in the absence of such verification the Custodian shall not be liable for any failure to act in accordance with such Certificate and the Fund may not claim that such Certificate was received by the Custodian. Such verification, which may occur after the Custodian has acted upon such Certificate, shall be accomplished on the same day on which such Certificate is received. ARTICLE XVI CONCERNING THE CUSTODIAN 1. Except as hereinafter provided, neither the Custodian nor its nominee shall be liable for any loss or damage, including counsel fees, resulting from its action or omission to act or otherwise, either hereunder or under any Margin Account Agreement, except for any such loss or damage of the Fund during the period of such loan or at the termination of such loan, provided, however, that the Custodian shall promptly notify the Fund in the event that such dividends or interest are not paid and received when due; or (f) The sufficiency or value of any amounts of money and/or Securities held in any Margin Account, Senior Security Account or Collateral Account in connection with transactions by the Fund. In addition, the Custodian shall be under no duty or obligation to see that any broker, dealer, futures commission merchant or Clearing Member makes payment to the Fund of any variation margin payment or similar payment which the Fund may be entitled to receive from such broker, dealer, futures commission merchant or Clearing Member, to see that any payment received by the Custodian from any broker, dealer, futures commission merchant or Clearing Member is the amount the Fund is entitled to receive, or to notify the Fund of the Custodian's receipt or non-receipt of any such payment. 3. The Custodian shall not be liable for, or considered to be the Custodian of, any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by it on behalf of the Fund until the Custodian actually receives and collects such money directly or by the final crediting of the account representing the Fund's interest at the Book-Entry System or the Depository. - 25 - 4. The Custodian shall have no responsibility and shall not be liable for ascertaining or acting upon any calls, conversions, exchange offers, tenders, interest rate changes or similar matters relating to Securities held in the Depository, unless the Custodian shall have actually received timely notice from the Depository. In no event shall the Custodian have any responsibility or liability for the failure of the Depository to collect, or for the late collection or late crediting by the Depository of any amount payable upon Securities deposited in the Depository which may mature or be redeemed, retired, called or otherwise become payable. However, upon receipt of a Certificate from the Fund of an overdue amount on Securities held in the Depository the Custodian shall make a claim against the Depository on behalf of the Fund, except that the Custodian shall not be under any obligation to appear in, prosecute or defend any action suit or proceeding in respect to any Securities held by the Depository which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required. 5. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount due to the Fund from the Transfer Agent of the Fund nor to take any action to effect payment or distribution by the Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer Agent of the Fund in accordance with this Agreement. 6. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount if the Securities upon which such amount is payable are in default, or if payment is refused after due demand or presentation, unless and until (i) it shall be directed to take such action by a Certificate and (ii) it shall be assured to its satisfaction of reimbursement of its costs and expenses in connection with any such action. 7. The Custodian may appoint one or more banking institutions as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-Custodian or Co-Custodians including, but not limited to, banking institutions located in foreign countries, of Securities and moneys at any time owned by the Fund, upon such terms and conditions as may be approved in a Certificate or contained in an agreement executed by the Custodian, the Fund and the appointed institution. 8. The Custodian shall not be under any duty or obligation (a) to ascertain whether any Securities at any time delivered to, or held by it for the account of the Fund and specifically allocated to a Series are such as properly may be held by the Fund or such Series under the provisions of its then current prospectus, or (b) to ascertain whether any transactions by the Fund, whether or not involving the Custodian, are such transactions as may properly be engaged in by the Fund. 9. The Custodian shall be entitled to receive and the Fund agrees to pay to the Custodian all out-of-pocket expenses and such compensation as may be agreed upon from time to time between the Custodian and the Fund. The Custodian may charge such compensation and any expenses with respect to a Series incurred by the Custodian in the performance of its duties pursuant to such agreement against any money specifically allocated to such Series. Unless and until the Fund instructs the Custodian by a Certificate to apportion any loss, damage, liability or expense among the Series in a specified manner, the Custodian shall also be entitled to charge against any money held by it for the account of a Series such Series' pro rata share (based on such Series net asset value at the time of the charge to the aggregate net asset value of all Series at that time) of the - 26 - amount of any loss, damage, liability or expense, including counsel fees, for which it shall be entitled to reimbursement under the provisions of this Agreement. The expenses for which the Custodian shall be entitled to reimbursement hereunder shall include, but are not limited to, the expenses of sub-custodians and foreign branches of the Custodian incurred in settling outside of New York City transactions involving the purchase and sale of Securities of the Fund. 10. The Custodian shall be entitled to rely upon any Certificate, notice or other instrument in writing received by the Custodian and reasonably believed by the Custodian to be a Certificate. The Custodian shall be entitled to rely upon any Oral Instructions actually received by the Custodian hereinabove provided for. The Fund agrees to forward to the Custodian a Certificate or facsimile thereof confirming such Oral Instructions in such manner so that such Certificate or facsimile thereof is received by the Custodian, whether by hand delivery, telecopier or other similar device, or otherwise, by the close of business of the same day that such Oral Instructions are given to the Custodian. The Fund agrees that the fact that such confirming instructions are not received, or that contrary instructions are received, by the Custodian shall in no way affect the validity of the transactions or enforceability of the transactions hereby authorized by the Fund. The Fund agrees that the Custodian shall incur no liability to the Fund in acting upon Oral Instructions given to the Custodian hereunder concerning such transactions provided such instructions reasonably appear to have been received from an Officer. 11. The Custodian shall be entitled to rely upon any instrument, instruction or notice received by the Custodian and reasonably believed by the Custodian to be given in accordance with the terms and conditions of any Margin Account Agreement. Without limiting the generality of the foregoing, the Custodian shall be under no duty to inquire into, and shall not be liable for, the accuracy of any statements or representations contained in any such instrument or other notice including, without limitation, any specification of any amount to be paid to a broker, dealer, futures commission merchant or Clearing Member. 12. The books and records pertaining to the Fund which are in the possession of the Custodian shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the Investment Company Act of 1940, as amended, and other applicable securities laws and rules and regulations. The Fund, or the Fund's authorized representatives, shall have access to such books and records during the Custodian's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by the Custodian to the Fund or the Fund's authorized representative, and the Fund shall reimburse the Custodian its expenses of providing such copies. Upon reasonable request of the Fund, the Custodian shall provide in hard copy or on micro-film, whichever the Custodian elects, any records included in any such delivery which are maintained by the Custodian on a computer disc, or are similarly maintained, and the Fund shall reimburse the Custodian for its expenses of providing such hard copy or micro-film. 13. The Custodian shall provide the Fund with any report obtained by the Custodian on the system of internal accounting control of the Book-Entry System, the Depository or O.C.C., and with such reports on its own systems of internal accounting control as the Fund may reasonably request from time to time. 14. The Fund agrees to indemnify the Custodian against and save the Custodian harmless from all liability, claims, losses and demands whatsoever, including attorney's fees, - 27 - howsoever arising or incurred because of or in connection with this Agreement, including the Custodian's payment or non-payment of checks pursuant to paragraph 6 of Article XIII as part of any check redemption privilege program of the Fund, except for any such liability, claim, loss and demand arising out of the Custodian's own negligence or willful misconduct. 15. Subject to the foregoing provisions of this Agreement, the Custodian may deliver and receive Securities, and receipts with respect to such Securities, and arrange for payments to be made and received by the Custodian in accordance with the customs prevailing from time to time among brokers or dealers in such Securities. When the Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with the Custodian's delivery of Securities pursuant to instructions of the Fund, which responsibility and liability shall continue until final payment in full has been received by the Custodian. 16. In the event the Custodian receives a delivery of Securities for the Account of the Fund prior to the Custodian's receipt of a Certificate, or of Oral Instructions in the case of a delivery of Money Market Securities, or if the delivery to the Custodian by the broker differs from the Certificate or Oral Instructions received from the Fund, the Custodian shall attempt to contact an Officer of the Fund to advise it of such delivery and such non-receipt of a Certificate or Oral Instructions, as the case may be, or of such difference. The Custodian shall "DK" the delivery only if the Custodian does not receive an appropriate Certificate, or appropriate Oral Instructions, as the case may be, prior to the latest time at which such delivery may be made subject to a "DK." 17. The Custodian shall pre-post income due in accordance with Exhibit E hereto, as such Exhibit may be unilaterally amended by the Custodian from time to time. Upon any such amendment, the Custodian shall promptly advise the Fund of the same. Any pre-postings described on Exhibit E shall be subject to the provisions of this Agreement, including, without limitation, Section 1 of Article III. 18. If the Custodian due to its own negligence or wilful misconduct fails to effect a delivery of Securities for settlement, the Custodian shall at its election either advance the amount of the proceeds which would have been received upon such settlement, or, alternatively, pay compensation at an available fed funds rate as determined by the Custodian. Any such advance shall be subject to the provisions of this Agreement, including, without limitation, Section 1 of Article III. 19. The acts or omissions for which the Custodian shall be liable to the extent set forth in Section 1 of Article XVI shall, subject to Section 4 of Article XVI, include its failure to send copies of any materials it receives from the issuer with respect to corporate actions relating to Securities held for the account of the Fund, unless such failure is due to circumstances beyond the reasonable control of the Custodian. 20. The Custodian shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against the Custodian. ARTICLE XVII - 28 - TERMINATION 1. Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice. In the event such notice is given by the Fund, it shall be accompanied by a copy of a resolution of the Board of Trustees of the Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by the Custodian, the Fund shall, on or before the termination date, deliver to the Custodian a copy of a resolution of the Board of Trustees of the Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, designating a successor custodian or custodians. In the absence of such designation by the Fund, the Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon the date set forth in such notice this Agreement shall terminate, and the Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and moneys then owned by the Fund and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled. 2. If a successor custodian is not designated by the Fund or the Custodian in accordance with the preceding paragraph, the Fund shall upon the date specified in the notice of termination of this Agreement and upon the delivery by the Custodian of all Securities (other than Securities held in the Book-Entry System which cannot be delivered to the Fund) and moneys then owned by the Fund be deemed to be its own custodian and the Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities held in the Book Entry System which cannot be delivered to the Fund to hold such Securities hereunder in accordance with this Agreement ARTICLE XVIII MISCELLANEOUS 1. Annexed hereto as Appendix A is a Certificate signed by two of the present Officers of the Fund under its seal, setting forth the names and the signatures of the present Officers. The Fund agrees to furnish to the Custodian a new Certificate in similar form in the event that any such present Officer ceases to be an Officer or in the event that other or additional Officers are elected or appointed. Until such new Certificate shall be received, the Custodian shall be fully protected in acting under the provisions of this Agreement upon Oral Instructions or signatures of the present Officers as set forth in the last delivered Certificate. 2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Custodian, shall be sufficiently given if addressed to the Custodian and mailed or delivered to it at its offices at 90 Washington Street, New York, New York 10286, or at such other place as the Custodian may from time to time designate in writing. - 29 - 3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and mailed or delivered to it at its office at the address for the Fund first above written, or at such other place as the Fund may from time to time designate in writing. 4. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties with the same formality as this Agreement and approved by a resolution of the Board of Trustees of the Fund. 5. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of the Custodian, or by the Custodian without the written consent of the Fund, authorized or approved by a resolution of the Fund's Board of Trustees. 6. This Agreement shall be construed in accordance with the laws of the State of New York without giving effect to conflict of laws principles thereof. Each party hereby consents to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder and hereby waives its right to trial by jury. 7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 8. A copy of the Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Board of Trustees of the Fund as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Fund; provided, however, that the Declaration of Trust of the Fund provides that the assets of a particular Series of the Fund shall under no circumstances be charged with liabilities attributable to any other Series of the Fund and that all persons extending credit to, or contracting with or having any claim against a particular Series of the Fund shall look only to the assets of that particular Series for payment of such credit. contract or claim. - 30 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective Officers, thereunto duly authorized hereunto and their respective seals to be hereunto affixed, as of the day and year first above written. MARINER MUTUAL FUNDS TRUST [SEAL] By:______________________________ Attest: - -------------------------------- THE BANK OF NEW YORK [SEAL] By:______________________________ Ira R. Rosner Vice President Attest: - 31 - APPENDIX A I ____________________________________________, President and I, ____________________________________________, _________________________ of Mariner Mutual Funds Trust, a Massachusetts business trust (the "Fund"), do hereby certify that: The following individuals serve in the following positions with the Fund and each has been duly elected or appointed by the Board of Trustees of the Fund to each such position and qualified therefor in conformity with the Fund's Declaration of Trust and By-Laws, and the signatures set forth opposite their respective names are their true and correct signatures: Name Position Signature - ------------------------ ------------------------ ------------------------ APPENDIX B SERIES U.S. Government Securities Fund New York Tax-Free Bond Fund Short-Term Fixed Income Fund Fixed Income Fund Total Return Equity Fund Small Cap Fund APPENDIX C I, Ira R. Rosner, a Vice President with THE BANK OF NEW YORK do hereby designate the following publications: The Bond Buyer Depository Trust Company Notices Financial Daily Card Service JJ Kenney Municipal Bond Service London Financial Times New York Times Standard & Poor's Called Bond Record Wall Street Journal EXHIBIT A CERTIFICATION The undersigned, Mark Pougnet , hereby certifies that he or she is the duly elected and acting VP and Treasurer of Mariner Mutual Funds Trust, a Massachusetts business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on October 31, 1995, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof. RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of September 25, 1995 (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis to deposit in the Book-Entry System, as defined in the Custody Agreement, all securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated, and to utilize the Book-Entry System to the extent possible in connection with its performance thereunder, including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of securities collateral. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Mariner Mutual Funds, as of the ____ day of __________________ 1995. --------------------------------------- [SEAL] EXHIBIT B CERTIFICATION The undersigned, Mark Pougnet , hereby certifies that he or she is the duly elected and acting VP and Treasurer of Mariner Mutual Funds Trust, a Massachusetts business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on October 31 , 1995, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof. RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of September 25, 1995 (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis until such time as it receives a Certificate, as defined in the Custody Agreement, to the contrary to deposit in the Depository, as defined in the Custody Agreement, all securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated, and to utilize the Depository to the extent possible in connection with its performance thereunder, including, without limitation, in connection with settlements of purchases and sales of securities, loans of securities, and deliveries and returns of securities collateral. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Mariner Mutual Funds Trust, as of the day of _______________, 1995. [SEAL] EXHIBIT C CERTIFICATION The undersigned, Mark Pougnet, hereby certifies that he or she is the duly elected and acting VP and Treasurer of Mariner Mutual Funds Trust, a Massachusetts business trust (the "Fund"), and further certifies that the following resolution was adopted by the Board of Trustees of the Fund at a meeting duly held on October 31, 1995, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date hereof. RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody Agreement between The Bank of New York and the Fund dated as of September 25, 1995 (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis until such time as it receives a Certificate, as defined in the Custody Agreement, to the contrary, to accept, utilize and act with respect to Clearing Member confirmations for Options and transaction in Options, regardless of the Series to which the same are specifically allocated, as such terms are defined in the Custody Agreement, as provided in the Custody Agreement. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Mariner Mutual Funds Trust, as of the _____ day of ______________, 1995. --------------------------------------- [SEAL] EXHIBIT D The undersigned, Mark Pougnet , hereby certifies that he or she is the duly elected and acting VP and Treasurer of Mariner Mutual Funds Trust, a Massachusetts business trust (the "Fund"), further certifies that the following resolutions were adopted by the Board of Trustees of the Fund at a meeting duly held on October 31, 1995, at which a quorum was at all times present and that such resolutions have not been modified or rescinded and are in full force and effect as of the date hereof. RESOLVED, that The Bank of New York, as Custodian pursuant to the Custody Agreement between The Bank of New York and the Fund dated as of September 25 , 1995 (the "Custody Agreement") is authorized and instructed on a continuous and ongoing basis to act in accordance with, and to rely on Certificates (as defined in the Custody Agreement) given by the Fund to the Custodian by a Terminal Link (as defined in the Custody Agreement). RESOLVED, that the Fund shall establish access codes and grant us of such access codes only to Officers of the fund as defined in the Custody Agreement, shall establish internal safekeeping procedures to safeguard and protect the confidentiality and availability of such access codes, shall limit its use of the Terminal Link to those purposes permitted by the Custody Agreement, shall require at least two such Officers to utilize their respective access codes in connection with each such Certificate, and shall use the Terminal Link only in a manner that does not contravene the Investment Company Act of 1940, as amended, or the rules and regulations thereunder. RESOLVED, that Officers of the Fund shall, following the establishment of such access codes and such internal safekeeping procedures, advise the Custodian that the same have been established by delivering a Certificate, as defined in the Custody Agreement, and the Custodian shall be entitled to rely upon such advice. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Mariner Mutual Funds Trust, as of the ________ day of _____________, 1995. --------------------------------- [SEAL] EXHIBIT E PD = Payment Date MD = Maturity Date FF = Fed Funds C = Collection Basis
Security Type Income Paydown Maturities - ------------------------------------------------------ ------------------------------ ------------------------------- Equities PD+1/FF N/A U.S. Governments PD/FF MD/FF Corporate Bond PD+1/FF MD+1/FF Municipal Bonds PD+1FF MD/FF Promisssory Notes N/A MD/FF Variable Rate Bonds PD+1/FF* MD/FF Medium Term Notes PD+1/FF MD/FF Anticipation Note PD+1/FF MD/FF Unit Investment Trust PD+1/FF MD+1/FF Dutch Auctions PD+1/FF* MD+1/FF Unannounced Equities PD+1/FF* N/A Private Placements PD+1/FF* MD/FF Sabres PD+1/FF MD/FF CMOs & Asset-Back Securities PD+1/FF* MD/FF Depositary Receipts PD+1/FF MD+1/FF Money Market Instruments Commercial Paper PD/FF MD/FF Certificates of Deposit PD/FF MD/FF Bankers' Acceptances N/A MD/FF Mortgage-Backed Securities GNMA I & II PD+1/FF MD/FF Non-PTC GNMA PD+1/FF MD/FF FHLMC PD/FF MD/FF FNMA PD/FF MD/FF GPM PD+1/FF MD/FF SBA LOANS C/FF MD/FF SBA POOLS PD+1/FF* MD/FF FHA C/FF MD/FF FBE Zero Coupon N/A PD/FF Stripped Coupons MD/FF N/A Non-U.S. Securities PD/Currency Rec'd MD/Currency Rec'd Canadian Securities PD+1/FF MD+1/FF * Payment contingent upon adequate servicing information payment history.
EX-99.9A 20 TRANSFER AGENCY AGREEMENT Exhibit 9(a) Transfer Agency Agreement between Registrant and BISYS Fund Services TRANSFER AGENCY AGREEMENT AGREEMENT made this day of , , between MARINER MUTUAL FUNDS TRUST (the "Trust"), a Massachusetts business trust having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS FUND SERVICES, INC. ("BISYS"), an Ohio corporation having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219. WHEREAS, the Trust desires that BISYS perform certain services for each of the investment portfolios of the Trust (individually referred to herein as a "Fund" and collectively as the "Funds"); and WHEREAS, BISYS is willing to perform such services on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual premises and covenants herein set forth, the parties agree as follows: 1. Services. BISYS shall perform for the Trust the transfer agent services set forth in Schedule A hereto. BISYS also agrees to perform for the Trust such special services incidental to the performance of the services enumerated herein as agreed to by the parties from time to time. BISYS shall perform such additional services as are provided on an amendment to Schedule A hereof, in consideration of such fees as the parties hereto may agree. BISYS may, in its discretion, appoint in writing other parties qualified to perform transfer agency services reasonably acceptable to the Trust (individually, a "Sub-transfer Agent") to carry out some or all of its responsibilities under this Agreement with respect to a Fund; provided, however, that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the Trust or such Fund, and that BISYS shall be fully responsible for the acts of such Sub-transfer Agent and shall not be relieved of any of its responsibilities hereunder by the appointment of such Sub-transfer Agent. 2. Fees. The Trust shall pay BISYS for the services to be provided by BISYS under this Agreement in accordance with, and in the manner set forth in, Schedule B hereto. BISYS may increase the fees it charges pursuant to the fee schedule; provided, however, that BISYS may not increase such fees until the expiration of the Initial Term of this Agreement (as defined below), unless the Trust otherwise agrees to such change in writing. Fees for any additional services to be provided by BISYS pursuant to an amendment to Schedule A hereto shall be subject to mutual agreement at the time such amendment to Schedule A is proposed. 3. Reimbursement of Expenses. In addition to paying BISYS the fees described in Section 2 hereof, the Trust agrees to reimburse BISYS for BISYS' out-of-pocket expenses in providing services hereunder, including without limitation, the following: (a) All freight and other delivery and bonding charges incurred by BISYS in delivering materials to and from the Trust and in delivering all materials to shareholders; (b) All direct telephone, telephone transmission and telecopy or other electronic transmission expenses incurred by BISYS in communication with the Trust, the Trust's investment adviser or custodian, dealers, shareholders or others as required for BISYS to perform the services to be provided hereunder; (c) Costs of postage, couriers, stock computer paper, statements, labels, envelopes, checks, reports, letters, tax forms, proxies, notices or other form of printed material which shall be required by BISYS for the performance of the services to be provided hereunder; (d) The cost of microfilm or microfiche of records or other materials; and (e) Any expenses BISYS shall incur at the written direction of an officer of the Trust thereunto duly authorized. 4. Effective Date. This Agreement shall become effective as of the date first written above (the "Effective Date"). 5. Term 5.01 Initial Term; Renewal Terms This Agreement shall become effective as of the date first written above and shall continue until March 1, 1999, and unless sooner terminated as provided herein, thereafter shall be renewed automatically for successive one-year terms, unless (i) it is terminated for cause pursuant to paragraph 5.03 below, (ii) it is terminated pursuant to paragraph 5.04 below, or (iii) written notice not to renew is given by the non-renewing party to the other party at least 120 days prior to the expiration of the then-current term; provided that such continuance is specifically reviewed and 2 approved at least annually (i) by the vote of a majority of the Trust's Board of Trustees or by the vote of a majority of the outstanding voting securities of such Fund and (ii) by the majority of the Trust's Trustees who are not parties to this Agreement or interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The scope of such review shall be whether there is any "cause" (as defined below) that would justify terminating the Agreement. 5.02 Termination of Agreement This Agreement is terminable with respect to a particular Fund (i) upon provision of written notice not to renew in accordance with paragraph 5.01, (ii) upon mutual agreement of the parties hereto, (iii) for cause by the party alleging cause pursuant to paragraph 5.03, or (iv) upon provision of written notice to terminate in accordance with paragraph 5.04. Written notice not to renew may be given for any reason, with or without "cause" (as defined in paragraph 5.03). Upon termination of this Agreement, if BISYS, with the written consent of the Trust, in fact continues to perform any one or more of the services contemplated by this Agreement or any schedule or exhibit hereto, the provisions of this Agreement, including without limitation the provisions dealing with indemnification, shall continue in full force and effect. Compensation due and payable to BISYS and unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. BISYS shall be entitled to collect from the Trust, in addition to the compensation described under Section 2 hereof, the amount of all of BISYS' cash disbursements for services in connection with BISYS' activities in effecting such termination, including without limitation, the delivery to the Trust and/or its designees of the Trust's property, records, instruments and documents, or any copies thereof. Subsequent to such termination, for a reasonable fee, BISYS will provide the Trust with reasonable access to any Trust documents or records remaining in its possession. 5.03 Termination for Cause This Agreement may be terminated for cause in accordance with this paragraph 5.03. In the event cause, as defined below, is alleged, the party alleging cause shall provide written notice to the other party specifying the event or events constituting cause and demanding that such other party cure the same. If appropriate corrective action is not taken within 30 days following receipt of such notice, the party alleging cause may terminate this Agreement by the provision of 60 days' written notice. For purposes of this Agreement, "cause" shall mean (a) willful misfeasance, bad faith, gross negligence or reckless disregard on the part of the party to be terminated with respect to its obligations and duties set forth herein; (b) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (c) financial difficulties on the part of the party to be terminated which is evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent, or acquiescence in, a voluntary or involuntary case under Title 11 of the United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the 3 modification or alteration of the rights of creditors. Notwithstanding the foregoing, the absence of either or both an annual review or ratification of this Agreement by the Board of Trustees shall not, in and of itself, constitute "cause" as used herein. 5.04 Termination in the Event of a Fund Liquidation or Fund Merger, or an Assignment of the Investment Advisory Contract If, during the initial term of this Agreement (as set forth in paragraph 5.01), (i) a Fund is liquidated or is merged into a mutual fund portfolio that is not part of the Trust or Mariner Funds Trust, or (ii) the investment advisory agreement between HSBC Asset Management Americas, Inc. ("HSBC") and the Trust is assigned (excluding any technical assignment based solely upon a change in control of HSBC) such that HSBC ceases to be the investment adviser to the Trust, this Agreement may be terminated by the Trust with respect to each liquidated or merged Fund (or, in the case of the assignment of the investment advisory agreement as described above, with respect to all of the Funds) by the provision of 60 days' written notice; provided, however, that upon such termination, the Trust shall make a one-time cash payment, as liquidated damages, to BISYS equal to the fees payable to BISYS hereunder for the shorter of (i) the eighteen-month period commencing on the termination date or (ii) the remainder of the initial term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the termination date will remain constant for the balance of such initial term. 5.05 Termination Without Cause In the event (i) the Trust terminates this Agreement for any reason other than (A) "cause" pursuant to paragraph 5.03 or (B) the reasons described in paragraph 5.04, (ii) BISYS is otherwise replaced as fund manager and administrator or (iii) a third party is added to perform all or a part of the services provided by BISYS under this Agreement (excluding any sub-administrator appointed by BISYS as provided in Section 1 hereof), then the Trust shall make a one-time cash payment, as liquidated damages, to BISYS equal to the balance due BISYS for the remainder of the term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the date BISYS is replaced, or a third party is added will remain constant for the balance of the contract term. 6. Uncontrollable Events. BISYS assumes no responsibility hereunder, and shall not be liable for any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. 7. Legal Advice. BISYS shall notify the Trust at any time BISYS believes that it is in need of the advice of counsel (other than counsel in the regular employ of BISYS or any affiliated companies) 4 with regard to BISYS' responsibilities and duties pursuant to this Agreement; and after so notifying the Trust, BISYS, at its discretion, shall be entitled to seek, receive and act upon advice of legal counsel of its choosing, such advice to be at the expense of the Trust or Funds unless relating to a matter involving BISYS' willful misfeasance, bad faith, gross negligence or reckless disregard with respect to BISYS' responsibilities and duties hereunder and BISYS shall in no event be liable to the Trust or any Fund or any shareholder or beneficial owner of the Trust for any action reasonably taken pursuant to such advice. 8. Instructions. Whenever BISYS is requested or authorized to take action hereunder pursuant to instructions from a properly authorized agent of the Trust, a shareholder, or a properly authorized agent of a shareholder ("shareholder's agent"), concerning an account in a Fund, BISYS shall be entitled to rely upon any certificate, letter or other instrument or communication, believed by BISYS to be genuine and to have been properly made, signed or authorized by an officer or other authorized agent of the Trust or by the shareholder or shareholder's agent, as the case may be, and shall be entitled to receive as conclusive proof of any fact or matter required to be ascertained by it hereunder a certificate signed by an officer of the Trust or any other person authorized by the Trust's Board of Trustees or by the shareholder or shareholder's agent, as the case may be. As to the services to be provided hereunder, BISYS may rely conclusively upon the terms of the Prospectuses and Statement of Additional Information of the Trust relating to the Funds to the extent that such services are described therein unless BISYS receives written instructions to the contrary in a timely manner from the Trust. 9. Standard of Care; Reliance on Records and Instructions; Indemnification. BISYS shall use its best efforts to ensure the accuracy of all services performed under this Agreement, but shall not be liable to the Trust for any action taken or omitted by BISYS in the absence of bad faith, willful misfeasance, gross negligence or from reckless disregard by it of its obligations and duties. The Trust agrees to indemnify and hold harmless BISYS, its employees, agents, directors, officers and nominees from and against any and all claims, demands, actions and suits, whether groundless or otherwise, and from and against any and all judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character arising out of or in any way relating to BISYS' actions taken or nonactions with respect to the performance of services under this Agreement or based, if applicable, upon reasonable reliance on information, records, instructions or requests given or made to BISYS by the Trust, the investment adviser and on any records provided by any fund accountant or custodian thereof; provided that this indemnification shall not apply to actions or omissions of BISYS in cases of its own bad faith, willful misfeasance, gross negligence or from reckless disregard by it of its obligations and duties; and further provided that prior to confessing any claim against it which may be the subject of this indemnification, BISYS shall give the Trust written notice of and reasonable opportunity to defend against said claim in its own name or in the name of BISYS. 5 10. Record Retention and Confidentiality. BISYS shall keep and maintain on behalf of the Trust all books and records which the Trust or BISYS is, or may be, required to keep and maintain pursuant to any applicable statutes, rules and regulations, including without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books and records in connection with the services to be provided hereunder. BISYS further agrees that all such books and records shall be the property of the Trust and to make such books and records available for inspection by the Trust or by the Securities and Exchange Commission (the "Commission") at reasonable times and otherwise to keep confidential all books and records and other information relative to the Trust and its shareholders, except when requested to divulge such information by duly-constituted authorities or court process, or requested by a shareholder or shareholder's agent with respect to information concerning an account as to which such shareholder has either a legal or beneficial interest or when requested by the Trust, the shareholder, or shareholder's agent, or the dealer of record as to such account. 11. Reports. BISYS shall prepare the reports set forth in Schedule C hereto and shall furnish them to appropriate persons designated by the Trust. 12. Rights of Ownership. All computer programs and procedures developed to perform services required to be provided by BISYS under this Agreement are the property of BISYS. All records and other data except such computer programs and procedures are the exclusive property of the Trust and all such other records and data will be furnished to the Trust in appropriate form as soon as practicable after termination of this Agreement for any reason. 13. Return of Records. BISYS may at its option at any time, and shall promptly upon the Trust's demand, turn over to the Trust and cease to retain BISYS' files, records and documents created and maintained by BISYS pursuant to this Agreement which are no longer needed by BISYS in the performance of its services or for its legal protection. If not so turned over to the Trust, such documents and records will be retained by BISYS for six years from the year of creation. At the end of such six-year period, such records and documents will be turned over to the Trust unless the Trust authorizes in writing the destruction of such records and documents. 14. Bank Accounts. The Trust and the Funds shall establish and maintain such bank accounts with such bank or banks as are selected by the Trust, as are necessary in order that BISYS may perform the 6 services required to be performed hereunder. To the extent that the performance of such services shall require BISYS directly to disburse amounts for payment of dividends, redemption proceeds or other purposes, the Trust and Funds shall provide such bank or banks with all instructions and authorizations necessary for BISYS to effect such disbursements. 15. Representations of the Trust. The Trust certifies to BISYS that: (a) as of the close of business on the Effective Date, each Fund which is in existence as of the Effective Date has authorized unlimited shares, and (b) by virtue of its Declaration of Trust, shares of each Fund which are redeemed by the Trust may be sold by the Trust from its treasury, and (c) this Agreement has been duly authorized by the Trust and, when executed and delivered by the Trust, will constitute a legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 16. Representations of BISYS. BISYS represents and warrants that: (a) BISYS has been in, and shall continue to be in, substantial compliance with all provisions of law, including Section 17A(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), required in connection with the performance of its duties under this Agreement; (b) the various procedures and systems which BISYS has implemented with regard to safekeeping from loss or damage attributable to fire, theft or any other cause of the blank checks, records, and other data of the Trust and BISYS' records, data, equipment, facilities and other property used in the performance of its obligations hereunder are adequate and that it will make such changes therein from time to time as are required for the secure performance of its obligations hereunder, and (c) this Agreement has been duly authorized by BISYS and, when executed and delivered by BISYS, will constitute a legal, valid and binding obligation of BISYS, enforceable against BISYS in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 17. Insurance. BISYS shall notify the Trust should its insurance coverage with respect to professional liability or errors and omissions coverage be canceled or reduced. Such notification shall include the date of change and the reasons therefor. BISYS shall notify the Trust of any material claims against it with respect to services performed under this Agreement, whether or not they may be covered by insurance, and shall notify the Trust from time to time as may be appropriate of the total outstanding claims made by BISYS under its insurance coverage. 7 18. Information to be Furnished by the Trust and Funds. The Trust has furnished to BISYS the following: (a) Copies of the Declaration of Trust of the Trust and of any amendments thereto, certified by the proper official of the state in which such Declaration has been filed. (b) Copies of the following documents: 1. The Trust's By-Laws and any amendments thereto; 2. Certified copies of resolutions of the Board of Trustees covering the following matters: A. Approval of this Agreement and authorization of a specified officer of the Trust to execute and deliver this Agreement and authorization for specified officers of the Trust to instruct BISYS hereunder; and B. Authorization of BISYS to act as Transfer Agent for the Trust on behalf of the Funds. (c) A list of all officers of the Trust, together with specimen signatures of those officers, who are authorized to instruct BISYS in all matters. (d) Two copies of the following (if such documents are employed by the Trust): 1. Prospectuses and Statement of Additional Information; 2. Distribution Agreement; and 3. All other forms commonly used by the Trust or its Distributor with regard to their relationships and transactions with shareholders of the Funds. (e) A certificate as to shares of beneficial interest of the Trust authorized, issued, and outstanding as of the Effective Date of BISYS' appointment as Transfer Agent (or as of the date on which BISYS' services are commenced, whichever is the later date) and as to receipt of full consideration by the Trust for all shares outstanding, such statement to be certified by the Treasurer of the Trust. 8 19. Information Furnished by BISYS. BISYS has furnished to the Trust the following: (a) BISYS' Articles of Incorporation. (b) BISYS' Bylaws and any amendments thereto. (c) Certified copies of actions of BISYS covering the following matters: 1. Approval of this Agreement, and authorization of a specified officer of BISYS to execute and deliver this Agreement; 2. Authorization of BISYS to act as Transfer Agent for the Trust. (d) A copy of the most recent independent accountants' report relating to internal accounting control systems as filed with the Commission pursuant to Rule 17Ad-13 under the Exchange Act. Copies of reports described in paragraph (d) directly above that are produced after the Effective Date will be furnished to the Trust upon request. 20. Amendments to Documents. The Trust shall furnish BISYS written copies of any amendments to, or changes in, any of the items referred to in Section 18 hereof forthwith upon such amendments or changes becoming effective. In addition, the Trust agrees that no amendments will be made to the Prospectuses or Statement of Additional Information of the Trust which might have the effect of changing the procedures employed by BISYS in providing the services agreed to hereunder or which amendment might affect the duties of BISYS hereunder unless the Trust first obtains BISYS' approval of such amendments or changes. 21. Reliance on Amendments. BISYS may rely on any amendments to or changes in any of the documents and other items to be provided by the Trust pursuant to Sections 18 and 20 of this Agreement and the Trust hereby indemnifies and holds harmless BISYS from and against any and all claims, demands, actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character which may result from actions or omissions on the part of BISYS in reasonable reliance upon such amendments and/or changes. Although BISYS is authorized to rely on the above-mentioned amendments to and changes in the documents and other items to be provided pursuant to Sections 18 and 20 hereof, BISYS shall be under no duty to comply with or 9 take any action as a result of any of such amendments or changes unless the Trust first obtains BISYS' written consent to and approval of such amendments or changes. 22. Compliance with Law. Except for the obligations of BISYS set forth in Section 10 hereof, the Trust assumes full responsibility for the preparation, contents, and distribution of each prospectus of the Trust as to compliance with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act, and any other laws, rules and regulations of governmental authorities having jurisdiction. BISYS shall have no obligation to take cognizance of any laws relating to the sale of the Trust's shares. The Trust represents and warrants that no shares of the Trust will be offered to the public until the Trust's registration statement under the 1933 Act and the 1940 Act has been declared or becomes effective. 23. Notices. Any notice provided hereunder shall be sufficiently given when sent by registered or certified mail to the party required to be served with such notice at the following address: 3435 Stelzer Road, Columbus, Ohio 43219, or at such other address as such party may from time to time specify in writing to the other party pursuant to this Section. 24. Headings. Paragraph headings in this Agreement are included for convenience only and are not to be used to construe or interpret this Agreement. 25. Assignment. This Agreement and the rights and duties hereunder shall not be assignable by either of the parties hereto except by the specific written consent of the other party. This Section 25 shall not limit or in any way affect BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1 hereof. 26. Governing Law and Matters Relating to the Trust as a Massachusetts Business Trust. This Agreement shall be governed by and provisions shall be construed in accordance with the laws of the Commonwealth of Massachusetts. It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Trustees, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, 10 but shall bind only the trust property of the Trust as provided in the Trust's Agreement and Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written. MARINER MUTUAL FUNDS TRUST By:________________________________ BISYS FUND SERVICES, INC. By:________________________________ 11 Dated: -------------------- SCHEDULE A TO THE TRANSFER AGENCY AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES, INC. TRANSFER AGENCY SERVICES Record Keeping 1. Produce monthly shareholder statements by the fifth business day 2. Post shareholder transactions 3. Produce and mail daily confirmations to shareholders 4. Produce and mail dividend and redemption checks 5. Balance daily transaction activity 6. Disburse dividends and capital gains 7. Maintain shareholder information files 8. Manage daily ACH transmissions 9. Monitor NSCC activity 10. Complete cash settlement between funds, custodians, NSCC and shareholders 11. Reconcile deposit, redemption, wire, check writing, dividend and DDAs 12. Microfiche all source documentation 13. Prepare daily open items report 14. Distribute new account welcome kits and all forms necessary for shareholders to transact business with the Trust (e.g., change-of-address forms, power-of-attorney forms, letter of intent forms) 15. Calculate and produce shareholder tax records 16. Coordinate development of systematic enhancements 17. Communicate and coordinate corporate action events 18. Generate user defined reports from the shareholder system 19. Perform legal review on all incoming transactions 20. Acquire fund CUSIPs 21. Complete quality assurance review of transactions 22. Calculate and distribute sales commissions 23. Track and report sales activity 24. Accept and track incoming retirement rollover subscriptions A-1 Retail Features 1. Process previously-authorized purchases 2. Process systematic withdrawals 3. Complete gross dividend reinvestment 4. Process payments to multiple payees 5. Manage FundServ linkage 6. Support full NSCC networking support 7. Establish account relationship linking 8. Maintain 401(k) interface 9. Provide an automated voice response unit (scripts to be provided by HSBC following NASD approval) Systems (charges will vary) 1. Research/Feasibility Studies 2. Systems specifications and implementation plans 3. Design and Testing 4. Implementation/conversion Miscellaneous 1. Coordinate use of outside vendors by Fund 2. Provide a designated project manager for routine ongoing projects 3. Institutional trade facilitation 4. Asset-related conversions 5. Provide proxy support by furnishing shareholder lists and mailing labels A-2 SCHEDULE B TO THE TRANSFER AGENCY AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES, INC. TRANSFER AGENT FEES Annual Per Fund Fee: $16,000 Annual Per Account Fee: Retail/Load Retail/No-Load Institutional ----------- -------------- ------------- Daily Dividend $25.00 $21.00 $17.00 Periodic Dividend $23.00 $19.00 $15.00 Closed Accounts $ 5.00 $ 5.00 $ 5.00 Multiple Classes of Shares: Classes of shares which have different net asset values or pay different daily dividends will be treated as separate classes, and the fee schedule above, including the appropriate minimums, will be charged for each separate class. Additional Services: Additional services such as IRA processing, development of interface capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps between DDAs and mutual fund accounts and coordination of the printing and distribution of prospectuses, annual reports and semi-annual reports are subject to additional fees which will be quoted upon request. Programming costs or database management fees for special reports or specialized processing will be quoted upon request. Out-of-pocket Expenses: BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket expenses including, but not limited to, the expenses set forth in Section 3 of the Transfer Agency Agreement to which this Schedule C is attached. B-1 SCHEDULE C TO THE TRANSFER AGENCY AGREEMENT BETWEEN MARINER MUTUAL FUNDS TRUST AND BISYS FUND SERVICES, INC. REPORTS 1. Daily Shareholder Activity Journal 2. Daily Fund Activity Summary Report a. Beginning Balance b. Dealer Transactions c. Shareholder Transactions d. Reinvested Dividends e. Exchanges f. Adjustments g. Ending Balance 3. Daily Wire and Check Registers 4. Monthly Dealer Processing Reports 5. Monthly Dividend Reports 6. Sales Data Reports for Blue Sky Registration 7. Annual report by independent public accountants concerning BISYS' shareholder system and internal accounting control systems to be filed with the Securities and Exchange Commission pursuant to Rule 17Ad-13 of the Securities Exchange Act of 1934, as amended. C-1 EX-99.D 21 SERVICE ORGANIZATION AGREEMENT Exhibit 9(d) Service Organization Agreement between Bank of Oklahoma and Registrant, dated October 25, 1994 October 25, 1994 SERVICE ORGANIZATION AGREEMENT MARINER MUTUAL FUNDS TRUST Dear Sirs: You have advised us that you are authorized and intend to invest shares of beneficial interest of the Trust ("Mariner Shares") on behalf of certain customers (the "Customers"), that you will be the shareholder of record, as nominee for the Customers, and that you intend to maintain subaccounts and handle investor relation services for the Customers. This letter sets forth the terms on which these services will be provided. You will perform shareholder services for Customers in a manner consistent with the Prospectus. Shareholder services include (a) maintenance of a separate subaccount for each Customer in which each transaction with respect to the Customer's interest in Mariner Shares will be promptly reflected; (b) prompt crediting of cash distributions to the customer account through which a Customer's interest in the Mariner Shares was acquired; (c) maintenance of records for each subaccount containing substantially the same information as referred to above; (d) processing purchase and redemption requests; (e) mailing to each Customer periodically a statement reflecting all transactions with respect to the Customer's interest in Mariner Shares; and (f) if required by law, distribution of the Trust's shareholder reports and proxy statements to Customers. If requested by a Customer, you will promptly request that Mariner Shares held on the Customer's behalf be registered in the Customer's name. In connection with these services, you will furnish us, or our auditors with such information as we or they may reasonably request with respect to such services, including, without limitation, confirmation of the provision of such services, information required for preparation of reports of the Trust or the determination of amounts payable by the Trust to us or by us to you. In consideration of the Shareholder services provided by you hereunder, we will reimburse you for your costs involved in providing these services, and you will accept as full payment therefor, an amount payable monthly not to exceed the maximum rate of twenty-five basis points per annum of the average daily value during the month of Mariner Shares held of record by you from time to time on behalf of Customers ("Customers' Mariner Shares"). For purposes of determining the fees payable under this paragraph, the daily value of the Customers' Mariner Shares will be computed in the manner specified in the Prospectus and the Trust's registration statement (as the same are in effect from time to time) in connection with the computation of the net asset value of Mariner Shares for purposes of purchases and redemptions. The fee rate stated above may be prospectively increased or decreased by us, in our sole discretion, at any time upon notice to you. Reimbursement will be paid as indicated below: o By direct payment to you of the amount equal to such costs. o By crediting the amount equal to such costs against other amounts due from you to us as agreed upon from time to time You will indemnify and hold us harmless from all loss, cost, damage and expense, including reasonable expenses for counsel, incurred by us resulting from any claim, demand, action or suit arising out of this Agreement, which does not arise out of our negligence or willful misconduct. Please acknowledge this Agreement by signing and returning a copy of this letter. This Agreement will become effective upon **** receipt by us of a signed copy. This Agreement shall replace and terminate a similar agreement between you and HSBC Asset Management Americas Inc. Very truly yours, MARINER FUNDS TRUST Acknowledged: By:______________________ Name: BANK OF OKLAHOMA Title: By:_________________________ Title: EX-99.9E 22 FUND ACCOUNTING AGREEMENT Exhibit 9(e) Fund Accounting Agreement between Registrant and BISYS Fund Services FUND ACCOUNTING AGREEMENT AGREEMENT made this day of , , between MARINER MUTUAL FUNDS TRUST (the "Trust"), a Massachusetts business trust having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219, and BISYS FUND SERVICES, INC. ("BISYS"), a corporation organized under the laws of the State of Ohio and having its principal place of business at 3435 Stelzer Road, Columbus, Ohio 43219. WHEREAS, the Trust desires that BISYS perform certain fund accounting services for each investment portfolio of the Trust (individually referred to herein as the "Fund" and collectively as the "Funds"); and WHEREAS, BISYS is willing to perform such services on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual premises and covenants herein set forth, the parties agree as follows: 1. Services as Fund Accountant. (a) Maintenance of Books and Records. BISYS will keep and maintain the following books and records of each Fund pursuant to Rule 31a-1 under the Investment Company Act of 1940 (the "Rule"): (i) Journals containing an itemized daily record in detail of all purchases and sales of securities, all receipts and disbursements of cash and all other debits and credits, as required by subsection (b)(1) of the Rule; (ii) General and auxiliary ledgers reflecting all asset, liability, reserve, capital, income and expense accounts, including interest accrued and interest received, as required by subsection (b)(2)(I) of the Rule; (iii) Separate ledger accounts required by subsection (b)(2)(ii) and (iii) of the Rule; and (iv) A monthly trial balance of all ledger accounts (except shareholder accounts) as required by subsection (b)(8) of the Rule. (b) Performance of Daily Accounting Services. In addition to the maintenance of the books and records specified above, BISYS shall perform the following accounting services daily for each Fund: (i) Calculate the net asset value per share utilizing prices obtained from the sources described in subsection 1(b)(ii) below; (ii) Obtain security prices from independent pricing services, or if such quotes are unavailable, then obtain such prices from each Fund's investment adviser or its designee, as approved by the Trust's Board of Trustees; (iii) Verify and reconcile with the Funds' custodian all daily trade activity; (iv) Compute, as appropriate, each Fund's net income and capital gains, dividend payables, dividend factors, 7-day yields, 7-day effective yields, 30-day yields, and weighted average portfolio maturity; (v) Review daily the net asset value calculation and dividend factor (if any) for each Fund prior to release to shareholders, check and confirm the net asset values and dividend factors for reasonableness and deviations, and distribute net asset values and yields to NASDAQ; (vi) Report to the Trust the daily market pricing of securities in any money market Funds, with the comparison to the amortized cost basis; (vii) Determine unrealized appreciation and depreciation on securities held in variable net asset value Funds; (viii) Upon receipt of timely instructions from each Fund's investment adviser, amortize premiums and accrete discounts on securities purchased at a price other than face value; (ix) Update fund accounting system to reflect rate changes, as received from a Fund's investment adviser, on variable interest rate instruments; (x) Post Fund transactions to appropriate categories; (xi) Accrue expenses of each Fund according to instructions received from the Trust's Administrator; (xii) Determine the outstanding receivables and payables for all (1) security trades, (2) Fund share transactions and (3) income and expense accounts; 2 (xiii) Provide accounting reports in connection with the Trust's regular annual audit and other audits and examinations by regulatory agencies; and (xiv) Provide such periodic reports as the parties shall agree upon, as set forth in a separate schedule. (c) Special Reports and Services. (i) BISYS may provide additional special reports upon the request of the Trust or a Fund's investment adviser, which may result in an additional charge, the amount of which shall be agreed upon between the parties. (ii) BISYS may provide such other similar services with respect to a Fund as may be reasonably requested by the Trust, which may result in an additional charge, the amount of which shall be agreed upon between the parties. (d) Additional Accounting Services. BISYS shall also perform the following additional accounting services for each Fund: (i) Provide monthly a download (and hard copy thereof) of the financial statements described below, within ten (10) business days of month-end. The download will include the following items: Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets, and Condensed Financial Information; (ii) Provide accounting information for the following: (A) federal and state income tax returns and federal excise tax returns; (B) the Trust's semi-annual reports with the Securities and Exchange Commission ("SEC") on Form N-SAR; (C) the Trust's annual, semi-annual and quarterly (if any) shareholder reports; (D) registration statements on Form N-1A and other filings relating to the registration of shares; 3 (E) the Administrator's monitoring of the Trust's status as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended; (F) annual audit by the Trust's auditors; and (G) examinations performed by the SEC. 2. Subcontracting. BISYS may, at its expense, subcontract with any entity or person concerning the provision of the services contemplated hereunder; provided, however, that BISYS shall not be relieved of any of its obligations under this Agreement by the appointment of such subcontractor and provided further, that BISYS shall be responsible, to the extent provided in Section 7 hereof, for all acts of such subcontractor as if such acts were its own. 3. Compensation. BISYS shall be entitled to receive compensation for the services provided herein in such amounts as the parties may agree upon. Such compensation shall be paid to BISYS Fund Services Limited Partnership ("BFSLP") by the Trust along with fees that are payable to BFSLP for services provided under its Management and Administration Agreement with the Trust. BFSLP has agreed to remit the compensation payable to BISYS hereunder that it receives pursuant to this payment arrangement. 4. Reimbursement of Expenses. In addition to paying BISYS the fees described in Section 3 hereof, the Trust agrees to reimburse BISYS for its out-of-pocket expenses in providing services hereunder, including without limitation the following: (a) All freight and other delivery and bonding charges incurred by BISYS in delivering materials to and from the Trust; (b) All direct telephone, telephone transmission and telecopy or other electronic transmission expenses incurred by BISYS in communication with the Trust, the Trust's investment advisor or custodian, dealers or others as required for BISYS to perform the services to be provided hereunder; (c) The cost of obtaining security market quotes pursuant to Section l(b)(ii) above; (d) The cost of microfilm or microfiche of records or other materials; (e) Any expenses BISYS shall incur at the written direction of an officer of the Trust thereunto duly authorized; and 4 (f) Any additional expenses reasonably incurred by BISYS in the performance of its duties and obligations under this Agreement. 5. Effective Date. This Agreement shall become effective with respect to a Fund as of the date first written above (or, if a particular Fund is not in existence on that date, on the date an amendment to Schedule A to this Agreement relating to the Fund is executed) (the "Effective Date"). 6. Term 6.01 Initial Term; Renewal Terms This Agreement shall become effective as of the date first written above and shall continue until March 1, 1999, and unless sooner terminated as provided herein, thereafter shall be renewed automatically for successive one-year terms, unless (i) it is terminated for cause pursuant to paragraph 6.03 below, (ii) it is terminated pursuant to paragraph 6.04 below, or (iii) written notice not to renew is given by the non-renewing party to the other party at least 120 days prior to the expiration of the then-current term; provided that such continuance is specifically reviewed and approved at least annually (i) by the vote of a majority of the Trust's Board of Trustees or by the vote of a majority of the outstanding voting securities of such Fund and (ii) by the majority of the Trust's Trustees who are not parties to this Agreement or interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The scope of such review shall be whether there is any "cause" (as defined below) that would justify terminating the Agreement. 6.02 Termination of Agreement This Agreement is terminable with respect to a particular Fund (i) upon provision of written notice not to renew in accordance with paragraph 6.01, (ii) upon mutual agreement of the parties hereto, (iii) for cause by the party alleging cause pursuant to paragraph 6.03, or (iv) upon provision of written notice to terminate in accordance with paragraph 6.04. Written notice not to renew may be given for any reason, with or without "cause" (as defined in paragraph 6.03). Upon termination of this Agreement, if BISYS, with the written consent of the Trust, in fact continues to perform any one or more of the services contemplated by this Agreement or any schedule or exhibit hereto, the provisions of this Agreement, including without limitation the provisions dealing with indemnification, shall continue in full force and effect. Compensation due and payable to BISYS and unpaid by the Trust upon such termination shall be immediately due and payable upon and notwithstanding such termination. BISYS shall be entitled to collect from the Trust, in addition to the compensation described under Section 3 hereof, the amount of all of BISYS' cash disbursements for services in connection with BISYS' activities in effecting such termination, including without limitation, the delivery to the Trust and/or its designees of the Trust's property, records, instruments and documents, or any copies thereof. Subsequent to such termination, for a reasonable fee, BISYS 5 will provide the Trust with reasonable access to any Trust documents or records remaining in its possession. 6.03 Termination for Cause This Agreement may be terminated for cause in accordance with this paragraph 6.03. In the event cause, as defined below, is alleged, the party alleging cause shall provide written notice to the other party specifying the event or events constituting cause and demanding that such other party cure the same. If appropriate corrective action is not taken within 30 days following receipt of such notice, the party alleging cause may terminate this Agreement by the provision of 60 days' written notice. For purposes of this Agreement, "cause" shall mean (a) willful misfeasance, bad faith, gross negligence or reckless disregard on the part of the party to be terminated with respect to its obligations and duties set forth herein; (b) a final, unappealable judicial, regulatory or administrative ruling or order in which the party to be terminated has been found guilty of criminal or unethical behavior in the conduct of its business; or (c) financial difficulties on the part of the party to be terminated which is evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent, or acquiescence in, a voluntary or involuntary case under Title 11 of the United States Code, as from time to time is in effect, or any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors. Notwithstanding the foregoing, the absence of either or both an annual review or ratification of this Agreement by the Board of Trustees shall not, in and of itself, constitute "cause" as used herein. 6.04 Termination in the Event of a Fund Liquidation or Fund Merger, or an Assignment of the Investment Advisory Contract If, during the initial term of this Agreement (as set forth in paragraph 6.01), (i) a Fund is liquidated or is merged into a mutual fund portfolio that is not part of the Trust or Mariner Funds Trust, or (ii) the investment advisory agreement between HSBC Asset Management Americas, Inc. ("HSBC") and the Trust is assigned (excluding any technical assignment based solely upon a change in control of HSBC) such that HSBC ceases to be the investment adviser to the Trust, this Agreement may be terminated by the Trust with respect to each liquidated or merged Fund (or, in the case of the assignment of the investment advisory agreement as described above, with respect to all of the Funds) by the provision of 60 days' written notice; provided, however, that upon such termination, the Trust shall make a one-time cash payment, as liquidated damages, to BISYS equal to the fees payable to BISYS hereunder for the shorter of (i) the eighteen-month period commencing on the termination date or (ii) the remainder of the initial term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the termination date will remain constant for the balance of such initial term. 6 6.05 Termination Without Cause In the event (i) the Trust terminates this Agreement for any reason other than (A) "cause" pursuant to paragraph 6.03 or (B) the reasons described in paragraph 6.04, (ii) BISYS is otherwise replaced as fund manager and administrator or (iii) a third party is added to perform all or a part of the services provided by BISYS under this Agreement (excluding any sub-administrator appointed by BISYS as provided in Section 1 hereof), then the Trust shall make a one-time cash payment, as liquidated damages, to BISYS equal to the balance due BISYS for the remainder of the term of this Agreement, assuming for purposes of calculation of the payment that the asset level of the Trust on the date BISYS is replaced, or a third party is added will remain constant for the balance of the contract term. 7. Standard of Care; Reliance on Records and Instructions; Indemnification. BISYS shall use its best efforts to insure the accuracy of all services performed under this Agreement, but shall not be liable to the Trust for any action taken or omitted by BISYS in the absence of bad faith, willful misfeasance, negligence or from reckless disregard by it of its obligations and duties. A Fund agrees to indemnify and hold harmless BISYS, its employees, agents, directors, officers and nominees from and against any and all claims, demands, actions and suits, whether groundless or otherwise, and from and against any and all judgments, liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character arising out of or in any way relating to BISYS' actions taken or nonactions with respect to the performance of services under this Agreement with respect to such Fund or based, if applicable, upon reasonable reliance on information, records, instructions or requests with respect to such Fund given or made to BISYS by a duly authorized representative of the Trust; provided that this indemnification shall not apply to actions or omissions of BISYS in cases of its own bad faith, willful misfeasance, gross negligence or from reckless disregard by it of its obligations and duties, and further provided that prior to confessing any claim against it which may be the subject of this indemnification, BISYS shall give the Trust written notice of and reasonable opportunity to defend against said claim in its own name or in the name of BISYS. 8. Record Retention and Confidentiality. BISYS shall keep and maintain on behalf of the Trust all books and records which the Trust and BISYS is, or may be, required to keep and maintain pursuant to any applicable statutes, rules and regulations, including without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books and records in connection with the services to be provided hereunder. BISYS further agrees that all such books and records shall be the property of the Trust and to make such books and records available for inspection by the Trust or by the Securities and Exchange Commission at reasonable times and otherwise to keep confidential all books and records and other information relative to the Trust and its shareholders; except when requested to divulge such information by duly-constituted authorities or court process. 7 9. Uncontrollable Events. BISYS assumes no responsibility hereunder, and shall not be liable, for any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. 10. Reports. BISYS shall furnish the reports prepared under this Agreement to appropriate persons designated by the Trust. 11. Rights of Ownership. All computer programs and procedures developed to perform services required to be provided by BISYS under this Agreement are the property of BISYS. All records and other data except such computer programs and procedures are the exclusive property of the Trust and all such other records and data will be furnished to the Trust in appropriate form as soon as practicable after termination of this Agreement for any reason. 12. Return of Records. BISYS may at its option at any time, and shall promptly upon the Trust's demand, turn over to the Trust and cease to retain BISYS' files, records and documents created and maintained by BISYS pursuant to this Agreement which are no longer needed by BISYS in the performance of its services or for its legal protection. If not so turned over to the Trust, such documents and records will be retained by BISYS for six years from the year of creation. At the end of such six-year period, such records and documents will be turned over to the Trust unless the Trust authorizes in writing the destruction of such records and documents. 13. Representations of the Trust. The Trust certifies to BISYS that: (1) as of the close of business on the Effective Date, each Fund that is in existence as of the Effective Date has authorized unlimited shares, and (2) this Agreement has been duly authorized by the Trust and, when executed and delivered by the Trust, will constitute a legal, valid and binding obligation of the Trust, enforceable against the Trust in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 14. Representations of BISYS. BISYS represents and warrants that: (1) the various procedures and systems which BISYS has implemented with regard to safeguarding from loss or damage attributable to fire, theft, or any other cause the records, and other data of the Trust and BISYS' records, data, equipment facilities and other property used in the performance of its obligations hereunder are adequate and 8 that it will make such changes therein from time to time as are required for the secure performance of its obligations hereunder, and (2) this Agreement has been duly authorized by BISYS and, when executed and delivered by BISYS, will constitute a legal, valid and binding obligation of BISYS, enforceable against BISYS in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties. 15. Insurance. BISYS shall notify the Trust should any of its insurance coverage be canceled or reduced. Such notification shall include the date of change and the reasons therefor. BISYS shall notify the Trust of any material claims against it with respect to services performed under this Agreement, whether or not they may be covered by insurance, and shall notify the Trust from time to time as may be appropriate of the total outstanding claims made by BISYS under its insurance coverage. 16. Information to be Furnished by the Trust and Funds. The Trust has furnished to BISYS the following: (a) Copies of the Declaration of Trust of the Trust and of any amendments thereto, certified by the proper official of the state in which such Declaration has been filed. (b) Copies of the following documents: (i) The Trust's Bylaws and any amendments thereto; and (ii) Certified copies of resolutions of the Board of Trustees covering the approval of this Agreement, authorization of a specified officer of the Trust to execute and deliver this Agreement and authorization for specified officers of the Trust to instruct BISYS thereunder. (c) A list of all the officers of the Trust, together with specimen signatures of those officers who are authorized to instruct BISYS in all matters. (d) Two copies of the Prospectuses and Statements of Additional Information for each Fund. 9 17. Information Furnished by BISYS. (a) BISYS has furnished to the Trust the following: (i) BISYS' Articles of Incorporation; and (ii) BISYS' Bylaws and any amendments thereto. (b) BISYS shall, upon request, furnish certified copies of corporate actions covering the following matters: (i) Approval of this Agreement, and authorization of a specified officer of BISYS to execute and deliver this Agreement; and (ii) Authorization of BISYS to act as fund accountant for the Trust and to provide accounting services for the Trust. 18. Amendments to Documents. The Trust shall furnish BISYS written copies of any amendments to, or changes in, any of the items referred to in Section 16 hereof forthwith upon such amendments or changes becoming effective. In addition, the Trust agrees that no amendments will be made to the Prospectuses or Statements of Additional Information of the Trust which might have the effect of changing the procedures employed by BISYS in providing the services agreed to hereunder or which amendment might affect the duties of BISYS hereunder unless the Trust first obtains BISYS' approval of such amendments or changes. 19. Compliance with Law. Except for the obligations of BISYS set forth in Section 8 hereof, the Trust assumes full responsibility for the preparation, contents and distribution of each prospectus of the Trust as to compliance with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the 1940 Act and any other laws, rules and regulations of governmental authorities having jurisdiction. BISYS shall have no obligation to take cognizance of any laws relating to the sale of the Trust's shares. The Trust represents and warrants that no shares of the Trust will be offered to the public until the Trust's registration statement under the Securities Act and the 1940 Act has been declared or becomes effective. 20. Notices. Any notice provided hereunder shall be sufficiently given when sent by registered or certified mail to the party required to be served with such notice, at the following address: 10 3435 Stelzer Road, Columbus, Ohio 43219, or at such other address as such party may from time to time specify in writing to the other party pursuant to this Section. 21. Headings. Paragraph headings in this Agreement are included for convenience only and are not to be used to construe or interpret this Agreement. 22. Assignment. This Agreement and the rights and duties hereunder shall not be assignable with respect to a Fund by either of the parties hereto except by the specific written consent of the other party. 23. Governing Law. This Agreement shall be governed by and provisions shall be construed in accordance with the laws of the Commonwealth of Massachusetts. 24. Limitation of Liability of the Trustees and Shareholders. It is expressly agreed that the obligations of the Trust hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Trust personally, but shall bind only the trust property of the Trust. The execution and delivery of this Agreement have been authorized by the Trustees, and this Agreement has been signed and delivered by an authorized officer of the Trust, acting as such, and neither such authorization by the Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in the Trust's Agreement and Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written. MARINER MUTUAL FUNDS TRUST By:________________________________ BISYS FUND SERVICES, INC. By:________________________________ 11 EX-99.10 23 CONSENT OF BAKER AND MCKENZIE Exhibit 10 Consent of Baker & McKenzie, counsel to Registrant April 22, 1996 HSBC Mutual Funds Trust 3435 Stelzer Road Columbus, Ohio 43219 RE: HSBC Mutual Funds Trust Registration No. 33-33734 ------------------------- Dear Sir or Madam: It is our opinion that the securities being registered hereunder will, when sold, be legally issued, fully paid and non-assessable, and we hereby consent to the reference to our firm as Counsel in Post-Effective Amendment No. 17 to Registration No. 33-33734. Very truly yours, BAKER & McKENZIE EX-99.11 24 CONSENT OF ERNST & YOUNG EXHIBIT 99.11 Exhibit 11 Consent of Ernst & Young, independent accountants EXHIBIT 99.11 CONSENT OF INDEPENDENT AUDITORSD We consent to the reference to our firm under the captions "Financial Highlights", "Independent Auditors" and "Experts" and to the use of our reports dated February 5, 1996, in this Registration Statement (Form N-1A No. 33-33734) of HSBC Mutual Funds Trust, formerly Mariner Mutual Funds Trust. /s/ Ernst & Young LLP ERNST & YOUNG LLP New York, New York April 23, 1996 EX-99.15A 25 RULE 12B1 DIST. PLAN AND AGREEMENT Exhibit 15(a) Rule 12-b Distribution Plan and Agreement between Registrant and BISYS Fund Services HSBC MUTUAL FUNDS TRUST HSBC FUNDS TRUST (together, the "Trust") RULE 12b-1 DISTRIBUTION PLAN 1. Definitions. (a) The Trust is an open-end management investment company organized under the laws of the Commonwealth of Massachusetts. The Trust is registered under the Investment Company Act of 1940, as amended (the "Act"). The Trust's shares of beneficial interest may be classified into series in which each series represents the entire undivided interests of a separate portfolio of assets. For all purposes of this Agreement, a "Fund" shall mean a separate portfolio of assets of the Trust and a "Series" shall mean the series of shares of beneficial interest representing undivided interests in a Fund. (b) As permitted by Rule 12b-1 (the "Rule") under the Act, the Trust has adopted a Distribution Plan (the "Plan") for each Fund (except Premium Institutional Class Shares) pursuant to which the Trust may make certain payments to the Distributor for expenses incurred in connection with the distribution of shares of the Funds. The Trust's Board of Trustees has determined that there is a reasonable likelihood that the Plan will benefit the Funds and their shareholders. 2. Adoption of Plan. The Trust hereby adopts this Plan, and the parties hereto enter into this Plan, on the terms and conditions specified herein. 3. Distribution-Related Fee. (a) The Trust shall pay the Distributor a monthly distribution-related fee on the first business day of each month in such an amount as the Distributor may request, provided that each such payment shall be based upon the average daily value of a Fund's net assets (as determined on each business day at the time set forth in the Trust's currently effective prospectus for determining net asset value per share) during the preceding month and shall be calculated at an annual rate not in excess of 0.35% (0.50% for Growth and Income Fund and Money Market Funds). (b) For purposes of calculating each such monthly fee, the value of a Fund's net assets shall be computed in the manner specified in the Trust's currently effective Prospectus and Restated and Amended Declaration of Trust. All expenses incurred by the Trust hereunder shall be charged against such Fund's assets. For purposes of this Plan, a "business day" is any day the Trust is open for business. 4. Purposes of Payments. The Distributor shall be obligated to use all amounts received under this Plan for (i) payments to broker/dealers and other financial intermediaries including the Distributor for their assistance in the distribution of Fund shares, and (ii) payments to broker/dealers and other financial intermediaries including the Distributor for promoting the sale of such Fund shares, such as by paying for the printing and distribution of prospectuses sent to prospective investors, the preparation, printing and distribution of sales literature and the expenses associated with media advertisements and telephone correspondents. The services rendered by the Distributor hereunder are in addition to the administrative services reasonably necessary for the operation of the Trust and the Funds pursuant to the Administrative Services Contract between the Trust and BISYS Fund Services Limited Partnership, dated as of March 9, 1996. 5. Related Agreements. All other agreements relating to the implementation of this Plan (the "related agreements") shall be in writing, and such related agreements shall be subject to termination, without penalty, on not more than sixty days' written notice to any other party to the agreement, in accordance with the provisions of clauses (a) and (b) of paragraph 9 hereof. 6. Approvals by Trustees and Shareholders. This Plan shall become effective upon approval by (a) a majority of the Board of Trustees of the Trust for each Fund, including a majority of the Trustees who are not "interested persons" (as defined in the Act) of the Trust and who have not direct or indirect financial interest in the operation of the plan or in any related agreements (the "Plan Trustees"), pursuant to a vote cast in person at a meeting called for the purpose of voting on the Plan, and (b) the holders of a majority of the outstanding securities of a Fund (as defined in the Act). Related agreements shall be subject to approval by the Trustees in the manner provided in clause (a) of the preceding sentence. 7. Duration and Annual Approval by Trustees. This Plan and any related agreements shall continue in effect for a period of more than one year from the date of their adoption by a majority of the Board of Trustees, including a majority of the Plan Trustees, pursuant to a vote cast in person at a meeting called for the purpose of voting on the continuance of this Plan or any related agreement. 8. Amendments. This Plan may be amended at any time with the approval of a majority of the Board of Trustees, provided that (a) any material amendment of this Plan must be approved by the Trustees, and (b) any amendment to increase materially the amount to be expended by the Fund pursuant to this Plan must also be approved by the vote of the holders of a majority of the outstanding voting securities of the Fund (as defined in the Act). 9. Termination. This Plan may be terminated at any time, without the payment of any penalty, by (a) the vote of a majority of the Plan Trustees, or (b) the vote of the holders of a majority of the outstanding voting securities of a Fund (as defined in the Act). If this plan is terminated with respect to any Funds, it shall nonetheless remain in effect with respect to any remaining Funds. 10. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of the Trustees who are not "interested persons" of the Trust (as defined in the Act) shall be committed to the discretion of the Trustees then in office who are not "interested persons" of the Trust. 11. Effect of Assignment. To the extent that this Plan constitutes a plan of distribution adopted pursuant to the Rule, it shall remain in effect as such so as to authorize the use of the Fund's assets in the amounts and for the purposes set forth herein, notwithstanding the occurrence of an assignment (as defined in the Act). To the extent this Plan concurrently constitutes an agreement relating to implementation of the plan of distribution, it shall terminate automatically in the event of its assignment, and the Trust may continue to make payments pursuant to this Plan only (a) upon the approval of the Board of Trustees, and (b) if the obligations of the Distributor under this Plan are to be performed by any organization other than the Distributor, upon such organization's adoption and assumption in writing of all provisions of this Plan as party hereto. 12. Quarterly Reports to Trustees. The Distributor shall prepare and furnish to the Board of Trustees, at least quarterly, a written report setting forth all amounts expended pursuant to this Plan and any related agreements and the purposes for which such expenditures were made. The written report shall include a detailed description of the continuing services provided by broker/dealers and other financial intermediaries pursuant to paragraph 4 of this Plan. 13. Preservation of Records. The Trust shall preserve copies of this Plan, any related agreements and any reports made pursuant to this Plan for a period of not less than six years from the date of this Plan or any such related agreement or report. For the first two years, copies of such documents shall be preserved in an easily accessible place. 14. Limitations on Liability of Distributor. The Distributor shall give the Trust the benefit of the Distributor's best judgment and efforts in rendering services under this Plan. As an inducement to the Distributor's undertaking to render these services, the Trust agrees that the Distributor shall not be liable under this Plan for any mistake in judgment or in any other event whatsoever except for lack of good faith, provided that nothing in this Plan shall be deemed to protect or purport to protect the Distributor against any liability to the Trust or its shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Distributor's duties under this Plan, or by reason of the Distributor's reckless disregard of its obligations and duties hereunder. 15. Other distribution-Related Expenditures. Nothing in this Plan shall operate or be construed to limit the extent to which the Distributor or any other person other than the Trust may incur costs and pay expenses associated with the distribution of Fund shares. 16. Miscellaneous. The Trust's Amended and Restated Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. The obligations of the Trust are not personally binding upon, nor shall resort be had to the private property of, any of the Trustees, shareholders, officers, employees or agents of the Trust, but only the Trust's property shall be bound. EX-99.18 26 FORM OF RULE 18F3 Exhibit 18 Form of Rule 18f-3 HSBC MUTUAL FUNDS TRUST Rule 18f-3 Plan Rule 18f-3 Pursuant to Rule 18f-3 (" Rule 18f-3") of the Investment Company Act of 1940, as amended (the "Act"), an open-end management investment company whose shares are registered on Form N- 1A may issue more than one class of voting stock (hereinafter referred to as "shares"), provided that these multiple classes differ either in the manner of distribution, or in services they provide to shareholders, or both. The HSBC Mutual Funds Trust (the "Trust"), a registered open-end investment company whose shares are registered on Form N-1A, consisting of the Short-Term U.S. Government Fund, Fixed Income Fund, New York Tax-Free Bond Fund, Growth & Income Fund, Small Cap Fund, and International Equity Fund, and any future fund or series created by the Trust (collectively, the "Funds"), may offer to shareholders multiple classes of shares in the Funds in accordance with a Rule 18f-3 Plan as described herein. Authorized Classes Each Fund may issue one or more classes of shares, in the same or separate prospectuses which may include the Service Class, the Institutional Class and the Premium Institutional Class (collectively, the "Classes" and individually, each a "Class"). The Service Class shares are available (as defined in the respective Fund prospectus) to retail investors subject to a minimum initial investment which may vary from Fund to Fund. There is no minimum initial investment, however, for accounts establishing automatic purchase and redemption arrangements on behalf of customer accounts maintained at Participating Organizations. Service Class shares are offered and sold with a sales load, the amount of which may vary from Fund to Fund, as may be approved by the Board of Trustees of the Trust from time to time. The sales load for the Service Class Shares may vary or be eliminated for certain classes of offerees as described in the Fund's prospectus. Service Class shares may also be offered with fees for distribution, servicing and marketing of such shares ("12b-1 Fees"), as well as fees for shareholder servicing ("Service Organization Fees" and "Shareholder Servicing Fees") of such shares pursuant to a Servicing Agreement and Shareholder Servicing Agreement, respectively. Institutional Class shares are available to customers of financial institutions or corporations on behalf of their customers or employees, or on behalf of any trust, pension, profit sharing or other benefit plan for such customers or employees. Institutional Shares are offered and sold without a sales load, and may impose 12b-1 Fees, Service Organization and Shareholder Servicing Fees on a Fund by Fund basis as determined by the Board. Premium Institutional Class shares will be issued to investors making a minimum initial investment of [$25,000,000.] Premium Institutional shares are offered without a sales load, and do not impose 12b-1 Fees, Service Organization Fees or Shareholder Servicing Fees. The Classes of shares issued by any Fund will be identical in all respects except for Class designation, allocation of certain expenses directly related to the distribution or service arrangement, or both, for a Class, and voting rights--each Class votes separately with respect to issues affecting only that Class. Shares of all Classes will represent interests in the same investment fund; therefore each Class is subject to the same investment objectives, policies and limitations. Class Expenses Each Class of shares shall bear expenses, not including advisory or custodial fees or other expenses related to the management of the Fund's assets, that are directly attributable to the kind or degree of services rendered to that Class ("Class Expenses"). Class Expenses, including the management fee or the fee of other service providers, may be waived or reimbursed by the Funds' investment adviser, underwriter or any other provider of services to the Funds with respect to each Class of a Fund on a Class by Class basis. Exchanges and Conversion Privileges For a nominal charge, shareholders who have held all or part of their shares in a Fund for at least seven days may exchange shares of one Fund for shares of any of the other portfolios of the Trust and the HSBC Funds Trust which are available for sale in their state. A shareholder who has paid a sales load in connection with the purchase of shares of any of the Funds will be subject only to that portion of the sales load of the Fund into which the shareholder is exchanging which exceeds the sales load originally paid by the shareholder. - 2 - EX-99.99 27 POWER OF ATTORNEY EXHIBIT 99.99 Other Exhibits (a) Power of Attorney for William B. Blundin, Wolfe J. Frankl, William L. Kufta, John P. Pfann, Robert A. Robinson, and Harald Paumgarten POWER OF ATTORNEY We, the undersigned Trustees of HSBC Global Funds Trust, a business trust organized under the laws of the Commonwealth of Massachusetts (the "Trust"), do hereby constitute and appoint William B. Blundin, Ann E. Bergin, William J. Tomko, Mark E. Nagle, Steven R. Howard, Martin R. Dean, Robert L. Tuch, and Alaina V. Metz, and each of them individually, our true and lawful attorneys and agents to take any and all action and execute any and all instruments which said attorneys and agents may deem necessary or advisable: (i) to enable the Trust to comply with the Securities Act of 1933, as amended, and any rules, regulations, orders or other requirements of the Securities and Exchange Commission thereunder, in connection with the registration under such Securities Act of 1933 of shares of beneficial interest of the Trust to be offered by the Trust, (ii) to enable the Trust to comply with the Investment Company Act of 1940, as amended, and any rules, regulations, orders or other requirements of the Securities and Exchange Commission thereunder, in connection with the registration of the Trust under the Investment Company Act of 1940, as amended, and (iii) to enable the Trust to comply with state securities laws and any rules, regulations, orders or other requirements of state securities commissions, in connection with the registration under state securities laws of the Trust and with the registration under state securities laws of the shares of beneficial interest of the Trust to be offered by the Trust, including specifically, but without limitation of the foregoing, power and authority to sign the name of the Trust in its behalf and to affix its seal, and to sign the name of such Trustee in his behalf as such Trustee as indicated below, to any amendment or supplement (including post-effective amendments) to the registration statement or statements filed with the Securities and Exchange Commission under such Securities Act of 1933 and such Investment Company Act of 1940, and to execute any instruments or documents filed or to be filed as a part of or in connection with such registration statement or statements; and to execute any instruments or documents filed or to be filed as part of or in connection with compliance with state securities laws, including, but not limited to, all state filings for any purpose, state filings in connection with corporate or trust organization or amending corporate or trust documentation, filings for purposes of state tax laws and filings in connection with blue sky regulations; and the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. - 1 - IN WITNESS WHEREOF, the undersigned place their hands this 7th day March, 1996. /s/ William B. Blundin ---------------------------- William B. Blundin ---------------------------- Wolfe J. Frankl ---------------------------- William L. Kufta ---------------------------- Harald Paumgarten ---------------------------- John P. Pfann ---------------------------- Robert A. Robinson - 2 - -----END PRIVACY-ENHANCED MESSAGE-----