As filed via EDGAR with the Securities and Exchange Commission on October 2,
1996
File No.
Registration No.
- --------------------------------------------------------------------------------
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. |_|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. | |
-------------------------------
MUTUAL FUND SELECT TRUST
(Exact Name of Registrant as Specified in Charter)
101 Park Avenue
New York, New York 10178
--------------------------------------------------
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: (212) 492-1600
Copies to:
George Martinez, Esq. Niall L. O'Toole, Esq. Gary S. Schpero, Esq.
BISYS Fund Services, Inc. Chase Manhattan Bank Simpson Thacher & Bartlett
3435 Stelzer Road 270 Park Avenue 425 Lexington Avenue
Columbus, Ohio 43219 New York, New York 10017 New York, New York 10017
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
the Registrant hereby elects to register an indefinite number of shares of
common stock, $.001 par value per share, of all series of the Registrant, now
existing or hereafter created. The amount of the registration fee required by
Rule 24f-2 is $500.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
MUTUAL FUND SELECT TRUST
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET
Pursuant to Rule 495(a) Under the Securities Act of 1933
VISTA(SM) SELECT INTERMEDIATE TAX FREE INCOME FUND
VISTA(SM) SELECT TAX FREE INCOME FUND
VISTA(SM) SELECT NEW YORK TAX FREE INCOME FUND
VISTA(SM) SELECT NEW JERSEY TAX FREE INCOME FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
- ----------- ------------------ -----------------------
<S> <C> <C>
1 Front Cover Page *
2(a) Expense Summary *
(b) Not Applicable *
3(a) Not Applicable *
(b) Not Applicable *
(c) Performance Information *
4(a)(b) Other Information *
Concerning the Fund;
Fund Objective; Investment
Policies
(c) Fund Objective; Investment *
Policies
(d) Not Applicable *
5(a) Management *
(b) Management *
(c)(d) Management; Other Information Concerning the Fund *
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
- ----------- ------------------ -----------------------
<S> <C> <C>
(e) Other Information Concerning *
the Fund; Back Cover Page
(f) Other Information Concerning *
the Fund
(g) Not Applicable *
5A Not Applicable *
6(a) Other Information Concerning *
the Fund
(b) Not Applicable *
(c) Not Applicable *
(d) Not Applicable *
(e)(f) About Your Investment; How to Purchase and *
Redeem Shares; How Distributions Are
Made; Tax Information; Other Information
Concerning the Fund
(f) How Distributions are Made; *
Tax Information
(g) How Distributions are Made; *
Tax Information
(h) About Your Investment; How to Purchase and *
Redeem Shares; Other Information Concerning
the Fund
7(a) How to Purchase and Redeem Shares *
(b) How the Fund Values its Shares; *
How to Purchase and Redeem Shares
(c) Not Applicable *
(d) How to Purchase and Redeem Shares *
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
- ----------- ------------------ -----------------------
<S> <C> <C>
(e) Management; Other Information *
Concerning the Fund
(f) Other Information Concerning the *
Fund
8(a) How to Purchase and Redeem Shares *
(b) How to Purchase and Redeem Shares *
(c) How to Purchase and Redeem Shares *
(d) How to Purchase and Redeem Shares *
9 Not Applicable *
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
- ----------- ------------------ -----------------------
<S> <C> <C>
10 * Front Cover Page
11 * Front Cover Page
12 * Not Applicable
13(a)(b) Fund Objective; Investment Investment Policies
Policies and Restrictions
14(c) * Management of the Trust and
Funds
(b) * Not Applicable
(c) * Management of the Trust and
Funds
15(a) * Not Applicable
(b) * General Information
(c) * General Information
16(a) Management Management of the Trust and
Funds
(b) Management Management of the Trust and
Funds
(c) Other Information Concerning Management of the Trust and
the Fund Funds
(d) Management Management of the Trust and
Funds
(e) * Not Applicable
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
- ----------- ------------------ -----------------------
<S> <C> <C>
(f) How to Purchase and Redeem Shares; Management of the Trust and
Other Information Concerning the Fund Funds
(g) * Not Applicable
(h) * Management of the Trust and
Funds
Independent Accountants
(i) * Not Applicable
17 Investment Policies Investment Policies and Restrictions
18(a) Other Information Concerning the Fund; General Information
How to Purchase and Redeem Shares
(b) * Not Applicable
19(a) How to Purchase and Redeem Shares Purchases and Redemptions
(b) How the Fund Values its Shares; How to Determination of Net Asset Value
Purchase and Redeem Shares
(c) * Purchases and Redemptions
20 How Distributions are Made; Tax Information Tax Matters
21(a) * Management of the Trust and Funds
(b) * Management of the Trust and Funds
(c) * Not Applicable
22 * Performance Information
23 * Not Applicable
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
-v-
<PAGE>
Subject to Completion--Dated October 2, 1996
[VISTA LOGO]
PROSPECTUS
VISTA(TX) SELECT TAX FREE INCOME FUNDS
INTERMEDIATE TAX FREE INCOME FUND
TAX FREE INCOME FUND NEW YORK TAX FREE INCOME FUND
NEW JERSEY TAX FREE INCOME FUND
INVESTMENT STRATEGY: Income
_____, 1996
This Prospectus explains concisely what you should know before investing.
Please read it carefully and keep it for future reference. You can find more
detailed information about the Funds in their ____, 1996 Statement of
Additional Information, as amended periodically (the "SAI"). For a free copy
of the SAI, call the Vista Select Service Center at 1-800-622-4273. The SAI
has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
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.
INVESTMENTS IN THE FUNDS ARE SUBJECT TO RISK--INCLUDING POSSIBLE LOSS OF
PRINCIPAL--AND WILL FLUCTUATE IN VALUE. SHARES OF THE FUNDS ARE NOT BANK
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, THE CHASE MANHATTAN
BANK OR ANY OF ITS AFFILIATES AND ARE NOT INSURED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
<PAGE>
TABLE OF CONTENTS
EXPENSE SUMMARY ......................................... 3
FUND OBJECTIVES AND INVESTMENT APPROACH ................. 4
COMMON INVESTMENT POLICIES .............................. 5
MANAGEMENT .............................................. 12
HOW TO PURCHASE AND REDEEM SHARES ....................... 13
HOW THE FUNDS VALUE THEIR SHARES ........................ 14
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION ............. 14
OTHER INFORMATION CONCERNING THE FUNDS .................. 16
PERFORMANCE INFORMATION ................................. 20
2
<PAGE>
EXPENSE SUMMARY
---------------
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Funds based on estimated
expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Vista Select Vista Select Vista Select
Intermediate Vista Select New York New Jersey
Tax Free Tax Free Tax Free Tax Free
Income Fund Income Fund Income Fund Income Fund
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ANNUAL FUND
OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fee 0.30% 0.30% 0.30% 0.30%
12b-1 Fee None None None None
Shareholder Servicing Fee None None None None
Other Expenses (after reimbursements)* 0.19% 0.19% 0.20% 0.19%
Total Fund Operating Expenses
(after reimbursements)* 0.49% 0.49% 0.50% 0.49%
EXAMPLE:
Your investment of $1,000 would
incur the following expenses
assuming 5% annual return:
1 Year $ 5 $ 5 $ 5 $ 5
3 Years $16 $16 $16 $16
</TABLE>
* Reflects the agreement by Chase voluntarily to reimburse certain expenses for
a period of at least one year after the date of this Prospectus. Absent such
reimbursements, Total Fund Operating Expenses for Vista Select Intermediate
Tax Free Income Fund, Vista Select Tax Free Income Fund, Vista Select New
York Tax Free Income Fund and Vista Select New Jersey Tax Free Income Fund
would be 0.54%, 0.53%, 0.58% and 0.75%, respectively.
The table is provided to help you understand the expenses of investing in the
Funds and your share of the operating expenses that the Funds incur. The
example should not be considered a representation of past or future expenses
or returns; actual expenses and returns may be greater or less than shown.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an
investment in the Funds.
3
<PAGE>
FUND OBJECTIVES AND
INVESTMENT APPROACH
- -------------------
VISTA SELECT INTERMEDIATE
TAX FREE INCOME FUND
The Fund's objective is to provide monthly dividends which are excluded from
gross income for federal tax purposes, as well as to protect the value of its
shareholders' investment.
The Fund invests primarily in Municipal Obligations (as defined under
"Municipal Obligations"). As a fundamental policy, under normal market
conditions, the Fund will have at least 80% of its assets in Municipal
Obligations the interest on which, in the opinion of bond counsel, is
excluded from gross income for federal income tax purposes and does not
constitute a preference item which would be subject to the federal
alternative minimum tax on individuals (these preference items are referred
to as "AMT Items"). The Fund reserves the right under normal market
conditions to invest up to 20% of its total assets in AMT Items or securities
the interest on which is subject to federal income tax. For temporary
defensive purposes, the Fund may exceed this limitation.
The average maturity of the Fund's portfolio will not exceed ten years.
VISTA SELECT TAX FREE
INCOME FUND
The Fund's objective is to provide monthly dividends which are excluded from
gross income for federal tax purposes, as well as to protect the value of its
shareholders' investment, by investing primarily (i.e., at least 80% of its
assets under normal conditions) in Municipal Obligations.
As a fundamental policy, under normal market conditions, the Fund will have
at least 80% of its assets in Municipal Obligations the interest on which, in
the opinion of bond counsel, is excluded from gross income for federal income
tax purposes and does not constitute an AMT Item. The Fund reserves the right
under normal market conditions to invest up to 20% of its total assets in AMT
Items or securities the interest on which is subject to federal income tax.
For temporary defensive purposes, the Fund may exceed this limitation.
There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security.
VISTA SELECT NEW YORK
TAX FREE INCOME FUND
The Fund's objective is to provide monthly dividends which are excluded from
gross income for federal tax purposes and exempt from New York State and New
York City personal income taxes, as well as to protect the value of its
shareholders' investment.
The Fund invests primarily in New York Municipal Obligations (as defined
under "Municipal Obligations"). As a fundamental policy, under normal market
conditions, the Fund will have at least 80% of its assets in New York
Municipal Obligations the interest on which, in the opinion of bond
counsel,does not constitute an AMT Item. The Fund reserves the right under
normal market conditions to invest up to 20% of its total assets in AMT Items
or securities the interest on which is
4
<PAGE>
subject to federal income tax and New York State and New York City personal
income taxes. For temporary defensive purposes, the Fund may exceed this
limitation.
There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security.
VISTA SELECT NEW JERSEY
TAX FREE INCOME FUND
The Fund's objective is to provide monthly dividends which are excluded from
gross income for federal tax purposes and exempt from New Jersey personal
income tax. As used in this Prospectus, the term "New Jersey personal income
tax" refers to the New Jersey Gross Income Tax.
Under normal market conditions, the Fund will invest at least 80% of its
assets in New Jersey Municipal Obligations (as defined under "Municipal
Obligations"). As a fundamental policy, under normal market conditions, the
Fund will have at least 80% of its assets in Municipal Obligations the
interest on which, in the opinion of bond counsel, does not constitute an AMT
Item. The Fund reserves the right under normal market conditions to invest up
to 20% of its total assets in AMT Items or securities the interest on which
is subject to federal income tax and New Jersey personal income tax. For
temporary defensive purposes, the Fund may exceed this limitation.
There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security.
COMMON INVESTMENT
POLICIES
- --------
Each Fund's investments may include, among other instruments, fixed, variable
or floating rate general obligation and revenue bonds, zero coupon
securities, inverse floaters and bonds with interest rate caps. Each Fund's
Municipal Obligations will be rated at time of purchase at least in the
category Baa, MIG-3 or VMIG-3 by Moody's Investors Service, Inc. ("Moody's"),
or BBB or SP-2 by Standard & Poor's Corporation ("S&P"), or BBB or FIN-3 by
Fitch Investors Service, Inc. ("Fitch") or comparably rated by another
national rating organization, or, if unrated, considered by the Fund's
advisers to be of comparable quality.
Each Fund's advisers may adjust the average maturity of the Fund's portfolio
based upon their assessment of the relative yields available on securities of
different maturities and their expectations of future changes in interest
rates.
Each Fund is classified as a "non-diversified" fund under federal securities
law. Each of such Fund's assets may be more concentrated in the securities of
any single issuer or group of issuers than if the Fund were diversified.
For temporary defensive purposes, each Fund may invest without limitation in
high quality money market instruments and repurchase agreements, the interest
income from which may be taxable to shareholders as ordinary income for
federal income tax purposes.
In lieu of investing directly, each Fund is authorized to seek to achieve its
objective by investing all of its investable assets in an
5
<PAGE>
investment company having substantially the same investment objective and
policies as such Fund. It is anticipated that certain Funds will adopt this
approach during 1997. See "Unique Characteristics of Master/Feeder Fund
Structure."
No Fund is intended to be a complete investment program, and there is no
assurance that any Fund will achieve its investment objective.
MUNICIPAL OBLIGATIONS
"Municipal Obligations" are obligations issued by or on behalf of states,
territories and possessions of the United States, and their authorities,
agencies, instrumentalities and political subdivisions, the interest on
which, in the opinion of bond counsel, is excluded from gross income for
federal income tax purposes (without regard to whether the interest thereon
is also exempt from the personal income taxes of any state or whether the
interest thereon constitutes a preference item for purposes of the federal
alternative minimum tax). "New York Municipal Obligations" are Municipal
Obligations of the State of New York and its political subdivisions and of
Puerto Rico, other U.S. territories and their political subdivisions, the
interest on which, in the opinion of bond counsel, is exempt from New York
State and New York City personal income taxes. "New Jersey Municipal
Obligations" are Municipal Obligations of the State of New Jersey and its
political subdivisions and of Puerto Rico, other U.S. territories and their
political subdivisions, the interest on which, in the opinion of bond
counsel, is exempt from New Jersey personal income tax. Municipal Obligations
are issued to obtain funds for various public purposes, such as the
construction of public facilities, the payment of general operating expenses
or the refunding of outstanding debts. They may also be issued to finance
various private activities, including the lending of funds to public or
private institutions for the construction of housing, educational or medical
facilities, and may include certain types of industrial development bonds,
private activity bonds or notes issued by public authorities to finance
privately owned or operated facilities, or to fund short-term cash
requirements. Short-term Municipal Obligations may be issued as interim
financing in anticipation of tax collections, revenue receipts or bond sales
to finance various public purposes.
The two principal classifications of Municipal Obligations are general
obligation and revenue obligation securities. General obligation securities
involve a pledge of the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation securities
vary according to the law applicable to the particular issuer. Revenue
obligation securities are payable only from revenues derived from a
particular facility or class of facilities, or a specific revenue source, and
generally are not payable from the unrestricted revenues of the issuer.
Industrial development bonds and private
6
<PAGE>
activity bonds are in most cases revenue obligation securities, the credit
quality of which is directly related to the private user of the facilities.
From time to time, each Fund may invest more than 25% of the value of its
total assets in industrial development bonds which, although issued by
industrial development authorities, may be backed only by the assets and
revenues of non-governmental issuers such as hospitals or airports, provided,
however, that a Fund may not invest more than 25% of the value if its total
assets in such bonds if the issuers are in the same industry.
MUNICIPAL LEASE OBLIGATIONS. Each Fund may invest in municipal lease
obligations. These are participations in a lease obligation or installment
purchase contract obligation and typically provide a premium interest rate.
Municipal lease obligations do not constitute general obligations of the
municipality. Certain municipal lease obligations contain "non-
appropriation" clauses which provide that the municipality has no obligation
to make lease or installment payments in future years unless money is later
appropriated for such purpose. Although "non-appropriation" lease
obligations are secured by the leased property, disposition of the property
in the event of foreclosure might prove difficult. Certain investments in
municipal lease obligations may be illiquid.
OTHER INVESTMENT PRACTICES
Each Fund may also engage in the following investment practices, when
consistent with the Fund's overall objective and policies. These practices,
and certain associated risks, are more fully described in the SAI.
MONEY MARKET INSTRUMENTS. Each Fund may invest in cash or high-quality,
short-term money market instruments. Such instruments may include U.S.
Government securities, commercial paper of domestic and foreign issuers and
obligations of domestic and foreign banks. Investments in foreign money
market instruments may involve certain risks associated with foreign
investment.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS. Each Fund may enter into
agreements to purchase and resell securities at an agreed-upon price and
time. Each Fund may purchase securities for delivery at a future date, which
may increase its overall investment exposure and involves a risk of loss if
the value of the securities declines prior to the settlement date. These
transactions involve some risk to a Fund if the other party should default on
its obligation and the Fund is delayed or prevented from recovering the
collateral or completing the transaction.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow money from
banks for temporary or short-term purposes, but will not borrow for
leveraging purposes. Each Fund may also sell and
7
<PAGE>
simultaneously commit to repurchase a portfolio security at an agreed-upon
price and time, to avoid selling securities during unfavorable market
conditions in order to meet redemptions. Whenever a Fund enters into a
reverse repurchase agreement, it will establish a segregated account in which
it will maintain liquid assets on a daily basis in an amount at least equal
to the repurchase price (including accrued interest). A Fund would be
required to pay interest on amounts obtained through reverse repurchase
agreements, which are considered borrowings under federal securities laws.
STAND-BY COMMITMENTS. Each Fund may enter into put transactions, including
transactions sometimes referred to as stand-by commitments, with respect to
securities in its portfolio. In these transactions, a Fund would acquire the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date. These transactions involve some risk to a Fund if
the other party should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the transaction.
Acquisition of puts will have the effect of increasing the cost of the
securities subject to the put and thereby reducing the yields otherwise
available from such securities.
STRIPS AND ZERO COUPON OBLIGATIONS. Each Fund may invest up to 20% of its
total assets in separately traded principal and interest components of
securities backed by the full faith and credit of the U.S. Government,
including instruments known as "STRIPS". Each Fund may also invest in zero
coupon obligations. Zero coupon obligations are debt securities that do not
pay regular interest payments, and instead are sold at substantial discounts
from their value at maturity. The value of STRIPS and zero coupon obligations
tends to fluctuate more in response to changes in interest rates than the
value of ordinary interest-paying debt securities with similar maturities.
The risk is greater when the period to maturity is longer.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES. Each Fund
may invest in floating rate securities, whose interest rates adjust
automatically whenever a specified interest rate changes, and variable rate
securities, whose interest rates are periodically adjusted. Certain of these
instruments permit the holder to demand payment of principal and accrued
interest upon a specified number of days' notice from either the issuer or a
third party. The securities in which a Fund may invest include participation
certificates and certificates of indebtedness or safekeeping. Participation
certificates are pro rata interests in securities held by others;
certificates of indebtedness or safekeeping are documentary receipts for such
original securities held in custody by others. As a result of the floating or
variable rate nature of these investments, a Fund's yield may decline and it
may forego the opportunity for capital appreciation during periods when
interest rates decline; however, during periods
8
<PAGE>
when interest rates increase, the Fund's yield may increase and it may have
reduced risk of capital depreciation. Demand features on certain floating or
variable rate securities may obligate a Fund to pay a "tender fee" to a third
party. Demand features provided by foreign banks involve certain risks
associated with foreign investments. The Internal Revenue Service has not
ruled on whether interest on participations in floating or variable rate
municipal obligations is tax exempt, and the Fund would purchase such
instruments based on opinions of bond counsel.
INVERSE FLOATERS AND INTEREST RATE CAPS. Each Fund may invest in inverse
floaters and in securities with interest rate caps. Inverse floaters are
instruments whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index, and their price may be
considerably more volatile than a fixed-rate security. Interest rate caps are
financial instruments under which payments occur if an interest rate index
exceeds a certain predetermined interest rate level, known as the cap rate,
which is tied to a specific index. These financial products will be more
volatile in price than municipal securities which do not include such a
structure.
OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of its total
assets in shares of other investment companies when consistent with its
investment objective and policies, subject to applicable regulatory
limitations. Additional fees may be charged by other investment companies.
DERIVATIVES AND RELATED INSTRUMENTS. Each Fund may invest its assets in
derivative and related instruments to hedge various market risks or to
increase the Fund's income or gain. Some of these instruments will be subject
to asset segregation requirements to cover the Fund's obligations. Each Fund
may (i) purchase, write and exercise call and put options on securities and
securities indexes (including using options in combination with securities,
other options or derivative instruments); (ii) enter into swaps, futures
contracts and options on futures contracts; (iii) employ forward interest
rate contracts; and (iv) purchase and sell structured products, which are
instruments designed to restructure or reflect the characteristics of certain
other investments.
There are a number of risks associated with the use of derivatives and
related instruments and no assurance can be given that any strategy will
succeed. The value of certain derivatives or related instruments in which a
Fund invests may be particularly sensitive to changes in prevailing economic
conditions and market value. The ability of a Fund to successfully utilize
these instruments may depend in part upon the ability of the Fund's advisers
to forecast these factors correctly. Inaccurate forecasts could expose a Fund
to a risk of loss. There can be no guarantee that there will be a correlation
between price movements in a hedging instrument and in the portfolio assets
being
9
<PAGE>
hedged. The Funds are not required to use any hedging strategies. Hedging
strategies, while reducing risk of loss, can also reduce the opportunity for
gain. Derivatives transactions not involving hedging may have speculative
characteristics, involve leverage and result in more risk to a Fund than
hedging strategies using the same instruments. There can be no assurance that
a liquid market will exist at a time when a Fund seeks to close out a
derivatives position. Activities of large traders in the futures and
securities markets involving arbitrage, "program trading," and other
investment strategies may cause price distortions in derivatives markets. In
certain instances, particularly those involving over-the-counter transactions
or forward contracts, there is a greater potential that a counterparty or
broker may default. In the event of a default, the Fund may experience a
loss. For additional information concerning derivatives, related instruments
and the associated risks, see the SAI.
PORTFOLIO TURNOVER. The frequency of a Fund's portfolio transactions will
vary from year to year. Each Fund's investment policies may lead to frequent
changes in investments, particularly in periods of rapidly changing market
conditions. High portfolio turnover rates would generally result in higher
transaction costs, including dealer mark-ups, and would make it more
difficult for a Fund to qualify as a registered investment company under
federal tax law. See "How Distributions are Made; Tax Information" and "Other
Information Concerning the Fund Certain Regulatory Matters."
LIMITING INVESTMENT RISKS
Specific investment restrictions help the Funds limit investment risks for
their shareholders. These restrictions prohibit each Fund from: (a) investing
more than 15% of its net assets in illiquid securities (which include
securities restricted as to resale unless they are determined to be readily
marketable in accordance with procedures established by the Board of
Trustees); or (b) investing more than 25% of its total assets in any one
industry (this would apply to municipal obligations backed only by the assets
and revenues of nongovernmental users, but excludes obligations of states,
cities, municipalities or other public authorities). A complete description
of these and other investment policies is included in the SAI. Except for
restriction (b) above and investment policies designated as fundamental above
or in the SAI, the Fund's investment policies (including their investment
objectives) are not fundamental. The Trustees may change any non-fundamental
investment policy without shareholder approval. However, in the event of a
change in one of such Funds' investment objective, shareholders must be given
at least 30 days' prior written notice.
RISK FACTORS
No Fund constitutes a balanced or complete investment program, and the net
asset value of the shares of each Fund can be expected to
10
<PAGE>
fluctuate based on the value of the securities in such Fund's portfolio.
Changes in interest rates may affect the value of the obligations held by the
Funds. The value of fixed income securities varies inversely with changes in
prevailing interest rates. For a discussion of certain other risks associated
with each Fund's additional investment activities, see "Common Investment
Policies-Other Investment Practices" and "-Municipal Obligations."
Because each Fund will invest primarily in obligations issued by states,
cities, public authorities and other municipal issuers, the Funds are
susceptible to factors affecting such states and their municipal issuers. A
number of municipal issuers, including New York and New Jersey issuers, have
a recent history of significant financial and fiscal difficulties. If an
issuer in which a Fund invests is unable to meet its financial obligations,
the income derived by the Fund and the Fund's ability to preserve capital and
liquidity could be adversely affected. See the SAI for further information
regarding New York and New Jersey municipal issuers.
Interest on certain Municipal Obligations (including certain industrial
development bonds), while exempt from federal income tax, is a preference
item for the purpose of the alternative minimum tax. Where a mutual fund
receives such interest, a proportionate share of any exempt-interest dividend
paid by the mutual fund may be treated as such a preference item to
shareholders. Federal tax legislation enacted over the past few years has
limited the types and volume of bonds which are not AMT Items and the
interest on which is not subject to federal income tax. This legislation may
affect the availability of Municipal Obligations for investment by a Fund.
Each Fund may invest up to 25% of its total assets in Municipal Obligations
secured by letters of credit or guarantees from U.S. and foreign banks, and
other foreign institutions. The dependence on banking institutions may
involve certain credit risks, such as defaults or downgrades, if at some
future date adverse economic conditions prevail in such industry. U.S. banks
are subject to extensive governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions.
General economic conditions as well as exposure to credit losses arising from
possible financial difficulties of borrowers play an important part in the
operations of this industry.
Obligations backed by foreign banks, foreign branches of U.S. banks and
foreign governmental and private issuers involve investment risks in addition
to those of obligations of domestic issuers, including risks relating to
future political and economic developments, more limited liquidity of foreign
obligations than comparable domestic obligations, the possible imposition of
withholding taxes on interest
11
<PAGE>
income, the possible seizure or nationalization of foreign assets, and the
possible establishment of exchange controls or other restrictions. There may
be less publicly available information concerning foreign issuers, there may
be difficulties in obtaining or enforcing a judgment against a foreign issuer
(including branches) and accounting, auditing and financial reporting
standards and practices may differ from those applicable to U.S. issuers. In
addition, foreign banks are not subject to regulations comparable to U.S.
banking regulations.
Because each Fund is "non-diversified," the value of its shares is more
susceptible to developments affecting issuers in which such Fund invests. In
addition, more than 25% of each Fund's assets may be invested in securities
to be paid from revenue of similar projects, which may cause the Fund to be
more susceptible to similar economic, political, or regulatory developments.
The New York Tax Free Income Fund and the New Jersey Tax Free Income Fund
will be particularly susceptible to such economic, political and regulatory
developments since the issuers in which such funds will generally be located
in the States of New York and New Jersey, respectively.
For a discussion of certain other risks associated with the Funds' additional
investment activities, see "Common Investment Policies - Other Investment
Practices" above.
MANAGEMENT
- ----------
THE FUND'S ADVISERS
The Chase Manhattan Bank ("Chase") acts as investment adviser to the Funds
pursuant to an Investment Advisory Agreement and has overall responsibility
for investment decisions of the Funds, subject to the oversight of the Board
of Trustees. Chase is a wholly-owned subsidiary of The Chase Manhattan
Corporation, a bank holding company. Chase and its predecessors have over 100
years of money management experience. For its investment advisory services to
the Funds, Chase is entitled to receive an annual fee computed daily and paid
monthly at an annual rate equal to 0.30% of the average daily net assets of
each Fund. Chase is located at 270 Park Avenue, New York, New York 10017.
Chase Asset Management, Inc. ("CAM"), a registered investment adviser, is the
sub-investment adviser to the Fund pursuant to a Sub-Investment Advisory
Agreement between CAM and Chase. CAM is a wholly-owned operating subsidiary
of Chase. CAM makes investment decisions for the Fund on a day-to-day basis.
For these services, CAM is entitled to receive a fee, payable by Chase from
its advisory fee, at an annual rate equal to 0.15% of the average daily net
assets of each Fund. CAM was recently formed for the purpose of providing
discretionary investment advisory services to institutional clients and to
consolidate Chase's investment management function. The same individuals who
serve as portfolio managers for Chase also serve as
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portfolio managers for CAM. CAM is located at 1211 Avenue of the Americas,
New York, New York 10036.
PORTFOLIO MANAGERS. Pamela Hunter, Vice President and Head of Tax Exempt
Investments of Chase, is responsible for the day-to-day management of the Tax
Free Income Fund and New York Tax Free Income Fund. Ms. Hunter manages the
investment team providing tax exempt strategy, portfolio management and
product development, and has been employed at Chase (including its
predecessors) since 1980.
Ms. Hunter and Robert Elder, Vice President and Senior Portfolio Manager of
Chase, are responsible for the day-to-day management of the New Jersey Tax
Free Income Fund. Mr. Elder has been employed with Chase and its predecessors
since 1981, where he has held positions in institutional municipal bond
sales, trading and fund management.
Ms. Hunter and Carolyn J. Gill, Vice President and Senior Portfolio Manager
of Chase, are responsible for the day-to-day management for the Intermediate
Tax Free Income Fund. Ms. Gill has been employed with Chase and its
predecessors since 1986 where she has been responsible for managing fund,
institutional and individual assets.
HOW TO PURCHASE AND
REDEEM SHARES
- -------------------
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased through Chase and other selected
financial institutions that have entered into an agreement with the Funds
(such institutions are referred to herein as "Financial Institutions") on
each business day during which Chase and the New York Stock Exchange are open
("Fund Business Day"). Qualified investors are defined as institutions,
trusts, partnerships, corporations, qualified and other retirement plans and
fiduciary accounts. The Funds reserve the right to reject any purchase order
or cease offering shares for purchase at any time.
Shares are sold at their public offering price, which is their next
determined net asset value. Orders received by the account administrator at
your Financial Institution in proper form prior to the New York Stock
Exchange closing time (or such earlier cut-off time as may be established by
your Financial Institution) are confirmed at that day's net asset value,
provided the order is received by the relevant Fund prior to its close of
business. Financial Institutions are responsible for forwarding orders for
the purchase of shares on a timely basis. Shares will be maintained in book
entry form and share certificates will not be issued. Management reserves the
right to refuse to sell shares of any Fund to any institution.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening an account.
MINIMUM INVESTMENTS
Financial Institutions are required to maintain at least $5,000,000 in an
omnibus account with one or more of the Vista Select Funds.
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HOW TO REDEEM SHARES
You may redeem all or any portion of the shares in your account at any time
at the net asset value next determined after a redemption request in proper
form is furnished by you to the account administrator at your Financial
Institution and transmitted to and received by the relevant Fund.
In making redemption requests, the names of the registered shareholders on
your account and your account number must be supplied. The price you will
receive is the next net asset value calculated after the relevant Fund
receives your request in proper form. In order to receive that day's net
asset value, the Fund must receive your request before the close of regular
trading on the New York Stock Exchange. Your Financial Institution will be
responsible for furnishing all necessary documentation to the Funds, and may
charge you for its services.
A Fund generally sends your Financial Institution payment for your shares in
federal funds on the business day after your request is received in proper
form. Under unusual circumstances, the Funds may suspend redemptions, or
postpone payment for more than seven days, as permitted by federal securities
law.
If a Financial Institution is authorized to act upon redemption and transfer
instructions received by telephone from an investor and the Financial
Institution fails to employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, it may be liable for any
losses due to unauthorized or fraudulent instructions. An investor agrees,
however, that to the extent permitted by applicable law, neither the Funds
nor the investor's Financial Institution nor any of their agents will be
liable for any loss, liability, cost or expense arising out of any redemption
request, including any fraudulent or unauthorized request. For information,
consult your account administrator.
HOW THE FUNDS
VALUE THEIR SHARES
- ------------------
The net asset value of each Fund's shares is determined once daily based upon
prices determined as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m., Eastern time, however, options are priced at
4:15 p.m., Eastern time), on each Fund Business Day, by dividing the net
assets of a Fund by the total number of outstanding shares of that Fund.
Values of assets held by the Funds are determined on the basis of their
market or other fair value, as described in the SAI.
HOW DISTRIBUTIONS ARE
MADE; TAX INFORMATION
- ---------------------
The Funds declare dividends daily and distribute any net investment income
other than short term capital gains at least monthly and any net realized short
term and long term capital gains at least annually. Distributions from capital
gains are made after applying any available capital loss carryovers.
You can choose from three distribution options if made available by your
Financial Institution: (1) reinvest all distributions in additional Fund
shares; (2) receive distributions from net investment
14
<PAGE>
income in cash while reinvesting capital gains distributions in additional
shares; or (3) receive all distributions in cash. You can change your
distribution option by notifying your account administrator in writing. If
your Financial Institution does not offer distribution reinvestment or if you
do not select an option when you open your account, all distributions will be
made in cash.
Each Fund intends to qualify as a "regulated investment company" for federal
income tax purposes and to meet all other requirements that are necessary for
it to be relieved of federal taxes on income and gains it distributes to
shareholders. Each Fund intends to distribute substantially all of its income
and gain on a current basis. If a Fund does not qualify as a regulated
investment company for any taxable year or does not make such distributions,
such Fund will be subject to tax on all of its income and gains.
Distributions by the Funds of their tax-exempt interest income will not be
subject to federal income tax. With respect to the Intermediate Tax Free
Income Fund and Tax Free Income Fund, such distributions will generally be
subject to state and local income taxes, but may be exempt if paid out of
interest on municipal obligations of the state or locality in which the
shareholder resides. To the extent paid out of interest on New York Municipal
Obligations, such distributions of the New York Tax Free Income Fund will
also be exempt from New York State and New York City personal income taxes
for a New York individual resident shareholder. To the extent paid out of
interest on New Jersey Municipal Obligations, such distributions of the New
Jersey Tax Free Income Fund will also be exempt from New Jersey personal
income tax for a New Jersey individual resident shareholder as long as the
Fund is a qualified investment fund. A "qualified investment fund" is any
investment company or trust, or any series of an investment company or trust,
registered with the Securities and Exchange Commission which, for the
calendar year in which a distribution is paid: (a) has no investments other
than interest-bearing obligations, obligations issued at a discount, cash,
cash items, including receivables, and financial options, futures, forward
contracts, or other similar financial instruments related to interest-
bearing obligations, obligations issued at a discount or bond indexes related
thereto; and (b) has not less than 80% of the aggregate principal amount of
all of its investments (excluding cash, cash items, including receivables,
and financial options, futures, forward contracts, or other similar financial
instruments related to interest- bearing obligations, obligations issued at a
discount or bond indexes related thereto) in New Jersey Municipal
Obligations. Qualified investment trusts are also subject to certain filing
requirements.
All other Fund distributions will be taxable to you as ordinary income,
except that any distributions of net long-term capital gains will be taxable
as such, regardless of how long you have held the shares. Distributions will
be treated in the same manner for federal income tax purposes as described
above whether received in cash or in shares
15
<PAGE>
through the reinvestment of distributions.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the next capital gains distribution date. Those
investors purchasing shares just prior to a distribution will be taxed on the
entire amount of the distribution received, even though the net asset value
per share on the date of such purchase reflected the amount of such
distribution.
Early in each calendar year the Funds will notify your Financial Institution
of the amount and tax status of distributions paid for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in the Funds. You should consult your tax adviser to determine the
precise effect of an investment in the Funds on your particular tax situation
(including possible liability for state and local taxes and, for foreign
shareholders, U.S. withholding taxes).
OTHER INFORMATION
CONCERNING THE FUNDS
- --------------------
Your Financial Institution may offer additional services to its customers,
including specialized procedures for the purchase and redemption of Fund shares,
such as pre-authorized or systematic purchase and redemption plans. Each
Financial Institution may establish its own terms and conditions, including
limitations on the amounts of subsequent transactions, with respect to such
services. Certain Financial Institutions may (although they are not required by
the Trust to do so) credit to the accounts of their customers from whom they are
already receiving other fees an amount not exceeding such other fees.
ADMINISTRATOR
Chase acts as the Funds' administrator and is entitled to receive a fee
computed daily and paid monthly at an annual rate equal to 0.10% of each
Fund's average daily net assets.
SUB-ADMINISTRATOR
AND DISTRIBUTOR
Vista Fund Distributors, Inc. ("VFD") acts as the Funds' sub-administrator
and distributor. VFD is a subsidiary of The BISYS Group, Inc. and is
unaffiliated with Chase. For the sub-administrative services it performs, VFD
is entitled to receive a fee from each Fund at an annual rate equal to 0.05%
of the Fund's average daily net assets. VFD has agreed to use a portion of
this fee to pay for certain expenses incurred in connection with organizing
new series of the Trust and certain other ongoing expenses of the Trust. VFD
is located at 101 Park Avenue, New York, New York 10178.
CUSTODIAN
Chase acts as custodian for the Funds and receives compensation under an
agreement with the Trust. Chase may sub-contract for the provision of certain
services to be provided under the custody agreement. Fund securities and cash
may be held by sub-custodian banks if such arrangements are reviewed and
approved by the Trustees.
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<PAGE>
EXPENSES
Each Fund pays the expenses incurred in its operations, including its pro
rata share of expenses of the Trust. These expenses include investment
advisory and administrative fees; the compensation of the Trustees;
registration fees; interest charges; taxes; expenses connected with the
execution, recording and settlement of security transactions; fees and
expenses of the Funds' custodian for all services to the Funds, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of preparing and mailing reports to investors and to
government offices and commissions; expenses of meetings of investors; fees
and expenses of independent accountants, of legal counsel and of any transfer
agent, registrar or dividend disbursing agent of the Trust; insurance
premiums; and expenses of calculating the net asset value of, and the net
income on, shares of the Funds. In addition, each Fund may allocate transfer
agency and certain other expenses by class if additional classes of such Fund
are established in the future. Service providers to a Fund may, from time to
time, voluntarily waive all or a portion of any fees to which they are
entitled.
ORGANIZATION AND
DESCRIPTION OF SHARES
The Funds are portfolios of Mutual Fund Select Trust, an open-end management
investment company organized as a Massachusetts business trust in 1996 (the
"Trust"). The Trust has reserved the right to create and issue additional
series and classes. Each share of a series or class represents an equal
proportionate interest in that series or class with each other share of that
series or class. The shares of each series or class participate equally in
the earnings, dividends and assets of the particular series or class. Shares
have no pre-emptive or conversion rights. Shares when issued are fully paid
and non-assessable, except as set forth below. Shareholders are entitled to
one vote for each whole share held, and each fractional share shall be
entitled to a proportionate fractional vote, except that Trust shares held in
the treasury of the Trust shall not be voted.
Each Fund currently issues a single class of shares but may, in the future,
offer other classes of shares. The categories of investors that are eligible
to purchase shares may differ for each class of Fund shares. In addition,
other classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of
certain other expenses, which will affect the relative performance of the
different classes. Investors may call 1-800-622-4273 to obtain additional
information about other classes of shares of the Funds that may be offered in
the future. Any person entitled to receive compensation for selling or
servicing shares of a Fund may receive different levels of compensation with
respect to one class of shares over another. Shares of each class of a Fund
would generally vote together except when required under federal securities
laws to vote separately on matters that only affect a particular class, such
as the approval of distribution plans for a particular class.
17
<PAGE>
The business and affairs of the Trust are managed under the general direction
and supervision of the Trust's Board of Trustees. The Trust is not required
to hold annual meetings of shareholders but will hold special meetings of
shareholders of all series or classes when in the judgment of the Trustees it
is necessary or desirable to submit matters for a shareholder vote. The
Trustees will promptly call a meeting of shareholders to remove a trustee(s)
when requested to do so in writing by record holders of not less than 10% of
all outstanding shares of the Trust.
Under Massachusetts law, shareholders of such a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
UNIQUE CHARACTERISTICS OF
MASTER/FEEDER FUND STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, each Fund is permitted to invest all of its investable
assets in a separate registered investment company (a "Portfolio"). In that
event, a shareholder's interest in a Fund's underlying investment securities
would be indirect. In addition to selling a beneficial interest to a Fund, a
Portfolio could also sell beneficial interests to other mutual funds or
institutional investors. Such investors would invest in such Portfolio on the
same terms and conditions and would pay a proportionate share of such
Portfolio's expenses. However, other investors in a Portfolio would not be
required to sell their shares at the same public offering price as a Fund,
and might bear different levels of ongoing expenses than the Fund.
Shareholders of the Funds should be aware that these differences may result
in differences in returns experienced in the different funds that invest in a
Portfolio. Such differences in return are also present in other mutual fund
structures.
Smaller funds investing in a Portfolio could be materially affected by the
actions of larger funds investing the Portfolio. For example, if a large fund
were to withdraw from a Portfolio, the remaining funds might experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the Portfolio could become less diverse, resulting in increased
portfolio risk. However, this possibility also exists for traditionally
structured funds which have large or institutional investors. Funds with a
greater pro rata ownership in a Portfolio could have effective voting control
of such Portfolio. Under this master/feeder investment approach, whenever the
Trust was requested to vote on matters pertaining to a Portfolio, the Trust
would hold a meeting of shareholders of the relevant Fund and would cast all
of its votes in the same proportion as did such Fund's shareholders. Shares
of a Fund for which no voting instructions had been received would be voted
in the same proportion as those shares for which voting instructions had been
received. Certain changes in a
18
<PAGE>
Portfolio's objective, policies or restrictions might require the Trust to
withdraw the relevant Fund's interest in such Portfolio. Any such withdrawal
could result in a distribution in kind of portfolio securities (as opposed to
a cash distribution from such Portfolio). A Fund could incur brokerage fees
or other transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less diversified portfolio
of investments or adversely affect the liquidity of the relevant Fund.
State securities regulations generally would not permit the same individuals
who are disinterested Trustees of the Trust to be Trustees of a Portfolio
absent the adoption of procedures by a majority of the disinterested Trustees
of the Trust reasonably appropriate to deal with potential conflicts of
interest up to and including creating a separate Board of Trustees. A Fund
will not adopt a master/feeder structure under which the disinterested
Trustees of the Trust are Trustees of the Portfolio unless the Trustees of
the Trust, including a majority of the disinterested Trustees, adopt
procedures they believed to be reasonably appropriate to deal with any
conflict of interest up to and including creating a separate Board of
Trustees.
If a Fund invests all of its investable assets in a Portfolio, investors in
such Fund will be able to obtain information about whether investment in the
Portfolio might be available through other funds by contacting the Fund at
1-800-622-4273.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass- Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and
generally prohibit banks from issuing, underwriting, selling or distributing
securities. These laws do not prohibit banks or their affiliates from acting
as investment adviser, administrator or custodian to mutual funds or from
purchasing mutual fund shares as agent for a customer. Chase and the Trust
believe that Chase (including its affiliates) may perform the services to be
performed by it as described in this Prospectus without violating such laws.
If future changes in these laws or interpretations required Chase to alter or
discontinue any of these services, it is expected that the Board of Trustees
would recommend alternative arrangements and that investors would not suffer
adverse financial consequences. State securities laws may differ from the
interpretations of banking law described above and banks may be required to
register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial banking
relationships with the issuers of securities purchased on behalf of any of
the Funds, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types
19
<PAGE>
of U.S. Government obligations and municipal obligations. Chase and its
affiliates may sell U.S. Government obligations and municipal obligations to,
and purchase them from, other investment companies sponsored by the Funds'
distributor or affiliates of the distributor. Chase will not invest any Fund
assets in any U.S. Government obligations, municipal obligations or
commercial paper purchased from itself or any affiliate, although under
certain circumstances such securities may be purchased from other members of
an underwriting syndicate in which Chase or an affiliate is a non-principal
member. This restriction may limit the amount or type of U.S. Government
obligations, municipal obligations or commercial paper available to be
purchased by any Fund. Chase has informed the Funds that in making its
investment decisions, it does not obtain or use material inside information
in the possession of any other division or department of Chase, including the
division that performs services for the Trust as custodian, or in the
possession of any affiliate of Chase. Shareholders of the Funds should be
aware that, subject to applicable legal or regulatory restrictions, Chase and
its affiliates may exchange among themselves certain information about the
shareholder and his account. Transactions with affiliated broker-dealers will
only be executed on an agency basis in accordance with applicable federal
regulations.
PERFORMANCE
INFORMATION
- -----------
Each Fund's investment performance may from time to time be included in
advertisements about the Fund. "Yield" is calculated by dividing the annualized
net investment income per share during a recent 30-day period by the maximum
public offering price per share on the last day of that period.
"Total return" for the one-, five- and ten-year periods (or for the life of a
class, if shorter) through the most recent calendar quarter represents the
average annual compounded rate of return on an investment of $1,000 in a Fund
invested at the public offering price. Total return may also be presented for
other periods.
All performance data is based on each Fund's past investment results and does
not predict future performance. The performance data for each Fund prior to
January 1, 1997 includes the historical performance of a predecessor common
trust fund, adjusted to reflect historical expenses at the levels indicated
(absent reimbursements) in the Expense Summary for that Fund. These
predecessor common trust funds were not registered under the Investment Company
Act of 1940 (the "1940 Act") and thus were not subject to certain investment
restrictions that are imposed by the 1940 Act. If the common trust funds had
been registered under the 1940 Act, their performance might have been adversely
affected. Investment performance, which will vary, is based on many factors,
including market conditions, the composition of a Fund's portfolio and a Fund's
20
<PAGE>
operating expenses. Investment performance also often reflects the risks
associated with a Fund's investment objectives and policies.
These factors should be considered when comparing a Fund's investment results
to those of other mutual funds and other investment vehicles. Quotation of
investment performance for any period when a fee waiver or expense limitation
was in effect will be greater than if the waiver or limitation had not been
in effect. Each Fund's performance may be compared to other mutual funds,
relevant indices and rankings prepared by independent services. See the SAI.
21
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<PAGE>
[This Page Intentionally Left Black]
<PAGE>
TRANSFER AGENT AND DIVIDEND PAYING AGENT
DST Systems, Inc.
210 West 10th Street
Kansas City, MO 64105
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
[VISTA LOGO]
101 Park Avenue
New York, 10178
INLC-1-796CX
<PAGE>
Subject to Completion--Dated October 2, 1996
STATEMENT OF
ADDITIONAL INFORMATION
__________, 1996
VISTA[SM] SELECT INTERMEDIATE TAX FREE INCOME FUND
VISTA[SM] SELECT TAX FREE INCOME FUND
VISTA[SM] SELECT NEW YORK TAX FREE INCOME FUND
VISTA[SM] SELECT NEW JERSEY TAX FREE INCOME FUND
101 Park Avenue, New York, New York 10178
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses offering
shares of Vista Select Intermediate Tax Free Income Fund, Vista Select Tax
Free Income Fund, Vista Select New York Tax Free Income Fund and Vista Select
New Jersey Tax Free Income Fund. Any reference to a "Prospectus" in this
Statement of Additional Information is a reference to one or more of the
foregoing Prospectuses, as the context requires. Copies of each Prospectus
may be obtained by an investor without charge by contacting Vista Fund
Distributors, Inc. ("VFD"), the Funds' distributor (the "Distributor"), at
the above-listed address.
This Statement of Additional Information is NOT a prospectus and is
authorized for distribution to prospective investors only if preceded or
accompanied by an effective prospectus.
For more information about the Funds, simply call or write the Vista Select
Service Center at:
1-800-622-4273
Vista Select Service Center
P.O. Box 419392
Kansas City, MO 64141
MFT-SAI
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any state in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such state.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
- ---------------------------------------------------------------------------------------------------
<S> <C>
The Funds 3
Investment Policies and Restrictions 3
Performance Information 16
Determination of Net Asset Value 19
Purchases and Redemptions 19
Tax Matters 20
Management of the Trust and Funds 26
Independent Accountants 32
General Information 32
Appendix A--Description of Certain Obligations Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities A-1
Appendix B--Description of Ratings B-1
Appendix C--Special Investment Considerations Relating to New York Municipal Obligations C-1
Appendix D--Special Investment Considerations Relating to New Jersey Municipal Obligations D-1
</TABLE>
2
<PAGE>
THE FUNDS
Mutual Fund Select Trust (the "Trust") is an open-end management
investment company which was organized as a business trust under the laws of
the Commonwealth of Massachusetts on October 1, 1996. The Trust presently
consists of 4 separate series (the "Funds"). All of the Funds are
non-diversified, as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act"). The shares of the Funds are collectively
referred to in this Statement of Additional Information as the "Shares."
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ("Chase")
is the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the "Administrator") and supervises the overall administration
of the Trust, including the Funds. A majority of the Trustees of the Trust
are not affiliated with the investment adviser or sub- advisers.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies
The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus. As used in this
Statement of Additional Information, with respect to those Funds and policies
for which they apply, the terms "Municipal Obligations" and "tax-exempt
securities" have the meanings given to them in the relevant Fund's
Prospectus. For descriptions of the securities ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch
Investors Service, Inc. ("Fitch"), see Appendix B. For a general discussion
of special investment considerations relating to investing in (i) New York
and (ii) New Jersey Municipal Obligations, see Appendices C and D,
respectively.
The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality--that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important
in the analysis is the relationship of a bond's yield and its maturity, in
which the managers evaluate the risks of investing in long-term
higher-yielding securities. Managers also use a computer model to simulate
possible fluctuations in prices and yields if interest rates change. Another
step in the analysis is comparing yields on different types of securities to
determine relative risk/reward profiles.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including U.S. Treasury bills (maturities
of one year or less), U.S. Treasury notes (maturities of one to ten years)
and U.S. Treasury bonds (generally maturities of greater than ten years); and
(2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow
any amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain
obligations of the U.S. Government agency or instrumentality or (d) the
credit of the agency or instrumentality. Agencies and instrumentalities of
the U.S. Government include but are not limited to: Federal Land Banks,
Federal Financing Banks, Banks for Cooperatives, Federal Intermediate Credit
Banks, Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, Student Loan Marketing
Association, United States Postal Service, Chrysler Corporate Loan Guarantee
Board, Small Business Administration, Tennessee Valley Authority and any
other enterprise established or sponsored by the U.S. Government. Certain
U.S. Government Securities, including U.S. Treasury bills, notes and bonds,
Government National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. Government Securities are issued or guaranteed by
federal agencies or government sponsored enterprises and are not supported by
the full faith and credit of the United States. These securities include
obligations that are supported by the
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right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of
the Federal National Mortgage Association or Federal Home Loan Mortgage
Corporation. Agencies and instrumentalities issuing such obligations include
the Farm Credit System Financial Assistance Corporation, the Federal
Financing Bank, The General Services Administration, Federal Home Loan Banks,
the Tennessee Valley Authority and the Student Loan Marketing Association.
For a description of certain obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small
Business Administration, Federal Aviation Administration, Department of
Defense, Bureau of Indian Affairs and Private Export Funding Corporation,
which often provide higher yields than are available from the more common
types of government-backed instruments. However, such specialized instruments
may only be available from a few sources, in limited amounts, or only in very
large denominations; they may also require specialized capability in
portfolio servicing and in legal matters related to government guarantees.
While they may frequently offer attractive yields, the limited-activity
markets of many of these securities means that, if a Fund were required to
liquidate any of them, it might not be able to do so advantageously;
accordingly, each Fund investing in such securities intends normally to hold
such securities to maturity or pursuant to repurchase agreements, and would
treat such securities (including repurchase agreements maturing in more than
seven days) as illiquid for purposes of its limitation on investment in
illiquid securities.
Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are
insured by either the Bank Insurance Fund or the Savings and Loan Insurance
Fund of the Federal Deposit Insurance Corporation, and foreign banks
(including their U.S. branches) having total assets in excess of $10 billion
(or the equivalent in other currencies), and such other U.S. and foreign
commercial banks which are judged by the advisers to meet comparable credit
standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against
funds deposited in the bank and is either interest-bearing or purchased on a
discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank,
which unconditionally guarantees to pay the draft at its face amount on the
maturity date. Fixed time deposits are obligations of branches of United
States banks or foreign banks which are payable at a stated maturity date and
bear a fixed rate of interest. Although fixed time deposits do not have a
market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Fixed time deposits
subject to withdrawal penalties and with respect to which a Fund cannot
realize the proceeds thereon within seven days are deemed "illiquid" for the
purposes of its restriction on investments in illiquid securities. Deposit
notes are notes issued by commercial banks which generally bear fixed rates
of interest and typically have original maturities ranging from eighteen
months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may
be made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit
losses arising from possible financial difficulties of borrowers might affect
a bank's ability to meet its obligations. Bank obligations may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation. Investors
should also be aware that securities of foreign banks and foreign branches of
United States banks may involve foreign investment risks in addition to those
relating to domestic bank obligations.
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Repurchase Agreements. A Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers
believed creditworthy, and only if fully collateralized by securities in
which such Fund is permitted to invest. Under the terms of a typical
repurchase agreement, a Fund would acquire an underlying debt instrument for
a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Fund to resell
the instrument at a fixed price and time, thereby determining the yield
during the Fund's holding period. This procedure results in a fixed rate of
return insulated from market fluctuations during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements are considered under the 1940 Act to be loans
collateralized by the underlying securities. All repurchase agreements
entered into by a Fund will be fully collateralized at all times during the
period of the agreement in that the value of the underlying security will be
at least equal to 102% of the amount of the loan, including the accrued
interest thereon, and the Fund or its custodian or sub-custodian will have
possession of the collateral, which the Board of Trustees believes will give
it a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a
collateralized loan has not been conclusively established. This might become
an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities
would not be owned by a Fund, but would only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, a Fund may suffer
time delays and incur costs in connection with the disposition of the
collateral. The Board of Trustees believes that the collateral underlying
repurchase agreements may be more susceptible to claims of the seller's
creditors than would be the case with securities owned by a Fund. Repurchase
agreements will give rise to income which will not qualify as tax-exempt
income when distributed by a Fund. Repurchase agreements maturing in more
than seven days are treated as illiquid for purposes of the Funds'
restrictions on purchases of illiquid securities. Repurchase agreements are
also subject to the risks described below with respect to stand-by
commitments.
Reverse Repurchase Agreements. Reverse repurchase agreements involve sales
of portfolio securities of a Fund to member banks of the Federal Reserve
System or securities dealers believed creditworthy, concurrently with an
agreement by such Fund to repurchase the same securities at a later date at a
fixed price which is generally equal to the original sales price plus
interest. A Fund retains record ownership and the right to receive interest
and principal payments on the portfolio security involved.
Forward Commitments. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although short-term investments will normally be in
tax-exempt securities or Municipal Obligations, short-term taxable securities
or obligations may be purchased if suitable short-term tax-exempt securities
or Municipal Obligations are not available. When a commitment to purchase a
security on a forward commitment basis is made, procedures are established
consistent with the General Statement of Policy of the Securities and
Exchange Commission concerning such purchases. Since that policy currently
recommends that an amount of the respective Fund's assets equal to the amount
of the purchase be held aside or segregated to be used to pay for the
commitment, a separate account of such Fund consisting of cash, cash
equivalents or high quality debt securities equal to the amount of such
Fund's commitments will be established at such Fund's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of
such securities declines, additional cash, cash equivalents or highly liquid
securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis
may involve more risk than other types of purchases. Securities purchased on
a forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception
of the creditworthiness of the issuer and changes,
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real or anticipated, in the level of interest rates. Purchasing securities on
a forward commitment basis can involve the risk that the yields available in
the market when the delivery takes place may actually be higher or lower than
those obtained in the transaction itself. On the settlement date of the
forward commitment transaction, the respective Fund will meet its obligations
from then available cash flow, sale of securities held in the separate
account, sale of other securities or, although it would not normally expect
to do so, from sale of the forward commitment securities themselves (which
may have a value greater or lesser than such Fund's payment obligations). The
sale of securities to meet such obligations may result in the realization of
capital gains or losses, which are not exempt from federal, state or local
taxation.
To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance
with procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Rule
144A provides an exemption from the registration requirements of the
Securities Act for the resale of certain restricted securities to qualified
institutional buyers. Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to institutional
investors such as a Fund who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale of Section
4(2) paper by the purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid
market for Rule 144A securities or Section 4(2) paper will develop or be
maintained. The Trustees have adopted policies and procedures for the purpose
of determining whether securities that are eligible for resale under Rule
144A and Section 4(2) paper are liquid or illiquid for purposes of the
limitation on investment in illiquid securities. Pursuant to those policies
and procedures, the Trustees have delegated to the advisers the determination
as to whether a particular instrument is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security
and the number of potential purchasers, dealer undertakings to make a market
in the security, the nature of the security and the time needed to dispose of
the security. The Trustees will periodically review the Funds' purchases and
sales of Rule 144A securities and Section 4(2) paper.
Stand-by Commitments. When a Fund purchases securities it may also acquire
stand-by commitments with respect to such securities. Under a stand-by
commitment, a bank, broker-dealer or other financial institution agrees to
purchase at a Fund's option a specified security at a specified price.
The stand-by commitments that may be entered into by the Funds are subject
to certain risks, which include the ability of the issuer of the commitment
to pay for the securities at the time the commitment is exercised, the fact
that the commitment is not marketable by a Fund, and that the maturity of the
underlying security will generally be different from that of the commitment.
Floating and Variable Rate Securities; Participation
Certificates. Floating and variable rate demand instruments permit the holder
to demand payment upon a specified number of days' notice of the unpaid
principal balance plus accrued interest either from the issuer or by drawing
on a bank letter of credit, a guarantee or insurance issued with respect to
such instrument. Investments by the Funds in floating or variable rate
securities normally will involve industrial development or revenue bonds that
provide for a peri-
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odic adjustment in the interest rate paid on the obligation and may, but need
not, permit the holder to demand payment as described above. While there is
usually no established secondary market for issues of these types of
securities, the dealer that sells an issue of such security frequently will
also offer to repurchase the securities at any time at a repurchase price
which varies and may be more or less than the amount the holder paid for
them.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term
rates, such as Treasury Bills or LIBOR (London Interbank Offered Rate), as
provided in the respective instruments. The Funds will decide which floating
or variable rate securities to purchase in accordance with procedures
prescribed by Board of Trustees of the Trust in order to minimize credit
risks.
The securities in which the Funds may be invested include participation
certificates, issued by a bank, insurance company or other financial
institution, in securities owned by such institutions or affiliated
organizations ("Participation Certificates"). A Participation Certificate
gives a Fund an undivided interest in the security in the proportion that the
Fund's participation interest bears to the total principal amount of the
security and generally provides the demand feature described below. Each
Participation Certificate is backed by an irrevocable letter of credit or
guaranty of a bank (which may be the bank issuing the Participation
Certificate, a bank issuing a confirming letter of credit to that of the
issuing bank, or a bank serving as agent of the issuing bank with respect to
the possible repurchase of the certificate of participation) or insurance
policy of an insurance company that the Board of Trustees of the Trust has
determined meets the prescribed quality standards for a particular Fund.
A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal
amount of the Fund's participation interest in the security, plus accrued
interest. The institutions issuing the Participation Certificates would
retain a service and letter of credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the Participation Certificates
were purchased by a Fund. The total fees would generally range from 5% to 15%
of the applicable prime rate or other short-term rate index. With respect to
insurance, a Fund will attempt to have the issuer of the Participation
Certificate bear the cost of any such insurance, although the Funds retain
the option to purchase insurance if deemed appropriate. Obligations that have
a demand feature permitting a Fund to tender the obligation to a foreign bank
may involve certain risks associated with foreign investment. A Fund's
ability to receive payment in such circumstances under the demand feature
from such foreign banks may involve certain risks such as future political
and economic developments, the possible establishments of laws or
restrictions that might adversely affect the payment of the bank's
obligations under the demand feature and the difficulty of obtaining or
enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on
an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. Participation Certificates will only be
purchased by a Fund if, in the opinion of counsel to the issuer, interest
income on such instruments will be tax-exempt when distributed as dividends
to shareholders of such Fund.
Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the
underlying floating or variable rate securities may change with changes in
interest rates generally, the floating or variable rate nature of the
underlying floating or variable rate securities should minimize changes in
value of the instruments. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation
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and the risk of potential capital depreciation is less than would be the case
with a portfolio of fixed rate securities. A Fund's portfolio may contain
floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest
on such floating or variable rate securities may fluctuate; to the extent it
does, increases or decreases in value may be somewhat greater than would be
the case without such limits. Because the adjustment of interest rates on the
floating or variable rate securities is made in relation to movements of the
applicable banks' "prime rates" or other short-term rate adjustment indices,
the floating or variable rate securities are not comparable to long-term
fixed rate securities. Accordingly, interest rates on the floating or
variable rate securities may be higher or lower than current market rates for
fixed rate obligations of comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of (i)
the notice period required before a Fund is entitled to receive payment of
the principal amount of the security upon demand or (ii) the period remaining
until the security's next interest rate adjustment. If variable rate
securities are not redeemed through the demand feature, they mature on a
specified date which may range up to thirty years from the date of issuance.
Zero Coupon and Stripped Obligations. The principal and interest
components of United States Treasury bonds with remaining maturities of
longer than ten years are eligible to be traded independently under the
Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program. Under the STRIPS program, the principal and interest
components are separately issued by the United States Treasury at the request
of depository financial institutions, which then trade the component parts
separately. The interest component of STRIPS may be more volatile than that
of United States Treasury bills with comparable maturities.
Zero coupon obligations are sold at a substantial discount from their
value at maturity and, when held to maturity, their entire return, which
consists of the amortization of discount, comes from the difference between
their purchase price and maturity value. Because interest on a zero coupon
obligation is not distributed on a current basis, the obligation tends to be
subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying securities with similar maturities.
The value of zero coupon obligations appreciates more than such ordinary
interest-paying securities during periods of declining interest rates and
depreciates more than such ordinary interest-paying securities during periods
of rising interest rates. Under the stripped bond rules of the Internal
Revenue Code of 1986, as amended, investments in zero coupon obligations
will result in the accrual of interest income on such investments in advance of
the receipt of the cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the
coupon payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury
Receipts, are examples of stripped U.S. Treasury securities separated into
their component parts through such custodial arrangements.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security
or other instrument which derives its value from the value or performance of
other instruments or assets, interest or currency exchange rates, or indexes.
For instance, derivatives include futures, options, forward contracts,
structured notes and various other over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position. Second,
to substitute for
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another security particularly where it is quicker, easier and less expensive
to invest in derivatives. Lastly, to speculate or enhance portfolio
performance. When used prudently, derivatives can offer several benefits,
including easier and more effective hedging, lower transaction costs, quicker
investment and more profitable use of portfolio assets. However, derivatives
also have the potential to significantly magnify risks, thereby leading to
potentially greater losses for a Fund.
Each Fund may invest its assets in derivative and related instruments
subject only to the Fund's investment objective and policies and the
requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to
avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Funds
invest may be particularly sensitive to changes in prevailing interest rates
or other economic factors, and--like other investments of the Funds-- the
ability of a Fund to successfully utilize these instruments may depend in
part upon the ability of the advisers to forecast interest rates and other
economic factors correctly. If the advisers accurately forecast such factors
and have taken positions in derivative or similar instruments contrary to
prevailing market trends, the Funds could be exposed to the risk of a loss.
The Funds might not employ any or all of the strategies described herein, and
no assurance can be given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement
the Funds' current prospectuses as well as provide useful information to
prospective investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no
guarantee that there will be a correlation between price movements in a
hedging vehicle and in the portfolio assets being hedged. An incorrect
correlation could result in a loss on both the hedged assets in a Fund and
the hedging vehicle so that the portfolio return might have been greater had
hedging not been attempted. The advisers may accurately forecast interest
rates, market values or other economic factors in utilizing a derivatives
strategy. In such a case, the Fund may have been in a better position had it
not entered into such strategy. Hedging strategies, while reducing risk of
loss, can also reduce the opportunity for gain. In other words, hedging
usually limits both potential losses as well as potential gains. Strategies
not involving hedging may increase the risk to a Fund. Certain strategies,
such as yield enhancement, can have speculative characteristics and may
result in more risk to a Fund than hedging strategies using the same
instruments. There can be no assurance that a liquid market will exist at a
time when a Fund seeks to close out an option, futures contract or other
derivative or related position. Many exchanges and boards of trade limit the
amount of fluctuation permitted in option or futures contract prices during a
single day; once the daily limit has been reached on particular contract, no
trades may be made that day at a price beyond that limit. In addition,
certain instruments are relatively new and without a significant trading
history. As a result, there is no assurance that an active secondary market
will develop or continue to exist. Finally, over-the-counter instruments
typically do not have a liquid market. Lack of a liquid market for any reason
may prevent a Fund from liquidating an unfavorable position. Activities of
large traders in the futures and securities markets involving arbitrage,
"program trading," and other investment strategies may cause price
distortions in these markets. In certain instances, particularly those
involving over-the-counter transactions, forward contracts there is a greater
potential that a counterparty or broker may default or be unable to perform
on its commitments. In the event of such a default, a Fund may experience a
loss.
Specific Uses and Strategies. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Funds.
Options on Securities and Securities Indexes. The Funds may PURCHASE, SELL
or EXERCISE call and put options on (i) securities, (ii) securities indexes,
and (iii) debt instruments.
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Although in most cases these options will be exchange-traded, the Funds may
also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such, over-
the-counter options generally have much less market liquidity and carry the risk
of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an underlying
or related security against a substantial decline in market value. One purpose
of purchasing call options is to protect against substantial increases in prices
of securities a Fund intends to purchase pending its ability to invest in such
securities in an orderly manner. A Fund may also use combinations of options to
minimize costs, gain exposure to markets or take advantage of price disparities
or market movements. For example, a Fund may sell put or call options it has
previously purchased or purchase put or call options it has previously sold.
These transactions may result in a net gain or loss depending on whether the
amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option which is sold. A Fund may write
a call or put option in order to earn the related premium from such
transactions. Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held
by the fund) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities
above the exercise price, but has retained the risk of loss should the price
of the underlying securities decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer
of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities at the
exercise price. The Funds will not write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund
will lose its entire investment in the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements
in a related security, the price of the put or call option may move more or
less than the price of the related security. There can be no assurance that a
liquid market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the
options markets, a Fund may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Funds may purchase
or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures
contracts ("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For
example, a Fund may sell a futures contract--or buy a futures option--to
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where a Fund intends to
acquire an instrument or enter into a position. For example, a Fund may
purchase a futures contract--or buy a futures option--to gain immediate
exposure in a market or otherwise offset increases in the purchase price of
securities or currencies to be acquired in the future. Futures options may
also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks
in certain
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instances. Funds may engage in cross-hedging by purchasing or selling futures
or options on a security different from the security position being hedged to
take advantage of relationships between the two securities.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
Forward Contracts. A Fund may also use forward contracts to hedge against
changes in interest- rates, increase exposure to a market or otherwise take
advantage of such changes. An interest-rate forward contract involves the
obligation to purchase or sell a specific debt instrument at a fixed price at
a future date.
Interest Rate Transactions. The Funds may employ interest rate management
techniques, including transactions in options (including yield curve
options), futures, options on futures, forward exchange contracts, and
interest rate swaps.
A Fund will only enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Interest rate swaps do
not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited
to the net amount of interest payments that a Fund is contractually obligated
to make. If the other party to and interest rate swap defaults, a Fund's risk
of loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. Since interest rate swaps are individually
negotiated, each Fund expects to achieve an acceptable degree of correlation
between its portfolio investments and its interest rate swap position.
A Fund may enter into interest rate swaps to the maximum allowed limits
under applicable law. A Fund will typically use interest rate swaps to
shorten the effective duration of its portfolio. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments.
Structured Products. The Funds may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured products to create securities with
different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured products is dependent on the extent of the cash
flow on the underlying instruments. A Fund may invest in structured products
which represent derived investment positions based on relationships among
different markets or asset classes.
The Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by
a formula to the price of an underlying instrument. Inverse floaters have
coupon rates that vary inversely at a multiple of a designated floating rate
(which typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost
of Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon
rate while any drop in the reference rate of an inverse floater causes an
increase in the coupon rate. A spread trade is an investment position
relating to a difference in the prices or interest rates of two securities
where the value of the investment position is determined by movements in the
difference between the prices or interest rates, as the case may be, of the
respective securities. When a Fund invests in notes linked to the price of an
underlying instrument, the price of the underlying security is determined by
a multiple (based on a formula) of the price of such under-
11
<PAGE>
lying security. A structured product may be considered to be leveraged to the
extent its interest rate varies by a magnitude that exceeds the magnitude of
the change in the index rate of interest. Because they are linked to their
underlying markets or securities, investments in structured products
generally are subject to greater volatility than an investment directly in
the underlying market or security. Total return on the structured product is
derived by linking return to one or more characteristics of the underlying
instrument. Because certain structured products of the type in which the Fund
anticipates it will invest may involve no credit enhancement, the credit risk
of those structured products generally would be equivalent to that of the
underlying instruments. A Fund is permitted to invest in a class of
structured products that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated structured products typically
have higher yields and present greater risks than unsubordinated structured
products. Although a Fund's purchase of subordinated structured products
would have similar economic effect to that of borrowing against the
underlying securities, the purchase will not be deemed to be leverage for
purposes of a Fund's fundamental investment limitation related to borrowing
and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Income Funds
invest may be deemed illiquid and subject to their limitation on illiquid
investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
In addition, because structured products are typically sold in private
placement transactions, there currently is no active trading market for
structured products.
Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a segregated
account with such Fund's custodian so that the amount so segregated, plus the
initial deposit and variation margin held in the account of its broker, will
at all times equal the value of the futures contract, thereby insuring that
the use of such futures is unleveraged.
The Funds' ability to engage in the transactions described herein may be
limited by the current federal income tax requirement that a Fund derive less
than 30% of its gross income from the sale or other disposition of securities
held for less than three months.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures contracts
held by a Fund not exceed 50% of the market value of its total assets.
Neither this restriction nor any policy with respect to the above-referenced
restrictions, would be changed by the Board of Trustees without considering
the policies and concerns of the various federal and state regulatory
agencies.
Investment Restrictions
The Funds have adopted the following investment restrictions which may not
be changed without approval by a "majority of the outstanding shares" of a
Fund which, as used in this Statement of Additional Information, means the
vote of the lesser of (i) 67% or more of the shares of a Fund present at a
meeting,
12
<PAGE>
if the holders of more than 50% of the outstanding shares of a Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of a Fund.
Each Fund may not:
(1) borrow money, except that each Fund may borrow money for
temporary or emergency purposes, or by engaging in reverse repurchase
transactions, in an amount not exceeding 33-1/3% of the value of its total
assets at the time when the loan is made and may pledge, mortgage or
hypothecate no more than 1/3 of its net assets to secure such borrowings.
Any borrowings representing more than 5% of a Fund's total assets must be
repaid before the Fund may make additional investments;
(2) make loans, except that each Fund may: (i) purchase and hold
debt instruments (including without limitation, bonds, notes, debentures
or other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, with respect to a Fund's
permissible futures and options transactions in U.S. Government
securities, positions in options and futures shall not be subject to this
restriction;
(4) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments but this shall not
prevent a Fund from (i) purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities or (ii) engaging in forward purchases or sales of
foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or
in marketable securities of companies engaged in such activities are not
hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except
that (a) a Fund may engage in transactions that may result in the issuance
of senior securities to the extent permitted under applicable regulations
and interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, a Fund may borrow money as authorized by the
1940 Act. For purposes of this restriction, collateral arrangements with
respect to a Fund's permissible options and futures transactions,
including deposits of initial and variation margin, are not considered to
be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as
a Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security.
In addition, as a matter of fundamental policy, notwithstanding any other
investment policy or restriction, a Fund may seek to achieve its investment
objective by investing all of its investable assets in another investment
company having substantially the same investment objective and policies as
the Fund. For pur-
13
<PAGE>
poses of investment restriction (5) above, real estate includes Real Estate
Limited Partnerships. For purposes of investment restriction (3) above,
industrial development bonds, where the payment of principal and interest is
the ultimate responsibility of companies within the same industry, are
grouped together as an "industry." Investment restriction (3) above, however,
is not applicable to investments by a Fund in municipal obligations where the
issuer is regarded as a state, city, municipality or other public authority
since such entities are not members of any "industry."
In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:
(1) Each Fund may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of any issuer.
(2) Each Fund may not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund.
(3) Each Fund may not purchase or sell interests in oil, gas or
mineral leases.
(4) Each Fund may not invest more than 15% of its net assets in
illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call
option or any combination thereof, provided that this shall not prevent
(i) the writing, purchasing or selling of puts, calls or combinations
thereof with respect to portfolio securities or (ii) with respect to a
Fund's permissible futures and options transactions, the writing,
purchasing, ownership, holding or selling of futures and options positions
or of puts, calls or combinations thereof with respect to futures.
(6) Each Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of
its total assets in the securities of other investment companies.
It is the Trust's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Trust has been
advised that the staff of the Securities and Exchange Commission's Division
of Investment Management does not consider these to be United States
Government securities, as defined under the 1940 Act.
For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
In order to permit the sale of its shares in certain states, a Fund may
make commitments more restrictive that the investment policies and
limitations described above and in its Prospectus. Should a Fund determine
that any such commitment is no longer in its best interests, it will revoke
the commitment by terminating sales of its shares in the state involved.
In order to comply with certain federal and state statutes and regulatory
policies, as a matter of operating policy, each Fund will not invest for the
purpose of exercising control or management.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time, later changes in
percentage or ratings resulting from any cause other than actions by a Fund
will not be considered a violation. If the value of a Fund's holdings of
illiquid securities at any time
14
<PAGE>
exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees
will consider what actions, if any, are appropriate to maintain adequate
liquidity.
Portfolio Transactions and Brokerage Allocation
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such
Fund and who is appointed and supervised by senior officers of such adviser
or sub-adviser. Changes in the Funds' investments are reviewed by the Board
of Trustees. The Funds' portfolio managers may serve other clients of the
advisers in a similar capacity. Money market instruments are generally
purchased in principal transactions.
The frequency of a Fund's portfolio transactions--the portfolio turnover
rate--will vary from year to year depending upon market conditions. Because a
high turnover rate may increase transaction costs and the possibility of
taxable short-term gains, the advisers will weigh the added costs of
short-term investment against anticipated gains. Each Fund will engage in
portfolio trading if its advisers believe a transaction, net of costs
(including custodian charges), will help it achieve its investment objective.
For the fiscal year ending August 31, 1997, the annual rate of portfolio
turnover for each Fund is expected not to exceed 200%.
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs
or proceeds being the most favorable to the Funds. In assessing the best
overall terms available for any transaction, the adviser and sub-advisers
consider all factors they deem relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, research services provided to
the adviser or sub-advisers, and the reasonableness of the commissions, if
any, both for the specific transaction and on a continuing basis. The adviser
and sub- advisers are not required to obtain the lowest commission or the
best net price for any Fund on any particular transaction, and are not
required to execute any order in a fashion either preferential to any Fund
relative to other accounts they manage or otherwise materially adverse to
such other accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case
of securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or markdown),
the adviser or sub- adviser to a Fund normally seeks to deal directly with
the primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
adviser or sub-adviser on the tender of a Fund's portfolio securities in
so-called tender or exchange offers. Such soliciting dealer fees are in
effect recaptured for the Funds by the adviser and sub-advisers. At present,
no other recapture arrangements are in effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for
effecting a securities transaction for the Funds in excess of the amount
other broker-dealers would have charged for the transaction if they determine
in good faith that the total commission is reasonable in relation to the
value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either that particular transaction or their
overall responsibilities to accounts over which they exercise investment
discretion. Not all of such services are useful or of value in advising the
Funds. The adviser and sub-advisers report to the Board of
15
<PAGE>
Trustees regarding overall commissions paid by the Funds and their
reasonableness in relation to the benefits to the Funds. The term "brokerage
and research services" includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or of purchasers or sellers of securities,
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used
to obtain such services, the brokerage commissions paid by the Funds will
exceed those that might otherwise be paid by an amount which cannot be
presently determined. Such services would be useful and of value to the
adviser or sub-advisers in serving one or more of their other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to the adviser and sub-advisers in carrying out
their obligations to the Funds. While such services are not expected to
reduce the expenses of the adviser or sub-advisers, they would, through use
of the services, avoid the additional expenses which would be incurred if
they should attempt to develop comparable information through their own
staff.
In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers'
other clients. Investment decisions for the Funds and for other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though
it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. In executing portfolio
transactions for a Fund, the adviser or sub-advisers may, to the extent
permitted by applicable laws and regulations, but shall not be obligated to,
aggregate the securities to be sold or purchased with those of other Funds or
their other clients if, in the adviser's or sub-advisers' reasonable
judgment, such aggregation (i) will result in an overall economic benefit to
the Fund, taking into consideration the advantageous selling or purchase
price, brokerage commission and other expenses, and trading requirements, and
(ii) is not inconsistent with the policies set forth in the Trust's
registration statement and the Fund's Prospectus and Statement of Additional
Information. In such event, the adviser or a sub-adviser will allocate the
securities so purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its fiduciary
obligations to the Fund and such other clients. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as a Fund is concerned. However, it is believed that the
ability of the Funds to participate in volume transactions will generally
produce better executions for the Funds.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based
on past investment results, it should not be considered as an indication or
representation of the performance of a Fund in the future. From time to time,
the performance and yield of a Fund may be quoted and compared to those of
other mutual funds with similar investment objectives, unmanaged investment
accounts, including savings accounts, or other similar products and to stock
or other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of
mutual funds. For example, the performance of a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. or Morningstar Mutual Funds on
Disc, widely recognized independent services which monitor the performance of
mutual funds. Performance and yield data as reported
16
<PAGE>
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times,
or in local or regional publications, may also be used in comparing the
performance and yield of a Fund. A Fund's performance may be compared with
indices such as the Lehman Brothers Government/Corporate Bond Index, the
Lehman Brothers Government Bond Index, the Lehman Government Bond 1-3 Year
Index and the Lehman Aggregate Bond Index; the S&P 500 Index, the Dow Jones
Industrial Average or any other commonly quoted index of common stock prices;
and the Russell 2000 Index and the NASDAQ Composite Index. Additionally, a
Fund may, with proper authorization, reprint articles written about such Fund
and provide them to prospective shareholders.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in
a Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period.
One-, five-, and ten-year periods will be shown, unless the Fund has been in
existence for a shorter-period.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values of shares of a
Fund will vary based on market conditions, the current market value of the
securities held by a Fund and changes in the Fund's expenses. The advisers,
the Administrator, the Distributor and other service providers may
voluntarily waive a portion of their fees on a month- to-month basis. In
addition, the Distributor may assume a portion of a Fund's operating expenses
on a month- to-month basis. These actions would have the effect of increasing
the net income (and therefore the yield and total rate of return) of shares
of a Fund during the period such waivers are in effect. These factors and
possible differences in the methods used to calculate the yields and total
rates of return should be considered when comparing the yields or total rates
of return of shares of a Fund to yields and total rates of return published
for other investment companies and other investment vehicles.
In connection with the conversion of various common trust funds maintained
by Chase into the Vista Select funds (the "CTF Conversion"), the Intermediate
Tax Free Income Fund was established to receive the assets of The
Intermediate-Term Tax-Exempt Bond Fund of Chemical Bank, the New Jersey Tax
Free Income Fund was established to receive the assets of The New Jersey
Municipal Bond Fund of Chemical Bank, the New York Tax Free Income Fund was
established to receive the assets of the New York Tax-Exempt Income Fund of
The Chase Manhattan Bank and the Tax Free Income Fund was established to
receive the assets of The Tax-Exempt Bond Fund of Chemical Bank and the
Tax-Exempt Income Fund of The Chase Manhattan Bank.
Performance results presented for the Intermediate Tax Free Income Fund,
New Jersey Tax Free Income Fund, New York Tax Free Income Fund and Tax Free
Income Fund will be based upon the performance of The Intermediate-Term
Tax-Exempt Bond Fund of Chemical Bank, The New Jersey Municipal Bond Fund of
Chemical Bank, the New York Tax-Exempt Income Fund of The Chase Manhattan
Bank and The Tax-Exempt Bond Fund of Chemical Bank, respectively, for periods
prior to the consummation of the CTF Conversion.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Fund.
Advertisements for the Vista funds may include references to the asset
size of other financial products made available by Chase, such as the
offshore assets of other funds.
Total Rate of Return
A Fund's total rate of return for any period will be calculated by (a)
dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such
period with respect to a share
17
<PAGE>
held at the beginning of such period and with respect to shares purchased
with such dividends and capital gains distributions, by (ii) the public
offering price per share on the first day of such period, and (b) subtracting
1 from the result. The average annual rate of return quotation will be
calculated by (x) adding 1 to the period total rate of return quotation as
calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from
theresult.
The average annual total rate of return figures for the following Funds,
reflecting the initial investment and reinvested dividends (but excluding the
effects of any applicable sales charges) for the one, five and ten year
periods ended August 31, 1996, and for the period from commencement of
business operations of each such Fund to , 1996, were as follows:
<TABLE>
<CAPTION>
One Five Ten Since Date of
Fund Year Years Years Inception Inception
- ---- --------- ---------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Intermediate Tax Free Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Tax Free Income Fund
</TABLE>
- -------------
Performance presented in the table above and in each table that follows the
Funds is based upon the performance of their respective predecessor funds (which
had fiscal years ending on , 1996) for periods prior to the consummation of the
CTF Reorganization. Performance presented for each of these Funds for periods
prior to the consummation of the CTF Reorganization is based on the historical
performance of shares of its predecessor fund, adjusted to reflect historical
expenses at the levels indicated (absent reimbursements) in the Expense Summary
for that Fund as disclosed in the Prospectus.
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance
of a Fund with other measures of investment return.
Yield Quotations
Any current "yield" quotation for a class of shares of a Fund shall
consist of an annualized hypothetical yield, carried at least to the nearest
hundredth of one percent, based on a thirty calendar day period and shall be
calculated by (a) raising to the sixth power the sum of 1 plus the quotient
obtained by dividing the Fund's net investment income earned during the
period by the product of the average daily number of shares outstanding
during the period that were entitled to receive dividends and the maximum
offering price per share on the last day of the period, (b) subtracting 1
from the result, and (c) multiplying the result by 2.
Any taxable equivalent yield quotation of shares of a Fund shall be
calculated as follows. If the entire current yield quotation for such period
is tax-exempt, the tax equivalent yield will be the current yield quotation
(as determined in accordance with the appropriate calculation described
above) divided by 1 minus a stated income tax rate or rates. If a portion of
the current yield quotation is not tax-exempt, the tax equivalent yield will
be the sum of (a) that portion of the yield which is tax-exempt divided by 1
minus a stated income tax rate or rates and (b) the portion of the yield
which is not tax-exempt.
<TABLE>
<CAPTION>
Thirty-Day Tax Equivalent
Yield Thirty-Day Yield*
---------------- -----------------------
as of --/--/96 as of --/--/96
<S> <C> <C>
Intermediate Tax Free Income Fund % %
New Jersey Tax Free Income Fund % %
New York Tax Free Income Fund % %
Tax Free Income Fund % %
</TABLE>
- -------------
Performance presented in the table for the Funds is based upon the
performance of their respective predecessor funds (which had fiscal years
ending on __________, 1996). Performance presented for each
18
<PAGE>
of these Funds for periods prior to the consummation of the CTF Reorganization
is based on the historical expenses and performance of the shares of its
predecessor fund, adjusted to reflect historical expenses at the levels
indicated (absent reimbursements) in the Expense Summary for that Fund as
disclosed in its prospectus.
* The tax equivalent yields assume a federal income tax rate of 39.6% for the
Intermediate Tax Free Income Fund and Tax Free Income Fund, a combined New
York State, New York City and federal income tax rate of 46.80% for the New
York Tax Free Income Fund and a combined New Jersey State and federal
income tax rate of % for the and New Jersey Tax Free Income Fund.
Non-Standardized Performance Results
The table below reflects the net change in the value of an assumed initial
investment of $10,000 in the Funds for the period from the commencement date
of business of the predecessor common trust fund for each such Fund (i.e.,
, 19 for the Intermediate Tax Free Income Fund,
, 19 for the New Jersey Tax Free Income Fund, ,
19 for the New York Tax Free Income Fund and , 19 for the
Tax Free Income Fund) through October 31, 1996. The values reflect an
assumption that capital gain distributions and income dividends, if any, have
been invested in additional shares of the same class. From time to time, the
Funds may provide these performance results in addition to the total rate of
return quotations required by the Securities and Exchange Commission. As
discussed more fully in the Prospectuses, neither these performance results,
nor total rate of return quotations, should be considered as representative
of the performance of the Funds in the future. These factors and the possible
differences in the methods used to calculate performance results and total
rates of return should be considered when comparing such performance results
and total rate of return quotations of the Funds with those published for
other investment companies and other investment vehicles.
<TABLE>
<CAPTION>
Value of Value of Value of
Period Ended Initial $10,000 Capital Gains Reinvested Total
, 1996 Investment Distribution Dividends Value
------------ --------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
Intermediate Tax Free Income Fund $ $ $ $
New Jersey Tax Free Income Fund
The New York Tax Free Income Fund
Tax Free Income Fund
</TABLE>
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition
to the days listed above (other than Good Friday), Chase is closed for
business on the following holidays: Martin Luther King Day, Columbus Day and
Veteran's Day.
Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the
Board of Trustees. In making such valuations, the pricing service utilizes
both dealer-supplied valuations and electronic data processing techniques
that take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since
such valuations are believed to reflect more accurately the fair value of
such securities. Short- term obligations which mature in 60 days or less are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Futures and option contracts that are traded on
commodities or securities exchanges are normally valued at the settlement
price on the exchange on which they are traded. Portfolio securities (other
than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Interest income on long-term obligations in a Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemp-
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tion price at maturity) and premiums (the excess of purchase price over
stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest and discount accrued less
amortization of premium.
PURCHASES AND REDEMPTIONS
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a financial institution's instructions until it has received them
in proper form. In addition, the privileges described in the Prospectuses are
not available until a completed and signed account application has been
received by the Transfer Agent.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio
securities (instead of cash). The securities so distributed would be valued
at the same amount as that assigned to them in calculating the net asset
value for the shares being sold. If a shareholder received a distribution in
kind, the shareholder could incur brokerage or other charges in converting
the securities to cash. The Trust has filed an election under Rule 18f-1
committing to pay in cash all redemptions by a shareholder of record up to
amounts specified by the rule (approximately $250,000).
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described
in the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as
substitutes for careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company, each Fund is not subject to federal income
tax on the portion of its net investment income (i.e., its investment company
taxable income, as that term is defined in the Code, without a deduction for
dividends paid), and net capital gain (i.e., the excess of net long-term
capital gains over net short-term capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its net investment
income and at least 90% of its tax-exempt income (net of expenses allocable
thereto) for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will
be considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement. Under the current view of the
Internal Revenue Service, if a Fund invests all of its assets in another
open-end management investment company which is classified as a partnership
for federal income tax purposes, such Fund will be deemed to own a
proportionate share of the income of the portfolio into which it contributes
all of its assets for purposes of determining whether such Fund satisfies the
Distribution Requirement and the other requirements necessary to qualify as a
regulated investment company (e.g., Income Requirement (hereinafter defined),
etc.).
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
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Requirement"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized
or unrealized losses on offsetting positions) from the sale or other
disposition of stock, securities or foreign currencies (or options, futures
or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options
or futures thereon). Because of the Short-Short Gain Test, a Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent a Fund from
disposing of investments at a loss, since the recognition of a loss before
the expiration of the three-month holding period is disregarded for this
purpose. Interest (including original issue discount) received by a Fund at
maturity or upon the disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain Test.
However, income that is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose.
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including a municipal obligation) purchased
by a Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of
the market discount which accrued during the period of time the Fund held the
debt obligation.
Further, the Code also treats as ordinary income, a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property
by such Fund and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning
of Section 1092 of the Code; (3) the transaction is one that was marketed or
sold to such Fund on the basis that it would have the economic
characteristics of a loan but the interest-like return would be taxed as
capital gain; or (4) the transaction is described as a conversion transaction
in the Treasury Regulations. The amount of the gain recharacterized generally
will not exceed the amount of the interest that would have accrued on the net
investment for the relevant period at a yield equal to 120% of the federal
long-term, mid-term, or short-term rate, depending upon the type of
instrument at issue, reduced by an amount equal to: (1) prior inclusions of
ordinary income items from the conversion transaction; and (2) the
capitalized interest on acquisition indebtedness under Code Section 263(g).
Built-in losses will be preserved where a Fund has a built-in loss with
respect to property that becomes a part of a conversion transaction. No
authority exists that indicates that the converted character of the income
will not be passed to a Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if: (1) the asset
is used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset
so used, (2) the asset is otherwise held by the Fund as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the
Fund grants a qualified covered call option (which, among other things, must
not be deep-in-the-money) with respect thereto); or (3) the asset is stock
and the Fund grants an in-the- money qualified covered call option with
respect thereto. However, for purposes of the Short- Short Gain Test, the
holding period of the asset disposed of may be reduced only in the case of
clause (1) above. In addition, a Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option
written by a Fund will commence
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on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, a Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by certain of the Funds (such as
regulated futures contracts, certain foreign currency contracts, and options
on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as
if they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising
as a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long- term capital gain or loss and 40% short-term capital
gain or loss. A Fund, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the Fund that are not Section 1256 contracts. The
Internal Revenue Service (the "IRS") has held in several private rulings that
gains arising from Section 1256 contracts will be treated for purposes of the
Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under Code
Section 1256.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess
of net long-term capital gain over net short-term capital loss) for any
taxable year, to elect (unless it has made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which
the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of such issuer and as to which the Fund does not hold
more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses. Generally, an option (call or put) with respect to a
security is treated as issued by the issuer of the security not the issuer of
the option. However, with regard to forward currency contracts, there does
not appear to be any formal or informal authority which identifies the issuer
of such instrument. For purposes of asset diversification testing,
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government such as the Federal Agricultural Mortgage Corporation, the Farm
Credit System Financial Assistance Corporation, a Federal Home Loan Bank, the
Federal Home Loan Mortgage Association, the Government National Mortgage
Corporation, and the Student Loan Marketing Association are treated as U.S.
Government Securities.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
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Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98%
of ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year
ending November 30 or December 31, for its taxable year (a "taxable year
election"))(Tax-exempt interest on municipal obligations is not subject to
the excise tax). The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar
year (and, instead, include such gains and losses in determining ordinary
taxable income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end
of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders of a Fund.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any
such amounts. If net capital gain is distributed and designated as a capital
gain dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by the Fund prior to the date on which the
shareholder acquired his shares.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such
gain on his tax return as long-term capital gain, will receive a refundable
tax credit for his pro rata share of tax paid by the Fund on the gain, and
will increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Each Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the its total assets consists of tax-exempt
municipal obligations. Distributions from a Fund will constitute
exempt-interest dividends to the extent of its tax-exempt interest income
(net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a Fund are excluded from gross income for
federal income tax purposes. However, shareholders required to file a federal
income tax return will be required to report the receipt of exempt- interest
dividends on their returns. Moreover, while exempt-interest dividends are
excluded from gross income for federal income tax purposes, they may be
subject to alternative minimum tax ("AMT") in certain
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circumstances and may have other collateral tax consequences as discussed
below. Distributions by a Fund of any investment company taxable income or of
any net capital gain will be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act
of 1986, a tax is imposed for taxable years beginning after 1986 and before
1996 at the rate of 0.12% on the excess of a corporate taxpayer's AMTI
(determined without regard to the deduction for this tax and the AMT net
operating loss deduction) over $2 million. Exempt- interest dividends derived
from certain "private activity" municipal obligations issued after August 7,
1986 will generally constitute an item of tax preference includable in AMTI
for both corporate and noncorporate taxpayers. In addition, exempt-interest
dividends derived from all municipal obligations, regardless of the date of
issue, must be included in adjusted current earnings, which are used in
computing an additional corporate preference item (i.e., 75% of the excess of
a corporate taxpayer's adjusted current earnings over its AMTI (determined
without regard to this item and the AMT net operating loss deduction))
includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to
federal income tax. Further, a shareholder of a Fund is denied a deduction
for interest on indebtedness incurred or continued to purchase or carry
shares of the Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds
held by a Fund will likely be subject to tax on dividends paid by the Fund
which are derived from interest on such bonds. Receipt of exempt-interest
dividends may result in other collateral federal income tax consequences to
certain taxpayers, including financial institutions, property and casualty
insurance companies and foreign corporations engaged in a trade or business
in the United States. Prospective investors should consult their own tax
advisers as to such consequences.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a
return of capital to the extent of (and in reduction of) the shareholder's
tax basis in his shares; any excess will be treated as gain from the sale of
his shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date. In addition, if the net
asset value at the time a shareholder purchases shares of a Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of
capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31
of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the
year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any share-
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<PAGE>
holder (1) who has provided either an incorrect tax identification number or
no number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the
shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Fund within 30 days before or after
the sale or redemption. In general, any gain or loss arising from (or treated
as arising from) the sale or redemption of shares of a Fund will be
considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss
arising from the sale or redemption of shares held for six months or less
will be disallowed to the extent of the amount of exempt-interest dividends
received on such shares and (to the extent not disallowed) will be treated as
a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding
period rules of Code Section 246(c)(3) and (4) (discussed above in connection
with the dividends-received deduction for corporations) generally will apply
in determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Although the Funds generally retains the right to pay the redemption price
of shares in kind with securities (instead of cash) the Trust has filed an
election under Rule 18f-1 of the Investment Company Act of 1940, as amended
(the "1940 Act"), committing to pay in cash all redemptions by a shareholder
of record up to the amounts specified in the rule (approximately $250,000).
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a
Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. federal income
tax on gains realized on the sale of shares of the Fund, capital gain
dividends and exempt-interest dividends and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to
U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that
are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Fund with proper notification of
its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advis-
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<PAGE>
ers with respect to the particular tax consequences to them of an investment
in a Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in
effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions
may have a retroactive effect with respect to the transactions contemplated
herein.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of these and other state and local tax rules
affecting investment in a Fund.
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<PAGE>
MANAGEMENT OF THE TRUST AND THE FUNDS
Trustees and Officers
The Trustees and of the Trust officers and their principal occupations for
at least the past five years are set forth below. Their titles may have
varied during that period.
Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 63. Address: 202 June Road, Stamford, CT 06903.
Richard E. Ten Haken--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New
York; Chairman of the Board and President, New York State Teachers'
Retirement System. Age: 61. Address: 4 Barnfield Road, Pittsford, NY 14534.
William J. Armstrong--Trustee. Vice President and Treasurer,
Ingersoll-Rand Company (Woodcliff Lake, New Jersey). Age: 54. Address: 49
Aspen Way, Upper Saddle River, NJ 07458.
John R.H. Blum--Trustee. Attorney in private practice; formerly a Partner
in the law firm of Richards, O'Neil & Allegaert; Commissioner of
Agriculture--State of Connecticut, 1992-1995. Age: 66. Address: 322 Main
Street, Lakeville,CT 06039.
Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices since
1954. Director of Blessings Corporation, Jefferson Insurance Company of New
York, Monticello Insurance Company and National. Age: 64. Address: 257
Plantation Circle South, Ponte Vedra Beach, FL 32082.
*H. Richard Vartabedian--Trustee and President of the Trust. Consultant,
Republic Bank of New York; formerly, Senior Investment Officer, Division
Executive of the Investment Management Division of The Chase Manhattan Bank,
N.A., 1980-1991. Age: 60. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.
Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 63. Address: 108 Valley
Road, Cos Cob, CT 06807.
Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 64. Address: 80 Perkins
Road, Greenwich, CT 06830.
*W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; Formerly Director and Chairman of The Hanover Funds, Inc.;
Formerly Director, Chairman and President of The Hanover Investment Funds,
Inc. Age: 68. Address: RR 1 Box 102, Weston, VT 05181.
Roland R. Eppley, Jr.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; Formerly Director of The Hanover Funds,
Inc. Age: 63. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.
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W.D. MacCallan--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp.; formerly Chairman of the Board and Chief Executive Officer
of The Adams Express Co. and Petroleum & Resources Corp.; Formerly Director
of The Hanover Funds, Inc. and The Hanover Investment Funds, Inc. Age: 68.
Address: 624 East 45th Street, Savannah, GA 31405.
Martin R. Dean--Treasurer and Assistant Secretary. Associate Director,
Accounting Services, BISYS Fund Services; formerly Senior Manager, KPMG Peat
Marwick (1987-1994). Age:32. Address: 3435 Stelzer Road, Columbus, OH 43219.
Ann E. Bergin--Secretary. First Vice President, BISYS Fund Services, Inc.;
formerly, Senior Vice President, Administration, Concord Financial Group
(1991-1995); Assistant Vice President, Dreyfus Service Corporation
(1982-1991). Age: 35. Address: 125 West 55th Street, New York, NY 10019.
- -------------
*Asterisks indicate those Trustees that are "interested persons" (as defined
in the 1940 Act). Mr. Reid is not an interested person of the Trust's
investment advisers or principal underwriter, but may be deemed an interested
person of the Trust solely by reason of being an officer of the Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Blum,
Cragin, Thode, Armstrong, Harkins, Reid and Vartabedian. The function of the
Audit Committee is to recommend independent auditors and monitor accounting
and financial matters.
The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman) and Reid, as well as Leonard M. Spalding, President of Vista
Capital Management. The function of the Investment Committee is to review the
investment management process of the Trust.
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to
a fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the
Trustee serves, which consists of an annual retainer component and a meeting
fee component. Each Trustee of the Vista Funds receives a quarterly retainer
of $12,000 and an additional per meeting fee of $1,500. Members of committees
receive a meeting fee only if the committee meeting is held on a day other
than a day on which a regularly scheduled meeting is held. The Chairman of
the Trustees and the Chairman of the Investment Committee each receive a 50%
increment over regular Trustee total compensation for serving in such
capacities for all the investment companies advised by the adviser.
Vista Funds Retirement Plan for Eligible Trustees
The Trustees have instituted a Retirement Plan for Eligible Trustees (the
"Plan") pursuant to which each Trustee (who is not an employee of any of the
Funds advised by the advisers, the advisers, administrator or distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date
is the date on which the eligible Trustee has attained age 65 and has
completed at least five years of continuous service with one or more of the
investment companies advised by the adviser or sub-adviser (collectively, the
"Covered Funds"). Each Eligible Trustee is entitled to receive from the
Covered Funds an annual benefit commencing on the first day of the calendar
quarter coincident with or following his date of retirement equal to 10% of
the highest annual compensation received from the Covered Funds multiplied by
the number of such Trustee's years of service (not in excess of 10 years)
completed with respect to any of the Covered Funds. Such benefit is payable
to each eligible Trustee in monthly installments for the life of the Trustee.
Set forth below in the table are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years
of service classifications. As of September 30, 1996, the
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<PAGE>
estimated credited years of service for Messrs. Reid, Ten Haken, Armstrong,
Blum, Harkins, Vartabedian, Cragin, Thode, Neff, Eppley and MacCallan were
11, 11, 8, 11, 5, 3, 3, 3, 6, 7 and 6, respectively.
<TABLE>
<CAPTION>
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------
$40,000 $45,000 $50,000 $55,000
Years of
Service Estimated Annual Benefits Upon Retirement
- ------------- ---------------------------------------------------
<S> <C> <C> <C> <C>
10 $40,000 $45,000 $50,000 $55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
</TABLE>
The Trustees have also instituted a Deferred Compensation Plan for
Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each
Trustee (who is not an employee of any of the Covered Funds, the advisers,
administrator or distributor or any of their affiliates) may enter into
agreements with the Covered Funds whereby payment of the Trustee's fees are
deferred until the payment date elected by the Trustee (or the Trustee's
termination of service). The deferred amounts are invested in shares of Vista
funds selected by the Trustee. The deferred amounts are paid out in a lump
sum or over a period of several years as elected by the Trustee at the time
of deferral. If a deferring Trustee dies prior to the distribution of amounts
held in the deferral account, the balance of the deferral account will be
distributed to the Trustee's designated beneficiary in a single lump sum
payment as soon as practicable after such deferring Trustee's death.
Messrs. Ten Haken, Thode and Vartabedian have each executed a deferred
compensation agreement for the 1996 calendar year and as of September 30,
1996 they had contributed $15,200, $39,500, and $59,250, respectively.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with
the Trust, unless, as to liability to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their
offices or with respect to any matter unless it is finally adjudicated that
they did not act in good faith in the reasonable belief that their actions
were in the best interest of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a
reasonable determination based upon a review of readily available facts, by
vote of a majority of disinterested Trustees or in a written opinion of
independent counsel, that such officers or Trustees have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
As of October 1, 1996, the Trustees and officers as a group owned no
outstanding shares of any Fund.
Adviser and Sub-Advisers
Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Subject to such policies as
the Board of Trustees may determine, Chase is responsible for investment
decisions for the Funds. Pursuant to the terms of the Advisory Agreement,
Chase provides the Funds with such investment advice and supervision as it
deems necessary for the proper supervision of the Funds' investments. The
advisers continuously provide investment programs and determine from time to
time what securities shall be purchased, sold or exchanged and what portion
of the Funds' assets shall be held uninvested. The advisers to the Funds
furnish, at their own expense, all services, facilities and personnel
necessary in connection with managing the investments and effecting portfolio
transactions for the Funds. The Advisory Agreement for the Funds will
continue in effect from year to year only if such con-
29
<PAGE>
tinuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of a Fund's outstanding voting securities and by a
majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without
penalty by the Trust on behalf of the Funds on not more than 60 days', nor
less than 30 days', written notice when authorized either by a majority vote
of a Fund's shareholders or by a vote of a majority of the Board of Trustees
of the Trust, or by the adviser or sub-adviser on not more than 60 days', nor
less than 30 days', written notice, and will automatically terminate in the
event of its "assignment" (as defined in the 1940 Act). The advisory
agreements provide that the adviser or sub-adviser under such agreement shall
not be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
portfolio transactions for the respective Fund, except for wilful
misfeasance, bad faith or gross negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to the Funds imposed by the securities laws or
regulations thereunder of any state in which the shares of the Funds are
qualified for sale, as such limitations may be raised or lowered from time to
time, the adviser shall reduce its advisory fee (which fee is described
below) to the extent of its share of such excess expenses. The amount of any
such reduction to be borne by the adviser shall be deducted from the monthly
advisory fee otherwise payable with respect to the Funds during such fiscal
year; and if such amounts should exceed the monthly fee, the adviser shall
pay to a Fund its share of such excess expenses no later than the last day of
the first month of the next succeeding fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement
provides that Chase may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of Chase as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Chase.
Chase, on behalf of the Funds, has entered into an investment sub-advisory
agreement with Chase Asset Management, Inc. ("CAM"). With respect to the day-
to-day management of the Funds, under the sub- advisory agreement, the
sub-adviser makes decisions concerning, and places all orders for, purchases
and sales of securities and helps maintain the records relating to such
purchases and sales. The sub-adviser may, in its discretion, provide such
services through its own employees or the employees of one or more affiliated
companies that are qualified to act as an investment adviser to the Company
under applicable laws and are under the common control of Chase; provided
that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized
officers of the sub-adviser. This arrangement will not result in the payment
of additional fees by the Funds.
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range
of banking and investment services to customers
30
<PAGE>
throughout the United States and around the world. Also included among the
Chase accounts are commingled trust funds and a broad spectrum of individual
trust and investment management portfolios. These accounts have varying
investment objectives.
CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment
adviser and was formed for the purpose of providing discretionary investment
advisory services to institutional clients and to consolidate Chase's
investment management function, and the same individuals who serve as
portfolio managers for CAM also serve as portfolio managers for Chase.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Fund's average daily net assets specified in the
relevant Prospectuses. However, the adviser may voluntarily agree to waive a
portion of the fees payable to it on a month- to-month basis. For its
services under its sub-advisory agreement, CAM will be entitled to receive
with respect to each such Fund, such compensation, payable by the adviser out
of its advisory fee, as is described in the relevent Prospectuses.
Administrator
Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Funds. Chase provides certain
administrative services to the Funds, including, among other
responsibilities, coordinating the negotiation of contracts and fees with,
and the monitoring of performance and billing of, the Funds' independent
contractors and agents; preparation for signature by an officer of the Trust
of all documents required to be filed for compliance by the Trust with
applicable laws and regulations excluding those of the securities laws of
various states; arranging for the computation of performance data, including
net asset value and yield; responding to shareholder inquiries; and arranging
for the maintenance of books and records of the Funds and providing, at its
own expense, office facilities, equipment and personnel necessary to carry
out its duties. Chase in its capacity as administrator does not have any
responsibility or authority for the management of the Funds, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue
in effect from year to year with respect to each Fund only if such
continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of such Fund's outstanding voting
securities and, in either case, by a majority of the Trustees who are not
parties to the Administration Agreement or "interested persons" (as defined
in the 1940 Act) of any such party. The Administration Agreement is
terminable without penalty by the Trust on behalf of each Fund on 60 days'
written notice when authorized either by a majority vote of such Fund's
shareholders or by vote of a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust, or by Chase on 60 days' written notice, and will
automatically terminate in the event of its "assignment" (as defined in the
1940 Act). The Administration Agreement also provides that neither Chase nor
its personnel shall be liable for any error of judgment or mistake of law or
for any act or omission in the administration of the Funds, except for
willful misfeasance, bad faith or gross negligence in the performance of its
or their duties or by reason of reckless disregard of its or their
obligations and duties under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to that Fund imposed by the securities laws or
regulations thereunder of any state in which the shares of such Fund are
qualified for sale, as such limitations
31
<PAGE>
may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share
of such excess expenses. The amount of any such reduction to be borne by
Chase shall be deducted from the monthly administration fee otherwise payable
to Chase during such fiscal years; and if such amounts should exceed the
monthly fee, Chase shall pay to such Fund its share of such excess expenses
no later than the last day of the first month of the next succeeding fiscal
year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.10% of each of the Fund's
average daily net assets, on an annualized basis for the Fund's then-current
fiscal year. Chase may voluntarily waive a portion of the fees payable to it
with respect to each Fund on a month-to-month basis.
Distribution and Sub-Administration Agreement
The Trust has entered into a Distribution and Sub-Administration Agreement
(the "Distribution Agreement") with the Distributor, pursuant to which the
Distributor acts as the Funds' exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of Shares. The
Distributor is a wholly-owned subsidiary of BISYS Fund Services, Inc. The
Distribution Agreement provides that the Distributor will bear the expenses
of printing, distributing and filing prospectuses and statements of
additional information and reports used for sales purposes, and of preparing
and printing sales literature and advertisements not paid for by the
Distribution Plans. The Trust pays for all of the expenses for qualification
of the shares of each Fund for sale in connection with the public offering of
such shares, and all legal expenses in connection therewith. In addition,
pursuant to the Distribution Agreement, the Distributor provides certain
sub-administration services to the Trust, including providing officers,
clerical staff and office space.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of such Fund's outstanding voting securities and, in either case, by a
majority of the Trustees who are not parties to the Distribution Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Distribution Agreement is terminable without penalty by the Trust on behalf
of each Fund on 60 days' written notice when authorized either by a majority
vote of such Fund's shareholders or by vote of a majority of the Board of
Trustees of the Trust, including a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust, or by the
Distributor on 60 days' written notice, and will automatically terminate in
the event of its "assignment" (as defined in the 1940 Act). The Distribution
Agreement also provides that neither the Distributor nor its personnel shall
be liable for any act or omission in the course of, or connected with,
rendering services under the Distribution Agreement, except for willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to that Fund imposed by the securities laws or
regulations thereunder of any state in which the shares of such Fund are
qualified for sale, as such limitations may be raised or lowered from time to
time, the Distributor shall reduce its sub-administration fee with respect to
such Fund (which fee is described below) to the extent of its share of such
excess expenses. The amount of any such reduction to be borne by the
Distributor shall be deducted from the monthly sub-administration fee
otherwise payable with respect to such Fund during such fiscal year; and if
such amounts should exceed the monthly fee, the Distributor shall pay to such
Fund its share of such excess expenses no later than the last day of the
first month of the next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives
an annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund
on a month-to-month basis.
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<PAGE>
Transfer Agent and Custodian
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from
time to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each
Fund. Chase is located at 3 Metrotech Center, Brooklyn, NY 11245. For
additional information, see the Prospectuses.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants of the Funds, provides the Funds with audit
services, tax return preparation and assistance and consultation with respect
to the preparation of filings with the Securities and Exchange Commission.
GENERAL INFORMATION
Description of Shares, Voting Rights and Liabilities
Mutual Fund Select Trust is an open-end, management investment company
organized as Massachusetts business trust under the laws of the Commonwealth
of Massachusetts on October 1, 1996. Because each of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of each Fund
may be invested in the obligations of any single issuer, which may make the
value of the shares in such a Fund more susceptible to certain risks than
shares of a diversified mutual fund. The fiscal year-end of the Funds in the
Trust is August 31.
The Trust currently consists of 4 series of shares of beneficial interest,
par value $.001 per share. The Trust has reserved the right to create and
issue additional series or classes. Each share of a series or class
represents an equal proportionate interest in that series or class with each
other share of that series or class. The shares of each series or class
participate equally in the earnings, dividends and assets of the particular
series or class. Expenses of the Trust which are not attributable to a
specific series or class are allocated among all the series in a manner
believed by management of the Trust to be fair and equitable. Shares have no
pre-emptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one
vote for each share held. Shares of each series or class generally vote
together, except when required under federal securities laws to vote
separately on matters that may affect a particular class, such as the
approval of distribution plans for a particular class.
Each Fund currently issues a single class of shares but may, in the
future, offer other classes of shares. The categories of investors that are
eligible to purchase shares may be different for each class of Fund shares.
Other classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of
certain other expenses, which will affect the relative performance of the
different classes.
Any person entitled to receive compensation for selling or servicing
shares of a Fund may receive different levels of compensation for selling one
particular class of shares rather than another.
The Trust is not required to hold annual meetings of shareholders but will
hold special meetings of shareholders of a series or class when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for
a shareholder vote. Shareholders have, under certain circumstances, the right
to communicate with other shareholders in connection with requesting a
meeting of shareholders for the purpose of removing one or more Trustees.
Shareholders also have, in certain circumstances, the right to remove one or
more
33
<PAGE>
Trustees without a meeting. No material amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each portfolio affected by the
amendment. Shares have no preemptive or conversion rights. Shares, when
issued, are fully paid and non- assessable, except as set forth below. Any
series or class may be terminated (i) upon the merger or consolidation with,
or the sale or disposition of all or substantially all of its assets to,
another entity, if approved by the vote of the holders of two-thirds of its
outstanding shares, except that if the Board of Trustees recommends such
merger, consolidation or sale or disposition of assets, the approval by vote
of the holders of a majority of the series' or class' outstanding shares will
be sufficient, or (ii) by the vote of the holders of a majority of its
outstanding shares, or (iii) by the Board of Trustees by written notice to
the series' or class' shareholders. Unless each series and class is so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of
the Trust. The Trust's Declaration of Trust also provides that the Trust
shall maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any action
or failure to act, errors of judgment or mistakes of fact or law, but nothing
in the Declaration of Trust protects a Trustee against any liability to which
he 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 office.
The Board of Trustees has adopted a Code of Ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The Code of Ethics substantially conforms to the
recommendations made by the Investment Company Institute ("ICI") (except
where noted) and includes such provisions as:
(bullet) Prohibitions on investment personnel acquiring securities in
initial offerings;
(bullet) A requirement that access persons obtain prior to acquiring
securities in a private placement and that the officer granting
such approval have no interest in the issuer making the private
placement;
(bullet) A restriction on access persons executing transactions for
securities on a recommended list until 14 days after distribution
of the list;
(bullet) A prohibition on access persons acquiring securities that are
pending execution by one of the Funds until 7 days after the
transactions of the Funds are completed;
(bullet) A prohibition of any buy or sell transaction in a particular
security in a 30-day period, except as may be permitted in
certain hardship cases or exigent circumstances where prior
approval is obtained. This provision differs slightly from the
ICI recommendation;
(bullet) A requirement for pre-clearance of any buy or sell transaction in
a particular security after 30 days, but within 60 days;
(bullet) A requirement that any gift exceeding $75.00 from a customer must
be reported to the appropriate compliance officer;
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<PAGE>
(bullet) A requirement that access persons submit in writing any request
to serve as a director or trustee of a publicly traded company;
(bullet) A requirement that all securities transactions in excess of
$1,000 be pre-cleared, except that if a person has engaged in
more than $10,000 of securities transactions in a calendar
quarter all securities of such person require pre-clearance (this
de minimus exception differs slightly from ICI recommendations);
(bullet) A requirement that all access persons direct their broker-dealer
to submit duplicate confirmation and customer statements to the
appropriate compliance unit; and
(bullet) A requirement that all access persons sign a Code of Ethics
acknowledgement, affirming that they have read and understood the
Code and submit a personal security holdings report upon
commencement of employment or status and a personal security
transaction report within 10 days of each calendar quarter
thereafter.
Principal Holders
As of October 1, 1996, no person owned of record, directly or indirectly,
5% or more of the outstanding shares of any Funds.
35
<PAGE>
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures may result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in
the pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on GNMA
Certificates may vary form their coupon rates for the following reasons: (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the
effect of raising the effective yield earned on the Certificates; and (iv)
the actual yield of each Certificate is affected by the prepayment of
mortgages included in the mortgage pool underlying the Certificates.
Principal which is so prepaid will be reinvested, although possibly at a
lower rate. In addition, prepayment of mortgages included in the mortgage
pool underlying a GNMA Certificate purchased at a premium could result in a
loss to a Fund. Due to the large amount of GNMA Certificates outstanding and
active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on,
among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each
Certificate. If agency securities are purchased at a premium above principal,
the premium is not guaranteed by the issuing agency and a decline in the
market value to par may result in a loss of the premium, which may be
particularly likely in the event of a prepayment. When and if available, U.S.
Government obligations may be purchased at a discount from face value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S.
Government.
GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
A-1
<PAGE>
New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import
Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor 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 U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
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APPENDIX B
DESCRIPTION OF RATINGS*
The ratings of Moody's and Standard & Poor's represent their opinions as
to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.
Description of Moody's
four highest municipal bond ratings:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Description of Moody's two highest ratings
of state and municipal notes:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run. Symbols used are as follows:
MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or
both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
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* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time
to time revise such ratings, they undertake no obligation to do so.
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Description of Standard & Poor's four highest municipal bond ratings:
- -------------
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
- -------------
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
- -------------
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
- -------------
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. 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 debt in this category than in higher rated categories.
- -------------
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Standard & Poor's
ratings of municipal notes and tax-exempt demand bonds:
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely receive
a long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/B-1+"). For the newer "demand notes," S&P's note
rating symbols, combined with the commercial paper symbols, are used (for
example, "SP-1+/A-1+").
Description of Standard & Poor's
two highest commercial paper ratings:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
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B-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's
two highest commercial paper ratings:
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2 and Prime-3.
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: (1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (4)
broad margins in earnings coverage of fixed financial charges and high
internal cash generation; and (5) well-established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Description of Fitch's ratings of municipal notes
and tax-exempt demand bonds
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.
AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1.
A--Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in eco-
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nomic conditions and circumstances, however, are more likely to have adverse
consequences on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade
is higher than for bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
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APPENDIX C
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the Vista New York Tax Free Money Market Fund and the Vista
New York Tax Free Income Fund in New York municipal securities are summarized
below. The following information constitutes only a brief summary, does not
purport to be a complete description and is largely based on information
drawn from official statements relating to securities offerings of New York
municipal obligations available as of the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in such offering statements has not been independently verified.
NEW YORK STATE
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation 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 New York State Legislature (the "Legislature")
and approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred
by the State. With the exception of general obligation housing bonds (which
must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments
that result in substantially level or declining debt service payments, within
40 years after issuance, beginning not more than one year after issuance of
such bonds.
In April 1993, legislation was also enacted providing for significant
constitutional changes to the long- term financing practices of the State and
the Authorities.
In June 1994, the Legislature passed a proposed constitutional amendment
that 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 amendment would permit multiple purpose general
obligation bond proposals to be proposed on the same ballot, require that
State debt be incurred only for capital projects included in a multi-year
capital financing plan and prohibit, after its effective date, lease-
purchase and contractual-obligation financing mechanisms for State
facilities.
Public hearings were held on the proposed constitutional amendment during
1993. Following these hearings, in February 1994, Governor Cuomo and the
State Comptroller recommended a revised constitutional amendment which would
further tighten the ban on lease-purchase and contractual-obligation
financing, incorporate existing lease-purchase and contractual-obligation
debt under the proposed revenue bond cap while simultaneously reducing the
size of the cap. After considering these recommendations, the Legislature
passed a revised constitutional amendment which tightens the ban, and
provides for a phase-in to a lower cap (4.4 percent of personal income).
Although the State Senate and Assembly passed the amendment, the voters
defeated it in November 1995.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued bonds, by issuing
bond anticipation notes ("BANs"). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. BANS may only be issued for the purposes and within the amounts for
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which bonds may be issued pursuant to voter authorizations. Such BANs 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 BANs for housing purposes, within five years of the date
of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State
Constitution provides for the State guarantee of the repayment of certain
borrowings for designated projects of the New York State Thruway Authority,
the Job Development Authority and the Port Authority of New York and New
Jersey. The State has never been called upon to make any direct payments
pursuant to such guarantees. The constitutional provisions allowing a
State-guarantee of certain Port Authority of New York and New Jersey debt
stipulates that no such guaranteed debt may be outstanding after December 31,
1996.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual- obligation financing, which involve
obligations of public authorities or municipalities that are State-supported
but not general obligations of the State. Under these financing arrangements,
certain public authorities and municipalities have issued obligations to
finance the construction and rehabilitation of facilities or the acquisition
and rehabilitation of equipment, and expect to meet their debt service
requirements through the receipt of rental or other contractual payments made
by the State. Although these financing arrangements involve a contractual
agreement by the State to make payments to a public authority, municipality
or other entity, the State's obligation to make such payments is generally
expressly made subject to appropriation by the Legislature and the actual
availability of money to the State for making the payments. The State has
also entered into a contractual-obligation financing arrangement with the New
York Local Government Assistance Corporation ("LGAC") to restructure the way
the States makes certain local aid payments. The State also participates in
the issuance of certificates of participation ("COPs") in a pool of leases
entered into by the State's Office of General Services on behalf of several
State departments and agencies interest in acquiring operational equipment,
or in certain cases, real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or
contractual-obligation financing arrangements and has never been called upon
to make any direct payments pursuant to its guarantees.
The State also employs moral obligations financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and includes statutory provisions requiring the State,
subject to appropriation by the Legislature, to make up any deficiencies
which may occur in the issuer's debt service reserve fund. There has never
been a default on any moral obligation debt of any public authority.
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 BANs) 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.
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 State University of
New York ("SUNY"), The City University of New York ("CUNY"), and health
facilities, (ii) the New
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York State Medical Care Facilities Finance Agency ("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").
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation for
The City of New York ("MAC"), created to provide financing assistance to New
York City (the "City"), is the only municipal assistance corporation created
to date. To enable MAC to pay debt service on its obligations, MAC receives,
subject to annual appropriation by the Legislature, receipts from the 4% New
York State Sales Tax for the Benefit of New York City, the State-imposed
Stock Transfer Tax and, subject to certain prior liens, certain local
assistance payments otherwise payable to the City. The legislation creating
MAC also includes a moral obligation provision. Under its enabling
legislation, MAC's authority to issue bonds and notes (other than refunding
bonds and notes) expired on December 31, 1984.
State Financial Operations. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to
the suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success that
the South and the West have had in attracting people and business. The City
has also had to face greater competition as other major cities have developed
financial and business capabilities which make them less dependent on the
specialized services traditionally available almost exclusively in the City.
Although the State ranks 22nd in the nation for its State tax burden, the
State has the second highest combined state and local tax burden in the
United States. In 1991, total State and local taxes in New York were $3,349
per capita, compared with $1,475 per capita in 1980. Between 1980 and 1991,
State and local taxes per capita increased at approximately the same rate in
the State as in the nation as a whole with per capita taxes in the State
increasing by 127% while such taxes increased 111% in the nation. The State
Division of the Budget ("DOB") believes, however, that it is more informative
to describe the state and local tax burden in terms of its relationship to
personal income. In 1992, total State and local taxes in New York were
$154.70 per $1,000 of personal income, compared with $152.70 in 1980. Between
1980 and 1992, State and local taxes per $1,000 of personal income increased
at a slower rate in the State than in the nation as a whole with such taxes
in the State increasing by 1.3 percent while such taxes increased 4 percent
in the nation. The burden of State and local taxation, in combination with
the many other causes of regional economic dislocation, may have contributed
to the decisions of some businesses and individuals to relocate outside, or
not locate within the State. The State and its localities have used these
taxes to develop and maintain their respective transportation networks,
public schools and colleges, public health systems, other social services,
and recreational facilities. Despite these benefits, the burden of State and
local taxation, in combination with the many other causes of regional
economic dislocation, may have contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the
State.
The national economy began expanding 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. DOB forecasted that national economic growth would
weaken, but not turn negative, during the course of 1995 before beginning to
rebound. This dynamic is often described as a "soft landing."
The national economy achieved the desired "soft landing" in 1995, as
growth slowed from 6.2 percent in 1994 to a rate sufficiently slow to inhibit
the buildup of inflationary pressures. This was achieved without
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any material pause in the economic expansion, although recession worries
flared in the late spring and early summer. Growth in the national economy is
expected to moderate during 1996. Real GDP grew only 0.9 percent in the
fourth quarter of 1995, and there were declines in the leading economic
indicators in four of the past five months. It is anticipated that slow
economic growth will continue through the first half of 1996 and inflationary
pressures will be modest in 1996. Economic growth will gradually accelerate
in the second half of 1996 as the lower level of interest rates over the last
year is expected to stimulate economic activity. Economic growth, as measured
by the nation's nominal GDP, is projected to expand by 4.3 percent in 1996
versus 4.6 in 1995. In 1992 dollars, real GDP is expected to grow 1.8 percent
as compared with the 2.1 percent growth in 1995. By either measure, economic
growth is projected to be noticeably slower for 1996 than 1995.
To stimulate economic growth, the State has developed programs, including
the provision of direct financial assistance, designed to assist businesses
to expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the State corporation franchise tax. Furthermore, the State has
created 40 "economic development zones" in economically distressed regions of
the States. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones. There can be no
assurance that these programs will be successful.
From 1994 to 1995 the annual growth rates of most economic indicators for
the State improved. The pace of private sector employment expansion and
personal income and wage growth all accelerated. Government employment fell
as workforce reductions were implemented at federal, State and local levels.
Similar to the nation, some moderation of growth is expected in the year
ahead. Private sector employment is expected to continue to rise, although
somewhat more slowly than in 1995, while public employment should continue to
fall, reflecting government budget cutbacks. Anticipated continued restraint
in wage settlements, a lower rate of employment growth and falling interest
rates are expected to slow personal income growth significantly.
The State's current fiscal year commenced on April 1, 1995, and ends on
March 31, 1996, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State
operations and other purposes, including all necessary appropriations for
debt service. The State Financial Plan for the 1995-96 fiscal year (the
"1995-96 State Financial Plan") was formulated on June 20, 1995 and is based
on the State's budget as enacted by the Legislature and signed into law by
the Governor. The State Financial Plan is updated quarterly pursuant to law
in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
Governor George Pataki, who assumed office on January 1, 1995. It is the
first budget in over half a century which proposed and, as enacted, projects
an absolute year-over-year decline in General Fund disbursements. Spending
for State operations is projected to drop even more sharply, by 4.6 percent.
Nominal spending from all State funding sources (i.e., excluding Federal aid)
is proposed to increase by only 2.5 percent from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged more than 6.0
percent annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the 1995- 96 State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing
disparity between sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth; the impact of
unfunded 1994-95 initiatives, primarily for local aid programs; and the use
of one-time solutions, primarily surplus funds from the prior year, to fund
recurring spending in the 1994-95 budget. The
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Governor proposed additional tax cuts to spur economic growth and provide
relief for low and middle-income tax payers, which were larger than those
ultimately adopted, and which added $240 million to the then projected
imbalance or budget gap, bringing the total to approximately $5 billion.
The 1995-96 State Financial Plan contemplates closing this gap based on
the enacted budget, through a series of actions, mainly spending reductions
and cost containment measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions. The 1995-96 State
Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to
reduce spending on the State workforce, SUNY and CUNY, mental hygiene
programs, capital projects, the prison system and fringe benefits; (iii) $300
million in savings from local assistance reforms, including actions affecting
school aid and revenue sharing while proposing program legislation to provide
relief from certain mandates that increase local spending; (iv) over $400
million in revenue measures, primarily a new Quick Draw Lottery game, changes
to tax payment schedules, and the sale of assets; and (v) $300 million from
reestimates in receipts.
The following discussion summarizes updates to the 1995-96 State Financial
Plan and recent fiscal years with particular emphasis on the State's General
Fund. Pursuant to statute, the State updates the financial plan at least on a
quarterly basis. Due to changing economic conditions and information, public
statements or reports may be released by the Governor, members of the
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the
State's financial condition, including potential operating results for the
current fiscal year and projected baseline gaps for future fiscal years, that
may vary materially and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1995-96 fiscal year, the General Fund is expected by
the State to account for approximately 49 percent of total governmental-fund
receipts and 71 percent of total governmental-fund disbursements. General
Fund moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts are projected to be $33.110 billion, an
increase of $48 million over total receipts in the prior fiscal year. Total
General Fund disbursements are projected to be $33.055 billion, an increase
of $344 million over the total amount disbursed and transferred in the prior
fiscal year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 40
percent of total government funds receipts and disbursements in the 1995-96
fiscal year, about three-quarters of that activity relates to
Federally-funded programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the "MTA") funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs
which deliver services financed by user fees.
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Capital Projects Funds are used to account for the financial resources used
for the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1995-96 fiscal year, activity in these funds
is expected to comprise 7 percent of total governmental receipts and
disbursements.
Disbursements from this fund type are projected to increase by $541
million over prior- year levels, primarily reflecting higher spending for
transportation and mental hygiene projects. The Dedicated Highway and Bridge
Trust Fund is projected to comprise 23 percent of the activity in this fund
type $936 million in 1995-96 and is the single largest dedicated fund.
Projected disbursements from this dedicated fund reflect an increase of $80
million over 1994-95 levels. Spending for capital projects will be financed
through a combination of sources: Federal grants (25 percent), public
authority bond proceeds (38 percent), general obligation bond proceeds (9
percent), and current revenues (28 percent). Total receipts in this fund type
are projected at $4.170 billion, not including $364 million expected to be
available from the proceeds of general obligation bonds.
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual- obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts
and disbursements in the 1995-96 fiscal year. Receipts in these funds in
excess of debt service requirements are transferred to the General Fund and
Special Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General
Fund, and seven other funds. In the 1995-96 fiscal year, total disbursements
in this fund type are projected at $2.506 billion, an increase of $303
million or 13.8 percent. The transfer from the General Fund of $1.583 billion
is expected to finance 63 percent of these payments.
The State contemplates financing the remaining payments by pledged
revenues, including $1.794 billion in taxes, $228 million in dedicated fees,
and $2.200 billion in patient revenues, including transfers of Federal
reimbursements. After impoundment for debt service, as required, $3.481
billion is expected to be transferred to the General Fund and other funds in
support of State operations. The largest transfer$1.761 billionis made to the
Special Revenue Fund type, in support of operations of the mental hygiene
agencies. Another $1.341 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service
on bonds of LGAC.
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 1995-96 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
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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 low spending from
the General Fund and $2 million was reflected in increased General Fund
receipts.
The State revised the cash-basis 1995-96 Financial Plan on December 15,
1995 (the "December 15 Update"), in conjunction with the release of the
Executive Budget for the 1996-97 fiscal year.
The December 15 Update projected continued balance in the 1995-96 General
Fund Financial Plan, with reductions on 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 projections.
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 in 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 balances of the
year.
The State issued its third required quarterly update to the 1995-96
cash-basis State Financial Plan on January 30, 1996 (the "Third Quarterly
Update"). The Third Quarterly Update was published two weeks after the
closure of the Governor's 30-day amendment period, during the Governor
revised the 1996-97 State Financial Plan.
The Third Quarterly Update reflected actual results through the third
quarter of the State's fiscal year, quarterly and year-end tax payments
received in December and January, and modest changes in spending to reflect
the current year impact of certain 30-day amendments. The 1995-96 General
Fund State Financial Plan was projected to remain in balance on a cash basis,
with both receipts and disbursements projected to be $47 million higher than
in the December 15 Update. Total taxes were projected to be $29.66 billion,
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$88 million higher than in the December 15 Update. Miscellaneous receipts and
transfers were expected to total $3.1 billion, down $41 million from the
December 15 Update. Total disbursements were projected to be $32.75 billion.
Spending in Governmental Funds were projected at $63.31 billion, an increase
of $15 million from the December 15 Update.
The Governor presented his 1996-97 Executive Budget to the Legislature on
December 15, 1995, and subsequently amended it. The Executive Budget also
contains financial projections for the State's 1997-98 and 1998-99 fiscal
years and an updated Capital Plan. As provided by the State Constitution, the
Governor submitted amendments to his 1996-97 Executive Budget within 30 days
following submission and after the 30-day amendment period. Those amendments
are reflected in the discussion of the 1996-97 Executive Budget contained in
this Statement of Additional Information. The 1996-1997 Executive Budget was
not adopted by the State Legislature by the statutory deadline of April 1,
1996. 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 Statement of Additional Information.
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. On April 3, 1996, the State
announced that the General Fund for the State's 1996 fiscal year is expected
to be balanced on a cash basis, with an operating surplus of $445 million.
There can be no assurance that the General Fund will yield such a surplus.
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
attributable 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 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 assumption regarding an increased share of
federal Medicaid funding has received bipartisan Congressional support and
would benefit 32 states, including New York.
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.
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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 are 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.
On March 15, 1996, two weeks before the start of the 1996-97 fiscal year,
the Governor presented additional amendments to the 1996-97 Executive Budget
which address two potential outcomes of the federal debate on entitlement
reform:
(bullet) Contingency Plan If the federal government fails to adopt
entitlement changes assumed to produce savings in the Executive
Budget for the State's 1996-97 fiscal year, the Governor has
identified $2.01 billion in new or redirected resources to
replace these savings in order to preserve budget balance in the
1996-97 State Financial Plan.
(bullet) Balanced Budget Bonus Plan If the federal government acts,
through legislation or through waivers of existing federal
provisions, and any necessary conforming changes are adopted by
the State Legislature, the State could receive all or a portion
of the $2.01 billion benefit anticipated in the original 1996-97
Executive Budget. As a result, a portion of the new resources
identified in the Contingency Plan would then be available to
make restorations or add new spending to the 1996-97 State
budget. The Balanced Budget Bonus Plan sets priorities for up to
$1.42 billion in potential recurring and non-recurring spending
increases.
There can be no assurance that the Legislature will enact the Executive
Budget or any of the amendments proposed by the Governor, that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in this Statement of Additional Information, or that
the State's actions will be sufficient to maintain budgetary balance in 1996-
97 or future fiscal years. Further, since the amendments implementing the
Contingency Plan and the Balanced Budget Bonus Plan have been submitted after
the 30-day amendment period, the Legislature must consent to their
introduction.
DOB believes that its economic assumptions and its projections of receipts
and disbursements for the 1996-97 Executive Budget as amended by the
Contingency Plan and the Balanced Budget Bonus Plan are reasonable. However,
various financial, social, economic, and political factors can affect these
projections, of which certain factors, such as action by the federal
government, are outside the State's control. Because of the uncertainty and
unpredictability of these factors, their impact cannot be fully anticipated
in the assumptions underlying the State's projections.
The 1996-97 Executive Budget includes actions that will have an impact on
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 budget gap primarily through expenditures reductions and
without increases in taxes or deferrals of scheduled tax reductions. After
accounting for proposed changes to the Executive Budget submitted during the
30-day amendment period, the net impact of these actions is expected to
produce a potential imbalance in the 1997-98 fiscal year of $1.44 billion and
in the 1998-99 fiscal year of $2.46 billion, assuming implementation of the
1996-97 Executive Budget recommendations. For 1997-98, receipts are estimated
at $30.62 billion and disbursements at $32.05 billion. For 1998-99, receipts
are estimated at $31.85 billion and disbursements at $34.32 billion.
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For 1996-97 the closing fund balance in the General Fund is projected to be
$272 million. The required deposit to the Tax Stabilization Reserve Fund adds
$15 million to the 1995-96 balance of $172 million in that fund, bringing the
total to $187 million at the close of 1996-97. The remaining General Fund
balance reflects the deposit of $85 million to the Contingency Reserve Fund, to
provide resources to finance potential costs associated with litigation against
the State. This deposit is expected to be made pursuant to legislation submitted
with the Executive Budget which will require the State share of certain
non-recurring federal recoveries to be deposited to the Contingency Reserve
Fund.
For 1996-97, the Financial Plan projects disbursements of $28.93 billion from
this Fund. This includes $7.65 billion from Special Revenue Funds containing
State revenues, and $21.28 billion from funds containing federal grants,
primarily for social welfare programs.
The 1996-97 Executive Budget recommends that all of the SUNY's revenues be
consolidated in a single fund, permitting SUNY more flexibility and control
in the use of its revenues. As a result of this proposal, General Fund
support would be transferred to this fund, rather than spent directly from
the General Fund. SUNY's spending from this fund is projected to total $2.55
billion in 1996-97. The Mass Transportation Operating Assistance Fund and the
Dedicated Mass Transportation Trust Fund, which receive taxes earmarked for
mass transportation programs throughout the State, are projected to have
total disbursements of $1.23 billion in 1996-97. Disbursements also include
$1.63 billion in lottery proceeds which, after payment of administrative
expenses, permit the distribution of $1.43 billion for education purposes.
One hundred million dollars of lottery proceeds will be reserved in a
separate account for a local school tax reduction program to be agreed upon
by the Governor and the Legislature for disbursement in State fiscal year
1997-98. Disbursements of $650 million in 1996-97 from the Disproportionate
Share Medicaid Assistance Fund constitutes most of the remaining estimated
State Special Revenue Funds disbursements.
Federal Special Revenue Fund projections for 1996-97 were developed in the
midst of considerable uncertainty as to the ultimate composition of the
federal budget, including uncertainties regarding major federal entitlement
reforms. Disbursements are estimated at $21.27 billion in 1996-97, an
increase of $2.02 billion, or 10.5 percent from 1995-96. The projections
included in the 1996-97 State Financial Plan assume that the federal Medicaid
program will be reformed generally along the lines of the congressional
MediGrant program. This would include an increase from 50 percent to 60
percent in the federal share of New York's Medicaid expenses. A repeal of the
federal Boren amendment regarding provider rates is also anticipated. As a
result of these changes, the Executive Budget projects the receipt of $13.1
billion in total federal Medicaid reimbursements in 1996-97, an increase of
approximately $915 million from the 1995-96 level.
The second largest projected increase in federal reimbursement is for the
State's welfare program. The State is projected to receive $2.5 billion, up
$421 million from 1995-96 levels, primarily because of increased funding
anticipated from the proposed federal welfare block grant. All other federal
spending is projected at $5.7 billion for 1996-97, an increase of $626
million.
Disbursements from the Capital Projects Funds in 1996-97 are estimated at
$3.76 billion. This estimate is $332 million less than the 1995-96
projections. The spending reductions are the result of program restructuring,
achieved in 1995-96 and continued in the 1996-97 Financial Plan. The spending
plan includes:
(bullet) $2.5 billion in disbursements for the second year of the
five-year $12.6 billion State and local highway and bridge
program;
(bullet) Environmental Protection Fund spending of $106.5 million;
(bullet) Correctional services spending of $153 million; and
(bullet) SUNY and CUNY capital spending of $196 million and $87 million,
respectively.
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The share of capital projects to be financed by "pay-as-you-go" resources is
projected to hold steady in 1996-97 at approximately 27 percent. State-supported
bond issuances finance 44 percent of capital projects, with federal grants
financing the remaining 29 percent.
Disbursements from the Debt Service Fund are estimated at $2.64 billion in
1996-97, an increase of $206 million or 9 percent from 1995-96. Of this
increase, $85 million is attributable to transportation bonding for the State
and local highway and bridge programs which are financed by the Dedicated
Highway and Bridge Trust Fund, $35 million is for corrections including new debt
service on prisons recently purchased from New York City, and $27 million is for
the mental hygiene programs financed through the Mental Health Services Fund.
Debt service for LGAC bonds increases only slightly after years of significant
increases, as the new- money bond issuance portion of the LGAC program was
completed in State fiscal year 1995-96. Increased debt service costs primarily
reflect prior capital commitments financed by bonds issued by the State and its
public authorities, the reduced use of capitalized interest, and the use of
shorter term bonds, such as the 10 year average maturity for the Dedicated
Highway and Bridge Trust Fund bonds.
The 1995-96 State Financial Plans and the 1996-97 Executive Budget are
based upon forecasts of national and State economic and financial conditions.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State but also by entities, such as
the federal government, that are outside the State's control. Because of the
uncertainty and unpredictability of changes in these factors, their impact
cannot be fully included in the assumptions underlying the State's
projections. There can be no assurance that the State economy will not
experience results in the 1995-96 and the 1996-97 fiscal years that are worse
than predicted, with corresponding material and adverse effects on the
State's financial projections.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. First, the national recession, and then the lingering economic
slowdown in the New York and regional economy, resulted in repeated
shortfalls in receipts and three budget deficits. For its 1992-93, 1993-94
and 1994-95 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in 1992-93 and 1993-94, and a smaller
fund balance in 1994-95 as described below.
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 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
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
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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.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion
in its tax refund reserve account, $265 million in its CRF and $134 million
in its Tax Stabilization Reserve Fund. These fund balances were primarily the
result of an improving national economy, State employment growth, tax
collections that exceeded earlier projections and disbursements that were
below expectations. Deposits to the personal income tax refund reserve have
the effect of reducing reported personal income tax receipts in the fiscal
year when made and withdrawals from such reserve increase receipts in the
fiscal year when made. The balance in the tax refund reserve account will be
used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account 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 LGAC program. The
balance in the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in the 1993-94 fiscal year exceeded those originally
projected when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal
income tax, the bank tax, the corporation franchise tax and the estate tax
accounted for most of this variance, and more than offset
weaker-than-projected collections from the sales and use tax and
miscellaneous receipts.
Collections from individual taxes were affected by various factors
including changes in Federal business laws, sustained profitability of banks,
strong performance of securities firms, and higher-than-expected consumption
of tobacco products following price cuts.
The higher receipts resulted, in part, because the State economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The
State economy exhibited signs of strength in the service sector, in
construction, and in trade. Long Island and the Mid-Hudson Valley continued
to lag behind the rest of the State in economic growth. The DOB believes that
approximately 100,000 jobs were added during the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below
the level that was projected in April 1993, an amount that would have been
$423 million had the State not accelerated the payment of Medicaid billings,
which in the April 1993 State Financial Plan were planned to be deferred into
the 1994-95
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fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted from lower spending
for Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC
program. Disbursements were higher-than-expected for general support for
public schools, the State share of income maintenance, overtime for prison
guards, and highway snow and ice removal. The State also made the first of
six required payments to the State of Delaware related to the settlement of
Delaware's litigation against the State regarding the disposition of
abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the
CRF as a way to assist the State in financing the cost of litigation
affecting the State. The CRF was initially funded with a transfer of $100
million attributable to the positive margin recorded in the 1992-93 fiscal
year. In addition, the State augmented this initial deposit with $132 million
in debt service savings attributable to the refinancing of State and public
authority bonds during 1993-94. A year-end transfer of $36 million was also
made to the CRF, which, after a disbursement for authorized fund purposes,
brought the CRF balance at the end of 1993-94 to $265 million. This amount
was $165 million higher than the amount originally targeted for this reserve
fund.
The State ended its 1992-93 fiscal year with a balance of $671 million in
the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992.
This favorable economic performance, particularly at year end, combined
with a tax-induced acceleration of income into 1992, was the primary cause of
the General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated
payment components of the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher- than-projected business tax collections and
the receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable
court decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections made in April 1992, although this includes a $150 million payment
to health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1993). All other disbursements were $105
million lower than projected. This reduction primarily reflected lower costs
in virtually all categories of spending, including Medicaid, local health
programs, agency operations, fringe benefits, capital projects and debt
service as partially offset by higher-than-anticipated costs for education
programs.
The financial condition of the State is affected by several factors,
including the strength of the State and regional economy and actions of the
Federal government, as well as State actions affecting the level of receipts
and disbursements. Owing to these and other factors, the State may, in future
years, face substantial potential budget gaps resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the future costs of maintaining State programs at current levels. Any
such recurring imbalance would be exacerbated if the State were to use a
significant amount of nonrecurring resources to balance the budget in a
particular fiscal year. To address a potential imbalance for a given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the
State Constitution the Governor is required to propose a balanced budget each
year. To correct recurring budgetary imbalances, the State would need to take
significant actions to align recurring receipts and disbursements in future
fiscal years. There can be no assurance, how-
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ever, that the State's actions will be sufficient to preserve budgetary
balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating 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
authorized LGAC to issue its bonds and notes in an amount not in excess of
$4.7 billion (exclusive of certain refunding bonds) plus certain other
amounts. Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to
eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one-quarter of the four cent
State sales and use tax to pay debt service on these bonds. The legislation
also imposed a cap on the annual seasonal borrowing of the State at $4.7
billion, less net proceeds of bonds issued by LGAC and bonds issued to
provide for capitalized interest, except in cases where the Governor and the
legislative leaders have certified the need for additional borrowing and
provided a schedule for reducing it to the cap. If borrowing above the cap is
thus permitted in any fiscal year, it is required by law to be reduced to the
cap by the fourth fiscal year after the limit was first exceeded. This
provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes 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 seasonal borrowing.
On January 13, 1992, Standard & Poor's ("S&P") lowered its rating on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised
the rating outlook assessment to stable. On February 14, 1994, S&P revised
its outlook to positive and, on October 3, 1995, confirmed its A- rating. On
January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On October
2, 1995, Moody's reconfirmed its A rating on the State's general obligation
long-term indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating. In
1992, S&P lowered the State's general obligation bond rating to A-, where it
currently remains and was affirmed on July 13, 1995. Prior to this, on March
26, 1990, S&P lowered its rating of all of the State's outstanding general
obligation bonds from AA- to A. Previous S&P ratings were AA- from August,
1987 to March, 1990 and A+ from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds
and notes within the amounts of, and as otherwise restricted by, their
legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to
default on their respective obligations. As of September 30, 1994, the date
of the latest data available, there were 18 Authorities that had outstanding
debt of $100 million or more, and the aggregate outstanding debt, including
refunding bonds, of these 18 Authorities was $70.3 billion. As of March 31,
1995, aggregate Authority debt outstanding as State-supported debt was $27.9
billion and as State-related debt was $36.1 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt
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service costs are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of highways, bridges
or tunnels, rentals charged for housing units, and charges for occupancy at
medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for
State local assistance payments otherwise payable to localities to be made
under certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and
commuter services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency, the New York State Urban Development
Corporation and certain other Authorities have in the past required and
continue to require substantial amounts of assistance from the State to meet
debt service costs or to pay operating expenses. Further assistance, possibly
in increasing amounts, may be required for these, or other, Authorities in
the future. In addition, certain other statutory arrangements provide for
State local assistance payments otherwise payable to localities to be made
under certain circumstances to certain Authorities. The State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to Authorities under these arrangements.
However, in the event that such local assistance payments are so diverted,
the affected localities could seek additional State funds.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus
lines in the New York Metropolitan area through MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll
bridges and tunnels. Because fare revenues are not sufficient to finance the
mass transit portion of these operations, the MTA has depended, and will
continue to depend for operating support upon a system of State, local
government and TBTA support, and, to the extent available, Federal operating
assistance, including loans, grants and operating subsidies. If current
revenue projections are not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required to seek additional
State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation
Region served by the MTA and a special one-quarter of 1 percent regional
sales and use tax--that provide revenues for mass transit purposes, including
assistance to the MTA. In addition, since 1987, State law has required that
the proceeds of a one quarter of 1% mortgage recording tax paid on certain
mortgages in the Metropolitan transportation Region be deposited in a special
MTA fund for operating or capital expenses. Further, in 1993 the State
dedicated a portion of the State petroleum business tax to fund operating or
capital assistance to the MTA. For the 1995-96 fiscal year, total State
assistance to the MTA is estimated by the State to be approximately $1.1
billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the
"1992-96 Capital Program"). The MTA has received approval of the
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1992-96 Capital Program based on this legislation from the 1992-96 Capital
Program Review Board, as State law requires. This is the third five-year plan
since the Legislature authorized procedures for the adoption, approval and
amendment of a five-year plan in 1981 for a capital program designed to
upgrade the performance of the MTA's transportation systems and to
supplement, replace and rehabilitate facilities and equipment. The MTA, the
TBTA and the TA are collectively authorized to issue an aggregate of $3.1
billion of bonds (net certain statutory exclusions) to finance a portion of
the 1992-96 Capital Program. The 1992-96 Capital Program may be financed in
significant part through dedication of State petroleum business taxes
referred to above. However, in December 1994 the proposed bond resolution
based on such tax receipts was not approved by the MTA Capital Program Review
Board. Further consideration of the resolution was deferred until 1995.
There can be no assurance that all the necessary governmental actions for
the 1992-96 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1992-96
Capital Program is delayed or reduced, ridership and fare revenues may
decline, which could, among other things, impair the MTA's ability to meet
its operating expenses without additional State assistance.
Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the 1995-96 fiscal years and thereafter. The potential impact on the State of
such actions by localities is not included in the projections of the State
receipts and disbursements for the 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re- establishment of the Financial Control Board for the City
of Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken
by the Governor or the Legislature to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipal Indebtedness. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1993, the total
indebtedness of all localities in the State was approximately $17.7 billion.
A small portion (approximately $105 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1993.
From time to time, proposed Federal expenditure reductions could reduce,
or in some cases eliminate, Federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If the State, the City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect certain localities and require
increasing State assistance in the future.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse affect on State
finances. Among the more significant of these cases are those that involve:
(i) a challenge to certain enhanced supplemental pension allowances for
members of the ose that involve state and local retirement systems; (ii)
several challenges to provisions of Chapter 81 of the Laws of 1995 which
after the nursing home Medicaid reimbursement methodology; (iii) the validity
of agreements and treaties by which various Indian tribes transferred title
to the State of certain land in central and upstate
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New York; (iv) a challenge to State regulations which reduce base prices for
the direct and indirect component of Medicaid reimbursement for rate years
commencing 1989; (v) an action against State and City officials alleging that
the present level of shelter allowance for public assistance recipients is
inadequate under statutory standards to maintain proper housing; (vi)
challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the client's Social Security benefits; (vii)
alleged responsibility of State officials to assist in remedying racial
segregation in the City of Yonkers; (viii) alleged responsibility of the
State Department of Environmental Conservation for a plaintiff's inability to
complete construction of a cogeneration facility in a timely fashion and the
damages suffered thereby; (ix) challenges to the promulgation of the State's
proposed procedure to determine the eligibility for and nature of home care
services for Medicaid recipients; (x) a challenge to State implementation of
a program which reduces Medicaid benefits to certain home-relief recipients;
(xi) a challenge to the constitutionality of petroleum business tax
assessments authorized by Tax Law 301; and (xii) two cases by commercial
insurers, employee welfare benefit plans, and health maintenance
organizations to provisions of Section 2807-c of the Public Health Law which
impose 13%, 11%, and 9% surcharges on inpatient hospital bills and a bad debt
and charity care allowance on all hospital bills paid by such entities were
resolved by order dated October 2, 1995, the United States District Court for
the Southern District of New York held that the 11 percent and 13 percent
surcharges are preempted by FEBHA and unenforceable against commercial
insurers which provide stop-loss coverage to self-funded ERISA plans.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a
balanced 1995-96 State Financial Plan. In its Notes to its General Purpose
Financial Statements for the fiscal year ended March 31, 1994, the State
reports its estimated liability for awards and anticipated unfavorable
judgments at $675 million. There can be no assurance that an adverse decision
in any of the above cited 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.
NEW YORK CITY
The fiscal health of the State may also be impacted by 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 fiscal years from
1981 through 1995, which end on June 30, show a General Fund surplus reported
in accordance with 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 law without additional tax or other revenue increases or
additional economic reductions in City services or entitlement programs,
which could adversely affect the City's economic base.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New
York ("MAC") to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for The City of New York
(the "Financial Emergency Act") which, among other things, established the
New York State Financial Control Board (the "Control Board") to oversee the
City's financial affairs. The State also established the Office of the State
Deputy Comptroller for the City of New York ("OSDC") to assist the Control
Board in exercising its powers and responsibilities; and a "Control Period"
from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal- monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board,
MAC and OSDC continue to exercise various fiscal-monitoring functions over
the City, and upon the occurrence or "substantial likelihood and imminence"
of the occurrence of certain events, including, but not limited to a City
operating
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budget deficit of more than $100 million, the Control Board is required by
law to reimpose a Control Period. Currently, the City and its Covered
Organizations (i.e., those which receive or may receive money from the City
directly, indirectly or contingently) operate under a four-year 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.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions,
are subject to various uncertainties. If, for example, expected Federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for in the City's financial plan or if other uncertainties materialize that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
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, the Board of Education ("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 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. It is likely
that the Financial Plan will be changed significantly in connection with the
preparation of the Executive Budget for the 1997 fiscal year as a result of
the status of State and Federal budget proposals and other factors. The City
expects to submit the Executive Budget to the City Council in early May 1996.
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
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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 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 City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition
to the $20 million of additional budget relief provided by MAC to the City
since January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in cash of the four fiscal years starting in
fiscal year 1997. The proposed refinancing, which must satisfy MAC
refinancing criteria, is subject to market conditions. The proposed sale of
the City's television station is subject to Federal regulatory approval, and
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.
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 millon, $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.
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 is expected to
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, on December 15,
1995. The 1996-1997 Executive Budget was not adopted by the State Legislature
by the statutory deadline of April 1, 1996. 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 Bud-
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get 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-closing 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
("District Council 37"), and assume that the City will reach agreement with
its remaining municipal unions under terms which are generally consistent
with such settlements which are discussed below. The projections for the 1996
through 1999 fiscal years also assume the 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 reports identifying
risks ranging between $440 million and $560 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. With respect
to the 1997 fiscal year, the report noted that the Financial Plan assumes the
implementation of highly uncertain State and Federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and
$1.4 billion in relief to the City, and identified additional risks,
including risks attributable to BOE which total $415 million, without taking
into account potential reductions that will likely take place upon adoption
of the Federal and State budgets. The report concluded that the magnitude of
the budget risk for the 1997 fiscal year, after two years of large agency
cutbacks and workforce reductions, indicates the seriousness of the City's
continuing budget difficulties, and that the Financial Plan will require
substantial revision in order to provide a credible program for dealing with
the large projected budget gap for the 1997 fiscal year. In addition, the
staff of the OSDC and the staff of the Control Board have issued reports on
the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. In November 1995 the City announced a tentative settlement
with the UFT and a coalition of unions headed by District Council 37 which
represent approximately two-thirds of the City's workforce. The settlement
provides for a wage freeze in the first two years, followed by a cumulative
effective wage increase of 11% by the end of the five year period covered by
the proposed agreements, ending in fiscal years 2000 and 2001. The United
Probation Officers' Association which represents approximately 1,000
probation officers recently ratified a contract with the City which conforms
to the pattern established by the civilian coalition. Additional benefit
increases would raise the total cumulative effective increase to 13% above
present costs. The Financial Plan reflects the costs associated with the
settlements, and assumes similar increases for all other City- funded
employees, which total $49 million, $459 million and $1.2 billion in the
1997, 1998 and 1999 fiscal years, respectively. Such increases exceed $2
billion in each fiscal year after the 1999 fiscal year. District Council 37
and Local 237, representing approximately 90,000 full-time employees, have
ratified the proposed settlement. On December 7, 1995, the members of the UFT
voted on the proposed settlement with the UFT. Six chapters of the UFT,
representing approximately 18,000 full-time employees, including teaching
paraprofessionals, voted to ratify the proposed settlement, which will apply
to those chapters if approved by BOE. Five
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chapters, representing approximately 76,000 full-time employees, including
teachers, voted not to ratify the proposed settlement. A portion of the
transitional labor savings contained in the Financial Plan is dependent upon
conclusion of collective bargaining agreements with the City's workforce.
There can be no assurance that the City will reach an agreement with the
chapters of the UFT which rejected the proposed settlement on the terms
contained in the Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which
can impose a binding settlement except in the case of collective bargaining
with the UFT, which may be subject to non-binding arbitration. On January 23,
1996, the City requested the Office of Collective Bargaining to declare an
impasse against the Patrolmen's Benevolent Association ("PBA") and the United
Firefighters Association ("UFA").
From time to time, the Control Board staff, MAC, OSDC, the City
Comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City
to eliminate projected operating deficits. Some of these reports and
statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the
City may not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's future economic and social conditions
and have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and to
provide necessary services. It is reasonable to expect that reports and
statements will continue to be issued and to engender public comment.
On February 29, 1996 the staff of the City Comptroller issued a report on
the Financial Plan. The report projects that there remains $408 million to
$528 million in budget risks for the 1996 fiscal year, before taking into
account the availability of $160 million in the General Reserve. The
principal risks for the 1996 fiscal year identified in the report include
$140 million to $190 million of uncertain revenues and projected savings at
BOE and the receipt by the City of $100 million to $130 million from a
proposed MAC refunding. The report also expressed concern as to whether the
required regulatory approval for the sale of the City's television station
would be received before the end of the 1996 fiscal year. In a subsequent
report, the City Comptroller increased the risks for the 1996 fiscal year by
$32 million. The report also noted that the city may be required to implement
additional cash management actions and delay payments to vendors if the
Federal budget impasse continues and the state budget process is delayed. In
addition, the report noted that tax revenues between July 1995 and February
1996 were $82.1 million below the Financial Plan projections and that tax
revenues were $10.8 million below the Financial Plan projections for the
month of February 1996, due principally to lower than forecast general
property tax receipts, which were partially offset by greater than forecast
personal income tax revenues.
With respect to the 1997 fiscal year, the report states that the Financial
Plan includes total risks of between $2.05 billion and $2.15 billion. The
report notes that the gap-closing program for the 1997 fiscal year assumes
the implementation of highly uncertain State and Federal actions that would
provide between $1.2 billion and $1.4 billion in relief to the City resulting
from proposed public assistance and medical assistance entitlement
reductions, a proposed increase in Federal Medicaid reimbursements,
additional State aid and various privatization proposals. The report
concludes that it is unlikely that the City will be able to implement most of
these initiatives due to Federal and State budget difficulties. Additional
risks for the 1997 fiscal year identified in the report include (i) risks
attributable to BOE relating to unspecified additional State aid, unspecified
expenditure reductions and proposals to reduce special education spending,
which total $415 million, without taking into account potential reductions
that will likely take place upon adoption of the Federal and State budgets;
(ii) proposals for the sale of parking meters and other assets; and (iii) the
receipt of $244 million to $294 million of lease payments from the Port
Authority for the City's airports.
The report concluded that the magnitude of the budget risk for the 1997
fiscal year, after two years of large agency cutbacks and work force
reductions, indicates the seriousness of the City's continuing budget
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difficulties, and that the Financial Plan will require substantial revision
in order to provide a credible program for dealing with the large projected
budget gap for the 1997 fiscal year. The report further notes that the
relative weakness of the national and City economies makes it unlikely that
new jobs and business expansion will generate significant additional tax
revenues and that proposed Federal and State reductions in funding will
reduce the levels of intergovernmental assistance for the City.
On March 6, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that there remained a budget gap for the 1996
fiscal year of $44 million, which can be closed with the $200 million General
Reserve, and additional significant risks totaling $507 million involving
actions which require the approval of the State and Federal governments or
other third parties. These risks include (i) potential delays in the sale of
the City's television station; (ii) shortfalls in projected resources from
MAC; and (iii) shortfalls of $100 million in projected State education aid
and $50 million in projected Federal assistance. In addition, the report
expressed concern that (i) the City may have to write off a portion of
approximately $300 million in State education aid that was included as
revenue in prior years' budgets, since the State has not made payment and
neither the current nor the proposed State budget include an appropriation
sufficient to cover most of this liability, and (ii) the City must complete
two transactions before the end of the fiscal year, the sale of property tax
liens and housing mortgages, that together are expected to produce resources
of $267 million.
The report also concluded that the gap for the 1997 fiscal year could be
$544 million greater than the City's projected budget gap of $2 billion,
primarily due to the failure of BOE to specify $304 million of expenditure
reductions or additional resources necessary to bring its spending in line
with the resources allocated to it in the Financial Plan. In addition, the
report noted that gap-closing proposals set forth in the Financial Plan
totalling $1.6 billion are at high risk of falling short of target. The
proposals identified in the report as high risk include (i) $800 million in
expected State and Federal assistance, primarily from savings in social
service entitlement programs, which are dependent on the ultimate resolution
of the Federal and State budgets; (ii) $300 million from initiatives to
privatize parking meters and other City assets; (iii) $244 million to be
received from the Port Authority as retroactive lease payments for the City's
two airports; and (iv) $181 million in spending cuts for BOE. Moreover, the
report expressed concern that the potential for budget cuts at BOE could
exceed $1 billion after taking into account the possible loss of $453 million
in proposed reductions in State and Federal funding. The report also stated
that non-recurring resources for the 1996 fiscal year have increased to over
$1.7 billion, approaching the unprecedented $2 billion used in the 1995
fiscal year, and that one-third of the 1997 fiscal year gap-closing program
already relies on one-time resources.
With respect to the economy, the report noted that, in a time of slow
economic growth, revenues continue to stagnate, and that the City's economic
forecast, which is premised on sluggish national growth, does not reflect the
potential for a national recession during the four years of the Financial
Plan. In addition, the report expressed concern that the City's economy, and
City and State tax revenues, are closely tied to swings in the financial
markets, such as rising interest rates, which sharply reduced the profits of
securities firms in 1994, and rising equity markets, which raised personal
income and business tax collections in 1995, as well as economic conditions
in Europe and Japan, which are currently weak.
The report noted that Federal and State assistance is likely to be
significantly reduced and that there is little potential for significant new
revenues beyond those already reflected in the Financial Plan. The report
concluded that, despite the City's success in work force reduction and
entitlement savings, the Financial Plan shows an increasing imbalance between
the City's recurring revenues and expenditures.
On March 15, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $384 millon for the 1996
fiscal year, including $109 million in uncertain State aid to be received by
BOE and $130 million of the projected $150 million in budget relief from MAC
which had not yet been agreed to by MAC. In addition to these risks, the
report noted that the City must successfully implement major initiatives,
including the sale of the City's television station, which requires
regulatory approval, and the proposed property tax lien sale and the sale of
a pool of mortgages. With respect to the 1997 fiscal
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year, the report projects that the City must resolve budget problems of $1.7
billion in the 1997 fiscal year and over $2.8 billion in the 1998 fiscal
year, $3.5 billion in the 1999 fiscal year and $4.6 billion in fiscal year
2000. The projected gaps for the 1997 and subsequent fiscal years result
primarily from uncertainties concerning the ability of BOE to implement
actions necessary to achieve a balanced budget; proposed sales of assets in
the 1997 fiscal year, including the City's parking meters; projected Medicaid
entitlement reductions from the State's assumption of certain Medicaid costs,
to be funded by a change in the Federal Medicaid matching rate formula; the
projected receipt of retroactive and increased lease payments for the City's
two airports; and the possibility of larger than forecast overtime costs. In
addition, the report noted that BOE has estimated that it could lose
additional funding of up to $453 million in the 1997 fiscal year due to
reductions in Federal and State aid.
With respect to the economy, the report noted that only 80,000 of the
310,000 private sector jobs lost during 1990 and 1992 have been regained, and
that the growth in private sector employment has been substantially offset by
the continuing contraction of Federal, State and local government jobs in the
City. The report further noted that most of the growth in local output is the
result of a substantial increase in financial sector salaries and bonus
payments, rather than growth in jobs, and that such rapid compensation growth
could evaporate when stock market growth slows. The report stated that it is
unlikely that the growth in nonproperty taxes projected in the Financial Plan
can be sustained if either the securities industry or the national economy
were to experience a substantial setback at any time over the next four
years.
The report concluded that, in spite of the large gap-closing efforts of
the past several years, the City's finances have continued to deteriorate,
that revenue growth is insufficient to support planned expenditures over the
term of the Financial Plan, and that the City continues to rely heavily on
non-recurring actions to balance its budget. The report identified several
factors underlying the City's fiscal problems, including sluggish revenue
growth, which is projected to be below the rate of inflation, a decline in
the real value of Federal and State aid relative to the size of the City's
budget, and the projected growth rate of expenditures, which exceeds the rate
of inflation after the 1997 fiscal year due to the impact of recent labor
settlements, the cost of fringe benefits and growth in Medicaid and debt
service costs. The report stated that the City is at a significant
crossroads, facing a growing gap between revenues and expenditures and
approaching its constitutional borrowing limit, with prospects of receiving
additional State and Federal assistance uncertain.
On December 12, 1995, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be reduced in
future years. The report noted that, under the State constitution, the City
is permitted to issue debt in an amount not greater than 10% of the average
full value of taxable real estate for the current year and preceding four
years. The report concluded that, if the value of taxable real property in
each of 1998 and 1999 fiscal years continues to decline, reflecting the
continuing trend of lower values of taxable property, the City would have to
continue to curtail its capital program from the levels projected in the
Financial Plan to remain within the legal debt-incurring limit in those
years. The City Comptroller recommended that the City prioritize and improve
the efficiency and administration of its current capital plan to determine
which capital projects can be delayed or cancelled to further reduce capital
expenditures and thus debt service over the course of the Financial Plan.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat"
tax could be detrimental to the creditworthiness of certain municipal bonds.
The report noted that the elimination of Federal income tax deductions
currently available, including residential mortgage interest, property taxes
and state and local income taxes, could have a severe impact on funding
methods under which municipalities operate. With respect to property taxes,
the report noted that the total valuation of a municipality's tax base is
affected by the affordability of real estate and that elimination of mortgage
interest deduction would result in a significant reduction in affordability
and, thus, in the demand for, and the valuation of, real estate. The report
noted that rapid losses in property valuations would be felt by many
municipalities, hurting their revenue raising abilities. In addition, the
report noted that the loss of the current deduction for real property and
state and local income taxes from Federal income tax liability would make
rate increases more difficult and increase pressures to lower existing rates,
and that
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the cost of borrowing for municipalities could increase if the tax-exempt
status of municipal bond interest is worth less to investors. Finally, the
report noted that tax anticipation notes issued in anticipation of property
taxes could be hurt by the imposition of a flat tax, if uncertainty is
introduced with regard to their repayment revenues, until property values
fully reflect the loss of mortgage and property tax deductions.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City's current monthly cash flow forecast for
the 1996 fiscal year shows a need of $2.4 billion of seasonal financing for
the 1996 fiscal year, a portion of which will be met with the proceeds of
notes. Seasonal financing requirements for the 1995 fiscal year increased to
$2.2 billion from $1.75 billion and $1.4 billion in the 1994 and 1993 fiscal
years, respectively. The delay in the adoption of the State's budget for its
1992 fiscal year required the City to issue $1.25 billion in short-term notes
on May 7, 1991, and the delay in the adoption of the State's budget for its
1991 fiscal year required the City to issue $900 million in short-term notes
on May 15, 1990. Seasonal financing requirements were $2.25 billion and $3.65
billion in the 1992 and 1991 fiscal years, respectively.
The 1996-1999 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues
in the amounts projected. The 1996-1999 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1996 through 1999 fiscal years; continuation of
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required
pension fund contributions; the willingness and ability of the State, in the
context of the State's current financial condition, to provide the aid
contemplated by the Financial Plan and to take various other actions to
assist the City, including the proposed entitlement spending reductions; the
ability of HHC, BOE and other such agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; adoption of the City's budgets by the
City Council in substantially the forms submitted by the Mayor; the ability
of the City to implement proposed reductions in City personnel and other cost
reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real
estate tax revenues; approval by MAC of the projected receipt of funds from
MAC; the City's ability to market its securities successfully in the public
credit markets; and unanticipated expenditures that may be incurred as a
result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.
On June 7, 1995, the State adopted its Budget for the State's 1996 fiscal
year, commencing April 1, 1995. Prior to adoption of the budget the State had
projected a potential budget gap of approximately $5 billion for its 1996
fiscal year. This gap is projected to be closed in the 1995-1996 State
Financial Plan based on the enacted budget, through a series of actions,
mainly spending reductions and cost containment measures and certain
reestimates that are expected to be recurring, but also through the use of
one-time solutions. The State Financial Plan projects (i) nearly $1.6 billion
in savings from cost containment, disbursement reestimates, and other savings
in social welfare programs, including Medicaid, income maintenance and
various child and family care programs; (ii) $2.2 billion in savings from
State agency actions to reduce spending on the State workforce, SUNY and
CUNY, mental hygiene programs, capital projects, the prison system and fringe
benefits; (iii) $300 million in savings from local assistance reforms,
including actions affecting school aid and revenue sharing while proposing
program legislation to provide relief from certain mandates that increase
local spending; (iv) over $400 million in revenue measures, primarily a new
Quick Draw Lottery game, changes to tax payment schedules, and the sale of
assets; and (v) $300 million from reestimates in receipts.
On April 3, 1996, the State announced that the General Fund for the
State's 1996 fiscal year is expected to be balanced on a cash basis, with an
operating surplus of $445 million. There can be no assurance that the General
Fund will yield such a surplus.
The Governor presented his 1996-1997 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it. The Legislature and the
Comptroller will review the Governor's Executive Bud-
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get and are expected to comment on it. There can be no assurance that the
Legislature will enact the Executive Budget into law, or that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in the Executive Budget.
The Governor's Executive Budget 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 $31.3
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 $31.2 billion, a decrease of $1.5 billion from
spending totals projected for the current fiscal year.
The 1996-1997 Executive Budget proposes $3.9 billion in actions to balance
the 1996-97 State Financial Plan. 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 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 State has noted that
there is considerable uncertainty as to the ultimate composition of the
Federal budget, including uncertainties regarding major Federal entitlement
reforms. The 1996-1997 Executive Budget seeks to lessen the effect of the
proposed cuts on localities by granting certain mandate relief to permit them
to exercise greater flexibility in allocating their resources. However, no
assurance can be given as to the amount of savings which the City might
realize from any of the Medicaid cost containment or welfare reform measures
proposed in the Executive Budget or the size of any reductions in State aid
to the City. Depending upon the amount of such savings or the size of any
such reduction in State aid, the City might be required to make substantial
additional changes in the Financial Plan.
The State Division of the Budget has noted that the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. Those factors can be very complex, can vary from
fiscal year to fiscal year, and are frequently the result of actions taken
not only by the State but also by entities, such as the Federal government,
that are outside the State's control. Because of the uncertainty and
unpredictability of these changes, their impact cannot be included in the
assumptions underlying the State's projections at this time. There can be no
assurance that the State economy will not experience results that are worse
than predicted, with corresponding material and adverse effects on the
State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that
the State's actions will be sufficient to preserve budgetary balance or to
align recurring receipts and disbursements in future fiscal years. The
1996-1997 Executive Budget includes actions that will have an impact on
receipts and disbursements in future fiscal years. The net impact of these
actions is expected to produce a potential imbalance in State fiscal year
1997-98 of $1.4 billion and in the 1998-99 fiscal year of $2.5 billion,
assuming implementation of the 1996-97 Executive Budget recommendations. It
is expected that the Governor will propose to close these budget gaps with
future spending reductions.
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 the current and future fiscal years. Specifically, the
assumption of $1.3 billion in savings in the State fiscal year 1996-97 from a
reduced State General Fund share of Medicaid is contingent upon anticipated
changes
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to Federal provisions, including an increase in 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 1996-1997 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. A
significant risk to the State's 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 1996-1997 fiscal
year. In addition, changes in Federal aid programs, currently pending in
Congress, could result in prolonged interruptions in the receipt of Federal
grants.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could
be used for additional program needs if the Federal government enacts welfare
and Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the
State assumed in the 1996-97 Executive Budget. In the State's 1996 fiscal
year and in certain recent fiscal years, the State has failed to enact a
budget prior to the beginning of the State's fiscal year. The State budget
for the State's 1997 fiscal year was not adopted by the statutory deadline of
April 1, 1996. However, temporary spending measures are being considered by
the State, which would maintain State spending until April 30, 1996. A
prolonged delay in the adoption of the State's budget beyond the statutory
April 1 deadline could delay the projected receipt by the City of State aid.
In addition, there can be no assurance that State budgets in future fiscal
years will be adopted by the April 1 statutory deadline.
The projections and assumptions contained in the 1996-1999 Financial Plan
are subject to revision which may involve substantial change, and no
assurance can be given that these estimates and projections, which include
actions which the City expects will be taken but which are not within the
City's control, will be realized. 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. The
City's projections are subject to the City's ability to implement the
necessary service and personnel reduction programs successfully.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if
any, on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon
the City's ability to carry out the 1996-99 Financial Plan. The City is a
party to numerous lawsuits and is the subject of numerous claims and
investigations. The City has estimated that its potential future liability on
account of outstanding claims against it as of June 30, 1995 amounted to
approximately $2.5 billion. This estimate was made by categorizing the
various claims and applying a statistical model, based primarily on actual
settlements by type of claim during the preceding ten fiscal years, and by
supplementing the estimated liability with information supplied by the City's
Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of
persistent softness in the City's economy, highlighted by weak job growth and
a growing dependence on the historically volatile financial services sector".
Other factors identified by S&P's in lowering its rating on City bonds
included a trend of using one-time measures, including debt refinancings, to
close projected budget gaps, dependence on unratified labor savings to help
balance the Financial Plan, optimistic projections of additional federal and
State aid or mandate relief, a history of cash flow difficulties caused by
State budget delays and continued high debt levels.
Fitch Investors Service, Inc. ("Fitch") rates City general obligation
bonds A-. Moody's rating for City general obligation bonds is Baa1. On March
1, 1996, Moody's stated that the rating for the City's Baa1 general
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obligation bonds remains under review for a possible downgrade 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. Since July 15, 1993, Fitch has rated
City bonds A-. On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications. There is no
assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of the City's general obligation bonds.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July
10, 1995, S&P revised its rating of City bonds downward to BBB+, as discussed
above. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1,
in May 1988 to A and again in February 1991 to Baa1. Since July 15, 1993,
Fitch has rated City bonds A-. On July 12, 1995, Fitch stated that the City's
credit trend remains "declining."
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APPENDIX D [TO BE UPDATED]
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW JERSEY MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New Jersey Tax Free Income Fund in New Jersey municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New Jersey municipal obligations available as of the date of
this Statement of Additional Information. The accuracy and completeness of
the information contained in such offering statements has not been
independently verified.
State Finance/Economic Information. New Jersey is the ninth largest state
in population and the fifth smallest in land area. With an average of 1,062
people per square mile, it is the most densely populated of all the states.
New Jersey's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural
areas with selective commercial agriculture. Historically, New Jersey's
average per capita income has been well above the national average, and in
1994 New Jersey ranked second among the states in per capita personal income
($27,742).
By the beginning of the national recession (which officially started in
July 1990 according to the National Bureau of Economic Research),
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the
long-term downward trend of factory employment had accelerated, partly
because of a leveling off of industrial demand nationally. The onset of
recession caused an acceleration of New Jersey's job losses in construction
and manufacturing, as well as an employment downturn in such previously
growing sectors as wholesale trade, retail trade, finance, utilities,
trucking and warehousing.
Reflecting the economic downturn, the rate of unemployment in New Jersey
rose from 3.6% during the first quarter of 1989 to a recessionary peak of
8.4% during 1992. The unemployment rate fell to an average of 6.4% during the
first ten months of 1995.
During the recovery period as a whole, May 1992 to October 1995, New
Jersey experienced an employment gain of 176,400, a recovery of 67% of the
jobs lost during the recession. Employment growth was particularly strong in
business services and its personnel supply component with increases of 14,400
and 5,800, respectively, in the 12-month period ended October 1995. Just as
New Jersey was hurt by the national recession, the State is now in its fourth
year of recovery which appears to be sustainable.
New Jersey's Budget and Appropriation System. New Jersey operates on a
fiscal year ending on June 30. The General Fund is the fund into which all
New Jersey revenues not otherwise restricted by statute are deposited and
from which appropriations are made. The largest part of the total financial
operations of New Jersey is accounted for in the General Fund, which includes
revenues received from taxes and unrestricted by statute, most federal
revenues, and certain miscellaneous revenue items. The Appropriation Acts
enacted by the New Jersey Legislature and approved by the Governor provide
the basic framework for the operation of the General Fund. The undesignated
General Fund balance at year end for fiscal year 1993 was $937.4 million, for
fiscal year 1994 was $926.0 million and for fiscal year 1995 was $569.2
million. For fiscal year 1996, the balance in the undesignated General Fund
is estimated to be $471.1 million, subject to change upon completion of the
year-end audit. The estimated balance for fiscal year 1997 is $254.9 million,
based on the amounts contained in the fiscal year 1997 Appropriations Acts.
The fund balances are available for appropriation in succeeding fiscal years.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may by statutory authority prevent any expenditure
under any appropriation. No supplemental appropriation may be enacted after
adoption of an appropriations act except where there are sufficient revenues
on hand or anticipated to meet such appropriation. In the past when actual
revenues have been less than the amount
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anticipated in the budget, the Governor has exercised plenary powers leading
to, among other actions, a hiring freeze for all New Jersey departments and
discontinuation of programs for which appropriations were budgeted but not
yet spent.
General Obligation Bonds. New Jersey finances capital projects primarily
through the sale of its general obligation bonds. These bonds are backed by
the full faith and credit of New Jersey. Tax revenues and certain other fees
are pledged to meet the principal and interest payments required to pay the
debt fully.
The aggregate outstanding general obligation bonded indebtedness of New
Jersey as of June 30, 1996 was $3.6884 billion. The appropriation for the
debt service obligation on outstanding indebtedness is $446.9 million for
fiscal year 1997.
In addition to payment from bond proceeds, capital construction can also
be funded by appropriation of current revenues on a pay-as-you-go basis. This
amount represents 2.2% of the total fiscal year 1997 budget.
Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey
initiated a program under which it issued tax and revenue anticipation notes
to aid in providing effective cash flow management to fund imbalances which
occur in the collection and disbursement of the General Fund and Property Tax
Relief Fund revenues. It is anticipated that this program will be continued
in fiscal year 1997. Such tax and revenue anticipation notes do not
constitute a general obligation of New Jersey or a debt or liability within
the meaning of the New Jersey Constitution. Such notes constitute special
obligations of New Jersey payable solely from moneys on deposit in the
General Fund and Property Tax Relief Fund which are attributable to New
Jersey's 1997 fiscal year and are legally available for such payment.
Lease Financing. New Jersey has entered into a number of leases relating
to the financing of certain real property and equipment. New Jersey leases
the Richard J. Hughes Justice Complex in Trenton from the Mercer County
Improvement Authority (the "MCIA"). Under lease agreements with the New
Jersey Economic Development Authority (the "EDA"), New Jersey leases (i)
office buildings that house the New Jersey Division of Motor Vehicles, New
Jersey Network, a branch of the United States Postal Service and a parking
facility, (ii) approximately 13 acres of real property and certain
infrastructure improvements thereon located in the City of Newark, and (iii)
two parking lots, certain infrastructure improvements and related elements
located at Liberty State Park in the City of Jersey City. Pursuant to various
leases with the New Jersey Building Authority (the "NJBA"), New Jersey leases
several office buildings in the Trenton area, as well as the State Capital
Complex. Rental payments under each of the foregoing leases are sufficient to
pay debt service on the related bonds issued by MCIA, EDA and NJBA, and in
each case are subject to annual appropriation by the New Jersey Legislature.
Beginning in April 1984, New Jersey, acting through the Director of the
Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment, services and real
property to be used by various departments and agencies of New Jersey. To
date, New Jersey has completed eleven lease purchase agreements which have
resulted in the issuance of Certificates of Participation totalling
$749,350,000. The agreements relating to these transactions provide for
semi-annual rental payments. New Jersey's obligation to pay rentals due under
these leases is subject to annual appropriations being made by the New Jersey
Legislature.
Market Transition Facility. Legislation enacted in June 1994 authorizes
the EDA to issue bonds to pay the current and anticipated liabilities and
expenses of the Market Transition Facility, which issued private passenger
automobile insurance policies for drivers who could not be insured by private
insurance companies on a voluntary basis. On July 26, 1994 the EDA issued
$705,270,000 aggregate principal amount of Market Transition Facility Senior
Lien Revenue Bonds, Series 1994A. The EDA and State Treasurer have entered
into an agreement which provides for the payment to the EDA of amounts on
deposit in the DMV Surcharge Fund to pay debt service on the bonds. Such
payments are subject to and dependent upon appropriations being made by the
State Legislature.
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<PAGE>
Educational Facilities Authority. Legislation enacted in 1993 authorizes
the Educational Facilities Authority (the "EFA") to issue bonds to finance
the purchase of equipment to be leased to institutions of higher learning. ON
August 17, 1994 the EFA issued $100,000,000 aggregate principal amount of
Higher Education Leasing Fund Program bonds. The EFA and the State Treasurer
have entered into an agreement which provides to the EFA amounts required to
pay debt service on the bonds. Such payments are subject to and dependent
upon appropriations being made by the State Legislature.
Other legislation enacted in 1993 created the Higher Education Facilities
Trust Fund and authorized its funding by the issuance of bonds to make grants
to New Jersey's public and private institutions of higher education for the
development, construction and improvement of instructional, laboratory,
communication and research facilities. The legislation limits the total
outstanding amounts of bonds to be issued to $220,000,000. ON November 29,
1995 the EFA issued $220,000,000 aggregate principal amount of Higher
Education Facilities Trust Fund Bonds, Series 1995A. These bonds are secured
by payments to be made to the EFA by the State, which payments are subject to
and dependent upon appropriations being made by the State Legislature.
State Supported School and County College Bonds. Legislation provides for
future appropriations for New Jersey aid to local school districts equal to
debt service on a maximum principal amount of $280,000,000 of bonds issued by
such local school districts for construction and renovation of school
facilities and for New Jersey aid to counties equal to debt service on up to
$80,000,000 of bonds issued by counties for construction of county college
facilities. The New Jersey Legislature is not legally bound to make such
future appropriations, but has done so to date on all outstanding obligations
issued under these laws.
"Moral Obligation" Financing. The authorizing legislation for certain New
Jersey entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal of and interest on the
obligations, and a New Jersey appropriation in the amount of the deficiency
is to be made. However, the New Jersey Legislature is not legally bound to
make such an appropriation. Bonds issued pursuant to authorizing legislation
of this type are sometimes referred to as "moral obligation" bonds. There is
no statutory limitation on the amount of "moral obligation" bonds which may
be issued by eligible New Jersey entities.
The following table sets forth the "moral obligation" bonded indebtedness
issued by New Jersey entities as of June 30, 1995.
<TABLE>
<CAPTION>
Maximum Annual Debt
Service Subject to
Outstanding Moral Obligation
------------------ --------------------
<S> <C> <C>
New Jersey Housing and Mortgage
Finance Agency $554,390,156.41 $50,775,490.73
South Jersey Port Corporation 86,525,000.00 7,379,256.00
Higher Education Assistance Authority 94,996,064.00 9,792,628.13
--------------- --------------
$735,911,220.41 $67,947,374.86
=============== ==============
</TABLE>
New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey
Housing and Mortgage Finance Agency nor its predecessors, the New Jersey
Housing Finance Agency and the New Jersey Mortgage Finance Agency, have had a
deficiency in a debt service reserve fund which required New Jersey to
appropriate funds to meet its "moral obligation." It is anticipated that this
agency's revenues will continue to be sufficient to cover debt service on its
bonds.
South Jersey Port Corporation. New Jersey provides the South Jersey Port
Corporation (the "Corporation") with funds to cover all debt service and
property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations. For calendar years 1986 through
1995, New Jersey
D-3
<PAGE>
has made appropriations totalling $39,126,084.25 which covered deficiencies
in revenues of the Corporation, for debt service and property tax payments.
Higher Education Assistance Authority. The Higher Education Assistance
Authority ("HEAA") has issued $94,996,064 aggregate principal amount of
revenue bonds. It is anticipated that the HEAA's revenues will be sufficient
to cover debt service on its bonds.
New Jersey Sports and Exposition Authority. On March 2, 1992, the New
Jersey Sports and Exposition Authority (the "Sports Authority") issued
$147,490,000 in New Jersey guaranteed bonds and defeased all previously
outstanding New Jersey guaranteed bonds of the Sports Authority. New Jersey
officials have stated the belief that the revenue of the Sports Authority
will be sufficient to provide for the payment of debt service on these
obligations without recourse to New Jersey's guarantee.
Legislation enacted in 1992 authorizes the Sports Authority to issue bonds
for various purposes payable from New Jersey appropriations. Pursuant to this
legislation, the Sports Authority and the New Jersey Treasurer have entered
into an agreement (the "State Contract") pursuant to which the Sports
Authority will undertake certain projects, including the refunding of certain
outstanding bonds of the Sports Authority, and the New Jersey Treasurer will
credit to the Sports Authority Fund amounts from the General Fund sufficient
to pay debt service and other costs related to the bonds. The payment of all
amounts under the State Contract is subject to and dependent upon
appropriations being made by the New Jersey Legislature. As of June 30, 1995
there were approximately $473,410,000 aggregate principal amount of Sports
Authority bonds outstanding, the debt service on which is payable from
amounts credited to the Sports Authority Fund pursuant to the State Contract.
New Jersey Transportation Trust Fund Authority. In July 1984, New Jersey
created the New Jersey Transportation Trust Fund Authority (the "TTFA"), an
instrumentality of New Jersey organized and existing under the New Jersey
Transportation Trust Fund Authority Act of 1984, as amended (the "Act") for
the purpose of funding a portion of New Jersey's share of the cost of
improvements to New Jersey's transportation system. Pursuant to the Act, the
TTFA, the New Jersey Treasurer and the Commissioner of Transportation
executed a contract (the "Contract") which provides for the payment of
certain amounts prescribed to the TTFA. The payment of all such amounts is
subject to and dependent upon appropriations being madeby the New Jersey
Legislature and there is no requirement that the Legislature make such
appropriations. On May 30, 1995, the New Jersey Legislative amended the Act
to provide, among other things, for (i) the funding of transportation
projects through Jun 30, 2000, (ii) the issuance of debt in an aggregate
principal amount in excess of the statutory debt limitation in effect prior
to such amendment, (iii) an increase in the amount of revenues available to
the TTFA and (iv) broadening the scope of transportation projects.
Pursuant to the Act, the aggregate principal amount of the TTFA's bonds,
notes or other obligations outstanding at any one time may not exceed $700
million plus amounts carried over from prior fiscal years. These bonds are
special obligations of the TTFA payable from the payments made by New Jersey
pursuant to the Contract.
Economic Recovery Fund Bonds. Legislation enacted during 1992 by New
Jersey authorizes the EDA to issue bonds for various economic development
purposes. Pursuant to that legislation, EDA and the New Jersey Treasurer have
entered into an agreement (the "ERF Contract") through which EDA has agreed
to undertake the financing of certain projects and the New Jersey Treasurer
has agreed to credit to the Economic Recovery Fund from the General Fund
amounts equivalent to payments due to New Jersey under an agreement with the
Port Authority of New York and New Jersey. The payment of all amounts under
the ERF Contract is subject to and dependent upon appropriations being made
by the New Jersey Legislature.
D-4
<PAGE>
SUMMARY OF OTHER NEW JERSEY RELATED OBLIGATIONS
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
Type of Issue Outstanding
------------- ---------------
<S> <C>
Lease Financing $
MCIA 94,080,000.00
EDA 116,641,455.70
NJBA 507,109,728.57
State COP 200,035,000.00
EFA 100,000,000.00
Market Transition Facility 705,270,000.00
State-Supported School and County
College Bonds 102,701,186.00
Moral Obligation 735,911,220.41
Sports Authority 615,100,000.00
TTFA(1) 1,409,340,000.00
Economic Recovery Fund Bonds 231,462,868.90
-----------------
TOTAL 4,817,651,458.58
=================
</TABLE>
<TABLE>
<CAPTION>
Subsequent Issues Since June 30, 1993 Par Amount Date of Issue
--------------------------------------- ------------ --------------
<S> <C> <C>
TTFA $804,475,000.00 8/3/95
TTFA 778,225,000.00 8/24/95
EFA 220,000,000.00 11/29/95
EDA 14,435,000.00 12/28/95
TTFA 334,065,000.00 2/29/96
EDA(2) 29,900,000.00 5/3/96
</TABLE>
- -------------
(1) All of the TTFA Bonds were defeased through the issuance by the TTFA of
refunding bonds on August 3, 1995 and August 24, 1995.
(2) These are refunding bonds issued to refund certain of the EDA's lease
financing bonds.
Municipal Finance. New Jersey's local finance system is regulated by
various statutes designed to assure that all local governments and their
issuing authorities remain on a sound financial basis. Regulatory and
remedial statutes are enforced by the Division of Local Government Services
(the "Division") in the New Jersey State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 40A:4-1 et
seq.) imposes specific budgetary procedures upon counties and municipalities
("local units"). Every local unit must adopt an operating budget which is
balanced on a cash basis, and items of revenue and appropriation must be
examined by the Director of the Division of Local Government Services in the
Department of Community Affairs (the "Director"). The accounts of each local
unit must be independently audited by a registered municipal accountant. New
Jersey law provides that budgets must be submitted in a form promulgated by
the Division and further provides for limitations on estimates of tax
collection and for reserves in the event of any shortfalls in collections by
the local unit. The Division reviews all municipal and county annual budgets
prior to adoption for compliance with the Local Budget Law. The Director is
empowered to require changes for compliance with law as a condition of
approval; to disapprove budgets not in accordance with law; and to prepare
the budget of a local unit, within the limits of the adopted budget of the
previous year with suitable adjustments for legal compliance, if the local
unit fails to adopt a budget in accordance with law. This process insures
that every municipality and county annually adopts a budget balanced on a
cash basis, within limitations on appropriations or tax levies, respectively,
and making adequate provision for principal of and interest on indebtedness
falling due in the fiscal year, deferred charges and other statutory
expenditure requirements. The Director
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<PAGE>
also oversees changes to local budgets after adoption as permitted by law,
and enforces regulations pertaining to execution of adopted budgets and
financial administration.
The Local Government Cap Law (N.J.S.A. 4OA:4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
municipality and the tax levy of any county to either 5 percent or an index
rate determined annually by the Director, whichever is less. However, where
the index percentage rate exceeds 5 percent, the Cap Law permits the
governing body of any municipality or county to approve the use of a higher
percentage rate up to the index rate. Further, where the index percentage
rate is less than 5 percent, the Cap Law also permits the governing body of
any municipality or county to approve the use of a higher percentage rate up
to 5 percent. Regardless of the rate utilized, certain exceptions exist to
the Cap Law's limitation on increases in appropriations. The principal
exceptions to these limitations are municipal and county appropriations to
pay debt service requirements; to comply with certain other New Jersey or
federal mandates; amounts approved by referendum; and, in the case of
municipalities only, to fund the preceding year's cash deficit or to reserve
for shortfalls in tax collections.
New Jersey law also regulates the issuance of debt by local units. The
Local Budget Law limits the amount of tax anticipation notes that may be
issued by local units and requires the repayment of such notes within 120
days of the end of the fiscal year (six months in the case of the counties)
in which issued. The Local Bond Law (N.J.S.A. 4OA:2-1 et seq.) governs the
issuance of bonds and notes by the local units. No local unit is permitted to
issue bonds for the payment of current expenses (other than Fiscal Year
Adjustment Bonds described more fully below). Local units may not issue bonds
to pay outstanding bonds, except for refunding purposes, and then only with
the approval of the Local Finance Board. Local units may issue bond
anticipation notes for temporary periods not exceeding in the aggregate
approximately ten years from the date of first issue. The debt that any local
unit may authorize is limited to a percentage of its equalized valuation
basis, which is the average of the equalized value of all taxable real
property and improvements within the geographic boundaries of the local unit,
as annually determined by the Director of the Division of Taxation, for each
of the three most recent years. In the calculation of debt capacity, the
Local Bond Law and certain other statutes permit the deduction of certain
classes of debt ("statutory deductions") from all authorized debt of the
local unit ("gross capital debt") in computing whether a local unit has
exceeded its statutory debt limit. Statutory deductions from gross capital
debt consist of bonds or notes (i) authorized for school purposes by a
regional school district or by a municipality or a school district with
boundaries coextensive with such municipality to the extent permitted under
certain percentage limitations set forth in the School Bond Law (as
hereinafter defined); (ii) authorized for purposes which are self
liquidating, but only to the extent permitted by the Local Bond Law; (iii)
authorized by a public body other than a local unit the principal of and
interest on which is guaranteed by the local unit, but only to the extent
permitted by law; (iv) that are bond anticipation notes; (v) for which
provision for payment has been made; or (vi) authorized for any other purpose
for which a deduction is permitted by law. Authorized net capital debt (gross
capital debt minus statutory deductions) is limited to 3.5 percent of the
equalized valuation basis in the case of municipalities and 2 percent of the
equalized valuation basis in the case of counties. The debt limit of a county
or municipality, with certain exceptions, may be exceeded only with the
approval of the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28,
1991, required certain municipalities and permits all other municipalities to
adopt the New Jersey fiscal year in place of the existing calendar fiscal
year. Municipalities that change fiscal years must adopt a six month
transition budget for January through June. Since expenditures would be
expected to exceed revenues primarily because state aid for the calendar year
would not be received by the municipality until after the end of the
transition year budget, the act authorizes the issuance of Fiscal Year
Adjustment Bonds to fund the one time deficit for the six month transition
budget. The act provides that the deficit in the six month transition budget
may be funded initially with bond anticipation notes based on the estimated
deficit in the six month transition budget. Notes issued in anticipation of
Fiscal Year Adjustment Bonds, including renewals, can only be issued for up
to one year unless the Local Finance Board permits the municipality to renew
them for a further period of time. While the act does not authorize counties
to change their fiscal years, it does provide that counties with cash flow
deficits may issue Fiscal Year Adjustment Bonds as well.
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<PAGE>
There are 567 municipalities and 21 counties in New Jersey. During 1993,
1994, and 1995 no county exceeded its statutory debt limitations or incurred
a cash deficit in excess of 4 percent of its tax levy. Only two
municipalities had a cash deficit greater than 4 percent of their tax levies
for 1994 and 1995. The number of municipalities which exceeded statutory debt
limits was six as of December 31, 1994. No New Jersey municipality or county
has defaulted on the payment of interest or principal on any outstanding debt
obligation since the 1930's.
School Districts. New Jersey's school districts operate under the same
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but New Jersey supervision
of school finance closely parallels that of local governments.
All New Jersey school districts are coterminous with the boundaries of one
or more municipalities. They are characterized by the manner in which the
board of education, the governing body of the school district, takes office.
Type I school districts, most commonly found in cities, have a board of
education appointed by the mayor or the chief executive officer of the
municipality constituting the school district. In a Type II school district,
the board of education is elected by the voters of the district. Nearly all
regional and consolidated school districts are Type II school districts.
The New Jersey Department of Education has been empowered with the
necessary and effective authority to abolish an existing school board and
create a State-operated school district where the existing school board has
failed or is unable to take the corrective actions necessary to provide a
thorough and efficient system of education in that school district pursuant
to N.J.S.A. 18A:7A-1 et seq. (the "School Act"). The New Jersey operated
school district, under the direction of a New Jersey appointed
superintendent, has all of the powers and authority of the local board of
education and of the local district superintendent. Pursuant to the authority
granted under the School Act, on October 4, 1989, the New Jersey Board of
Education ordered the creation of a New Jersey operated school district in
the City of Jersey City. Similarly, on August 7, 1991, the New Jersey Board
of Education ordered the creation of a New Jersey operated school district in
the City of Paterson, and on July 5, 1995 ordered the creation of a
State-operated school district in the City of Newark.
School Budgets. In every school district having a board of school
estimate, the board of school estimate examines the budget request and fixes
the appropriation amounts for the next year's operating budget after a public
hearing at which the taxpayers and other interested persons shall have an
opportunity to raise objections and to be heard with respect to the budget.
This board certifies the budget to the municipal governing bodies and to the
local board of education. If the local board of education disagrees, it must
appeal to the New Jersey Commissioner of Education (the "Commissioner") to
request changes.
In Type II school districts without a board of school estimate, the
elected board of education develops the budget proposal and, after public
hearing, submits it to the voters of such district for approval. Previously
authorized debt service is not subject to referendum in the annual budget
process. If approved, the budget goes into effect. If defeated, the governing
body of each municipality in the school district has until May 19 in any year
to determine the amount necessary to be appropriated for each item appearing
in such budget. Should the governing body fail to certify any amount
determined by the board of education to be necessary, the board of education
may appeal the action to the Commissioner.
The State laws governing the distribution of State aid to local school
districts limit the annual increase of a school district's net budget. The
Commissioner certifies the allowable amount of increase for each school
district but may grant a higher level of increase in certain limited
instances. A school district may also submit a proposal to the voters to
raise amounts above the allowable amount of increase. If defeated, such a
proposal is subject to further review or appeal to the Commissioner only if
the county superintendent of schools determines that additional funds are
required to provide a thorough and efficient education.
The county superintendents of schools must also review every proposed
local school district budget for the next school year. The county
superintendents of schools examine every item of appropriation for cur-
D-7
<PAGE>
rent expenses and budgeted capital outlay to determine their adequacy in
relation to the identified needs and goals of the school district. If, in
their view they are insufficient, the county superintendents of schools must
order remedial action. If necessary, the Commissioner is authorized to order
changes in the school district's budget.
In New Jersey operated school districts the New Jersey District
Superintendent has the responsibility for the development of the budget
subject to appeal by the governing body of the municipality to the
Commissioner and the Director of the Division of Local Government Services in
the New Jersey Department of Community Affairs. Based upon his review, the
Director is required to certify the amount of revenues which can be raised
locally to support the budget of the New Jersey operated district. Any
difference between the amount which the Director certifies and the total
amount of local revenues required by the budget approved by the Commissioner
is to be paid by New Jersey in the fiscal year in which the expenditures are
made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes are
issued in conformity with N.J.S.A 18A:24-1 et seq. (the "School Bond Law"),
which closely parallels the Local Bond Law (for further information relating
to the Local Bond Law, see "MUNICIPAL FINANCE-Counties and Municipalities"
herein). Although school districts are exempted from the 5 percent down
payment provision generally applied to bonds issued by municipalities and
counties, they are subject to debt limits (which vary depending on the type
of school system provided) and to New Jersey regulation of their borrowing.
The debt limitation on school district bonds depends upon the classification
of the school district, but may be as high as 4 percent of the average
equalized valuation basis of the constituent municipality. In certain cases
involving school districts in cities with populations exceeding 100,000, the
debt limit is 8 percent of the average equalized valuation basis of the
constituent municipality, and in cities with populations in excess of 80,000
the debt limit is 6 percent of the aforesaid average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the governing
body of a municipality within a Type I school district; (ii) adoption of a
proposal by resolution by the board of education of a Type II school district
having a board of school estimate; (iii) adoption of a proposal by resolution
by the board of education and approval of the proposal by the legal voters of
any other Type II school district; or (iv) adoption of a proposal by
resolution by a capital project control board for projects in a State
operated school district. If school bonds will exceed the school district
borrowing capacity, a school district (other than a regional school district)
may use the balance of the municipal borrowing capacity. If the total amount
of debt exceeds the school district's borrowing capacity and any available
remaining municipal borrowing capacity, the Commissioner and the Local
Finance Board must approve the proposed authorization before it is submitted
to the voters. All authorizations of debt in a Type II school district
without a board of school estimate require an approving referendum, except
where, after hearing, the Commissioner and the New Jersey Board of Education
determine that the issuance of such debt is necessary to meet the
constitutional obligation to provide a thorough and efficient system of
public schools. When such obligations are issued, they are issued by, and in
the name of, the school district.
In Type I and II school districts with a board of school estimate, that
board examines the capital proposal of the board of education and certifies
the amount of bonds to be authorized. When it is necessary to exceed the
borrowing capacity of the municipality, the approval of a majority of the
legally qualified voters of the municipality is required, together with the
approval of the Commissioner and the Local Finance Board. When such bonds are
issued for a Type I school district, they are issued by the municipality and
identified as school bonds. When bonds are issued by a Type II school
district having a board of school estimate, they are issued by, and in the
name of, the school district.
School District Lease Purchase Financings. In 1982, school districts were
given an alterative to the traditional method of bond financing capital
improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase Law").
The Lease Purchase Law permits school districts to acquire a site and school
building
D-8
<PAGE>
through a lease purchase agreement with a private lessor corporation. The
lease purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual
appropriation by the school district and are required, pursuant to N.J.A.C.
6:22A- 1.2(h), to be included in the annual current expense budget of the
school district. Furthermore, the rent payments attributable to the lease
purchase agreement do not constitute debt of the school district and
therefore do not impact on the school district's debt limitation. Lease
purchase agreements in excess of five years require the approval of the
Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c.
39) which provides for the issuance by municipalities and school districts of
"qualified bonds." Whenever a local board of education or the governing body
of a municipality determines to issue bonds, it may file an application with
the Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c. 39. Upon
approval of such an application and after receipt of a certificate stating
the name and address of the paying agent for such bonds, the maturity
schedule, interest rates and payment dates, the New Jersey Treasurer shall,
in the case of qualified bonds for school districts, withhold from the school
aid payable to such municipality or school district and, in the case of
qualified bonds for municipalities, withhold from the amount of business
personal property tax replacement revenues, gross receipts tax revenues,
municipal purposes tax assistance fund distributions, New Jersey urban aid,
New Jersey revenue sharing, and any other funds appropriated as New Jersey
aid and not otherwise dedicated to specific municipal programs, payable to
such municipalities, an amount sufficient to cover debt service on such
bonds. These "qualified bonds" are not direct, guaranteed or moral
obligations of New Jersey, and debt service on such bonds will be provided by
New Jersey only if the above mentioned appropriations are made by New Jersey.
Total outstanding indebtedness for "qualified bonds" consisted of
$224,492,700 by various school districts as of June 30, 1995 and $903,760,316
by various municipalities as of June 30, 1995.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
(N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund or the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or
school districts for school purposes (exclusive of bonds whose debt service
is provided by New Jersey appropriations), but not in excess of monies
available in such Fund. If a municipality, county or school district is
unable to meet payment of the principal of or interest on any of its school
bonds, the trustee of the school bond reserve will purchase such bonds at the
face amount thereof or pay the holders thereof the interest due or to become
due. At June 30, 1995, the book value of the Fund's assets aggregated
$88,736,798 and the reserve, computed as of June 30, 1995, amounted to
$38,811,015. There has never been an occasion to call upon this Fund.
Local Financing Authorities. The Local Authorities Fiscal Control Law
(N.J.S.A. 4OA:5A-1 et. seq.) provides for state supervision of the fiscal
operations and debt issuance practices of independent local authorities and
special taxing districts by the New Jersey Department of Community Affairs.
The Local Authorities Fiscal Control Law applies to all autonomous public
bodies created by counties or municipalities, which are empowered to issue
bonds, to impose facility or service charges, or to levy taxes in their
districts. This encompasses most autonomous local authorities (sewerage,
municipal utilities, parking, pollution control, improvement, etc.) and
special taxing districts (fire, water, etc.). Authorities which are subject
to differing New Jersey or federal financial restrictions are exempted, but
only to the extent of that difference.
The Local Finance Board reviews, conducts public hearings and issues
findings and recommendations on any proposed project financing of an
authority or district, and on any proposed financing agreement between a
municipality or county and an authority or special district. The Director of
the Division of Local Government Services reviews and approves annual budgets
of authorities and special districts.
As of June 30, 1994, there were 196 locally created authorities with a
total outstanding capital debt of $7,000,077,854 (figures do not include
housing authorities and redevelopment agencies). This amount
D-9
<PAGE>
reflects outstanding bonds, notes, loans and mortgages payable by the
authorities as of their respective fiscal years ended nearest to June 30,
1994.
Litigation. At any given time, there are various numbers of claims and
cases pending against New Jersey, New Jersey agencies and employees, seeking
recovery of monetary damages that are primarily paid out of the fund created
pursuant to the Tort Claims Act, N.J.S.A. 59:1-1 et. seq (the "Tort Claims
Act"). At any given time there are various contract and other claims against
New Jersey and New Jersey agencies, including environmental claims arising
from the alleged disposal of hazardous waste, seeking recovery of monetary
damages or other relief which would require the expenditure of funds. In
addition, at any given time there are various numbers of claims and cases
pending against the University of Medicine and Dentistry of New Jersey and
its employees, seeking recovery of monetary damages that are primarily paid
out of the Self- Insurance Reserve Fund created pursuant to the Tort Claims
Act, and various numbers of contract and other claims against the University
of Medicine and Dentistry, seeking recovery of monetary damages or other
relief which would require the expenditure of funds. New Jersey is unable to
estimate its exposure for these claims.
Other lawsuits presently pending or threatened in which New Jersey has the
potential for either a significant loss of revenue or significant
unanticipated expenditures include the following: New Jersey Education
Association et al. v. State of New Jersey et al. challenging amendments
enacted in 1994 affecting the funding of the Teachers Pension and Annuity
Fund, the Public Employee's Retirement System, the Police and Fireman's
Retirement System, the State Police Retirement System and the Judicial
Retirement System; Beth Israel Hospital et al. v. Essential Health Services
Commission, a challenge by eleven New Jersey hospitals to the .53% hospital
assessment authorized by the Health Care Reform Act of 1992; Abbot v. Burke,
a decision by the New Jersey Supreme Court on July 12, 1994, affirms the
trial court's conclusion that the Quality Education Act of 1990 was
unconstitutional, and requires that a funding formula be adopted by September
1996 which will achieve by the 1997-98 school year the mandated parity in
spending and will address the special educational needs of children in poor
and urban school districts; County of Passaic v. State of New Jersey alleging
tort and contractual claims against New Jersey and the New Jersey Department
of Environmental Protection in connection with a resource recovery facility
plaintiffs had planned to build in Passaic County, seeking approximately $30
million in damages; on March 17, 1995, the court granted the State's motion
for summary judgment, dismissing all claims against the State, and plaintiffs
have filed an appeal; Robert E. Brennan v. Richard Barry, et al., a suit
filed against two members of the New Jersey Bureau of Securities alleging
causes of action for defamation, injury to reputation, abuse of process and
improper disclosure, based on the Bureau's investigation of certain publicly
traded securities; on January 11, 1995, the State was granted summary
judgment and on June 12, 1996, the Appellate Division affirmed dismissal;
Camden Co. v. Waldman et al., consolidated with similar suits filed by
Middlesex, Monmouth and Atlantic Counties, seeking reimbursement of federal
funds received by New Jersey for disproportionate share hospital payments
made to county psychiatric facilities from July 1, 1988 through July 1, 1991
where an Appellate Division decision on July 15, 1996 affirmed Commission's
decision not to share federal funds with counties; Interfaith Community
Organization v. Shinn et al., a suit filed by a coalition of churches and
church leaders in Hudson County against the Governor, the Commissioners of
the Department of Environmental Protection and the Department of Health,
concerning chromium contamination in Liberty State Park in Jersey City; Waste
Management of Pennsylvania et al. v. Shinn et al., an action filed in federal
district court seeking declaratory and injunctive relief and compensatory
damages from Department of Environmental Protection Commissioner Shinn and
former Acting Commissioner Fox, alleging violations of constitutional rights
based on emergency redirection orders and a draft permit; American Trucking
Associations, Inc. and Tri-State Motor Transit v. State of New Jersey,
challenging the constitutionality of annual hazardous and solid waste
licensure fees collected by the Department of Environmental Protection,
seeking a permanent injunction enjoining future collection of fees and refund
of all renewal fees, fines and penalties collected.
In addition to litigation against New Jersey, at any given time there are
various numbers of claims and cases pending or threatened against the
political subdivisions of New Jersey, including but not limited to New
D-10
<PAGE>
Jersey authorities, counties, municipalities and school districts, which have
potential for either a significant loss of revenue or significant
unanticipated expenditures. The New Jersey Hospital Association et al. v.
State of New Jersey, seeking a declaratory judgment that the State's failure
to provide funding to the hospitals for calendar year 1996 to reimburse them
for charity care costs violates the U.S. and the state constitutions and
seeking payment of all charity care costs since January 1, 1996; on June 20,
1996 plaintiffs filed a Notice of Dismissal of the case without prejudice;
and Affiliated FM Insurance Company et al. v. State of New Jersey et al., and
action by certain members of the New Jersey Property-Liability Insurance
Guaranty Association challenging the constitutionality of assessments used
for the Market Transition Facility and seeking repayment of the assessments
paid since 1990.
Ratings. Standard & Poor's Rating Group, Moody's Investors Service and
Fitch Investors Service, Inc. have assigned long-term ratings of AA+, Aa1 and
AA+, respectively, to New Jersey General Obligation Bonds. There is no
assurance that the ratings of New Jersey General Obligation Bonds will
continue for any given period of time or that they will not be revised
downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of New Jersey's General
Obligation Bonds.
The various political subdivisions of New Jersey are rated independently
from New Jersey by S&P and/or Moody's, if they are rated. These ratings are
based upon information supplied to the rating agency by the political
subdivision. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely. Any such downward revision or withdrawal could have an adverse
effect on the market prices of bonds issued by the political subdivision.
D-11
<PAGE>
PART C
MUTUAL FUND SELECT TRUST
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial statements
In Part A: None
In Part B: To be filed by amendment
In Part C: None.
(b) Exhibits:
Exhibit
Number
- -------
1 Declaration of Trust (1)
2 By-laws. (1)
3 None.
4 None.
5(a) Form of Proposed Investment Advisory Agreement. (1)
5(b) Form of Proposed Sub-Advisory Agreement between The Chase Manhattan
Bank and Chase Asset Management, Inc.(1)
5(c) Form of Proposed Investment Subadvisory Agreement between The Chase
Manhattan Bank and Chase Asset Management (London) Limited (1)
6 Form of Proposed Distribution and Sub-Administration Agreement (1)
7(a) Form of Retirement Plan for Eligible Trustees.(2)
7(b) Form of Deferred Compensation Plan for Eligible Trustees. (2)
8(a) Form of Proposed Custodian Agreement. (1)
8(b) Form of Proposed Sub-Custodian Agreement. (3)
9(a) Form of Proposed Transfer Agency Agreement. (1)
9(b) Form of Proposed Administration Agreement. (1)
C-1
<PAGE>
10 Opinion re: Legality of Securities being Registered. (3)
11 Consent of Price Waterhouse LLP (3)
12 None.
13 Not Applicable
14 None.
15 None.
16 Schedule for Computation for Each Performance Quotation.(3)
17 Financial Data Schedules (3)
18 Not Applicable
- --------------------
(1) Filed herewith
(2) Incorporated by reference to Amendment No. 6 to the Registration Statement
on Form N-1A of Mutual Fund Group (File No. 33-14196) as filed with the
Securities and Exchange Commission on March 23, 1990.
(3) To be filed by amendment
ITEM 25. Persons Controlled by or Under Common
Control with Registrant
Not applicable
C-2
<PAGE>
ITEM 26. Number of Holders of Securities
Number of Record Holders
Title of Series as of September 30, 1996
--------------- ------------------------
VISTA(SM) SELECT INTERMEDIATE TAX FREE INCOME FUND None
VISTA(SM) SELECT TAX FREE INCOME FUND None
VISTA(SM) SELECT NEW YORK TAX FREE INCOME FUND None
VISTA(SM) SELECT NEW JERSEY TAX FREE INCOME FUND None
ITEM 27. Indemnification
Reference is hereby made to Article V of the Registrant's Declaration
of Trust.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser, administrator and distributor are insured under
an errors and omissions liability insurance policy. The Registrant and its
officers are also insured under the fidelity bond required by Rule 17g-1 under
the Investment Company Act of 1940.
Under the terms of the Registrant's Declaration of Trust, the
Registrant may indemnify any person who was or is a Trustee, officer or employee
of the Registrant to the maximum extent permitted by law; provided, however,
that any such indemnification (unless ordered by a court) shall be made by the
Registrant only as authorized in the specific case upon a determination that
indemnification of such persons is proper in the circumstances. Such
determination shall be made (i) by the Trustees, by a majority vote of a quorum
which consists of Trustees who are neither in Section 2(a)(19) of the Investment
Company Act of 1940, nor parties to the proceeding, or (ii) if the required
quorum is not obtainable or, if a quorum of such Trustees so directs, by
independent legal counsel in a written opinion. No indemnification will be
provided by the Registrant to any Trustee or officer of the Registrant for any
liability to the Registrant or shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
Insofar as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
that amount to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such promise
must be secured by a surety bond, other suitable
C-3
<PAGE>
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested,
non-party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of it 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 Act and will
be governed by the final adjudication of such issue.
ITEM 28(a). Business and Other Connections of Investment Adviser
The Chase Manhattan Bank (the "Adviser") is a commercial bank
providing a wide range of banking and investment services.
To the knowledge of the Registrant, none of the Directors or
executive officers of the Adviser, except those described below, are or have
been, at any time during the past two years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
Directors and executive officers of the Adviser also hold or have held various
positions with bank and non-bank affiliates of the Adviser, including its
parent, The Chase Manhattan Corporation. Each Director listed below is also a
Director of The Chase Manhattan Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ----------- ----------------------------
<S> <C> <C>
Thomas G. Labreque President and Chief Operating Officer Chairman, Chief Executive Officer
and Director and a Director of The Chase
Manhattan Corporation and a
Director of AMAX, Inc.
M. Anthony Burns Director Chairman of the Board, President
and Chief Executive Officer of
Ryder System, Inc.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director of
Amoco Corporation and Director of
Abbott Laboratories
Paul W. MacAvoy Director Dean of Yale School of
Organization and Management
David T. McLaughlin Director President and Chief Executive
Officer of The Aspen Institute,
Chairman of Standard Fuse
Corporation and a Director of each
of ARCO Chemical Company and
Westinghouse Electric Corporation
Edmund T. Pratt, Jr. Director Chairman Emeritus, formerly
Chairman and Chief Executive
Officer, of Pfizer Inc. and a
Director of each of Pfizer, Inc.,
Celgene Corp., General Motors
Corporation and International Paper
Company
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.
Donald H. Trautlein Director Retired Chairman and Chief
Executive Officer of Bethlehem
Steel Corporation
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
James L. Ferguson Director Retired Chairman and Chief
Executive Officer of General Foods
Corporation
William H. Gray III Director President and Chief Executive
Officer of the United Negro College
Fund, Inc
David T. Kearns Director Retired Chairman and Chief
Executive Officer of the Xerox
Corporation
Delano E. Lewis Director President and Chief Executive
Officer of National Public Radio
John H. McArthur Director Dean of the Harvard Graduate
School of Business Administration
Frank A. Bennack, Jr. Director President and Chief Executive Officer
The Hearst Corporation
Michael C. Bergerac Director Chairman of the Board and
Chief Executive Officer Bergerac & Co., Inc.
Susan V. Berresford Director President, The Ford Foundation
Randolph W. Bromery Director President, Springfield College; President,
Geoscience Engineering Corporation
Charles W. Duncan, Jr. Director Private Investor
Melvin R. Goodes Director Chairman of the Board and Chief Executive
Officer, The Warner-Lambert Company
George V. Grune Director Retired Chairman and Chief Executive
Officer, The Reader's Digest Association,
Inc.; Chairman, The DeWitt Wallace-
Reader's Digest Fund; The Lila-Wallace
Reader's Digest Fund
William B. Harrison, Jr. Vice Chairman of the Board
Harold S. Hook Director Chairman and Chief Executive Officer,
General Corporation
Helen L. Kaplan Director Of Counsel, Skadden, Arps, Slate, Meagher
& Flom
E. Michael Kruse Vice Chairman of the Board
J. Bruce Llewellyn Director Chairman of the Board, The Philadelphia
Coca-Cola Bottling Company, The Coca-
Cola Bottling Company of Wilmington,
Inc., Queen City Broadcasting, Inc.
John P. Mascotte Director Chairman, The Missouri Corporation of
Johnson & Higgins
John F. McGillicuddy Director Retired Chairman of the Board and
Chief Executive Officer
Edward D. Miller Senior Vice Chairman
of the Board
Walter V. Shipley Chairman of the Board and
Chief Executive Officer
Andrew C. Sigler Director Chairman of the Board and Chief
Executive Officer, Champion International
Corporation
Michael I. Sovern Director President, Emeritus and Chancellor Kent,
Professor of Law, Columbia University
John R. Stafford Director Chairman, President and Chief Executive
Officer, American Home Products
Corporation
W. Bruce Thomas Director Private Investor
Marina v. N. Whitman Director Professor of Business Administration and
Public Policy, University of Michigan
Richard D. Wood Director Retired Chairman of the Board, Eli Lilly
and Company
</TABLE>
<PAGE>
Item 28(b)
Chase Asset Management ("CAM") is an Investment Advisor providing investment
services to institutional clients.
To the knowledge of the Registrant, none of the Directors or executive
officers of the CAM, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain Directors and
executive officers of the CAM also hold or have held various positions with bank
and non-bank affiliates of the Advisor, including its parent, The Chase
Manhattan Corporation.
Principal Occupation or Other
Position with Employment of a Substantial
Name the Sub-Advisor Nature During Past Two Years
- ---- --------------- ----------------------------
James Zeigon Chairman and Director Director of Chase Asset
Management (London) Limited
Steven Prostano Executive Vice President Chief Operating Officer and
and Chief Operating Officer Director of Chase Asset
Management (London) Limited
Mark Richardson President and Chief Investment Chief Investment Officer
Officer and Director of Chase Asset
Management (London) Limited
<PAGE>
ITEM 29. Principal Underwriters
(a) Vista Fund Distributors, Inc., a wholly-owned subsidiary of
The BISYS Group, Inc. is the underwriter for Mutual Fund Group, Mutual Fund
Trust and Mutual Fund Select Group.
(b) The following are the Directors and officers of Vista Fund
Distributors, Inc. The principal business address of each of these persons, is
listed below.
<TABLE>
<CAPTION>
Position and Offices Position and Offices
Name and Address with Distributor with the Registrant
- ---------------- -------------------- --------------------
<S> <C> <C>
Lynn J. Mangum Chairman None
150 Clove Street
Little Falls, NJ 07424
Robert J. McMullan Director and Exec. Vice President None
150 Clove Street
Little Falls, NJ 07424
Lee W. Schultheis President None
101 Park Avenue, 16th Floor
New York, NY 10178
George O. Martinez Senior Vice President None
3435 Stelzer Road
Columbus, OH 43219
Irimga McKay Vice President None
1230 Columbia Street
5th Floor, Suite 500
San Diego, CA 92101
Michael Burns Vice President/Compliance None
3435 Stelzer Road
Columbus, OH 43219
William Blundin Vice President None
125 West 55th Avenue
11th Floor
New York, NY 10019
Dennis Sheehan Vice President None
150 Clove Street
Little Falls, NJ 07424
Annamaria Porcaro Assistant Secretary None
150 Clove Street
Little Falls, NJ 97424
Robert Tuch Assistant Secretary None
3435 Stelzer Road
Columbus, OH 43219
Stephen Mintos Executive Vice President/COO None
3435 Stelzer Road
Columbus, OH 43219
Dale Smith Vice President/CFO None
3435 Stelzer Road
Columbus, OH 43219
William J. Tomko Vice President None
3435 Stelzer Road
Columbus, OH 43219
</TABLE>
(c) Not applicable
C-6
<PAGE>
ITEM 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Name Address
---- -------
Vista Fund Distributors, Inc. 101 Park Avenue,
New York, NY 10178
DST Systems, Inc. 210 W. 10th Street,
Kansas City, MO 64105
The Chase Manhattan Bank 270 Park Avenue,
New York, NY 10017
Chase Asset Mangement, Inc. 1211 Avenue of the
Americas,
New York, NY 10036
The Chase Manhattan Bank One Chase Square,
Rochester, NY 14363
ITEM 31. Management Services
Not applicable
ITEM 32. Undertakings
(1) Registrant undertakes that its trustees shall promptly
call a meeting of shareholders of the Trust for the purpose of voting upon the
question of removal of any such trustee or trustees when requested in writing so
to do by the record holders of not less than 10 per centum of the outstanding
shares of the Trust. In addition, the Registrant shall, in certain
circumstances, give such shareholders assistance in communicating with other
shareholders of a fund as required by Section 16(c) of the Investment Company
Act of 1940.
(2) The Registrant, on behalf of the Funds, undertakes,
provided the information required by Item 5A is contained in the latest annual
report to shareholders, to furnish to each person to whom a prospectus has been
delivered, upon their request and without charge, a copy of the Registrant's
latest annual report to shareholders.
(3) Registrant undertakes to file a post-effective amendment,
using reasonably current financial statements which need not be certified,
within four to six months from the date of commencement of investment operations
for each of Vista Select Intermediate Tax Free Income Fund, Vista Select Tax
Free Income Fund, Vista Select New York Tax Free Income Fund and Vista Select
New Jersey Tax Free Income Fund.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
on Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and the State of New York on the 1st day of
October, 1996.
MUTUAL FUND SELECT GROUP
By /s/ H. Richard Vartabedian
--------------------------
H. Richard Vartabedian
President
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.
/s/ Fergus Reid, III Chairman and Trustee October 1, 1996
- ------------------------------
Fergus Reid, III
/s/ H. Richard Vartabedian President October 1, 1996
- ------------------------------ and Trustee
H. Richard Vartabedian
/s/ Martin R. Dean Treasurer and October 1, 1996
- ------------------------------ Principal Financial
Martin R. Dean Officer
C-8
<PAGE>
Exhibit
Number
- --------
1 Declaration of Trust.
2 By-Laws.
5(a) Form of Proposed Investment Advisory Agreement.
5(b) Form of Proposed Investment Subadvisory Agreement
between The Chase Manhattan Bank and Chase Asset
Management, Inc.
6 Form of Proposed Distribution and Sub-Administration
Agreement.
8(a) Form of Proposed Custodian Agreement.
9(a) Form of Proposed Transfer Agency Agreement.
9(b) Form of Proposed Administration Agreement.
MUTUAL FUND SELECT TRUST
------------------------------------
DECLARATION OF TRUST
Dated October 1, 1996
TABLE OF CONTENTS
Page
ARTICLE I
NAME AND DEFINITIONS........................................ 1
Section 1.1. Name........................................................ 1
Section 1.2. Definitions................................................. 1
ARTICLE II
TRUSTEES............................... 3
Section 2.1. Number of Trustees.......................................... 3
Section 2.2. Term of Office of Trustees.................................. 3
Section 2.3. Resignation and Appointment of Trustees..................... 4
Section 2.4. Vacancies................................................... 4
Section 2.5. Delegation of Power to Other Trustees....................... 4
ARTICLE III
POWERS OF TRUSTEES.......................... 5
Section 3.1. General..................................................... 5
Section 3.2. Investments................................................. 5
Section 3.3. Legal Title................................................. 6
Section 3.4. Issuance and Repurchase of Securities....................... 7
Section 3.5. Borrowing Money; Lending Trust Property..................... 7
Section 3.6. Delegation; Committees...................................... 7
Section 3.7. Collection and Payment...................................... 7
Section 3.8. Expenses.................................................... 7
Section 3.9. Manner of Acting; By-Laws................................... 7
Section 3.10. Miscellaneous Powers....................................... 8
Section 3.11. Principal Transactions..................................... 8
Section 3.12. Trustees and Officers as Shareholders...................... 9
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR,
ADMINISTRATOR, TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT..... 9
Section 4.1. Investment Adviser.......................................... 9
Section 4.2. Distributor................................................. 10
Section 4.3. Administrator............................................... 10
Section 4.4. Transfer Agent and Shareholder Servicing
Agents.................................................................... 10
Section 4.5. Parties to Contract......................................... 11
i
<PAGE>
Page
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS......................... 11
Section 5.1. No Personal Liability of Shareholders,
Trustees; Etc............................................... 11
Section 5.2. Non-Liability of Trustees, Etc.............................. 12
Section 5.3. Mandatory Indemnification................................... 12
Section 5.4. No Bond Required of Trustees................................ 14
Section 5.6. Reliance on Experts, Etc.................................... 14
ARTICLE VI
SHARES OF BENEFICIAL INTEREST.................... 15
Section 6.1. Beneficial Interest......................................... 15
Section 6.2. Rights of Shareholders...................................... 15
Section 6.3. Trust Only.................................................. 15
Section 6.4. Issuance of Shares.......................................... 16
Section 6.5. Register of Shares.......................................... 16
Section 6.6. Transfer of Shares.......................................... 16
Section 6.7. Notices..................................................... 17
Section 6.8. Voting Powers............................................... 17
Section 6.9. Series Designation.......................................... 18
ARTICLE VII
REDEMPTIONS............................. 21
Section 7.1. Redemptions................................................. 21
Section 7.2. Suspension of Right of Redemption........................... 21
Section 7.3. Redemption of Shares, Disclosure of
Holding..................................................... 22
Section 7.4. Redemptions of Accounts of Less than
$500........................................................ 22
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS..................... 22
ARTICLE IX
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC........................ 23
Section 9.1. Duration.................................................... 23
Section 9.2. Termination of Trust........................................ 23
Section 9.3. Amendment Procedure......................................... 24
Section 9.4. Merger, Consolidation and Sale of Assets.................... 25
Section 9.5. Incorporation, Reorganization............................... 25
Section 9.6. Incorporation or Reorganization of
Series...................................................... 26
ii
<PAGE>
Page
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS.................... 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................................................ 28
iii
<PAGE>
DECLARATION OF TRUST
OF THE
MUTUAL FUND SELECT TRUST
------------------------------------
Dated October 1, 1996
------------------------------------
WHEREAS, the Trustees desire to establish a 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 (par
value $0.001 per share) issued in one or more series as hereinafter provided;
and
NOW THEREFORE, the Trustees hereby declare that all money and
property contributed to the trust established hereunder shall be held and
managed in trust for the benefit of holders, from time to time, of the Shares of
Beneficial Interest (without par value) 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
"Mutual Fund Select Trust", but the Trust may conduct all or a portion of its
business and activities under such other designations or names as the Trustees
may from time to time authorize.
Section 1.2. Definitions. Wherever they are used
herein, the following terms have the following respective
meanings:
(a) "Administrator" means a party furnishing services to the
Trust pursuant to any contract described in Section 4.3 hereof.
(b) "By-Laws" means the By-laws referred to in Section 3.9
hereof, as from time to time amended.
(c) "Commission" has the meaning given that term in
the 1940 Act.
(d) "Custodian" means a party employed by the Trust to furnish
services as described in Article X of the By-Laws.
<PAGE>
2
(e) "Declaration" means this Declaration of Trust as amended
from time to time. Reference in this Declaration of Trust to
"Declaration", "hereof", "herein", and "hereunder" shall be deemed to
refer to this Declaration rather than the article or section in which
such words appear.
(f) "Distributor" means a party furnishing services to the
Trust pursuant to any contract described in Section 4.2 hereof.
(g) "Interested Person" has the meaning given that
term in the 1940 Act.
(h) "Investment Adviser" means a party furnishing services to
the Trust pursuant to any contract described in Section 4.1 hereof.
(i) "Majority Shareholder Vote" has the same meaning as the
phrase "vote of a majority of the outstanding voting securities" as
defined in the 1940 Act, except that such term may be used herein with
respect to the Shares of the Trust as a whole or the Shares of any
particular series, as the context may require.
(j) "1940 Act" means the Investment Company Act of 1940 and
the Rules and Regulations thereunder, as amended from time to time.
(k) "Person" means and includes individuals, corporations,
limited liability companies, partnerships, trusts, associations, joint
ventures and other entities, whether or not legal entities, and
governments and agencies and political subdivisions thereof, whether
domestic or foreign.
(l) "Shareholder" means a record owner of outstanding
Shares.
(m) "Shares" means the Shares of Beneficial Interest into
which the beneficial interest in the Trust shall be divided from time
to time or, when used in relation to any particular series (or class or
subseries of a series) of Shares established by the Trustees pursuant
to Section 6.9 hereof, the equal proportionate units into which such
series (or class or subseries of a series) of Shares shall be divided
from time to time. The term "Shares" includes fractions of Shares as
well as whole Shares.
(n) "Shareholder Servicing Agent" means a party furnishing
services to the Trust pursuant to any shareholder servicing contract
described in Section 4.4 hereof.
<PAGE>
3
(o) "Transfer Agent" means a party furnishing services to the
Trust pursuant to any transfer agency contract described in Section 4.4
hereof.
(p) "Trust" means the trust created hereby.
(q) "Trust Property" means 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, including, without limitation,
any and all property allocated or belonging to any series of Shares
pursuant to Section 6.9 hereof.
(r) "Trustees" means the persons who have signed the
Declaration, so long as they shall continue in office in accordance
with the terms hereof, and all other persons who may from time to time
be duly elected or appointed, qualified and serving as Trustees in
accordance with the provisions hereof, and reference herein to a
Trustee or the Trustees shall refer to such person or persons in their
capacity as trustees hereunder unless the context otherwise requires.
ARTICLE II
TRUSTEES
Section 2.1. Number of Trustees. The number of Trustees shall
be such number as shall be fixed from time to time by a written instrument
signed by a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be less than three nor more than 15.
Section 2.2. Term of Office of Trustees. Subject to the
provisions of Section 16(a) of the 1940 Act, the Trustees shall hold office
during the lifetime of this Trust and until its termination as hereinafter
provided; except (a) that 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 other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee may be
removed with cause, at any time by written instrument, signed by at least
two-thirds of the remaining Trustees, specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or who has become incapacitated by illness or injury may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) a Trustee may be removed at any meeting of
Shareholders by a vote of two-thirds of the outstanding Shares of each series.
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
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4
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.
Section 2.3. Resignation and Appointment of Trustees. In case
of the declination, death, resignation, retirement, removal or incapacity of any
of the Trustees, or in case a vacancy shall, by reason of an increase in number,
or for any other reason, exist, the remaining Trustees shall fill such vacancy
by appointing such other individual as they in their discretion shall see fit.
Such appointment shall be evidenced by a written instrument signed by a majority
of the Trustees in office. Any such appointment shall not become effective,
however, until the person named in the written instrument of appointment shall
have accepted in writing such appointment and agreed in writing to be bound by
the terms of the Declaration. Within twelve months of such appointment, the
Trustees shall cause notice of such appointment to be mailed to each Shareholder
at his address as recorded on the books of the Trustees. An appointment of a
Trustee may be made by the Trustees then in office and notice thereof mailed to
Shareholders as aforesaid in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. The power of appointment is subject to the provisions of Section 16(a)
of the 1940 Act.
Section 2.4. Vacancies. The death, declination, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul the Trust or to revoke any existing agency created pursuant to
the terms of this Declaration. Whenever a vacancy in the number of Trustees
shall occur, until such vacancy is filled as provided in Section 2.3, 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. A written instrument certifying the existence of
such vacancy signed by a majority of the Trustees shall be conclusive evidence
of the existence of such vacancy.
Section 2.5. Delegation of Power to Other Trustees. Any
Trustee may, by power of attorney, delegate his power for a period not exceeding
six months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two Trustees personally exercise the powers granted to the
Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III
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5
POWERS OF TRUSTEES
Section 3.1. General. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as the Trustees deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of the Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the Trustees may be
exercised without order of or resort to any court.
Section 3.2. Investments. (a) The Trustees shall
have the power:
(i) to conduct, operate and carry on the business of
an investment company;
(ii) to subscribe for, invest in, reinvest in, purchase
or otherwise acquire, own, hold, pledge, sell, assign, transfer,
exchange, distribute, lend or otherwise deal in or dispose of U.S. and
foreign currencies, any form of gold or other precious metal, commodity
contracts, any form of option contract, contracts for the future
acquisition or delivery of fixed income or other securities, and
securities of every nature and kind, including, without limitation, all
types of bonds, debentures, stocks, negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of
deposit or indebtedness, commercial paper, repurchase agreements,
bankers' acceptances, and other securities of any kind, issued,
created, guaranteed or sponsored by any and all Persons, including,
without limitation,
(A) states, territories and possessions of the United States
and the District of Columbia and any political subdivision, agency or
instrumentality of any such Person,
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6
(B) the U.S. Government, any foreign government, any
political subdivision or any agency or instrumentality of the
U.S. Government, any foreign government or any political
subdivision of the U.S. Government or any foreign government,
(C) any international instrumentality,
(D) any bank or savings institution, or
(E) any corporation or organization organized under the laws
of the United States or of any state, territory or possession thereof, or under
any foreign law;
or in "when issued" contracts for any such securities, to retain Trust assets in
cash and from time to time change the securities or obligations in which the
assets of the Trust are invested; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investments
of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more Persons to exercise any of said rights, powers and privileges in respect of
any of said investments; and
(iii) to carry on any other business in connection with
or incidental to any of the foregoing powers, to do everything
necessary, proper or desirable for the accomplishment of any purpose or
the attainment of any object or the furtherance of any power
hereinbefore set forth, and to do every other act or thing incidental
or appurtenant to or connected with the aforesaid purposes, objects or
powers.
(b) The Trustees shall not be limited to investing in
securities or obligations maturing before the possible termination of the Trust,
nor shall the Trustees be limited by any law limiting the investments which may
be made by fiduciaries.
Section 3.3. Legal Title. Legal title to all Trust Property
shall be vested in the Trustees as joint tenants except 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, or in the name of the Trust, or in the name
of any other Person or nominee, on such terms as the Trustees may determine. 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
resignation, removal or death of a Trustee, 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 documents have been executed and
delivered.
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Section 3.4. Issuance and Repurchase of Securities. The
Trustees shall have the power to issue, sell, repurchase, redeem, retire,
cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal
in Shares and, subject to the provisions set forth in Articles VII, VIII and IX
and Section 6.9 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds of the Trust or other Trust
Property whether capital or surplus or otherwise, to the full extent now or
hereafter permitted by the laws of the Commonwealth of Massachusetts governing
business corporations.
Section 3.5. Borrowing Money; Lending Trust Property. The
Trustees shall have power to borrow money or otherwise obtain credit and to
secure the same by mortgaging, pledging or otherwise subjecting as security the
Trust Property, to endorse, guarantee, or undertake the performance of any
obligation, contract or engagement of any other Person and to lend Trust
Property.
Section 3.6. Delegation; Committees. The Trustees shall have
power to delegate from time to time to such of their number or to officers,
employees or agents of the Trust 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.
Section 3.7. Collection and Payment. Subject to Section 6.9
hereof, the Trustees shall have power to collect all property due to the Trust;
to pay all claims, including taxes, against the Trust Property; to prosecute,
defend, compromise or abandon any claims relating to the Trust Property; to
foreclose any security interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases, agreements and other
instruments.
Section 3.8. Expenses. Subject to Section 6.9 hereof, the
Trustees shall have the power to incur and pay any expenses which in the opinion
of the Trustees are necessary or incidental to carry out any of the purposes of
the Declaration, and to pay reasonable compensation from the funds of the Trust
to themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees.
Section 3.9. Manner of Acting; By-Laws. Except as otherwise
provided herein or in the By-Laws, any action to be taken by the Trustees may be
taken by a majority of the Trustees present at a meeting of Trustees at which a
quorum is present, including any meeting held by means of a conference telephone
circuit or similar communications equipment by means of which all persons
participating in the meeting can hear each other, or by written consents of all
the Trustees. The Trustees may adopt By-Laws not inconsistent with this
Declaration to provide for the conduct of the business of the Trust and may
amend or repeal such
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8
By-Laws to the extent such power is not reserved to the Shareholders.
Section 3.10. Miscellaneous Powers. The Trustees shall have
the power to: (a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c) remove
Trustees or fill vacancies in or add to their number, elect and remove such
officers and appoint and terminate such agents or employees as they consider
appropriate, and appoint from their own number, and terminate, any one or more
committees which may exercise some or all of the power and authority of the
Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust
Property, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, any Investment Adviser, Administrator, Distributor, selected
dealers or independent contractors of the Trust against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (e) establish pension, profit-sharing, Share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees or
agents of the Trust; (f) to the extent permitted by law, indemnify any person
with whom the Trust has dealings, including any Investment Adviser,
Administrator, Custodian, Distributor, Transfer Agent, Shareholder Servicing
Agent and any dealer, to such extent as the Trustees shall determine; (g)
guarantee indebtedness or contractual obligations of others; (h) determine and
change the fiscal year of the Trust and the method by which its accounts shall
be kept; and (i) adopt a seal for the Trust, provided, that the absence of such
seal shall not impair the validity of any instrument executed on behalf of the
Trust.
Section 3.11. Principal Transactions. Except in transactions
permitted by the 1940 Act, or any order of exemption issued by the Commission,
the Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust to, any Trustee or officer of the Trust or any firm of which any
such Trustee or officer is a member acting as principal, or have any such
dealings with any Investment Adviser, Administrator, Shareholder Servicing
Agent, Custodian, Distributor or Transfer Agent or with any Interested Person of
such Person; but the Trust may, upon customary terms, employ any such Person, or
firm or company in which such Person is an Interested Person, as broker, legal
counsel, registrar, transfer agent, dividend disbursing agent or custodian. The
Trustees are specifically authorized to engage the service of The Chase
Manhattan Bank and its affiliates, to act as broker, as an agent or as a
principal, subject to the provisions of the 1940 Act and other applicable laws,
to execute transactions and to provide
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9
other services with respect to the Trust or any series of the Trust so
designated, in the Trustees' discretion as fiduciary, including the purchase of
any securities currently distributed or currently underwritten by The Chase
Manhattan Bank or its affiliates.
Section 3.12. Trustees and Officers as Shareholders. Except as
hereinafter provided, no officer, Trustee or Member of the Advisory Board of the
Trust, and no member, partner, officer, director or trustee of the Investment
Adviser, Administrator or of the Distributor, and no Investment Adviser,
Administrator or Distributor of the Trust, shall take long or short positions in
the securities issued by the Trust. The foregoing provision shall not prevent:
(a) The Distributor from purchasing Shares from the Trust if
such purchases are limited (except for reasonable allowances for
clerical errors, delays and errors of transmission and cancellation of
orders) to purchases for the purpose of filling orders for Shares
received by the Distributor and provided that orders to purchase from
the Trust are entered with the Trust or the Custodian promptly upon
receipt by the Distributor of purchase orders for Shares, unless the
Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent
for the account of the Trust;
(c) The purchase from the Trust or from the Distributor of
Shares by any officer, Trustee or member of the Advisory Board of the
Trust or by any member, partner, officer, director or trustee of the
Investment Adviser or of the Distributor at a price not lower than the
net asset value of the Shares at the moment of such purchase, provided
that any such sales are only to be made pursuant to an offer described
in the Trust's current prospectus or statement of additional
information; or
(d) The Investment Adviser, the Distributor, or any of their
officers, partners, directors or trustees from purchasing Shares prior
to the effective date of the Trust's Registration Statement under the
Securities Act of 1933, as amended, relating to the Shares.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR,
ADMINISTRATOR, TRANSFER AGENT AND SHAREHOLDER SERVICING AGENTS
Section 4.1. Investment Adviser. Subject to a
Majority Shareholder Vote of the Shares of each series affected
thereby (except to the extent such Majority Shareholder Vote is
not required by the 1940 Act), the Trustees may in their
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10
discretion from time to time enter into one or more investment advisory or
management contracts whereby the other party to each such contract shall
undertake to furnish the Trust such management, investment advisory, statistical
and research facilities and services, promotional activities, and such other
facilities and services, if any, with respect to one or more series of Shares,
as the Trustees shall from time to time consider desirable and all upon such
terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provision of the Declaration, the Trustees may delegate to
the Investment Adviser authority (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales, loans or exchanges of assets of the Trust on behalf of the Trustees or
may authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of the Investment Adviser (and
all without further action by the Trustees). Any of such purchases, sales, loans
or exchanges shall be deemed to have been authorized by all the Trustees. Such
services may be provided by one or more Persons.
Section 4.2. Distributor. The Trustees may in their discretion
from time to time enter into one or more distribution contracts providing for
the sale of Shares whereby the Trust may either agree to sell the Shares to the
other party to any such contract or appoint any such other party its sales agent
for such Shares. In either case, any such contract shall be on such terms and
conditions as the Trustees may in their discretion determine, provided that such
terms and conditions are not inconsistent with the provisions of the Declaration
or the By-Laws; and such contract may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may provide
that such other party may enter into selected dealer agreements with registered
securities dealers to further the purpose of the distribution or repurchase of
the Shares. Such services may be provided by one or more Persons.
Section 4.3. Administrator. The Trustees may in their
discretion from time to time enter into one or more administrative services
contracts whereby the other party to each such contract shall undertake to
furnish such administrative services to the Trust as the Trustees shall from
time to time consider desirable and all upon such terms and conditions as the
Trustees may in their discretion determine, provided that such terms and
conditions are not inconsistent with the provisions of this Declaration or the
By-Laws. Such services may be provided by one or more persons.
Section 4.4. Transfer Agent and Shareholder Servicing Agents.
The Trustees may in their discretion from time to time enter into one or more
transfer agency and shareholder servicing contracts whereby the other party to
each such contract shall undertake to furnish such transfer agency and/or
shareholder services to the Trust or to shareholders of the Trust as the
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11
Trustees shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine, provided that such
terms and conditions are not inconsistent with the provisions of this
Declaration or the By-Laws. Such services may be provided by one or more
Persons. Except as otherwise provided in the applicable shareholder servicing
contract, a Shareholder Servicing Agent shall be deemed to be the record owner
of outstanding Shares beneficially owned by customers of such Shareholder
Servicing Agent for whom it is acting pursuant to such shareholder servicing
contract.
Section 4.5. Parties to Contract. Any contract of the
character described in Section 4.1, 4.2, 4.3 or 4.4 of this Article IV or any
Custodian contract may be entered into with any Person, although one or more of
the Trustees or officers of the Trust may be an officer, partner, director,
trustee, shareholder, or member of such other party to the contract, and no such
contract shall be invalidated or rendered voidable by reason of the existence of
any such relationship; nor shall any Person holding such relationship be liable
merely by reason of such relationship for any loss or expense to the Trust under
or by reason of any such contract or accountable for any profit realized
directly or indirectly therefrom, provided that the contract when entered into
was not inconsistent with the provisions of the Article IV or the By-Laws. The
same Person may be the other party to contracts entered into pursuant to
Sections 4.1, 4.2, 4.3 and 4.4 above or any Custodian contract, and any
individual may be financially interested or otherwise affiliated with Persons
who are parties to any or all of the contracts mentioned in this Section 4.5.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1. No Personal Liability of Shareholders, Trustees;
Etc. No Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs of
the Trust. No Trustee, officer, employee or agent of the Trust shall be subject
to any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, wilful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee, or agent, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability, he shall not, on account thereof, be
held to any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities to which such
Shareholder may become subject by
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12
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The rights accruing to a
Shareholder under this Section 5.1 shall not exclude any other right to which
such Shareholder may be lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Notwithstanding any other provision of this Declaration to the contrary, no
Trust Property shall be used to indemnify or reimburse any Shareholder of any
Shares of any series other than Trust Property allocated or belonging to such
series.
Section 5.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, wilful misfeasance, gross negligence or
reckless disregard of his duties.
Section 5.3. Mandatory Indemnification. (a) Subject
to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is or has been a Trustee or
officer of the Trust shall be indemnified by the Trust against all
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim", "action", "suit", or
"proceeding" shall apply to all claims, actions, suits or proceedings
(civil, criminal, administrative or other, including appeals), actual
or threatened; and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Trust or the
Shareholders by reason of a final adjudication by the court or other
body before which the proceeding was brought that he engaged in wilful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
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(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(iii) in the event of a settlement involving a payment by
a Trustee or officer or other disposition not involving a final
adjudication as provided in paragraph (b) (i) or (b) (ii) above
resulting in a payment by a Trustee or officer. unless there has been
either a determination that such Trustee or officer did not engage in
wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office by the court or
other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that he did not engage
in such conduct:
(A) by vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
(C) The rights of indemnification herein provided may
be insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any Trustee or
officer may now or hereafter be entitled, shall continue as to a Person
who has ceased to be such Trustee or officer and shall inure to the
benefit of the heirs, executors and administrators of such Person.
Nothing contained herein shall affect any rights to indemnification to
which personnel other than Trustees and officers may be entitled by
contract or otherwise under law.
(c) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character described in paragraph
(a) of this Section 5.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security or the Trust shall be insured against
losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees then
in office act on the matter) or an independent legal counsel in a
written opinion, shall determine, based
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upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 5.3 a "Disinterested Trustee" is one
(i) who is not an "Interested Person" of the Trust (including anyone who has
been exempted from being an "Interested Person" by any rule, regulation or order
of the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
Section 5.4. No Bond Required of Trustees. No Trustee
shall be obligated to give any bond or other security for the
performance of any of his duties hereunder.
Section 5.5. No Duty of Investigation; Notice in Trust
Instruments, Etc. No purchaser, lender, Shareholder Servicing Agent, 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 purported to be made by the Trustees or by said officer,
employee or agent or be liable for the application of money or property paid,
loaned, or delivered to or on the order of the Trustees or of said officer,
employee or agent. Every obligation, contract, instrument, certificate, Share,
other security of the Trust or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall be conclusively presumed
to have been executed or done by the executors thereof only in their capacity as
Trustees under the Declaration or in their capacity as officers, employees or
agents of the Trust. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking made or issued by
the Trustees shall recite that the same is executed or made by them not
individually, but as Trustees under the Declaration, and that the obligations of
any such instrument are not binding upon any of the Trustees or Shareholders
individually, but bind only the trust estate, and may contain any further
recital which they or he may deem appropriate, but the omission of such recital
shall not operate to bind any of the Trustees or Shareholders individually. The
Trustees shall at all times maintain insurance for the protection of the Trust
Property, the Trust's Shareholders, Trustees, officers, employees and agents in
such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment shall
deem advisable.
Section 5.6. Reliance on Experts, Etc. Each Trustee and
officer or employee of the Trust shall, in the performance of his duties, be
fully and completely justified and protected with regard to any act or any
failure to act resulting from reliance in good faith upon the books of account
or other records of the Trust, upon an opinion of counsel, or upon reports made
to the
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15
Trust by any of its officers or employees or by any Investment Adviser,
Administrator, Distributor, Transfer Agent, Custodian, Shareholder Servicing
Agent, selected dealers, accountants, appraisers or other experts or consultants
selected with reasonable care by the Trustees, officers or employees of the
Trust, regardless of whether such counsel or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1. Beneficial Interest. The interest of the
beneficiaries hereunder may be divided into transferable Shares of Beneficial
Interest (par value $0.001 per share), all of one class, which may be divided
into one or more series as provided in Section 6.9 hereof. Each Share shall
represent an equal proportionate beneficial interest in the net assets of the
Trust with each other Share, except that, if the Shares shall have been divided
into one or more series pursuant to Section 6.9 hereof, each Share of a
particular series shall represent an equal proportionate beneficial interest in
the net assets pertaining to such series with each other Share of such series.
The number of Shares authorized hereunder is unlimited. All Shares issued
hereunder including, without limitation, Shares issued in connection with a
dividend in Shares or a split of Shares, shall be fully paid and non-assessable.
Section 6.2. Rights of Shareholders. The ownership of the
Trust Property of every description 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 assume any losses of the Trust or suffer an
assessment of any kind by virtue of their ownership of Shares. The Shares shall
be personal property giving only the rights specifically set forth in the
Declaration. The Shares shall not entitle the holder to preference, preemptive,
appraisal, conversion or exchange rights, except as the Trustees may determine
with respect to any series of Shares.
Section 6.3. Trust Only. 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, limited liability company, bailment or any form of legal
relationship other than a trust. Nothing in the Declaration shall be construed
to make the Shareholders, either by themselves or with the Trustees, partners or
members of a joint stock association.
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16
Section 6.4. Issuance of Shares. The Trustees, in their
discretion may, from time to time without vote of the Shareholders, issue
Shares, in addition to the then issued and outstanding Shares and Shares held in
the treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times, and on such
terms as the Trustees may deem best, and may in such manner acquire other assets
(including the acquisition of assets subject to, and in connection with, the
assumption of liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares. The Trustees may from time to
time divide or combine the Shares of any series into a greater or lesser number
without thereby changing their proportionate beneficial interests in Trust
Property allocated or belonging to such series. Contributions to the Trust may
be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000ths
of a Share or integral multiples thereof.
Section 6.5. Register of Shares. A register or registers shall
be kept at the principal office of the Trust or at an office of the Transfer
Agent or any one or more Shareholder Servicing Agents which register or
registers, taken together, 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 or registers 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, the Shareholder
Servicing Agent which is the agent of record for such Shareholder, or such other
officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of Share
certificates and promulgate appropriate rules and regulations as to their use.
Section 6.6. Transfer of Shares. Shares shall be transferable
on the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees, the
Transfer Agent or the Shareholder Servicing Agent which is the agent of record
for such Shareholder, of a duly executed instrument of transfer, together with
any certificate or certificates (if issued) for such Shares, and such evidence
of the genuineness of each such execution and authorization and of other matters
as may reasonably be required. Upon such delivery the transfer shall be recorded
on the register of the Trust. Until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes
hereunder and neither the Trustees nor any Transfer Agent, Shareholder Servicing
Agent or registrar nor any officer,
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17
employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
Any person becoming entitled to any Shares in consequence of
the death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees, the
Transfer Agent or the Shareholder Servicing Agent which is the agent of record
for such Shareholder; but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent, Shareholder Servicing Agent or
registrar nor any officer or agent of the Trust shall be affected by any notice
of such death, bankruptcy or incompetence, or other operation of law.
Section 6.7. Notices. Any and all notices to which any
Shareholder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the register of the Trust.
Section 6.8. Voting Powers. The Shareholders shall have power
to vote only (i) for the removal of Trustees as provided in Section 2.2 hereof,
(ii) with respect to any investment advisory or management contract as provided
in Section 4.1 hereof, (iii) with respect to termination of the Trust as
provided in Section 9.2 hereof, (iv) with respect to any amendment of this
Declaration to the extent and as provided in Section 9.3 hereof, (v) with
respect to any merger, consolidation or sale of assets as provided in Sections
9.4 and 9.6 hereof, (vi) with respect to incorporation of the Trust or any
series to the extent and as provided in Sections 9.5 and 9.6 hereof, (vii) to
the same extent as the stockholders of a Massachusetts business corporation as
to 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 (viii) with respect to such additional matters relating
to the Trust as may be required by the Declaration, the By-Laws or any
registration of the Trust with the Commission (or any successor agency) 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 it is entitled to vote
and each fractional Share shall be entitled to a proportionate fractional vote,
except that Shares held in the treasury of the Trust shall not be voted. Shares
shall be voted by individual series on any matter submitted to a vote of the
Shareholders of the Trust except as provided in Section 6.9(g) hereof. There
shall be no cumulative voting in the election of Trustees. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required by law, the Declaration or the By-Laws to be taken by
Shareholders. At any meeting of shareholders of the Trust or of any series of
the
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18
Trust, without limiting any right or power which it may otherwise have by virtue
of being the record owner of Shares, (a) a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are not otherwise represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares
otherwise represented at the meeting in person or by proxy as to which such
Shareholder Servicing Agent is the agent of record and (b) any shares so voted
by a Shareholder Servicing Agent will be deemed represented at the meeting for
quorum purposes. The By-Laws may include further provisions for Shareholder
votes and meetings and related matters.
Section 6.9. Series Designation. As set forth in Appendix I
hereto, the Trustees have authorized the division of Shares into series, as
designated and established pursuant to the provisions of Appendix I and this
Section 6.9. The Trustees, in their discretion, may authorize the division of
Shares into one or more additional series, and the different series shall be
established and designated, and the variations in the relative rights,
privileges and preferences as between the different series shall be fixed and
determined by the Trustees upon and subject to the following provisions:
(a) All Shares shall be identical except that there may be
such variations as shall be fixed and determined by the Trustees
between different series as to purchase price, right of redemption and
the price, terms and manner of redemption, and special and relative
rights as to dividends and on liquidation.
(b) The number of authorized Shares and the number of Shares
of each series that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously
issued and reacquired of any series into one or more series that may be
established and designated from time to time. The Trustees may hold as
treasury shares (of the same or some other series), reissue for such
consideration and on such terms as they may determine, or cancel any
Shares of any series reacquired by the Trust at their discretion from
time to time.
(c) All consideration received by the Trust for the issue or
sale of Shares of a particular series, together with all assets in
which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever
form the same may be, shall irrevocably belong to that series for all
purposes, subject only to the rights of creditors of such series, and
shall be so recorded upon the books of account of the Trust. In the
event that there are any assets, income, earnings, profits, and
proceeds thereof,
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19
funds, or payments which are not readily identifiable as belonging to
any particular series, the Trustees shall allocate them among any one
or more of the series established and designated from time to time in
such manner and on such basis as they, in their sole discretion, deem
fair and equitable. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all series for all
purposes. No holder of Shares of any particular series shall have any
claim on or right to any assets allocated or belonging to any other
series of Shares.
(d) The assets belonging to each particular series shall be
charged with the liabilities of the Trust in respect of that series and
all expenses, costs, charges and reserves attributable to that series,
and any general liabilities, expenses, costs, charges or reserves of
the Trust which are not readily identifiable as belonging to any
particular series shall be allocated and charged by the Trustees to and
among any one or more of the series established and designated from
time to time in such manner and on such basis as the Trustees in their
sole discretion deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all series for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders. Under no circumstances shall the assets allocated or
belonging to any particular series be charged with liabilities
attributable to any other series. All Persons who have extended credit
which has been allocated to a particular series, or who have a claim or
contract which has been allocated to any particular series, shall look
only to the assets of that particular series for payment of such
credit, claim or contract.
(e) The power of the Trustees to invest and reinvest the Trust
Property allocated or belonging to any particular series shall be
governed by Section 3.2 hereof unless otherwise provided in the
instrument of the Trustees establishing such series which is
hereinafter described.
(f) Each Share of a series shall represent a beneficial
interest in the net assets allocated or belonging to such series only,
and such interest shall not extend to the assets of the Trust
generally. Dividends and distributions on Shares of a particular series
may be paid with such frequency as the Trustees may determine, which
may be monthly or otherwise, pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees
may determine, to the holders of Shares of that series only, from such
of the income and capital gains,
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20
accrued or realized, from the assets belonging to that series, as the
Trustees may determine, after providing for actual and accrued
liabilities belonging to that series. All dividends and distributions
on Shares of a particular series shall be distributed pro rata to the
holders of that series in proportion to the number of Shares of that
series held by such holders at the date and time of record established
for the payment of such dividends or distributions. Shares of any
particular series of the Trust may be redeemed solely out of Trust
Property allocated or belonging to that series. Upon liquidation or
termination of a series of the Trust, Shareholders of such series shall
be entitled to receive a pro rata share of the net assets of such
series only.
(g) Notwithstanding any provision hereof to the contrary, on
any matter submitted to a vote of the Shareholders of the Trust, all
Shares then entitled to vote shall be voted by individual series,
except that (i) when required by the 1940 Act to be voted in the
aggregate, Shares shall not be voted by individual series, and (ii)
when the Trustees have determined that the matter affects only the
interests of Shareholders of one or more series, only Shareholders of
such series shall be entitled to vote thereon.
(h) The establishment and designation of any series of Shares
shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such series, or
as otherwise provided in such instrument. At any time that there are no
Shares outstanding of any particular series previously established and
designated, the Trustees may by an instrument executed by a majority of
their number abolish that series and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.
(i) Notwithstanding anything in this Declaration to the
contrary, the Trustees may, in their discretion, authorize the division
of Shares of any series into shares of one or more classes of such
series. All Shares of a class shall be identical with each other and
with the Shares of each other class or subseries of the same series
except for such varieties between classes as may be approved by the
Board of Trustees and be permitted under the 1940 Act or pursuant to
any exemptive order issued by the Securities and Exchange Commission.
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21
ARTICLE VII
REDEMPTIONS
Section 7.1. Redemptions. In case any Shareholder at any time
desires to dispose of his Shares, he may deposit his certificate or certificates
therefor, duly endorsed in blank or accompanied by an instrument of transfer
executed in blank, or if the Shares are not represented by any certificates, a
written request or other such form of request as the Trustees may from time to
time authorize, at the office of the Transfer Agent, the Shareholder Servicing
Agent which is the agent of record for such Shareholder, or at the office of any
bank or trust company, either in or outside of Massachusetts, which is a member
of the Federal Reserve System and which the said Transfer Agent or the said
Shareholder Servicing Agent has designated in writing for that purpose, together
with an irrevocable offer in writing in a form acceptable to the Trustees to
sell the Shares represented thereby to the Trust at the net asset value thereof
per Share, determined as provided in Section 8.1 hereof, next after such
deposit. Payment for said Shares shall be made to the Shareholder within seven
days after the date on which the deposit is made, unless (i) the date of payment
is postponed pursuant to Section 7.2 hereof, or (ii) the receipt, or
verification of receipt, of the purchase price for the Shares to be redeemed is
delayed, in either of which events payment may be delayed beyond seven days.
Section 7.2. Suspension of Right of Redemption. The
Trust may declare a suspension of the right of redemption or postpone the date
of payment of the redemption proceeds for the whole or any part of any period
(i) during which the New York Stock Exchange is closed other than customary
week-end and holiday closings, (ii) during which trading on the New York Stock
Exchange is restricted, (iii) during which an emergency exists as a result of
which disposal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust fairly to
determine the value of its net assets, or (iv) during any other period when 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 of the redemption proceeds; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (ii), (iii) or (iv) exist. Such suspension shall take effect at
such time as the Trust shall specify but not later than the close of business on
the business day next following the declaration of suspension, and thereafter
there shall be no right of redemption or payment of the redemption proceeds
until the Trust shall declare the suspension at an end, except that the
suspension shall terminate in any event on the first day on which said stock
exchange shall have reopened or the period specified in (ii) or (iii) shall have
expired (as to which, in the absence of an official ruling by the Commission,
the determination of the Trust shall be conclusive).
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In the case of a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
Section 7.3. Redemption of Shares, Disclosure of Holding. 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 Internal Revenue Code of 1986, as
amended (the "Code"), then the Trustees shall have the power by lot or other
means deemed equitable by them (i) to call for redemption by any such Person a
number, or principal amount. of Shares or other securities of the Trust
sufficient to maintain or bring the direct or indirect ownership of shares or
other securities of the Trust into conformity with the requirements for such
qualification, and (ii) to refuse to transfer or issue Shares or other
securities of the Trust to any Person whose acquisition of the Shares or other
securities of the Trust in question would result in such disqualification. The
redemption shall be effected at the redemption price and in the manner provided
in Section 7.1 hereof.
The holders of Shares or other securities of the Trust shall
upon demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Code, or to comply
with the requirements of any other authority. Upon the failure of a Shareholder
to disclose such information and to comply with such demand of the Trustees, the
Trust shall have the power to redeem such Shares at a redemption price
determined in accordance with Section 7.1 hereof.
Section 7.4. Redemptions of Accounts of Less than $500. The
Trustees shall have the power at any time to redeem Shares of any Shareholder at
a redemption price determined in accordance with Section 7.1 hereof if at such
time the aggregate net asset value of the Shares in such Shareholder's account
is less, than $500. A Shareholder shall be notified that the value of his
account is less than $500 and allowed 60 days to make an additional investment
before the redemption is effected.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
The Trustees, in their absolute discretion, may prescribe and
shall set forth in the By-Laws or in a duly adopted vote or votes of the
Trustees such bases and times for determining the per Share net asset value of
the Shares or net
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income, or the declaration and payment of dividends and
distributions, as they may deem necessary or desirable.
ARTICLE IX
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 9.1. Duration. The Trust shall continue
without limitation of time but subject to the provisions of this
Article IX.
Section 9.2. Termination of Trust. (a) The Trust may be
terminated (i) by a Majority Shareholder Vote of the holders of each series of
its Shares, or (ii) by the Trustees by written notice to the Shareholders. Any
series of the Trust may be terminated (i) by a Majority Shareholder Vote of the
holders of Shares of that series, or (ii) by the Trustees by written notice to
the Shareholders of that series. Upon the termination of the Trust or any series
of the Trust:
(i) The Trust or series of 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 or series of the Trust and all the powers of the Trustees
under this Declaration shall continue until the affairs of the Trust or
series of the Trust shall have been wound up, including the power to
fulfill or discharge the contracts of the Trust or series of the Trust,
collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust Property or
Trust Property of the series 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 to 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 shall require Shareholder approval in accordance with Section
9.4 hereof, and any sale, conveyance, assignment, exchange, transfer or
other disposition of all or substantially all of the Trust Property
allocated or belonging to any series shall require the approval of the
Shareholders of such series as provided in Section 9.6 hereof; and
(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 or
Trust Property of the
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24
series, in cash or in kind or partly in cash and partly in kind, among
the Shareholders of the Trust or the series according to their
respective rights.
(b) After termination of the Trust or series and distribution
to the Shareholders of the Trust or series 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 with
respect to the Trust or series, and the rights and interests of all Shareholders
of the Trust or series shall thereupon cease.
Section 9.3. Amendment Procedure. (a) This Declaration may be
amended by a Majority Shareholder Vote of the Shareholders of the Trust or by
any instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than a majority of the
Shares of the Trust. The Trustees may also amend this Declaration without the
vote or consent of Shareholders to designate series in accordance with Section
6.9 hereof (or to modify any provision of this Declaration to the extent deemed
necessary or appropriate by the Trustees to reflect such designation), to change
the name of the Trust, to amend, alter, modify or repeal any provision of this
Declaration with respect to any item provided that such amendment, alteration,
modification or repeal does not adversely affect the economic value or legal
rights of a Shareholder, or if they deem it necessary or advisable to conform
this Declaration to the requirements of applicable federal laws or regulations
or the requirements of the regulated investment company provisions of the
Internal Revenue Code of 1986, as amended, but the Trustees shall not be liable
for failing to do so.
(b) No amendment which the Trustees shall have determined
shall adversely affect the rights, privileges or interests of holders of a
particular series of Shares, and which would otherwise require a Majority
Shareholder Vote under paragraph (a) of this Section 9.3, but not the rights,
privileges or interests of holders of Shares of the Trust generally, may be made
except with the vote or consent by a Majority Shareholder Vote of such series.
(c) Notwithstanding any other provision hereof, no amendment
may be made under this Section 9.3 which would change any rights with respect to
the Shares, or any series of Shares, by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the Majority Shareholder Vote of the Shares or
that series of Shares. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders,
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25
Trustees, officers, employees and agents of the Trust or to permit assessments
upon Shareholders.
(d) A certificate signed by a majority of the Trustees setting
forth an amendment and reciting that it was duly adopted by the Shareholders or
by the Trustees as aforesaid or a copy of the Declaration, as amended, and
executed by a majority of the Trustees, shall be conclusive evidence of such
amendment when lodged among the records of the Trust.
(e) 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 have become
effective, this Declaration may be 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 9.4. 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 (or all or substantially all of the Trust Property allocated
or belonging to a particular series of the Trust) including its good will, upon
such terms and conditions and for such consideration when and as authorized at
any meeting of Shareholders called for such purpose by the vote of the holders
of two-thirds of the outstanding shares of each affected series of the Trust or
by an instrument or instruments in writing without a meeting, consented to by
the vote of the holders of two-thirds of the outstanding Shares of each affected
series of the Trust; provided, however, that if such merger, consolidation,
sale, lease or exchange is recommended by the Trustees, the vote or written
consent by Majority Shareholder Vote shall be sufficient authorization; and any
such merger, consolidation, sale, lease or exchange shall be deemed for all
purposes to have been accomplished under and pursuant to the statutes of the
Commonwealth of Massachusetts. Nothing contained herein shall be construed as
requiring approval of Shareholders for any sale of assets in the ordinary course
of the business of the Trust.
Section 9.5. Incorporation, Reorganization. Subject to a
Majority Shareholder Vote, the Trustees may cause to be organized or assist in
organizing a corporation or corporations under the laws of any jurisdiction, or
any other trust, unit investment 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 to sell,
convey and transfer the Trust Property to any such corporation. trust,
partnership, association or organization in exchange for the shares or
securities thereof or otherwise, and to lend money to, subscribe for the shares
or securities of, and enter into any contracts with any such corporation, trust,
partnership, association or organization in
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26
which the Trust holds or is about to acquire shares or any other interest.
Subject to Section 9.4 hereof, 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 if and to the
extent permitted by law. Nothing contained in this Section 9.5 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 a
portion of the Trust Property to such organization or entities.
Section 9.6. Incorporation or Reorganization of Series. With
the approval of a Majority Shareholder Vote of any series, the Trustees may
sell, lease or exchange all of the Trust Property allocated or belonging to that
series, or cause to be organized or assist in organizing a corporation or
corporations under the laws of any other jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization, to take over
all of the Trust Property allocated or belonging to that series and to sell,
convey and transfer such Trust Property to any such corporation, trust, unit
investment trust, partnership, association, or other organization in exchange
for the shares or securities thereof or otherwise.
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS
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 certified by
independent public accountants.
Whenever 10 or more Shareholders of record who have been such
for at least six months preceding the date of application, and who hold in the
aggregate either Shares having a net asset value of at least $25,000 or at least
1% of the Shares outstanding, whichever is less, shall apply to the Trustees in
writing, stating that they wish to communicate with other Shareholders with a
view to obtaining signatures to a request for a meeting of Shareholders for the
purpose of removing one or more Trustees pursuant to Section 2.2 hereof and
accompany such application with a form of communication and request which they
wish to transmit, the Trustees shall within five business days after receipt of
such application either (a) afford to such applicants access to a list of the
names and addresses of all Shareholders as recorded on the books of the Trust;
or (b) inform such applicants as to the approximate number of Shareholders of
record, and the approximate cost of mailing to them the proposed communication
and form of request. If the Trustees elect to follow the course specified in (b)
above, the Trustees, upon the written request of such applicants, accompanied by
a tender of the material to be mailed and of the reasonable expenses of
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27
mailing, shall, with reasonable promptness, mail such material to all
Shareholders of record, unless within five business days after such tender the
Trustees mail to such applicants and file with the Commission, together with a
copy of the material to be mailed, a written statement signed by at least a
majority of the Trustees to the effect that in their opinion either such
material contains untrue statements of fact or omits to state facts necessary to
make the statements contained therein not misleading, or would be in violation
of applicable law, and specifying the basis of such opinion.
ARTICLE XI
MISCELLANEOUS
Section 11.1. Filing. This Declaration, as amended, and any
subsequent amendment hereto shall be filed in the office of the Secretary of the
Commonwealth of Massachusetts and in such other place or 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. Each
amendment so filed shall be accompanied by a certificate signed and acknowledged
by a Trustee stating that such action was duly taken in a manner provided
herein, and unless such amendment or such certificate sets forth some later time
for the effectiveness of such amendment, such amendment shall be effective upon
its filing. A restated Declaration, integrating into a single instrument all of
the provisions of the 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 thereafter be referred to in lieu of
this 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 instrument, 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: (i) the number or identity of Trustees or
Shareholders, (ii) the due authorization of the execution of any
instrument or writing, (iii) the form of any vote passed at a
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28
meeting of Trustees or Shareholders, (iv) the fact that the number of Trustees
or Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (v) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (vi) 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 the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986, as amended, or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision 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 the
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this
instrument this 1st day of October, 1996.
-----------------------------
Fergus Reid, III
as Trustee
and not individually
101 Park Avenue
New York, New York 10178
-----------------------------
H. Richard Vartabedian
as Trustee
and not individually
101 Park Avenue
New York, New York 10178
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
October 1, 1996
Then personally appeared the above-named Fergus Reid, III and
H. Richard Vartabedian who severally acknowledged the foregoing instrument to be
their free act and deed.
Before me,
----------------------
Notary Public
My commission expires:
<PAGE>
Appendix I
MUTUAL FUND SELECT TRUST
Establishment and
Designation of Series of Shares of
Beneficial Interest (without par value)
Pursuant to Section 6.9 of the Declaration of Trust, dated
October 1, 1996 (the "Declaration of Trust"), of the Mutual Fund Select Trust
(the "Trust"), the Trustees of the Trust hereby establish and designate ten
initial series of Shares (as defined in the Declaration of Trust), such series
to have the following special and relative rights:
1. The series shall be respectively designated as follows:
Vista Select Intermediate Tax Free Income Fund
Vista Select Tax Free Income Fund
Vista Select New York Tax Free Income Fund
Vista Select New Jersey Tax Free Income Fund
When Shares of any of the above series are made available to
customers of an entity with which the Trust has entered into a shareholder
servicing or similar agreement, such series may be referred to by the
designation set forth above with an identifying prefix other than the word
"Vista", to denote the services being offered by that entity to its customers
who own Shares of that series.
2. Each series shall be authorized to invest in cash,
securities, instruments and other property as from time to time described in the
Trust's then currently effective registration statement under the Securities Act
of 1933 to the extent pertaining to the offering of Shares of such series. Each
Share of each series shall be redeemable, shall be entitled to one vote or
fraction thereof in respect of a fractional share on matters on which shares of
that series shall be entitled to vote, shall represent a pro rata beneficial
interest in the assets allocated or belonging to such series, and shall be
entitled to receive its pro rata share of the net assets of such series upon
liquidation of the series, all as provided in Section 6.9 of the Declaration of
Trust.
3. Shareholders of each series shall vote separately as a
class on any matter to the extent required by, and any matter shall be deemed to
have been effectively acted upon with respect to such series as provided in,
Rule 18f-3, as from time to time in effect, under the Investment Company Act of
1940, as amended, or any successor rule, and by the Declaration of Trust.
<PAGE>
2
4. The assets and liabilities of the Trust shall be allocated
among these series as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of
the Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets and
expenses or to change the designation of any series now or hereafter created, or
to otherwise change the special and relative rights of any such series.
BY-LAWS
OF THE
MUTUAL FUND SELECT TRUST
ARTICLE I
DEFINITIONS
The terms "Commission", "Declaration", "Distributor",
"Investment Adviser", "Majority Shareholder Vote", "1940 Act", "Shareholder",
"Shares", "Transfer Agent", "Trust", "Trust Property" and "Trustees" have the
respective meanings given them in the Declaration of Trust of the Mutual Fund
Select Trust, dated October 1, 1996, as amended from time to time.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees,
the principal office of the Trust in the Commonwealth of Massachusetts shall
be in the City of Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in
such other places without as well as within the Commonwealth of Massachusetts
as the Trustees may from time to time determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. Meetings of Shareholders may be called at
any time by a majority of the Trustees and shall be called by any Trustee upon
written request, which shall specify the purpose or purposes for which such
meeting is to be called, of Shareholders holding in the aggregate not less than
10% of the outstanding Shares entitled to vote on the matters specified in such
written request. Any such meeting shall be held within or without the
Commonwealth of Massachusetts on such day and at such time as the Trustees shall
designate. The holders of a majority of outstanding Shares entitled to vote
present in person or by proxy shall constitute a quorum at any meeting of
Shareholders, except that where any provision of law, the Declaration or these
By-Laws permits or requires that holders of any series shall vote as a series,
then a majority of the aggregate number of Shares of that series entitled to
vote shall be necessary to constitute a quorum for the transaction of business
by that series. In the absence of a quorum, a majority of outstanding Shares
entitled to vote present in person or by proxy may adjourn the meeting from time
to time until a quorum shall be present.
<PAGE>
2
Section 2. Notice of Meetings. Notice of all meetings of
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder entitled 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. Only the business stated
in the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice. No notice need be given
to any Shareholder who shall have failed to inform the Trust of his current
address or if a written waiver of notice, executed before or after the meeting
by the Shareholder or his attorney thereunto authorized, is filed with the
records of the meeting.
Section 3. Record Date. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 90 days prior to the
date of any meeting of Shareholders or distribution or other action as a record
date for the determination of the persons to be treated as Shareholders of
record for such purpose.
Section 4. Proxies. At any meeting of Shareholders, any holder
of Shares entitled to vote thereat may vote by proxy, provided that no proxy
shall be voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a vote of a majority of the Trustees, proxies may be solicited in
the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be entitled to a vote of such
fraction. 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, 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 to be
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. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
such Share may be voted by such guardian or such other person as regards the
charge or
<PAGE>
3
management of such Share, such Share may be voted by such guardian or such other
person appointed or having such control, and such vote may be given in person or
by proxy.
Section 5. Inspection of Records. The records of the
Trust shall be open to inspection by the Shareholders to the same extent as
is permitted shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be
taken by Shareholders may be taken without a meeting if a majority of
Shareholders entitled to vote on the matter (or such larger proportion thereof
as shall be required by law, the Declaration or these By-Laws for approval of
such matter) consent to the action in writing and the written consents are filed
with the records of the meetings of Shareholders. Such consent shall be treated
for all purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the Chairman or
by any Trustee. Notice of the time and place of each meeting other than regular
or stated meetings shall be given by the Secretary or an Assistant Secretary or
by the officer or Trustee calling the meeting and shall be mailed to each
Trustee at least two days before the meeting, or shall be telegraphed, cabled,
or wirelessed to each Trustee at his business address, or personally delivered
to him at least one day before the meeting. Such notice may, however, be waived
by any Trustee. 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 thereto or at its commencement the lack of notice to
him. A notice or waiver of notice need not specify the purpose of any meeting.
The Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, which telephone conference meeting shall be deemed
to have been held at a place designated by the Trustees at the meeting.
Participation in a telephone conference meeting shall constitute presence in
person at such meeting. Any action required or permitted to be taken at any
meeting of the Trustees may be taken
<PAGE>
4
by the Trustees without a meeting if all the Trustees consent to the action in
writing and the written consents are filed with the records of the Trustees'
meetings. Such consents shall be treated as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the
Trustees present in person at any regular or special meeting of the Trustees
shall constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration or these By-Laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES AND ADVISORY BOARD
Section 1. Executive and Other Committees. The Trustees by
vote of a majority of all the Trustees may elect from their own number an
Executive Committee to consist of not less than three Trustees to hold office at
the pleasure of the Trustees. While the Trustees are not in session, the
Executive Committee shall have the power to conduct the current and ordinary
business of the Trust, including the purchase and sale of securities and the
designation of securities to be delivered upon redemption of Shares of the
Trust, and such other powers of the Trustees as the Trustees may, from time to
time, delegate to the Executive Committee except those powers which by law, the
Declaration or these By-Laws the Trustees are prohibited from so delegating. The
Trustees may also elect from their own number other Committees from time to
time, the number composing such Committees, the powers conferred upon the same
(subject to the same limitations as with respect to the Executive Committee) and
the terms of membership on such Committees to be determined by the Trustees. The
Trustees may designate a chairman of any such Committee. In the absence of such
designation a Committee may elect its own chairman.
Section 2. Meeting, Quorum and Manner of Acting. The
Trustees may (i) provide for stated meetings of any Committee, (ii) specify the
manner of calling and notice required for special meetings of any Committee,
(iii) specify the number of members of a Committee required to constitute a
quorum and the number of members of a Committee required to exercise specified
powers delegated to such Committee, (iv) authorize the making of decisions to
exercise specified powers by written assent of the requisite number of
<PAGE>
5
members of a Committee without a meeting, and (v) authorize the members of a
Committee to meet by means of a telephone conference circuit.
Each Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the office of the Trust.
Section 3. Advisory Board. The Trustees may appoint an
Advisory Board to consist in the first instance of not less than three members.
Members of such Advisory Board shall not be Trustees or officers and need not be
Shareholders. A member of such Advisory Board shall hold office for such period
as the Trustees may by vote provide and may resign therefrom by a written
instrument signed by him which shall take effect upon its delivery to the
Trustees. The Advisory Board shall have no legal powers and shall not perform
the functions of Trustees in any manner, such Advisory Board being intended
merely to act in an advisory capacity. Such Advisory Board shall meet at such
times and upon such notice as the Trustees may provide.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall
be a Chairman, a President, a Treasurer and a Secretary, who shall be elected by
the Trustees. The Trustees may elect or appoint such other officers or agents as
the business of the Trust may require, including one or more Vice Presidents,
one or more Assistant Treasurers, and one or more Assistant Secretaries. The
Trustees may delegate to any officer or committee the power to appoint any
subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as
otherwise provided by law, the Declaration of Trust or these By-Laws, the
Chairman, the President, the Treasurer and the Secretary shall hold office until
his respective successor shall have been duly elected and qualified, and all
other officers shall hold office at the pleasure of the Trustees. The Secretary
and Treasurer may be the same person. A Vice President and the Treasurer or a
Vice President and the Secretary may be the same person, but the offices of Vice
President, Secretary and Treasurer shall not be held by the same person. Neither
the Chairman nor the President shall hold any other office. Except as above
provided, any two offices may be held by the same person. Any officer may be,
but none need be, a Trustee or Shareholder.
<PAGE>
6
Section 3. Removal. The Trustees, at any regular or special
meeting of the Trustees, may remove any officer with or without cause by a vote
of a majority of the Trustees. Any officer or agent appointed by any officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 4. Powers and Duties of the Chairman. The Chairman may
call meetings of the Trustees and of any Committee thereof when he deems it
necessary and shall preside at all meetings of the Shareholders. Subject to the
control of the Trustees and any Committee of the Trustees, the Chairman shall at
all times exercise a general supervision and direction over the affairs of the
Trust. The Chairman shall have the power to employ attorneys and counsel for the
Trust and to employ such subordinate officers, agents, clerks and employees as
he may find necessary to transact the business of the Trust. The Chairman shall
also have the power to grant, issue, execute or sign such powers of attorney,
proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The Chairman shall have such other
powers and duties as, from time to time, may be conferred upon or assigned to
him by the Trustees.
Section 5. Powers and Duties of the President. In the absence
or disability of the Chairman, the President shall perform all the duties and
may exercise any of the powers of the Chairman, subject to the control of the
Trustees. The President shall perform such other duties as may be assigned to
him from time to time by the Trustees or the Chairman.
Section 6. Powers and Duties of Vice Presidents. In the
absence or disability of the President, the Vice President or, if there be more
than one Vice President, any Vice President designated by the Trustees shall
perform all the duties and may exercise any of the powers of the President,
subject to the control of the Trustees. Each Vice President shall perform such
other duties as may be assigned to him from time to time by the Trustees or the
President.
Section 7. Powers and Duties of the Treasurer. The Treasurer
shall be the principal financial and accounting officer of the Trust. The
Treasurer shall deliver all funds of the Trust which may come into his hands to
such custodian as the Trustees may employ pursuant to Article X hereof. 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 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. The Treasurer shall
give a bond to the faithful discharge of his duties, if required to do so by the
Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
<PAGE>
7
Section 8. Powers and Duties of the Secretary. The Secretary
shall keep the minutes of all meetings of the Shareholders in the proper books
provided for that purpose; shall keep the minutes of all meetings of the
Trustees; shall have custody of the seal of the Trust; and shall have charge of
the Share transfer books, lists and records unless the same are in the charge of
a Transfer Agent of the Trust (as such party is defined in the Declaration). The
Secretary shall attend to the giving and serving of all notices by the Trust in
accordance with the provisions of these By-Laws and as required by law; and
subject to these By-Laws, shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Trustees.
Section 9. Powers and Duties of Assistant Treasurers. In the
absence or disability of the Treasurer, any Assistant Treasurer designated by
the Trustees shall perform all the duties, and may exercise any of the powers,
of the Treasurer. Each Assistant Treasurer shall perform such other duties as
from time to time may be assigned to him by the Trustees. Each Assistant
Treasurer shall give a bond for the faithful discharge of his duties, if
required to do so by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.
Section 10. Powers and Duties of Assistant Secretaries. In the
absence or disability of the Secretary, any Assistant Secretary designated by
the Trustees shall perform all of the duties, and may exercise any of the powers
of the Secretary. Each Assistant Secretary shall perform such other duties as
from time to time may be assigned to him by the Trustees.
Section 11. Compensation of Officers and Trustees and Members
of the Advisory Board. Subject to any applicable law or provision of the
Declaration, the compensation of the officers and Trustees and members of the
Advisory Board shall be fixed from time to time by the Trustees or, in the case
of officers, by any Committee or officer upon whom such power may be conferred
by the Trustees. No officer shall be prevented from receiving such compensation
as such officer by reason of the fact that he is also a Trustee.
<PAGE>
8
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of
September in each year and shall end on the last day of August in the succeeding
year, provided, however, that the Trustees may from time to time change the
fiscal year.
ARTICLE VIII
SEAL
The Trustees shall adopt a seal which shall be in the form and
shall have such inscription thereon as the Trustees may from time to time
prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wirelessed for the purposes of these By-Laws when it
has been delivered to a representative of any telegraph, cable or wireless
company with instruction that it be telegraphed, cabled or wirelessed. Any
notice shall be deemed to be given at the time when the same shall be mailed,
telegraphed, cabled or wirelessed.
ARTICLE X
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or
repealed, or new By-Laws may be adopted (a) by Majority Shareholder Vote, or (b)
by the Trustees, provided, however, that no By-Law may be amended, adopted or
repealed by the Trustees if such amendment, adoption or repeal requires,
pursuant to law, the Declaration or these By-Laws, a vote of the Shareholders.
Dated: October 1, 1996
INVESTMENT ADVISORY AGREEMENT
BETWEEN
MUTUAL FUND SELECT TRUST
AND
THE CHASE MANHATTAN BANK
AGREEMENT made as of the __th day of _________, 1996, by and
between Mutual Fund Select Trust, a Massachusetts business trust which may issue
one or more series of shares (hereinafter the "Trust"), and The Chase Manhattan
Bank, a New York State chartered bank (hereinafter the "Adviser").
WHEREAS, the Trust is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser to furnish
investment advisory services in connection with the series of the Trust listed
on Schedule A (each, a "Fund" and collectively, the "Funds"), and the Adviser
represents that it is willing and possesses legal authority to so furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Structure of Agreement. The Trust is entering into this
Agreement on behalf of the Funds severally and not jointly. The responsibilities
and benefits set forth in this Agreement shall refer to each Fund severally and
not jointly. No individual Fund shall have any responsibility for any obligation
with respect to any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing,
(a) any breach of any term of this Agreement regarding the
Trust with respect to any one Fund shall not create a right or obligation with
respect to any other Fund;
(b) under no circumstances shall the Adviser have the right
to set off claims relating to a Fund by applying property of any other Fund; and
(c) the business and contractual relationships created by
this Agreement, the consideration for entering into this Agreement, and the
consequences of such relationships and consideration relate solely to the Trust
and the particular Fund to which such relationship and consideration applies.
2. Delivery of Documents. The Trust has delivered to the
Adviser copies of each of the following documents and will deliver to it all
future amendments and supplements thereto, if any:
(a) The Trust's Declaration of Trust;
<PAGE>
(b) The By-Laws of the Trust;
(c) Resolutions of the Board of Trustees of the Trust
authorizing the execution and delivery of this Agreement;
(d) The most recent Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940, as amended (the "1940 Act"), on Form N-1A as filed with the
Securities and Exchange Commission (the "Commission") (the "Registration
Statement");
(e) Notification of Registration of the Trust under the 1940
Act on Form N- 8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of
the Funds (collectively, the "Prospectuses").
3. Appointment.
(a) General. The Trust hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Trust under applicable laws and are under the control of The
Chase Manhattan Corporation, the parent of the Adviser; provided that (i) all
persons, when providing services hereunder, are functioning as part of an
organized group of persons, and (ii) such organized group of persons is managed
at all times by authorized officers of the Adviser.
(c) Sub-Advisers. It is understood and agreed that the
Adviser may from time to time employ or associate with such other entities or
persons as the Adviser believes appropriate to assist in the performance of this
Agreement with respect to a particular Fund or Funds (each a "Sub-Adviser"), and
that any such Sub-Adviser shall have all of the rights and powers of the Adviser
set forth in this Agreement; provided that a Fund shall not pay any additional
compensation for any Sub-Adviser and the Adviser shall be as fully responsible
to the Trust for the acts and omissions of the Sub-Adviser as it is for its own
acts and omissions; and provided further that the retention of any Sub-Adviser
shall be approved in advance by (i) the Board of Trustees of the Trust and (ii)
the shareholders of the relevant Fund if required under any applicable
provisions of the 1940 Act. The Adviser will review, monitor and report to the
Trust's Board of Trustees regarding the performance and investment procedures of
any Sub-Adviser. In the event that the services of any Sub-Adviser are
terminated, the Adviser may provide investment advisory services pursuant to
this Agreement to the Fund without a Sub-Adviser and without further shareholder
approval, to the extent consistent with the 1940 Act. A Sub-Adviser may be an
affiliate of the Adviser.
-2-
<PAGE>
4. Investment Advisory Services.
(a) Management of the Funds. The Adviser hereby undertakes to
act as investment adviser to the Funds. The Adviser shall regularly provide
investment advice to the Funds and continuously supervise the investment and
reinvestment of cash, securities and other property composing the assets of the
Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the Trust and
each Fund;
(ii) obtain and evaluate pertinent economic, statistical and
financial data, as well as other significant events and developments, which
affect the economy generally, the Funds' investment programs, and the issuers of
securities included in the Funds' portfolios and the industries in which they
engage, or which may relate to securities or other investments which the Adviser
may deem desirable for inclusion in a Fund's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iv) furnish a continuous investment program for each Fund;
(v) in its discretion and without prior consultation with the
Trust, buy, sell, lend and otherwise trade any stocks, bonds and other
securities and investment instruments on behalf of each Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such investment program and the
Adviser's functions as provided above, including the making of appropriate
periodic reports to the Trust's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment
advisory and supervisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in: (i) each Fund's
Prospectus and Statement of Additional Information as revised and in effect from
time to time; (ii) the Trust's Declaration of Trust, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act; (iv) other
applicable laws; and (v) such other investment policies, procedures and/or
limitations as may be adopted by the Trust with respect to a Fund and provided
to the Adviser in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended, and regulations issued thereunder (the "Code"), except as may
be authorized to the contrary by the Trust's Board of Trustees. The management
of the Funds by the Adviser shall at all times be subject to the review of the
Trust's Board of Trustees.
(c) Books and Records. The Adviser shall keep each Fund's
books and records required by applicable law to be maintained by the Funds with
respect to advisory services. The Adviser agrees that all records which it
maintains for a Fund are the property of the Fund and it will promptly surrender
any of such records to the Fund upon the Fund's
-3-
<PAGE>
request. The Adviser further agrees to preserve for the periods prescribed by
the 1940 Act any such records of the Fund required to be preserved by such Rule.
(d) Reports, Evaluations and other services. The Adviser shall
furnish reports, evaluations, information or analyses to the Trust with respect
to the Funds and in connection with the Adviser's services hereunder as the
Trust's Board of Trustees may request from time to time or as the Adviser may
otherwise deem to be desirable. The Adviser shall make recommendations to the
Trust's Board of Trustees with respect to Trust policies, and shall carry out
such policies as are adopted by the Board of Trustees. The Adviser shall,
subject to review by the Board of Trustees, furnish such other services as the
Adviser shall from time to time determine to be necessary or useful to perform
its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place
all orders for the purchase and sale of portfolio securities for each Fund with
brokers or dealers selected by the Adviser, which may include brokers or dealers
affiliated with the Adviser to the extent permitted by the 1940 Act and the
Trust's policies and procedures applicable to the Funds. The Adviser shall use
its best efforts to seek to execute portfolio transactions at prices which,
under the circumstances, result in total costs or proceeds being the most
favorable to the Funds. In assessing the best overall terms available for any
transaction, the Adviser shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, research
services provided to the Adviser, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest commission or the best
net price for any Fund on any particular transaction, nor shall the Adviser be
under any duty to execute any order in a fashion either preferential to any Fund
relative to other accounts managed by the Adviser or otherwise materially
adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers or dealers may be
selected who also provide brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) to the Adviser,
the Funds and/or the other accounts over which the Adviser exercises investment
discretion. The Adviser is authorized to pay a broker or dealer who provides
such brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that the total commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
overall responsibilities of the Adviser with respect to accounts over which it
exercises investment discretion. The Adviser shall report to the Board of
Trustees of the Trust regarding overall commissions paid by the Funds and their
reasonableness in relation to the benefits to the Funds.
(g) Aggregation of Securities Transactions. In executing
portfolio transactions for a Fund, the Adviser may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to, aggregate the
securities to be sold or purchased with
-4-
<PAGE>
those of other Funds or its other clients if, in the Adviser's reasonable
judgment, such aggregation (i) will result in an overall economic benefit to the
Fund, taking into consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading requirements, and (ii) is
not inconsistent with the policies set forth in the Trust's registration
statement and the Fund's Prospectus and Statement of Additional Information. In
such event, the Adviser will allocate the securities so purchased or sold, and
the expenses incurred in the transaction, in an equitable manner, consistent
with its fiduciary obligations to the Fund and such other clients.
5. Expenses. (a) The Adviser shall, at its expense, provide
the Funds with office space, furnishings and equipment and personnel required by
it to perform the services to be provided by the Adviser pursuant to this
Agreement. The Adviser also hereby agrees that it will supply to any sub-adviser
or administrator (the "Administrator") of a Fund all necessary financial
information in connection with the Administrator's duties under any Agreement
between the Administrator and the Trust.
(b) Except as provided in subparagraph (a), the Trust shall be
responsible for all of the Funds' expenses and liabilities, including, but not
limited to, taxes; interest; fees (including fees paid to its trustees who are
not affiliated with the Adviser or any of its affiliates); fees payable to the
Securities and Exchange Commission; state securities qualification fees;
association membership dues; costs of preparing and printing Prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
6. Compensation. (a) In consideration of the services to be
rendered by the Adviser under this Agreement, the Trust shall pay the Adviser
monthly fees on the first Business Day (as defined in the Prospectuses) of each
month based upon the average daily net assets of each Fund during the preceding
month (as determined on the days and at the time set forth in the Prospectuses
for determining net asset value per share) at the annual rate set forth opposite
the Fund's name on Schedule A attached hereto. If the fees payable to the
Adviser pursuant to this paragraph begin to accrue before the end of any month
or if this Agreement terminates before the end of any month, the fees for the
period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Funds' net assets shall be computed in the manner
specified in the Prospectuses and the Declaration of Trust for the computation
of the value of the Funds' net assets in connection with the determination of
the net asset value of the Funds' shares of beneficial interest.
(b) If the aggregate expenses incurred by, or allocated to,
each Fund in any fiscal year shall exceed the lowest expense limitation, if
applicable to such Fund, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Adviser shall reduce its investment advisory fee, but not below zero, to
-5-
<PAGE>
the extent of its share of such excess expenses; provided, however, there shall
be excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund. Such reduction, if any, shall be computed
and accrued daily, shall be settled on a monthly basis and shall be based upon
the expense limitation applicable to the Fund as at the end of the last business
day of the month. Should two or more of such expense limitations be applicable
at the end of the last business day of the month, that expense limitation which
results in the largest reduction in the Adviser's fee shall be applicable. For
the purposes of this paragraph, the Adviser's share of any excess expenses shall
be computed by multiplying such excess expenses by a fraction, the numerator of
which is the amount of the investment advisory fee which would otherwise be
payable to the Adviser for such fiscal year were it not for this subsection 6(b)
and the denominator of which is the sum of all investment advisory and
administrative fees which would otherwise be payable by the Fund were it not for
the expense limitation provisions of any investment advisory or administrative
agreement to which the Fund is a party.
(c) In consideration of the Adviser's undertaking to render
the services described in this Agreement, the Trust agrees that the Adviser
shall not be liable under this Agreement for any error of judgment or mistake of
law or for any act or omission or loss suffered by the Trust in connection with
the performance of this Agreement, provided that nothing in this Agreement shall
be deemed to protect or purport to protect the Investment Adviser against any
liability to the Trust or its stockholders to which the Adviser would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of the Adviser's duties under this Agreement or by reason of the
Adviser's reckless disregard of its obligations and duties hereunder or breach
of fiduciary duty with respect to receipt of compensation.
7. Non-Exclusive Services. Except to the extent necessary to
perform the Investment Adviser's obligations under this Agreement, nothing
herein shall be deemed to limit or restrict the right of the Adviser, or any
affiliate of the Adviser, including any employee of the Adviser, 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.
8. Interested Persons. It is understood that, to the extent
consistent with applicable laws, the Trustees, officers and investors of the
Trust are or may be or become interested in the Adviser as directors, officers
or otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Trust.
9. Effective Date; Modifications; Termination. This Agreement
shall become effective on the date hereof (the "Effective Date") provided that
it shall have been approved by a majority of the outstanding voting securities
of each Fund, in accordance with the requirements of the 1940 Act, or such later
date as may be agreed by the parties following such shareholder approval.
-6-
<PAGE>
(a) This Agreement shall continue in force for two years from
the Effective Date and shall continue in effect from year to year thereafter for
successive annual periods, provided such continuance is specifically approved at
least annually (i) by a vote of the majority of the Trustees of the Trust who
are not parties to this Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by a vote of the Board of Trustees of the Trust or a majority of the
outstanding voting securities of each Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those Trustees of the Trust
who are not interested persons of any party to this Agreement, cast in person at
a meeting called for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph
8, either party hereto may terminate this Agreement at any time on sixty (60)
days' prior written notice to the other, without payment of any penalty. A
termination of this Agreement on behalf of a Fund may be effected by a vote of
the Trust's Board of Trustees or, with respect to a Fund, by vote of a majority
of the outstanding voting securities of that Fund. This Agreement may remain in
effect with respect to a Fund even if it has been terminated in accordance with
this paragraph with respect to the other Funds. This Agreement shall terminate
automatically in the event of its assignment as that term is defined under the
1940 Act.
10. Board of Trustees Meetings. The Trust agrees that notice
of each meeting of the Board of Trustees of the Trust will be sent to the
Adviser and that the Trust will make appropriate arrangements for the attendance
(as persons present by invitation) of such person or persons as the Adviser may
designate.
11. Limitation of Liability of Trustees and Investors. The
Adviser acknowledges the following limitation of liability:
The terms "Mutual Fund Select Trust" and "Trustees of Mutual
Fund Select Trust" refer, respectively, to the trust created and the Trustees,
as trustees but not individually or personally, acting from time to time under
the Declaration of Trust, to which reference is hereby made and a copy of which
is on file at the office of the Secretary of State of the State of
Massachusetts, such reference being inclusive of any and all amendments thereto
so filed or hereafter filed. The obligations of "Mutual Fund Select Trust"
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities and
are not binding upon any of the Trustees, investors or representatives of the
Trust personally, but bind only the assets of the Trust, and all persons dealing
with the Trust or a Fund must look solely to the assets of the Trust or Fund for
the enforcement of any claims against the Trust or Fund.
12. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as
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<PAGE>
hereafter amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
13. Independent Contractor. The Adviser shall for all
purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided herein or authorized by the Board of Trustees of
the Trust from time to time, have no authority to act for or represent the Trust
or any Fund in any way or otherwise be deemed an agent of the Trust.
14. Governing Law. This Agreement shall be governed by the
laws of the State of New York, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act or the Advisers Act.
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby and, to this extent,
the provisions of this Agreement shall be deemed to be severable.
16. Notices. Notices of any kind to be given to the Adviser
hereunder by the Trust shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 270 Park Avenue, New York, New York 10017 or at such
other address or to such individual as shall be so specified by the Adviser to
the Trust. Notices of any kind to be given to the Trust hereunder by the Adviser
shall be in writing and shall be duly given if mailed or delivered to the Trust
at 101 Park Avenue, New York, New York 10178 or at such other address or to such
individual as shall be so specified by the Trust to the Adviser. Notices shall
be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their respective officers thereunto duly authorized, and their
respective seals to be hereunto affixed, all as of the date written above.
THE CHASE MANHATTAN BANK MUTUAL FUND SELECT TRUST
By: _________________________ By:_______________________
Name: Name:
Title: Title:
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<PAGE>
Schedule A
Fund: Fee:
----- ----
1. Vista Select Intermediate Tax Free Income Fund 0.30%
2. Vista Select Tax Free Income Fund 0.30
3. Vista Select New York Tax Free Income Fund 0.30
4. Vista Select New Jersey Tax Free Income Fund 0.30
INVESTMENT SUBADVISORY AGREEMENT
between
THE CHASE MANHATTAN BANK
and
CHASE ASSET MANAGEMENT, INC.
AGREEMENT made as of the __th day of _________, 1996, by and
between The Chase Manhattan Bank, a New York State chartered bank (the
"Adviser"), and Chase Asset Management, Inc., a Delaware Corporation (the
"Sub-Adviser").
WHEREAS, the Adviser provides investment advisory services to
the series of Mutual Fund Select Trust, a Massachusetts business trust (the
"Trust"), which is registered as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant
to an Investment Advisory Agreement dated _________ __, 1996 (the "Advisory
Agreement"); and
WHEREAS, the Sub-Adviser is a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to
furnish investment subadvisory services in connection with the series of the
Trust listed on Schedule A (each, a "Fund" and collectively, the "Funds"), and
the Sub-Adviser represents that it is willing and possesses legal authority to
so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) General. The Adviser hereby appoints the Sub-Adviser to
act as investment subadviser to the Funds for the period and on the terms set
forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
(b) Employees of Affiliates. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
subadviser to the Funds under applicable laws and are under the control of The
Chase Manhattan Corporation, the indirect parent of the Sub-Adviser; provided
that (i) all persons, when providing services hereunder, are functioning as part
of an organized group of persons, and (ii) such organized group of persons is
managed at all times by authorized officers of the Sub-Adviser.
2. Delivery of Documents. The Adviser has delivered to
the Sub-Adviser copies of each of the following documents along with all
amendments thereto through the
<PAGE>
2
date hereof, and will promptly deliver to it all future amendments and
supplements thereto, if any:
(1) the Trust's Declaration of Trust;
(2) the By-Laws of the Trust;
(3) resolutions of the Board of Trustees of the Trust
authorizing the execution and delivery of the
Advisory Agreement and this Agreement;
(4) the most recent Post-Effective Amendment to the
Trust's Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), and the
1940 Act, on Form N-1A as filed with the Securities
and Exchange Commission (the "Commission");
(5) Notification of Registration of the Trust under the
1940 Act on Form N-8A as filed with the Commission;
and
(6) the Prospectuses and Statements of Additional
Information of the Funds.
3. Investment Advisory Services.
(a) Management of the Funds. The Sub-Adviser hereby undertakes
to act as investment subadviser to the Funds. The Sub-Adviser shall regularly
provide investment advice to the Funds and continuously supervise the investment
and reinvestment of cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant events and developments, which
affect the economy generally, the Funds' investment programs, and the issuers of
securities included in the Funds' portfolios and the industries in which they
engage, or which may relate to securities or other investments which the
Sub-Adviser may deem desirable for inclusion in a Fund's portfolio;
(ii) determine which issuers and securities
shall be included in the portfolio of each Fund;
(iii) furnish a continuous investment program for each
Fund;
(iv) in its discretion, and without prior consultation,
buy, sell, lend and otherwise trade any stocks, bonds and other securities and
investment instruments on behalf of each Fund; and
(v) take, on behalf of each Fund, all actions the
Sub-Adviser may deem necessary in order to carry into effect such investment
program and the Sub-Adviser's
<PAGE>
3
functions as provided above, including the making of appropriate periodic
reports to the Adviser and the Trust's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the investment
objectives, policies, and restrictions provided in: (i) each Fund's Prospectus
and Statement of Additional Information as revised and in effect from time to
time; (ii) the Trust's Declaration of Trust, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act; (iv) other
applicable laws; and (v) such other investment policies, procedures and/or
limitations as may be adopted by the Trust or the Adviser with respect to a Fund
and provided to the Sub-Adviser in writing. The Sub-Adviser agrees to use
reasonable efforts to manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended, and regulations issued thereunder (the
"Code"), except as may be authorized to the contrary by the Trust's Board of
Trustees. The management of the Funds by the Sub-Adviser shall at all times be
subject to the review of the Adviser and the Trust's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the
Sub-Adviser shall keep each Fund's books and records required to be maintained
by, or on behalf of, the Funds with respect to subadvisory services rendered
hereunder. The Sub-Adviser agrees that all records which it maintains for a Fund
are the property of the Fund and it will promptly surrender any of such records
to the Fund upon the Fund's request. The Sub-Adviser further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act any such records of
the Fund required to be preserved by such Rule.
(d) Reports, Evaluations and other services. The Sub-Adviser
shall furnish reports, evaluations, information or analyses to the Adviser and
the Trust with respect to the Funds and in connection with the Sub-Adviser's
services hereunder as the Adviser and/or the Trust's Board of Trustees may
request from time to time or as the Sub-Adviser may otherwise deem to be
desirable. The Sub-Adviser shall make recommendations to the Adviser and the
Trust's Board of Trustees with respect to the Trust's policies, and shall carry
out such policies as are adopted by the Board of Trustees. The Sub-Adviser may,
subject to review by the Adviser, furnish such other services as the Sub-Adviser
shall from time to time determine to be necessary or useful to perform its
obligations under this Agreement.
(e) Purchase and Sale of Securities. The Sub-Adviser shall
place all orders for the purchase and sale of portfolio securities for each Fund
with brokers or dealers selected by the Sub-Adviser, which may include brokers
or dealers affiliated with the Adviser or the Sub-Adviser to the extent
permitted by the 1940 Act and the Trust's policies and procedures applicable to
the Funds. The Sub-Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the circumstances, result in total
costs or proceeds being the most favorable to the Funds. In assessing the best
overall terms available for any transaction, the Sub-Adviser shall consider all
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, research services provided to the Sub-Adviser, and the
reasonableness of the commission, if any, both for the specific transaction and
on a
<PAGE>
4
continuing basis. In no event shall the Sub-Adviser be under any duty to obtain
the lowest commission or the best net price for any Fund on any particular
transaction, nor shall the Sub-Adviser be under any duty to execute any order in
a fashion either preferential to any Fund relative to other accounts managed by
the Sub-Adviser or otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers or dealers may be
selected who also provide brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) to the
Sub-Adviser, the Funds, and/or the other accounts over which the Sub-Adviser
exercises investment discretion. The Sub-Adviser is authorized to pay a broker
or dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for a Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if the Sub-Adviser determines in good faith that the total
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the Sub-Adviser with
respect to accounts over which it exercises investment discretion. The
Sub-Adviser shall report to the Board of Trustees of the Trust regarding overall
commissions paid by the Funds and their reasonableness in relation to their
benefits to the Funds.
(g) Aggregation of Securities Transactions. In executing
portfolio transactions for a Fund, the Sub-Adviser may, to the extent permitted
by applicable laws and regulations, but shall not be obligated to, aggregate the
securities to be sold or purchased with those of other Funds or its other
clients if, in the Sub-Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission and other expenses,
and trading requirements, and (ii) is not inconsistent with the policies set
forth in the Trust's registration statement and the Fund's Prospectus and
Statement of Additional Information. In such event, the Sub-Adviser will
allocate the securities so purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its fiduciary obligations
to the Fund and such other clients.
4. Representations and Warranties.
(a) The Sub-Adviser hereby represents and warrants to the
Adviser as follows:
(i) The Sub-Adviser is a corporation duly organized and
in good standing under the laws of the State of Delaware and is fully authorized
to enter into this Agreement and carry out its duties and obligations hereunder.
(ii) The Sub-Adviser is registered as an investment
adviser with the Commission under the Advisers Act, and is registered or
licensed as an investment adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such registrations or licenses in
effect at all times during the term of this Agreement.
<PAGE>
5
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out the Sub-Adviser's obligations
hereunder.
(b) The Adviser hereby represents and warrants to the
Sub-Adviser as follows:
(i) The Adviser is a chartered bank duly organized
and in good standing under the laws of the State of New York and is fully
authorized to enter into this Agreement and carry out its duties and obligations
hereunder.
(ii) The Trust has been duly organized as a business
trust under the laws of the State of Massachusetts.
(iii) The Trust is registered as an investment company
with the Commission under the 1940 Act, and shares of the each Fund are
registered for offer and sale to the public under the 1933 Act and all
applicable state securities laws where currently sold. Such registrations will
be kept in effect during the term of this Agreement.
5. Compensation. (a) As compensation for the services which
the Sub- Adviser is to provide or cause to be provided pursuant to Paragraph 3,
with respect to each Fund, the Adviser shall pay to the Sub-Adviser (or cause to
be paid by the Trust directly to the Sub-Adviser) a fee, which shall be accrued
daily and paid in arrears on the first business day of each month, at an annual
rate set forth in Schedule A, as a percentage of the average daily net assets of
the Fund during the preceding month (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information). Average
daily net assets shall be based upon determinations of net assets made as of the
close of business on each business day throughout such month. The fee for any
partial month shall be calculated on a proportionate basis, based upon average
daily net assets for such partial month.
(b) The Sub-Adviser shall have the right, but not the
obligation, to voluntarily waive any portion of the sub-advisory fee from time
to time. Any such voluntary waiver will be irrevocable and determined in advance
of rendering sub-investment advisory services by the Sub-Adviser, and shall be
in writing and signed by the parties hereto.
(c) If the aggregate expenses incurred by, or allocated to,
each Fund in any fiscal year shall exceed the lowest expense limitation, if
applicable to such Fund, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Sub-Adviser shall reduce its investment advisory fee, but not below zero, to the
extent of its share of such excess expenses; provided, however, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund. Such reduction, if any, shall be computed
and accrued daily, shall be settled on a monthly basis and shall be based upon
the expense limitation applicable to the Fund as at the end of the last business
day of the month. Should two or more of such expense limitations be applicable
at the end
<PAGE>
6
of the last business day of the month, that expense limitation which results in
the largest reduction in the Sub-Adviser's fee shall be applicable. For the
purposes of this paragraph, the Sub-Adviser's share of any excess expenses shall
be computed by multiplying such excess expenses by a fraction, the numerator of
which is the amount of the investment advisory fee which would otherwise be
payable to the Sub-Adviser for such fiscal year were it not for this subsection
5(b) and the denominator of which is the sum of all investment advisory and
administrative fees which would otherwise be payable by the Fund were it not for
the expense limitation provisions of any investment advisory or administrative
agreement to which the Fund is a party.
6. Interested Persons. It is understood that, to the extent
consistent with applicable laws, the Trustees, officers and shareholders of the
Trust or the Adviser are or may be or become interested in the Sub-Adviser as
directors, officers or otherwise and that directors, officers and shareholders
of the Sub-Adviser are or may be or become similarly interested in the Trust or
the Adviser.
7. Expenses. The Sub-Adviser will pay all expenses incurred
by it in connection with its activities under this Agreement other than the cost
of securities (including brokerage commissions) purchased for or sold by the
Funds.
8. Non-Exclusive Services; Limitation of Sub-Adviser's
Liability. The services of the Sub-Adviser hereunder are not to be deemed
exclusive, and the Sub-Adviser may render similar services to others and engage
in other activities. The Sub-Adviser and its affiliates may enter into other
agreements with the Funds, the Trust or the Adviser for providing additional
services to the Funds, the Trust or the Adviser which are not covered by this
Agreement, and to receive additional compensation for such services. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Sub-Adviser, or
a breach of fiduciary duty with respect to receipt of compensation, neither the
Sub-Adviser nor any of its directors, officers, shareholders, agents, or
employees shall be liable or responsible to the Adviser, the Trust, the Funds or
to any shareholder of the Funds for any error of judgment or mistake of law or
for any act or omission in the course of, or connected with, rendering services
hereunder or for any loss suffered by the Adviser, the Trust, a Fund, or any
shareholder of a Fund in connection with the performance of this Agreement.
9. Effective Date; Modifications; Termination. This Agreement
shall become effective on the date hereof (the "Effective Date") provided that
it shall have been approved by a majority of the outstanding voting securities
of each Fund, in accordance with the requirements of the 1940 Act, or such later
date as may be agreed by the parties following such shareholder approval.
(a) This Agreement shall continue in force for two years from
the Effective Date and shall continue in effect from year to year thereafter as
to each Fund for successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the majority of the
Trustees of the Trust who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
<PAGE>
7
voting on such approval, and (ii) by a vote of the Board of Trustees of the
Trust or a majority of the outstanding voting securities of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those Trustees of the Trust
who are not interested persons of any party to this Agreement, cast in person at
a meeting called for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph
9, either party hereto may terminate this Agreement as to any Fund(s) at any
time on sixty (60) days' prior written notice to the other, without payment of
any penalty. A termination of the Sub- Adviser may be effected as to any
particular Fund by the Adviser, by a vote of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the Fund. This
Agreement shall terminate automatically in the event of its assignment.
10. Limitation of Liability of Trustees and Shareholders.
The Sub-Adviser acknowledges the following limitation of liability:
The terms "Mutual Fund Select Trust" and "Trustees of Mutual
Fund Select Trust" refer, respectively, to the trust created and the Trustees,
as trustees but not individually or personally, acting from time to time under
the Declaration of Trust, to which reference is hereby made and a copy of which
is on file at the office of the Secretary of State of the State of
Massachusetts, such reference being inclusive of any and all amendments thereto
so filed or hereafter filed. The obligations of "Mutual Fund Select Trust"
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities and
are not binding upon any of the Trustees, shareholders or representatives of the
Trust personally, but bind only the assets of the Trust, and all persons dealing
with the Trust or a Fund must look solely to the assets of the Trust or Fund for
the enforcement of any claims against the Trust or Fund.
11. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
12. Independent Contractor. The Sub-Adviser shall for all
purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided herein or authorized by the Board of Trustees of
the Trust from time to time, have no authority to act for or represent a Fund in
any way or otherwise be deemed an agent of a Fund.
13. Structure of Agreement. The Adviser and Sub-Adviser are
entering into this Agreement with regard to the respective Funds severally and
not jointly. The responsibilities and benefits set forth in this Agreement shall
be deemed to be effective as
<PAGE>
8
between the Adviser and Sub-Adviser in connection with each Fund severally and
not jointly. This Agreement is intended to govern only the relationships between
the Adviser, on the one hand, and the Sub-Adviser, on the other hand, and is not
intended to and shall not govern (i) the relationship between the Adviser or
Sub-Adviser and any Fund, or (ii) the relationships among the respective Funds.
14. Governing Law. This Agreement shall be governed by the
laws of the State of New York, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act or the Advisers Act.
15. Severability. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby and, to this
extent, the provisions of this Agreement shall be deemed to be severable.
16. Notices. Notices of any kind to be given to the Adviser
hereunder by the Sub-Adviser shall be in writing and shall be duly given if
mailed or delivered to the Adviser at 270 Park Avenue, New York, New York 10017
or at such other address or to such individual as shall be so specified by the
Adviser to the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser
hereunder by the Adviser shall be in writing and shall be duly given if mailed
or delivered to the Sub-Adviser at 1211 Avenue of the Americas, New York, New
York 10036 or at such other address or to such individual as shall be so
specified by the Sub-Adviser to the Adviser. Notices shall be effective upon
delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date written above.
CHASE ASSET MANAGEMENT, INC. THE CHASE MANHATTAN BANK
By:______________________________ By:_________________________
Name: Name:
Title: Title:
<PAGE>
9
Schedule A
Fund: Fee:
1. Vista Select Intermediate Tax Free Income Fund 0.15%
2. Vista Select Tax Free Income Fund 0.15
3. Vista Select New York Tax Free Income Fund 0.15
4. Vista Select New Jersey Tax Free Income Fund 0.15
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
THIS AGREEMENT made as of the __th day of _________, 1996 by
and between MUTUAL FUND SELECT TRUST (the "Trust"), a Massachusetts business
trust, and VISTA FUND DISTRIBUTORS, INC. (the "Distributor"), an indirect wholly
owned subsidiary of THE BISYS GROUP, INC., a Delaware corporation.
W I T N E S S E T H:
In consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
FIRST: The Trust on behalf of each of its series and any new
series to be created hereby appoints the Distributor as its sub-administrator
and as its exclusive underwriter to provide certain administration services and
to promote and arrange for the sale of shares of beneficial interest of each
series of the Trust in jurisdictions wherein shares may legally be offered for
sale. The Trust shall notify the Distributor in writing of all states in which
its shares are qualified for offer and sale, including any limitations with
respect to offers or sales in such states. In addition, the Distributor shall
receive payment for certain distribution expenses if and to the extent provided
for pursuant to Rule 12b-1 distribution plans ("12b-1 Plans") adopted by the
Trust.
The Trust agrees to sell and deliver its unissued shares of
each series, as from time to time shall be effectively registered under the
Securities Act of 1933 (the "1933 Act"), upon the terms hereinafter set forth.
SECOND: The Trust hereby authorizes the Distributor, subject
to law and the Declaration of Trust of the Trust (the "Declaration of Trust"),
to accept, for the account of each series of the Trust, orders for the purchase
of shares, satisfactory to the Distributor, as of the time of receipt of such
orders or as otherwise described in the then current Prospectuses and Statements
of Additional Information of the Trust.
THIRD: The price at which the shares may be sold (the
"offering price") shall be the net asset value per share plus any sales charge
that may be imposed on any class of shares. For the purpose of computing the
offering price, the net asset value per share and the sales charge, if any,
shall be determined in the manner provided in the Registration Statement of the
Trust, as amended from time to time.
FOURTH: The Distributor shall use its best efforts with
reasonable promptness to promote and sell shares of each of the series of the
Trust. The Distributor, with the consent of the Trust, may enter into agreements
with selected broker-dealers ("Selected Dealers") for the purpose of sale and
redemption of shares of each of the series of the Trust upon terms consistent
with those found in this Agreement. The Distributor shall not be obligated to
sell any certain number of shares of beneficial interest. Each series of the
<PAGE>
Trust reserves the right to issue shares in connection with any merger or
consolidation of the Trust or any series with any other investment company or
any personal holding company or in connection with offers of exchange exempted
from Section 11(a) of the Investment Company Act of 1940 (the "Act").
FIFTH: All sales literature and advertisements used by the
Distributor in connection with sales of shares of any series of the Trust shall
be subject to the approval of the Trust. The Trust authorizes the Distributor in
connection with the sale or arranging for the sale of the shares to give only
such information and to make only such statements or representations as are
contained in the then current Prospectuses and Statements of Additional
Information of the Trust or in sales literature or advertisements approved for
any series by the Trust or in such financial statements and reports as are
furnished to the Distributor pursuant to this Agreement. The Trust shall not be
responsible in any way for any information, statements or representations given
or made by the Distributor or its representative or agents other than such
information, statements or representations contained in the then current
Prospectuses and Statement of Additional Information or other financial
statements of the Trust or any sales literature or advertisements approved by
the Trust.
SIXTH: The Distributor as agent of the Trust, and any Selected
Dealer entering into a Selected Dealer Agreement with the Distributor are
authorized, subject to the direction of the Trust, to accept shares of the
series of the Trust for redemption at their net asset value less any applicable
deferred sales charge, determined as prescribed in the then current Prospectuses
and Statement of Additional Information of the Trust.
SEVENTH: The Trust shall cause to be delivered to the
Distributor all books, records, and other documents and papers relating to the
federal and state registration of Trust shares, as well as all books, records
and other documents and papers relating in any way to the sub-administration of
the Trust or the distribution of Trust shares.
EIGHTH: The Trust shall bear:
(A) The costs and expenses incurred in connection
with the registration of the shares of each series of the Trust under the 1933
Act (including any amendment to any Registration Statement or Prospectuses or
Statements of Additional Information), and all expenses in connection with
preparing, printing and distributing the Prospectuses or Statements of
Additional Information except as set forth in Paragraph NINTH hereof;
(B) the expenses of qualification of the shares of
each series of the Trust for sale in connection with such public offerings in
such states as shall be selected by the Distributor and of continuing the
qualification therein until the Distributor notifies the Trust that it does not
wish such qualification continued; and
(C) all legal expenses in connection with the
foregoing.
NINTH: The Distributor shall provide certain sub-
administration anddistribution services including:
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<PAGE>
(A) providing officers, clerical staff and office
space to use as the headquarters of the Trust;
(B) arranging for the printing, distribution and
filing of prospectuses and statements of additional information;
(C) preparing, filing and maintaining all Trust
registrations with the securities regulatory agencies of all states and other
jurisdictions in which the Trust shares are sold;
(D) making all required filings of advertising and
promotional materials with the National Association of Securities Dealers, Inc.;
and
(E) bearing the expenses of:
(i) the printing, distribution and filing
of prospectuses and statements of additional information after such have been
typeset (other than those prospectuses and statements of additional information
required by applicable laws and regulations to be distributed to the existing
shareholders of the Trust, unless paid for by any 12b-1 Plan adopted by the
Trust);
(ii) any promotional or sales literature
which are used by the Distributor or furnished by the Distributor to purchasers
or dealers in connection with the Distributor's activities pursuant to this
Agreement (unless paid for by any 12b-1 Plan adopted by the Trust);
(iii) any advertising used by the
Distributor in connection with such public offering (unless paid for by any
12b-1 Plan adopted by the Trust); and
(iv) all legal expenses in connection with
the foregoing.
TENTH: The Distributor will accept orders for shares of a
series of the Trust only to the extent of purchase orders actually received and
not in excess of such orders, and it will not avail itself of any opportunity of
making a profit by expediting or withholding orders.
ELEVENTH: The Trust shall keep the Distributor fully informed
with regard to its affairs and shall furnish the Distributor with a certified
copy of all financial statements and any amendments to its Registration
Statement under the 1933 Act.
TWELFTH: The Trust shall register, from time to time as
necessary, additional shares with the Securities and Exchange Commission, state
and other regulatory bodies and to pay the related filing fees therefor and to
file such amendments, reports and other documents as may be necessary in order
that there may be no untrue statement of a material fact in the Registration
Statement, Prospectus or Statements of Additional Information necessary in order
that there may be no omission to state a material fact therein, in light of the
circumstances under which they were made, not misleading. As used in this
Agreement, the term "Registration Statement" shall mean the Registration
Statement most
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<PAGE>
recently filed by the Trust with the Securities and Exchange Commission and
effective under the 1933 Act, as such Registration Statement is amended at such
time, and the term "Prospectus" and "Statement of Additional Information" shall
mean for the purposes of this Agreement the form of the then current
prospectuses and statements of additional information for each series authorized
by the Trust for use by the Distributor and by dealers.
THIRTEENTH:
(A) The Trust and the Distributor shall each comply with all
applicable provisions of the Act, the 1933 Act and the rules and regulations of
the National Association of Securities Dealers, Inc. and of all other Federal
and state laws, rules and regulations governing the issuance and sale of shares
of the series of Trust.
(B) The Distributor shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Trust in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Distributor's part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
(C) In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Distributor or any of its officers, directors or employees, the Trust
agrees to indemnify the Distributor and any controlling person of the
Distributor against any and all claims, demands, liabilities and expenses
(including reasonable attorney's fees) which the Distributor may incur (i) based
on any act or omission the course of, or connected with, rendering services
hereunder, (ii) based on any representations made herein by the Trust; (iii)
based on any act or omission of any prior Distributor (in its capacity as
Distributor or Sub-Administrator), Administrator or Adviser to the Trust,
including the registration or failure to register any shares of the Trust in
accordance with state or federal laws or resulting from or relating to any books
or records delivered to the Distributor in connection with its responsibilities
under this Agreement and occurring prior to the date of this Agreement; and (iv)
under the 1933 Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any Registration
Statement, Statements of Additional Information or Prospectuses of the Trust, or
any omission to state a material fact therein, the omission of which makes any
statement contained therein misleading, unless such statement or omission was
made in reliance upon, and in conformity with written information furnished to
the Trust in connection therewith by or on behalf of the Distributor.
(D) The Distributor shall indemnify the Trust against any and
all claims, demands, liabilities and expenses which the Trust may incur under
the 1933 Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of material fact contained in any Registration
Statement, Statements of Additional Information or Prospectuses of the Trust, or
any omission to state a material fact therein if such statement or omission was
made in reliance upon, and in conformity with, written information furnished to
the Trust in connection therewith by the Distributor.
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<PAGE>
FOURTEENTH: Nothing herein contained shall require the Trust
to take any action contrary to any provision of its Declaration of Trust or to
any applicable statute or regulation.
FIFTEENTH: The Trust shall pay the Distributor, as full
compensation for the sub-administration services rendered hereunder, an annual
fee on behalf of each series payable monthly and computed on the net asset value
of the series the end of each business day at the annual rate set forth in
Exhibit A, as the same may be amended from time to time.
It is understood that the fees payable by one series
under this Agreement shall be payable only from the assets relating to that
series, and that no series shall be liable for the payment of any fees relating
to another series.
SIXTEENTH:
(A) This Agreement shall go into effect at the close of business
on the date hereof, and, unless terminated as hereinafter provided, shall
continue in effect for six months thereafter and from year to year thereafter,
but only so long as such continuance is specifically approved at least annually
by the Trust's Board of Trustees, including the vote of a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party cast in person at a meeting called for the
purpose of voting on such approval, or by the vote of the holders of a
"majority" (as so defined) of the outstanding voting securities of the
applicable series and by such vote of the Trustees.
(B) This Agreement may be terminated by the Distributor at
any time without penalty upon giving the Board of Trustees of the Trust sixty
(60) days' written notice (which notice may be waived by the Trust) and may be
terminated by the Board of Trustees of the Trust at any time without penalty
upon giving the Distributor sixty (60) days' written notice (which may be waived
by the Distributor), provided that such termination by the Board of Trustees of
the Trust shall be directed or approved by the vote of a majority of all of its
Trustees in office at the time, including a majority of the Trustees who are not
interested persons (as defined in the Act) of the Trust, or by the vote of the
holders of a majority (as defined in the Act) of the voting securities of each
series of the Trust at the time outstanding and entitled to vote. This Agreement
shall automatically terminate in the event of its assignment, the term
"Assignment" for this purpose having the meaning defined in Section 2(a)(4) of
the Act.
SEVENTEENTH: The Distributor may at any time or times in its
discretion and at its own expense appoint (and may at any time remove) an agent
or agents to carry out such of the provisions of Article EIGHTH herein as the
Distributor may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Distributor of its
responsibilities or liabilities hereunder.
EIGHTEENTH: In the event this Agreement is terminated, the
Distributor agrees to delete the word "Vista" from its name and to discontinue
any other use of the words "Vista" and "Vista Select". The adviser to the Trust,
and certain of its affiliates, are entitled to use such names and to grant to
other investment companies, administrators, investment
-5-
<PAGE>
advisers or broker-dealers the right to use that name in connection with the
business of operating or providing services to management investment companies,
as defined in the Act.
NINETEENTH: A copy of the Declaration of Trust 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 Trustees of the Trust 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 Trust, and all persons dealing
with any class of shares of the Trust must look solely to the Trust property
belonging to such class for the enforcement of any claims against the Trust.
TWENTIETH: Any notice under this Agreement shall be in
writing, addressed and delivered, or mailed, postage paid, to the other party at
such address as such other party may designate for the receipt of such notices.
Until further notice to the other party, it is agreed that the address of the
Trust and the Distributor shall be 101 Park Avenue, New York, NY 10178.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
ATTEST: MUTUAL FUND SELECT TRUST
_________________________________ By:_________________________________
ATTEST: VISTA FUND DISTRIBUTORS, INC. an
indirect wholly owned subsidiary of THE
BISYS GROUP, INC.
_________________________________ By:_________________________________
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<PAGE>
EXHIBIT A
Mutual Fund Select Trust
Schedule of
Distribution and
Sub-Administration Fees
The Trust shall pay the Distributor/Sub-Administrator, as full
compensation for all services rendered, an annual fee on behalf of each Fund
payable monthly and computed on the net asset value of the Fund at the end of
each business day at the annual following rates:
Fund Fee%
---- ----
Vista Select Intermediate Tax Free Income Fund 0.05%
Vista Select Tax Free Income Fund 0.05
Vista Select New York Tax Free Income Fund 0.05
Vista Select New Jersey Tax Free Income Fund 0.05
Agreed and Approved:
Vista Fund Distributors, Inc. Mutual Fund Select Trust
By:______________________________ By:_______________________
Name: Name:
Title: Title:
MUTUAL FUND CUSTODY AGREEMENT
THIS AGREEMENT is effective as of the __th day of
_________, 1996, by and between Mutual Fund Select Trust (the "Trust"), an
open-end management investment company organized as a Massachusetts business
trust in 1996, on behalf of all of its existing Series and any and all Series it
may create in the future (individually "a Fund" and collectively "the Funds")
and The Chase Manhattan Bank (the "Custodian"), a New York State chartered bank.
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end,
non-diversified, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Custodian to serve as the
Trust's custodian and the Custodian is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) The Trust hereby appoints the Custodian to act as custodian of
its portfolio securities, cash and other property and to act as agent to perform
certain accounting and recordkeeping functions required of a duly registered
investment company in compliance with applicable provisions of federal, state
and local laws, rules and regulations including, as may be required:
<PAGE>
(i) Provide information necessary for the Trust to file required
financial reports; maintaining and preserving required books,
accounts and records as the basis for such reports; and
performing certain daily functions in connection with such
accounts and records.
(ii) Calculating daily net asset value of each Fund,
and
(iii) Acting as liaison with independent auditors.
(b) The Custodian accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 25 of this Agreement. The Custodian agrees to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder. The
Trust may from time to time issue separate Funds, classes or classify and
reclassify shares of such Funds or classes. Pursuant to Instructions, the
Custodian shall identify to each such Fund or class Property belonging to such
Fund or class and in such reports, confirmations and notices to the Trust called
for under this Agreement shall identify the Fund or class to which such report,
confirmation or notice pertains.
2. Delivery of Documents. The Trust has furnished
the Custodian with copies properly certified or authenticated of
each of the following:
(a) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Custodian as custodian of the portfolio securities, cash and
other property of the Trust, the recordkeeper for certain Fund accounting
functions as described herein and approving this Agreement;
(b) Schedule A identifying and containing the signatures of the
Trust's officers and/or other persons authorized to issue Oral Instructions and
to sign Written Instructions, as hereinafter defined, on behalf of the Trust;
-2-
<PAGE>
(c) Schedule B setting forth the names and signatures
of the present officers of the Trust;
(d) The Trust's current Registration Statement on Form N-1A under
the 1940 Act and the Securities Act of 1933, as amended ("the 1933 Act") as
filed with the Securities and Exchange Commission ("the SEC"), relating to the
Trust's shares of beneficial interest, no par value (the "Shares");
(e) The current prospectus and statement of additional information
of each of the Fund, including all amendments and supplements thereto (the
"Prospectuses").
(f) A copy of the notice filed with the Commodity Futures Trading
Commission ("CFTC") of eligibility to claim the exclusion from the definition of
"commodity pool operator" contained in Section 2(a)(1)(A) of the Commodity
Exchange Act ("CEA") that is provided in Rule 4.5 under the CEA, together with
all supplements as are required by the CFTC.
The Trust will furnish Custodian from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
3. Definitions.
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means any of the Trust's officers, and any other person,
whether or not any such person is an officer or employee of the Trust, duly
authorized by the Board of Trustees of the Trust to give Oral and Written
Instructions on behalf of the Trust and listed on Schedule A, which may be
amended from time to time.
(b) "Book-Entry System". As used in this Agreement, the term
"Book-Entry System" means the Federal Reserve/Treasury book-entry system for
United States and federal agency securities, its successor or successors and its
nominee or nominees
-3-
<PAGE>
and any book-entry system maintained by a clearing agencyregistered with the SEC
under Section 17A of the Securities Exchange Act of 1934 (the "1934 Act").
(c) "Oral Instructions". As used in this Agreement, the term "Oral
Instructions" means oral instructions actually received by the Custodian from an
Authorized Person or from a person reasonably believed by the Custodian to be an
Authorized Person. The Trust agrees to deliver to the Custodian, at the time and
in the manner specified in Paragraph 9 of this Agreement, Written Instructions
confirming Oral Instructions.
(d) "Officer's Certificate". The term "Officer's Certificate" as
used in this Agreement means instructions delivered by hand, mail, tested
telegram, cable, telex or facsimile sending device and received by the Custodian
signed by two officers of the Fund.
(e) "Property". The term "Property", as used in this
Agreement, means:
(i) any and all securities and other property of the Trust which
the Trust may from time to time deposit, or cause to be deposited,
with the Custodian or which the Custodian may from time to time hold
for the Trust;
(ii) all income in respect of any other such securities or other
property;
(iii) all proceeds of the sales of any of such
securities or other property; and
(iv) all proceeds of the sale of securities
issued by the Trust, which are received by the
Custodian from time to time from or on behalf of the
Trust.
(f) "Securities Depository". As used in this
Agreement, the term "Securities Depository" shall mean the Depository Trust
Company or Participants Trust Company, each a clearing agency registered with
the SEC or, their successor or successors and their nominee or nominees; and
shall also mean any other registered or industry recognized clearing agency, its
successor or successors specifically identified in a certified
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<PAGE>
copy of a resolution of the Trust's Board of Trustees approving deposits by the
Custodian therein.
(g) "Written Instructions". As used in this Agreement, "Written
Instructions" means instructions delivered by hand, mail, tested telegram,
cable, telex, facsimile sending device, and received by the Custodian, signed by
two Authorized Persons.
4. Delivery and Registration of the Property. The Trust will deliver
or cause to be delivered to the Custodian all securities and all moneys owned by
it, including cash received for the issuance of its Shares, at any time during
the period of this Agreement, except for securities and monies to be delivered
to any subcustodian appointed pursuant to Paragraph 7 hereof. The Custodian will
not be responsible for such securities and such monies until actually received
by it. All securities delivered to the Custodian or to any such subcustodian
(other than in bearer form) shall be registered in the name of the Trust or in
the name of a nominee of the Trust or in the name of the Custodian or any
nominee of the Custodian (with or without indication of fiduciary status) or in
the name of any subcustodian or any nominee of such subcustodian appointed
pursuant to Paragraph 7 hereof or shall be properly endorsed and in form for
transfer satisfactory to the Custodian.
5. Domestic and Foreign Corporate Actions and Proxies. With respect
to all securities, however registered, it is understood that the voting and
other rights and powers shall be exercised by the Trust. The Custodian shall
transmit promptly to the Trust any proxy statement, proxy materials, notice of a
call or conversation or similar communications received by it as Custodian for
the Trust as follows:
(i) With respect to domestic U.S. and Canadian securities (the
latter if held in DTC), the Custodian will send to the Trust or the
proper authorized person, such proxies (signed in blank, if issued
in the name of the Custodian's
-5-
<PAGE>
nominee or the nominee of a central depository) and communications
with respect to securities in the
Trust's Account as call for voting or relate to legal proceedings
within a reasonable time after sufficient copies are received by the
Custodian for forwarding to its customers. In addition, the
Custodian will follow coupon payments, redemptions, exchanges or
similar matters with respect to securities in the Trust's Account
and advise the Trust or the proper authorized person for such
Account of rights issued, tender offers or any other discretionary
rights with respect to such securities, in each case, of which the
Custodian has received notice from the issuer of the securities, or
as to which notice is published in publications routinely utilized
by the Custodian for this purpose.
Where warrants, options, tenders or other securities have
fixed expiration dates, the Trust understands that in order for the
Custodian to act, the Custodian must receive the Trust's
instructions at its offices in New York City, addressed as the
Custodian may from time to time request, by no later than noon (NY
City time) at least one business day prior to the last scheduled
date to act with respect thereto (or such earlier date or time as
the Custodian may reasonably notify the Trust). Absent the
Custodian's timely receipt of such instructions, such instructions
will expire without liability to the Custodian. Corporate reports
need not be forwarded to the Trust.
(ii) With respect to securities held or settled through the Chase
global custody network, whenever the Custodian receives information
which requires discretionary action by the Trust (other than a
proxy), such as subscription rights, bonus issues, stock repurchase
plans and rights offerings, or legal notices or other material
-6-
<PAGE>
intended to be transmitted to securities holders ("Corporate
Actions"), the Custodian will give the Trust notice of such
Corporate Actions to the extent that the Custodian's central
corporate actions department has actual knowledge of a Corporate
Action in time to notify its customers.
When a rights entitlement or a fractional interest
resulting from a rights issue, stock dividend, stock split or similar Corporate
Action is received which bears an expiration date, the Custodian will endeavor
to obtain Instructions from the Trust, but if Instructions are not received in
time for the Custodian to take timely action, or actual notice of such Corporate
Action was received too late to seek Instructions, the Custodian is authorized
to sell such rights entitlement or fractional interest and to credit the proper
Fund account with the proceeds or take any other action it deems, in good faith,
to be appropriate in which case it shall be held harmless for any such action.
The Custodian will deliver proxies to the Trust or its designated
agent pursuant to special arrangements which may have been agreed to in writing.
Such proxies shall be executed in the appropriate nominee name relating to
portfolio securities in the Custody Account registered in the name of such
nominee but without indicating the manner in which such proxies are to be voted;
and where bearer securities are involved, proxies will be delivered in
accordance with Instructions.
6. Receipt and Disbursement of Money.
(a) The Custodian shall open and maintain a custody
account for each Fund of the Trust, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account, subject to the provisions hereof, all cash received by it from or for
each Fund of the Trust. The Custodian shall make payments of cash to, or for the
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<PAGE>
account of, each Fund of the Trust from such cash only (i) for the purchase of
securities for the Trust as provided in paragraph 15 hereof; (ii) upon receipt
of an Officer's Certificate, for the payment of dividends or other distributions
of shares, or for the payment of interest, taxes, administration, distribution
or advisory fees or expenses which are to be borne by the Trust under the terms
of this Agreement, and, with respect to each Fund, any Investment Advisory
Agreement, Administration Agreement or Distribution and Sub-administration
Agreement; (iii) upon receipt of Written Instructions for payments in connection
with the conversion, exchange or surrender of securities owned or subscribed to
by the Trust and held by or to be delivered to the Custodian; (iv) to a
subcustodian pursuant to Paragraph 7 hereof; or (v) for the redemption of Trust
Shares; or (vi) upon receipt of an Officer's Certificate for other corporate
purposes. No payment pursuant to (i) other than pursuant to Instruction and in
accordance with local market practice.
(b) the Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received as custodian
for the Trust.
7. Receipt of Securities.
(a) Except as provided by Paragraph 8 hereof, the Custodian shall
hold and physically segregate in a separate account with respect to each Fund,
identifiable from those of any other person, all securities and non-cash
property received by it for the Trust. All such securities and non-cash property
are to be held or disposed of by the Custodian for each Fund of the Trust
pursuant to the terms of this Agreement. In the absence of Written Instructions
accompanied by a certified resolution authorizing the specific transaction by
the Trust's Board of Trustees, the Custodian shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such
securities and investments, except in accordance with the express terms provided
for in this Agreement. In no case may any trustee, officer, employee or agent of
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the Trust withdraw any securities except as provided in this Agreement and
pursuant to a duly adopted resolution of the Board of Trustees. In connection
with its duties under this Paragraph 7, the Custodian may, at its own expense,
except to the extent the Custodian is instructed to engage a subcustodian it
would not otherwise have engaged, enter into subcustodian agreements with other
banks or trust companies for the receipt of certain securities and cash to be
held by the Custodian for the account of a Fund of the Trust pursuant to this
Agreement; provided that each such bank or trust company has an aggregate
capital, surplus and undivided profits, as shown by its last published report,
of not less than one million dollars ($1,000,000) for a Custodian Subsidiary or
affiliate, or of not less than twenty million dollars ($20,000,000) for a
subcustodian that is not a Custodian Subsidiary or affiliate and that in either
case such bank or trust company agrees with the Custodian to comply with all
relevant provisions of the 1940 Act and applicable rules and regulations
thereunder. The Custodian will provide the Trust with a copy of each
subcustodian agreement it executes relating to the Trust. The Custodian will be
liable for acts or omissions of any such subcustodian, except to the extent the
Custodian is instructed by the Trust to engage a subcustodian it would not
otherwise have engaged and the Trust is a party to the agreement with such
sub-custodian, under the standards of care provided for herein, of any bank or
trust company that it chooses pursuant to this Paragraph 7.
(b) Notwithstanding any other provisions of this Agreement, the
foreign securities of each Fund of the Trust (as defined in Rule 17f-5(c)(1)
under the 1940 Act) and each Fund's cash or cash equivalents, in amounts
reasonably necessary to effect the Fund's foreign securities transactions, may
be held in the custody of one or more banks or trust companies acting as
subcustodians; and thereafter, pursuant to a written contract or contracts as
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approved by Trust's Board of Trustees, may be transferred to an account
maintained by such subcustodian with an eligible foreign custodian, as defined
in Rule 17f-5(c)(2), provided that any such arrangement involving a foreign
custodian shall be in accordance with the provisions of Rule 17f-5 under the
1940 Act or any exemptive order issued to the Custodian under the 1940 Act.
(c) Promptly after the close of business on each day the Custodian
shall furnish the Trust with a summary of all transfers to or from the account
of each Fund of the Trust during said day. Where securities are transferred to
the account of any Fund of the Trust established at a Securities Depository or
the Book Entry System pursuant to Paragraph 8 herein, the Custodian shall also
by book-entry or otherwise identify as belonging to such Fund the quantity of
securities in a fungible bulk of securities registered in the name of the
Custodian (or its nominee) or shown in the Custodian's account on the books of a
Securities Depository or the Book-Entry System. At least monthly and from time
to time, the Custodian shall furnish the Trust with a detailed statement of the
Property held for each Fund under this Agreement.
8. Use of Securities Depository or the Book-Entry System. The Trust
shall deliver to the Custodian a certified resolution of the Board of Trustees
of the Trust approving, authorizing and instructing the Custodian on a
continuous and ongoing basis until instructed to the contrary by Oral or Written
Instructions actually received by the Custodian (i) to deposit in a Securities
Depository or the Book-Entry System all securities of the Trust eligible for
deposit therein and (ii) to utilize a Securities Depository or the Book-Entry
System to the extent possible in connection with the performance of its duties
hereunder, including without limitation settlements of purchases and sales of
securities by the Trust, and deliveries and returns of securities loaned,
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subject to repurchase agreements or used as collateral in connection with
borrowings. Without limiting the generality of such use, it is agreed that the
following provisions shall apply thereto:
(a) Securities and any cash of the Trust deposited in a Securities
Depository or the Book-Entry System will at all times be segregated from any
assets and cash controlled by the Custodian in other than a fiduciary or
custodian capacity. The Custodian and its subcustodians, if any, will pay out
money only upon receipt of securities and will deliver securities only upon
receipt of money, unless the Trust has given the Custodian Written Instructions
to the contrary.
(b) All Books and records maintained by the Custodian that relate to
the Trust participation in a Securities Depository or the Book-Entry System will
at all times during the Custodian's regular business hours be open to the
inspection of the Trust's duly authorized employees or agents, the Trust's
independent auditors in accordance with applicable regulations, and the Trust
will be furnished with all information in respect of the services rendered to it
as it may require.
(c) The Custodian will provide the Trust with copies of any report
obtained by the Custodian on the system of internal accounting control of the
Securities Depository or Book-Entry System promptly after receipt of such a
report by the Custodian. The Custodian will also provide the Trust with such
reports on its own system of internal control as the Trust may reasonably
request from time to time.
9. Instructions Consistent With the Charter, etc. Unless otherwise
provided in this Agreement, the Custodian shall act only upon Oral and Written
Instructions. The Custodian may assume that any Oral or Written Instructions
received hereunder are not in any way inconsistent with any provision of the
Charter, By-Laws, any prospectus pursuant to which Shares of a Fund are offered
for sale, any rule or regulation of any applicable regulatory body or
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governmental agency or any vote or resolution of the Trust's Board of Trustees,
or any committee thereof. The Custodian shall be entitled to rely upon any Oral
or Written Instructions actually received by the Custodian pursuant to this
Agreement. The Trust agrees to forward to the Custodian Written Instructions
confirming Oral Instructions in such manner that the Written Instructions are
received by the Custodian at the close of business of the same day that such
Oral Instructions are given to the Custodian. The Trust agrees that the fact
that such confirming Written Instructions are not received by the Custodian
shall in no way affect the validity of any of the transactions authorized by the
Trust by giving Oral Instructions nor shall receipt of conflicting Written
Instructions affect the validity of transactions undertaken based on Oral
Instructions or the Custodian's obligations or responsibilities with respect
thereto if such actions have been taken prior to the receipt of such Written
Instructions. The Trust agrees that the Custodian shall incur no liability in
acting upon Oral Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to have been received
from an Authorized Person, unless any liability to the Trust results from the
negligence or willful misconduct of the Custodian. In accord with instructions
from the Trust, as required by accepted industry practice or as the Custodian
may elect in effecting the execution of Trust instructions, advances of cash or
other Property made by the Custodian, arising from the purchase, sale,
redemption, transfer or other disposition of Property of the Trust, or in
connection with the disbursement of funds to any party, or in payment of fees,
expenses, claims or liabilities owed to the Custodian by the Trust, or to any
other party which has secured judgment in a court of law against the Trust which
creates an overdraft in the accounts or overdelivery of Property shall be deemed
a loan by the Custodian to the Trust, payable on demand, bearing interest at
such rate customarily charged by the Custodian for similar loans.
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10. Transactions Not Requiring Instructions. The
Custodian is authorized to take the following action without
Written Instructions:
(a) Collection of Income and Other Payments. The
Custodian shall:
(i) collect and receive for the account of any Fund of the
Trust, all income and other payments and distributions, including
(without limitation) stock dividends, rights, warrants and similar
items, included or to be included in the Property of any Fund of the
Trust, and promptly advise the Trust of such receipt and shall
credit such income, as collected, to such Fund of the Trust. With
respect to non-foreign issuers, the Custodian shall credit the
account with interest, dividends or principal payments on the
payable date, in anticipation of receiving same from a payor,
central depository, broker or other agent employed by the Trust or
the Custodian (each advance made hereunder shall be subject to
reversal in the event that (i) payment to which it relates is not
made within a reasonable time after its due date and (2) the
Custodian notifies the Trust within 30 days of such due date that it
anticipates a delay in collection).
(ii) with respect to securities of foreign issue, effect
collection of dividends, interest and other income, and to notify
the Trust of any call for redemption, offer of exchange, right of
subscription, reorganization, or other proceedings affecting such
securities, or any default in payments due thereon. It is
understood, however, the Custodian shall be under no responsibility
for any failure or delay in effecting such collections or giving
such notice with respect to securities of foreign issue, regardless
of whether or not the relevant information is published in any
financial service available to it unless such failure or delay is
due to its negligence. Collections of income in foreign currency
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are, to the extent possible, to be converted into United States
dollars unless otherwise instructed in writing, and in effecting
such conversion the Custodian may use such methods or agencies as it
may see fit, including the facilities of its own foreign division at
customary rates. All risk and expenses incident to such collection
and conversion is for the account of the Trust and the Custodian
shall have no responsibility for fluctuations in exchange rates
affecting any such conversion.
(iii) endorse and deposit for collection in the
name of the Trust and each of its Funds, checks,
drafts, or other orders for the payment of money on
the same day as received;
(iv) receive and hold for the account of each of the Funds all
securities received by the Trust as a result of a stock dividend,
share split-up or reorganization, recapitalization, readjustment or
other rearrangement or distribution of rights or similar securities
issued with respect to any portfolio securities of the Trust held by
the Custodian hereunder;
(v) present for payment and collect the amount payable upon all
securities which may mature or be called, redeemed or retired, or
otherwise become payable on the date such securities become payable;
(vi) take any action which may be necessary and proper in
connection with the collection and receipt of such income and other
payments and the endorsement for collection of checks, drafts and
other negotiable instructions;
(vii) to exchange securities in temporary form for securities in
definitive form, to effect an exchange of the shares where the par
value of stock is changed, and to surrender securities at maturity
or when advised of earlier call for redemption, against payment
therefor in accordance with accepted local industry practice. When
fractional shares of stock of a declaring corporation are received
as a stock distribution, the Custodian is authorized to sell the
fraction received and credit the Trust's account. Unless
specifically instructed to the contrary in writing, the Custodian is
authorized to exchange securities in bearer form for securities in
registered form. If any Property registered in the name of a nominee
of the Custodian is called for partial redemption by the issuer of
such Property, the Custodian is authorized to allot the called
portion to the respective beneficial holders of the Property in such
manner deemed to be fair and equitable by the Custodian in its sole
discretion. (b) Miscellaneous Transactions. The Custodian is
authorized to deliver or cause to be delivered Property against payment or other
consideration or written receipt therefor in the following cases:
(i) for examination by a broker selling for
the account of the Trust in accordance with local
industry practice;
(ii) for the exchange of interim receipts or
temporary securities for definitive securities;
(iii) for transfer of securities into the name of the Trust or the
Custodian or a nominee of either, or for exchange or securities for
a different number of bonds, certificates, or other evidence,
representing the same aggregate face amount or number of units
bearing the same interest rate, maturity date and call provisions,
if any; provided that, in any such case, the new securities are to
be delivered to the Custodian.
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11. Transactions Requiring Instructions. Upon
receipt of Oral or Written Instructions and not otherwise, the
Custodian, directly or through the use of a Securities
Depository or the Book-Entry System, shall:
(a) Execute and deliver to such persons as may be
designated in such Oral or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the authority of the Trust as
owner of any securities may be exercised;
(b) Deliver any securities held for any Fund of the Trust against
receipt of 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;
(c) Deliver any securities held for any Fund of the Trust 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, against receipt of such certificates or
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 any Fund of
the Trust and take such other steps as shall be stated in said instructions to
be for the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Trust;
(e) Release securities belonging to any Fund of the Trust to any
bank or trust company for the purpose of pledge or hypothecation to secure any
loan incurred by the Trust; provided, however, that securities shall be released
only upon payment to the Custodian of the monies borrowed, except that in cases
where additional collateral is required to secure a borrowing already made,
subject to proper prior authorization, further securities may be released for
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that purpose; and pay such loan upon redelivery to it of the securities pledged
or hypothecated therefore and upon surrender of the note or notes evidencing the
loan;
(f) Deliver any securities held for the Trust upon
the exercise of a covered call option written by the Trust on
such securities;
(g) Release and deliver securities owned by the Trust in connection
with any repurchase agreement entered into on behalf of any Fund of the Trust,
but only on receipt of payment therefor; and pay out moneys of the Trust in
connection with such repurchase agreements, but only upon the delivery of the
securities;
(h) otherwise transfer, exchange or deliver securities in accordance
with Oral or Written Instructions.
12. Segregated Accounts. The Custodian shall upon receipt of Written
or Oral Instructions establish and maintain a segregated account or accounts on
its records for and on behalf of any Fund of the Trust, into which account or
accounts may be transferred cash and/or securities, including securities in the
Book-Entry System (i) for the purposes of compliance by the Trust with the
procedures required by a securities or option exchange, providing such complies
with the Investment Company Act and Release No. 10666 or any subsequent release
or releases of the SEC relating to the maintenance of segregated accounts by
registered investment companies and (ii) for other proper corporate purposes,
but only, in the case of clause (ii), upon receipt of, Written Instructions.
13. Calculation of Net Asset Value. Custodian will calculate the net
asset value of each Fund or class of a Fund once daily in accordance with the
procedures attached as Schedule C. Custodian will prepare and maintain a daily
evaluation of portfolio securities of each Fund for which market quotations are
available by the use of outside services normally used and contracted for this
purpose; all other portfolio securities of each Fund will be evaluated in
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accordance with Trust's instructions. Custodian will have no responsibility for
the accuracy of the prices quoted by these outside services or for the
information supplied by Trust or upon instructions.
14. Dividends and Distributions. (a) The Trust shall furnish the
Custodian with appropriate evidence of action by the Trust's Board of Trustees
declaring and authorizing the payment of any dividends and distributions. The
amounts of Dividends and/or distributions will be calculated by the Custodian in
accordance with the procedures attached as Schedule C. Upon receipt by the
Custodian of an Officer's Certificate with respect to dividends and
distributions declared by the Trust's Board of Trustees and payable to
shareholders of any Fund or class who are entitled to receive cash for
fractional shares and those who have elected in the proper manner to receive
their distributions on dividends in cash, and in conformance with the procedures
mutually agreed upon by the Custodian, the Trust, and the Trust's Administrator
or Transfer Agent, the Custodian shall pay to the Trust's transfer agent, as
agent for the shareholders, an amount equal to the amount indicated in said
Officer's Certificate as payable by the Trust to such shareholders for
distribution in cash by the transfer agent to such shareholders. In lieu of
paying the Trust's transfer agent cash dividends and distributions, the
Custodian may arrange for the direct payment of cash dividends and distributions
to shareholders by the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time by and among the Trust, the
Custodian and the Trust's Administrator and transfer agent.
(b) The Custodian may enter into separate custodial agreements with
various futures commission merchants ("FCMs") that the Trust uses (each an "FCM
Agreement"), pursuant to which the Trust's margin deposits in any transactions
involving futures contracts and options on futures contracts will be held by
Custodian in accounts (each an "FCM Account") subject to the disposition by the
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FCM involved in such contracts in accordance with the customer contract between
FCM and the Trust ("FCM Contract"), SEC rules governing such segregated
accounts, CFTC rules and the rules of the applicable commodities exchange. Such
FCM Agreements shall only be entered into upon receipt of Written Instructions
from the Trust. Transfers of initial margin shall be made into an FCM Account
only upon Written Instructions; transfers of premium and variation margin may be
made into an FCM Account pursuant to Oral Instructions. Transfers of funds from
an FCM Account to the FCM for which Custodian holds such an account may only
occur upon certification by the FCM to the Custodian that pursuant to the FCM
Agreement and the FCM Contract, all conditions precedent to its right to give
the Custodian such instruction have been satisfied.
15. Purchase of Securities. Promptly after each purchase of
securities by the Investment Adviser on behalf of any Fund, the Trust shall
deliver to the Custodian Oral or Written Instructions specifying with respect to
each such purchase: (a) the name of the issuer and the title of the securities,
(b) the number of shares or the principal amount purchased and accrued interest,
if any, (c) the dates of purchase and settlement, (d) the purchase price per
unit, (e) the total amount payable upon such purchase, (f) the name of the
person from whom or the broker through whom the purchase was made, (g) the Fund
for which the purchase was made and (h) the cusip number or other industry
standard identification when available. The Custodian shall upon receipt of
securities purchased by or for the Trust pay out of the moneys held for the
account of such Trust the total amount payable to the person from whom or the
broker through whom the purchase was made, provided that the same conforms to
the total amount payable as set forth in such Oral or Written Instructions.
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16. Notation Pursuant to Section 17f-2 of the 1940 Act. With respect
to each deposit or withdrawal of securities or when ordering the deposit or
withdrawal of securities from safekeeping, the Custodian shall sign a notation
in respect of each such deposit, withdrawal or order that shall show: (a) the
date and time of the deposit, withdrawal or order; (b) the title and amount of
the securities or other investments deposited, withdrawn or ordered to be
withdrawn, and the identification thereof by certificate numbers or otherwise;
(c) the manner of acquisition of the securities or similar investments deposited
or the purpose for which they have been withdrawn, or ordered to be withdrawn;
and (d) if withdrawn and delivered to another person, the name of such person.
The time of any deposit, withdrawal or order means the time of the formal
recording of such transactions on the books of the Custodian at the Custodian's
close of business. Such notation shall be transmitted promptly to an officer or
trustee of the Trust designated by the Board of Trustees who shall not otherwise
be authorized to have access to the Trust's securities. Such notation shall be
on serially numbered forms and shall be preserved for at least one year.
17. Sales of Securities. Promptly after each sale of securities by
the investment manager, the Trust shall deliver to the Custodian Oral or Written
Instructions, specifying with respect to each such sale: (a) the name of the
issuer and the title of the security, (b) the number of shares or principal
amount sold, and accrued interest, if any, (c) the date of sale, (d) the sale
price per unit, (e) the total amount payable to the Trust upon such sale, (f)
the name of the broker through whom or the person to whom the sale was made, (g)
the Fund for which the sale was made and (h) the cusip number or other industry
standard identification when available. The Custodian shall deliver the
securities upon receipt of the total amount payable to the Trust upon such sale,
provided that the same conforms to the total amount payable as set forth in such
Oral or Written Instructions. Subject to the foregoing, the Custodian may accept
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payment in such form as shall be satisfactory to it, and may deliver securities
and arrange for payment in accordance with the local customs prevailing among
dealers in securities.
18. Records. The books and records pertaining to the Trust shall be
prepared and maintained as required by the 1940 Act, as amended, and other
applicable securities laws and rules and regulations. The Trust, or the Trust's
authorized representatives, shall have access to such books and records at all
times during the Custodian's normal business hours, and such books and records
shall be surrendered to the Trust promptly upon request. Upon reasonable request
of the Trust, copies of any such books and records shall be provided by the
Custodian to the Trust or the Trust's authorized representative at the Trust's
expense.
19. Reports.
(a) The Custodian shall furnish the Trust the
following reports:
(1) such periodic and special reports as the
Trust may reasonably request;
(2) a monthly statement summarizing all
transactions and entries for the account of
each Fund;
(3) a monthly report of portfolio securities belonging to
each Fund showing the adjusted average cost of each
issue and the market value at the end of such month;
(4) a monthly report of the cash account of each
Fund showing disbursements;
(5) the reports to be furnished to the Trust
pursuant to Rule 17f-4;
(6) the reports to be furnished to the Trust
pursuant to Rule 17f-5, and;
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(7) such other information as may be agreed upon
from time to time between the Trust and the
Custodian.
(b) The Custodian with the direction and as interpreted by the
Trust, the Trust's accountants and/or other tax advisors will prepare and
maintain as complete, accurate, and current all accounts and records required to
be maintained by each Fund under the Internal Revenue Code of 1986, as amended,
under the rules and regulations of the 1940 Act and as agreed upon between the
parties and will preserve such records in the manner and for the periods
required by law.
(c) Unless the information necessary to perform the above functions
is furnished in writing or its electronic or digital equivalent to the Custodian
in a timely manner prior to the next calculation of each Fund's net asset value,
the Custodian shall incur no liability except as provided in Paragraph 9 herein
and the Trust shall indemnify and hold the Custodian harmless from and against
any liability arising from any discrepancy between the information received by
the Custodian and used in such calculation and any subsequent information
received from the Trust.
(d) The Custodian shall assist the Trust's independent auditors, or
upon approval of the Trust or upon demand, any regulatory body, in any requested
review of the Trust's accounts and records maintained by the Custodian but shall
be reimbursed by the Trust for all expenses and employee time invested in any
such review outside of routine and normal periodic reviews.
(e) Upon receipt from the Trust of the necessary information, the
Custodian shall provide information for tax returns, questionnaires, or periodic
reports to shareholders and such other reports and information requests as the
Trust and the Custodian shall agree upon from time to time.
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20. Cooperation with Accountants. The Custodian shall cooperate with
the Trust's independent certified public accountants and shall take all
reasonable action in the performance of its obligations under this Agreement and
under Rule 17f-2 to assure that the necessary information is made available to
such accountants for the expression of their unqualified opinion with respect
to, including without limitation, the three audits required each year, the
certificates with respect to such annual audits and the opinion included in the
Trust's semi-annual report on Form N-SAR, and will require each sub-custodian
appointed pursuant to paragraph 7 hereof to grant such access to the information
to the Trust's independent certified public accountant. The Custodian shall
require any sub-custodian it appoints with respect to the Trust to comply with
the provisions of this Paragraph 20.
21. Confidentiality. The Custodian agrees on behalf of itself and
its employees to treat confidentially and as the proprietary information of the
Trust all records and other information relative to the Trust and its prior,
present or potential shareholders and relative to the managers and its prior,
present or potential customers, 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 the
Custodian 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.
22. Equipment Failures. In the event of equipment failures beyond
the Custodian's control, the Custodian shall, at no additional expense to the
Trust, take reasonable steps to minimize service interruptions but shall not
have liability with respect thereto. The Custodian shall make and maintain
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reasonable provisions for back up emergency use of electronic data processing
equipment to the extent appropriate equipment is available.
23. Right to Receive Advice.
(a) Advice of Trust. If the Custodian shall be in doubt as to any
action to be taken or omitted by it, it may request, and shall receive, from the
Trust clarification or advice, including Oral or Written Instructions.
(b) Advice of Counsel. If the Custodian shall be in doubt as to any
question of law involved in any action to be taken or omitted by the Custodian,
it may request advice from counsel of its own choosing (who may be counsel for
the Trust or the Custodian, at the option of the Custodian).
(c) Conflicting Advice. In case of conflict between directions,
advice or Oral or Written Instructions received by the Custodian pursuant to
subparagraph (a) of this paragraph and advice received by the Custodian pursuant
to subparagraph (b) of this paragraph, the Custodian shall be entitled to rely
on and follow the advice received pursuant to the latter provision alone.
(d) Protection of The Custodian. The Custodian shall be protected in
any action or inaction which it takes or omits to take in reliance on any
directions, advice or Oral or Written Instructions received pursuant to
subparagraphs (a) or (b) of this section which the Custodian, after receipt of
any such directions, advice or Oral or Written Instructions, in good faith
believes to be consistent with such directions, advice or Oral or Written
Instructions, as the case may be. Nothing in this paragraph shall be construed
as imposing upon the Custodian any obligation (i) to seek such directions,advice
or Oral or Written Instructions, or (ii) to act in accordance with such
directions, advice or Oral or Written Instructions when received, unless, under
the terms or another provision of this Agreement, the same is a condition to the
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Custodian's properly taking or omitting to take such action. Nothing in this
subparagraph shall excuse the Custodian when an action or omission on the part
of the Custodian constitutes willful misfeasance, bad faith, negligence or
reckless disregard by the Custodian of its duties under this Agreement.
24. Compliance with Governmental Rules and Regulations. The
Custodian undertakes to comply with all applicable requirements of the 1933 Act,
the 1934 Act, the 1940 Act and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties and obligations to be
performed by the Custodian hereunder. The Custodian acknowledges that it is
subject to Rule 17f-2 under the 1940 Act with respect to its duties to be
performed pursuant to this Agreement.
25. Compensation. As compensation for the services rendered by the
Custodian during the term of this Agreement, the Trust will pay to the
Custodian, in addition to reimbursement of its reasonable out-of-pocket
expenses, including reasonable counsel fees, monthly fees as outlined in
Schedule D, or as otherwise agreed upon from time to time in writing by the
Custodian and the Trust.
26. Indemnification. The Trust, as sole owner of the Property,
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims, and liabilities (including,
without limitation, liabilities arising under the 1933 Act, the Act of 1934, the
1940 Act, the CEA, and any state and foreign securities and blue sky laws, all
as or to be amended from time to time) and expenses, including (without
limitation) attorney's fees and disbursements, arising directly or indirectly
(a) from the fact that securities included in the Property are registered in the
name of any such nominee or (b) without limiting the generality of the foregoing
clause (a) from any action or thing which the Custodian takes or does or omits
to take or do (i) at the request or on the direction of or in reliance on the
-25-
<PAGE>
advice of the Trust, or (ii) upon Oral or Written Instructions, provided, that
neither the Custodian nor any of its nominees or subcustodian shall be
indemnified against any liability to any Fund of the Trust or to its
shareholders (or any expenses incident to such liability) arising out of (x) the
Custodian's or such nominee's or subcustodian's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties under this Agreement or
(y) the Custodian's own negligent failure to perform its duties under this
Agreement. In the event of any advance of cash for any purpose made by the
Custodian resulting from Oral or Written Instructions of the Trust, or in the
event that the Custodian or its nominee or subcustodian shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise from
its or its nominee's or subcustodian's own negligent action, negligent failure
to act, willful misconduct, or reckless disregard, the Trust shall promptly
reimburse the Custodian for such advance of cash or such taxes, charges,
expenses, assessment claims or liabilities. Notwithstanding anything to the
contrary, any one Fund shall not provide indemnification to the Custodian for
any loss or liability resulting from actions with respect to any other Fund.
27. Responsibility of The Custodian. The Custodian shall be under no
duty to take any action on behalf of the Trust except as specifically set forth
herein or as may be specifically agreed to by the Custodian in writing. In the
performance of its duties hereunder, the Custodian shall be obligated to
exercise reasonable care and diligence and to act in good faith to insure the
accuracy of all services performed under this Agreement. The Custodian shall be
responsible for its own negligent failure or that of any subcustodian it shall
appoint to perform its duties under this Agreement but to the extent that
duties, obligations and responsibilities are not expressly set forth in this
Agreement, the Custodian shall not be liable for any act or omission which does
-26-
<PAGE>
not constitute willful misfeasance, bad faith, or negligence on the part of the
Custodian or reckless disregard of such duties, obligations and
responsibilities. Without limiting the generality of the foregoing or of any
other provision of this Agreement, the Custodian in connection with its duties
under this Agreement shall not be under any duty or obligation to inquire into
and shall not be liable for or in respect of (a) the validity or invalidity or
authority or lack thereof of any advice, direction, notice or other instrument
which conforms to the applicable requirements of this Agreement, if any, and
which the Custodian believes to be genuine, (b) the validity of the issue of any
securities purchased or sold by the Trust, the legality of the purchase or sale
thereof or the propriety of the amount paid or received therefore, (c) the
legality of the issue or sale of any Shares, or the sufficiency of the amount to
be received therefore, (d) delays or errors or loss of data occurring by reason
of circumstances beyond the Custodian's control, including acts of civil or
military authority, national emergencies, strikes or work stoppages, fire,
mechanical breakdown (except as provided in Paragraph 22), flood or catastrophe,
acts of God, insurrection, acts of war or terrorism, riots, revolutions, nuclear
fusion, fission or radiation, or failure of the mail, transportation,
communication or power supply. Without limiting the foregoing,the Custodian
shall not be liable for any loss which results from: (1) the general risk of
investing, or (2) investing or holding Fund assets in a particular country
including, but not limited to, losses resulting from nationalization,
expropriation or other governmental actions; regulation of the banking or
securities industry; currency restrictions, devaluations or fluctuations; and
market conditions which prevent the orderly execution of securities transactions
or affect the value of assets.
28. Collection. All collections of monies or other property in
respect, or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by the Custodian) shall be at the sole risk of the Trust.
-27-
<PAGE>
In any case in which the Custodian does not receive any payment due the Trust
within a reasonable time after the Custodian has made proper demands for the
same, it shall so notify the Trust in writing, including copies of all demand
letters, any written responses thereto, and memoranda of all oral responses
thereto, and to telephonic demands, and await instructions from the Trust. The
Custodian shall not be obliged to take legal action for collection unless and
until reasonably indemnified to its satisfaction. The Custodian shall also
notify the Trust as soon as reasonably practicable whenever income due on
securities is not collected in due course.
29. Duration and Termination. This Agreement shall be effective as
of the date hereof and shall continue until termination by the Trust or by the
Custodian on 90 days' written notice. Upon any termination of this Agreement,
pending appointment of a successor to the Custodian or a vote of the
shareholders of the Trust to dissolve or to function without a custodian of its
cash, securities or other property, the Custodian shall not deliver cash,
securities or other property of the Trust to the Trust, but may deliver them to
a bank or trust company of its own selection, having aggregate capital, surplus
and undivided profits, as shown by its last published report of not less than
twenty million dollars ($20,000,000) as a custodian for the Trust to be held
under terms similar to those
of this Agreement, provided, however, that the Custodian shall not be required
to make any such delivery or payment until full payment shall have been made by
the Trust of all liabilities constituting a charge on or against the properties
then held by the Custodian or on or against the Custodian and until full payment
shall have been made to the Custodian of all of its fee, compensation, costs and
expenses, subject to the provisions of Paragraph 22 of this Agreement.
30. Notices. All notices and other communications (collectively
referred to as "Notice" or "Notices" in this paragraph) hereunder shall be in
writing or by confirmed telegram, cable, telex, or facsimile sending device.
-28-
<PAGE>
Notices shall be addressed (a) if to the Custodian, The Chase Manhattan Bank,
Institutional Custody & Escrow, One Chase Manhattan Plaza Floor 3B, New York,
New York 10081, Attention: ________________; (b) if to the Trust, at the address
of the Trust, Attention: Ann Bergin, Secretary; or (c) if to neither of the
foregoing, at such other address as shall have been notified to the sender of
any such Notice or other communication. Notice shall be deemed to have been
given when actually received by the other party. All postage, cable, telegram,
telex and facsimile sending device charges arising from the sending of a Notice
hereunder shall be paid by the sender.
31. Further Actions. Each party agrees to perform
such further acts and execute such further documents as are
necessary to effectuate the purposes hereof.
32. Amendments. This Agreement or any part hereof
may be changed or waived only by an instrument in writing signed by the party
against which enforcement of such change or waiver is sought.
33. Miscellaneous. This Agreement embodies the entire Agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement 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 Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
-29-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
MUTUAL FUND SELECT TRUST
By: ATTEST:
Title: Title:
THE CHASE MANHATTAN BANK
By: ATTEST:
Title: Title:
-30-
505339\0007\02004\969TJG87.AGR 09/30/96 12:40PM
<PAGE>
SCHEDULE A
- -------------------------------------------------------------------------------
Fund:
- -------------------------------------------------------------------------------
1. Vista Select Intermediate Tax Free Income Fund
- -------------------------------------------------------------------------------
2. Vista Select Tax Free Income Fund
- -------------------------------------------------------------------------------
3. Vista Select New York Tax Free Income Fund
- -------------------------------------------------------------------------------
4. Vista Select New Jersey Tax Free Income
- -------------------------------------------------------------------------------
<PAGE>
SCHEDULE B
- ------------------------------------------------------------------------------
Fergus Reid Chairman of the Board
- ------------------------------------------------------------------------------
H. Richard Vartabedian President
- ------------------------------------------------------------------------------
Ann Bergin Secretary and Assistant Treasurer
- ------------------------------------------------------------------------------
Martin R. Dean Treasurer and Assistant Secretary
- ------------------------------------------------------------------------------
TRANSFER AGENCY AGREEMENT
THIS AGREEMENT made the ____ day of _________, 1996, by and between
MUTUAL FUND SELECT TRUST, a Massachusetts business trust, having its principal
place of business at 125 West 55th Street, New York, New York 10022 ("Fund"),
and DST SYSTEMS, INC., a Missouri corporation, having its principal place of
business at 1055 Broadway, Kansas City, Missouri 64105 ("DST"):
WITNESSETH:
WHEREAS, the Fund is a Massachusetts business trust registered with
the Securities and Exchange Commission as an investment company pursuant to the
Investment Company Act of 1940, as amended; and
WHEREAS, the Fund wishes to appoint DST as transfer agent and
dividend disbursing agent as to any and all shares issued by the Fund; and
WHEREAS, DST wishes to accept such appointment; and
NOW, THEREFORE, in consideration of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Documents to be Filed with Appointment.
In connection with the appointment of DST as Transfer Agent
and Dividend Disbursing Agent for the Fund, there will be
filed with DST the
following documents:
A. A certified copy of the Votes of the Board of
Trustees of the Fund appointing DST as
Transfer Agent and Dividend Disbursing Agent,
approving the form of this Agreement, and
<PAGE>
2
designating certain persons to sign stock
certificates, if any, and give written
instructions and requests on behalf of the
Fund;
B. A certified copy of the Articles of
Incorporation and all future amendments
affecting the number of authorized shares or
DST's provision of services hereunder;
C. A certified copy of the Bylaws of the Fund;
D. Copies of all current and future Registration
Statements and amendments thereto, filed with
the Securities and Exchange Commission;
E. Specimens of all forms of outstanding stock
certificates, if any;
F. An opinion of counsel for the Fund with
respect to:
(1) Fund's organization and existence under
the laws of its state of organization,
(2) The status of all shares of stock of
Fund covered by the appointment under the
Securities Act of 1933, as amended, and any other
applicable federal or state statute, and
(3) That all issued shares are, and all unissued
shares will be when issued, validly issued, fully
paid and nonassessable.
<PAGE>
3
2. Certain Representations and Warranties of DST.
DST represents and warrants to the Fund that:
A. It is a corporation duly organized and
existing and in good standing under the laws
of Missouri.
B. It is duly qualified to carry on its business
in the State of Missouri.
C. It is empowered under applicable laws and by
its Articles of Incorporation and bylaws to
enter into and perform the services
contemplated in this Agreement.
D. It is registered as a transfer agent to the
extent required under the Securities Exchange
Act of 1934.
E. All requisite corporate proceedings have been
taken to authorize it to enter into and
perform this Agreement.
F. It has and will continue to have and maintain
the necessary facilities, equipment and
personnel to perform its duties and
obligations under this Agreement.
3. Certain Representations and Warranties of the
Fund. The Fund represents and warrants to DST
that:
A. It is a business trust duly organized and
existing and in good standing under the laws
of the Commonwealth of Massachusetts.
<PAGE>
4
B. It is an open-end diversified management
investment company registered under the
Investment Company Act of 1940, as amended.
C. A registration statement under the Securities Act of
1933 has been filed and is effective with respect to the
shares of the Fund being offered for sale.
D. All requisite steps have been and, in the
future, will be taken to register the Fund's
shares for sale in applicable states.
E. The Fund is empowered under applicable laws
and by Articles of Incorporation and bylaws
to enter into and perform this Agreement.
4. Scope of Appointment.
A. Subject to the conditions set forth in this Agreement,
effective the ___th day of _________, 1996, the Fund
hereby employs and appoints DST as Transfer Agent and
Dividend Disbursing Agent as to all current and future
issued and outstanding shares of the Fund.
B. DST hereby accepts such employment and
appointment and agrees that it will act as
the Fund's Transfer Agent and Dividend
Disbursing Agent. DST agrees that it will
also act as agent in connection with the
Fund's periodic investment and withdrawal
<PAGE>
5
payment accounts, other open-account and
similar plans for shareholders, if any.
C. DST agrees to provide the necessary
facilities, equipment and personnel to
perform its duties and obligations hereunder
in accordance with industry practice.
D. The Fund agrees to deliver to DST in Kansas
City, Missouri, as soon as they are
available, all of its shareholder account
records.
E. Subject to the provisions of Sections 19. and
20. hereof, DST agrees that it will perform
all of the usual and ordinary services of
Transfer Agent and Dividend Disbursing Agent
and as Agent for the various shareholder
accounts, including, without limitation, the
following: issuing, transferring and
cancelling stock certificates; maintaining
all shareholder accounts; preparing
shareholder meeting lists, mailing proxies,
receiving and tabulating proxies (outside
agency bills treated as out-of-pocket
expenses); mailing shareholder reports and
prospectuses; withholding taxes on
nonresident alien and foreign corporation
accounts, for pension and deferred income
accounts for which DST is the named trustee
<PAGE>
6
or custodian, on accounts which DST has been advised are
subject to backup withholding or other instances agreed
upon by the parties; preparing and mailing checks for
disbursement of income dividends and capital gains
distributions, preparing and filing U.S. Treasury
Department Form 1099 for shareholders as directed by the
Fund; preparing and mailing confirmation forms to
shareholders and dealers with respect to purchases and
liquidation of the Fund shares and other transactions in
shareholder accounts for which confirmations are
required or as directed by the Fund; recording
reinvestments of dividends and distributions in Fund
shares; and preparing and mailing checks for payments
upon redemption and for disbursements to withdrawal plan
holders.
5. Limit of Authority.
Unless otherwise expressly limited by the resolution of
appointment or by subsequent action by the Fund, the
appointment of DST as Transfer Agent will be construed to
cover the full amount of the Shares of the Fund for which DST
is appointed as the same will, from time to time, be
constituted, and any subsequent increases in such authorized
amount.
<PAGE>
7
In case of such increase the Fund will file with
DST:
A. If the appointment of DST was theretofore
expressly limited, a certified copy of a Vote
of the Board of Trustees of the Fund
increasing the authority of DST;
B. A certified copy of the amendment to the
Articles of Incorporation authorizing the increase of
shares.
6. Compensation and Expenses.
A. In consideration for its services hereunder
as Transfer Agent and Dividend Disbursing
Agent, the Fund will pay to DST from time to
time a reasonable compensation for all
services rendered as Agent, and also, all its
reasonable out-of-pocket expenses, charges,
counsel fees, and other disbursements
incurred in connection with the agency. Such
compensation will be set forth in a separate
schedule to be agreed to by the Fund and DST,
a copy of which is attached hereto and
incorporated herein by reference. If the
Fund has not paid such compensation and
expenses to DST within a reasonable time, and
as permitted by applicable law, DST may
charge against any monies held under this
Agreement in the Fund's name, the amount of
<PAGE>
8
any compensation, expense, loss or liability for which
DST shall be entitled to reimbursement under this
Agreement.
B. The Fund agrees to promptly reimburse DST for
all reasonable out-of-pocket expenses or
advances incurred by DST in connection with
the performance of services under this
Agreement, for postage (which may be required
to be paid in advance) and first class mail
insurance in connection with mailing stock
certificates, envelopes, check forms,
continuous forms, forms for reports and
statements, stationery, and other similar
items, telephone and telegraph charges
incurred in answering or making inquiries
from or of dealers or shareholders, microfilm
used each year to record the previous year's
transactions in shareholder accounts and
computer tapes used for permanent storage of
records and cost of insertion of materials in
mailing envelopes by outside firms.
7. Operation of DST System.
A. In connection with the performance of its
services under this Agreement, DST is
responsible for such items as:
(1) The accuracy of entries made by DST in
DST's records reflecting orders and
<PAGE>
9
instructions received by DST from
dealers, shareholders, the Fund or its
principal underwriter;
(2) The availability and the accuracy of shareholder
lists, shareholder account verifications,
confirmations and other shareholder account
information to be produced from its records or
data;
(3) The accurate and timely issuance of dividend and
distribution checks in accordance with
instructions received from the Fund;
(4) The accuracy of redemption transactions and
payments in accordance with redemption
instructions received from dealers, shareholders
or the Fund;
(5) The deposit daily in the Fund's appropriate bank
account of all checks and payments received
directly or individually from dealers or
shareholders for investment in shares;
(6) The requiring of proper forms of instructions,
signatures and signature guarantees and any
necessary documents supporting the legality of
transfers, redemptions and other shareholder
account transactions, all in conformance
<PAGE>
10
with DST's present procedures with such
changes as may be required or approved
by the Fund; and
(7) The maintenance of a current duplicate set of the
Fund's essential records maintained by DST for the
Fund under this agreement at a secure distant
location.
B. DST is not responsible for and shall have no
liability as a result of or which arises out
of errors, inaccuracies or omissions in the
Fund's books and records as received by DST
from the prior transfer and dividend
disbursing agent and any errors, inaccuracies
or omissions in reports, lists,
verifications, confirmations or other
information or data derived or produced
therefrom.
8. Indemnification
A. DST will not be responsible for, and the Fund
will hold harmless and indemnify DST from and
against any loss by or liability to the Fund
or a third party, including attorney's fees,
in connection with any claim or suit
asserting any such liability arising out of
or attributable to actions taken or omitted
by DST pursuant to this Agreement, unless DST
<PAGE>
11
has acted negligently or in bad faith. The matters
covered by this indemnification include but are not
limited to those of Section 14. hereof and any costs,
including legal fees, incurred in enforcing this right
of indemnification. The Fund will be responsible for,
and will have the right to conduct or control the
defense of any litigation asserting liability against
which DST is indemnified hereunder. DST will not be
under any obligation to prosecute or defend any action
or suit in respect of the agency relationship hereunder,
which, in its opinion, may involve it in expense or
liability, unless the Fund will, as often as requested,
furnish DST with reasonable, satisfactory security and
indemnity against such expense or liability and pay all
costs, including attorney's fees, as incurred.
B. DST will hold harmless and indemnify the Fund
from and against any loss or liability
arising out of DST's failure to comply with
the terms of this Agreement or out of DST's
negligence, misconduct, or bad faith, except
to the extent DST is entitled to
indemnification under Subsection A. hereof
<PAGE>
12
9. Certain Covenants of DST and the Fund.
A. The Fund hereby agrees that all requisite
steps will be taken by the Fund from time to time when
and as necessary to register the Fund's shares for sale
in all states in which the Fund's shares shall at the
time be offered for sale and require registration. If at
any time the Fund will receive notice of any stop order
or other proceeding in any such state affecting such
registration or the sale of the Fund's shares, or of any
stop order or other proceeding under the Federal
securities laws affecting the sale of the Fund's shares,
the Fund will give prompt notice thereof to DST.
B. DST hereby agrees to perform such transfer
agency functions as are attached hereto as
Exhibit A and establish and maintain
facilities and procedures reasonably
acceptable to the Fund for safekeeping of
stock certificates, check forms, and
facsimile signature imprinting devices, if
any; and for the preparation or use, and for
keeping account of, such certificates, forms
and devices, and to carry such insurance as
specified in Exhibit B.
<PAGE>
13
C. To the extent required by Section 31 of the
Investment Company Act of 1940 as amended and
Rules thereunder, DST agrees that all records
maintained by DST relating to the services to
be performed by DST under this Agreement are
the property of the Fund and will be
preserved and will be surrendered promptly to
the Fund on request. The Fund will be
responsible for the costs of storing and
retrieving such records.
D. DST agrees to furnish the Fund annual reports of its
financial condition, consisting of a balance sheet,
earnings statement and any other public financial
information reasonably requested by the Fund. The annual
financial statements will be certified by DST's
certified public accountants.
E. DST represents and agrees that it will use
its best efforts to keep current on the
trends of the investment company industry
relating to transfer agent services and will
use its best efforts to continue to modernize
and improve its system without additional
cost to the Fund. Notwithstanding the
foregoing, (i) DST shall not be liable for
failing to make any modification or
improvement as to the necessity which the
<PAGE>
14
Fund has not advised DST in writing; (ii) for any delay
in the implementation of such modification or
improvement where DST reasonably required more time than
was permitted by circumstances or regulations; and (iii)
the Fund may be charged for utilization of any
modification or improvement if utilization of such
modification or improvement is charged to DST's clients
generally, and provided such modification or improvement
is utilized to provide services to the Fund hereunder.
F. DST will permit the Fund and its authorized
representatives to make periodic inspections of its
operations as such would involve the Fund at reasonable
times during business hours, subject to such authorized
representatives' execution of DST's Confidentiality and
Limited Use Agreement.
10. Recapitalization or Readjustment.
In case of any recapitalization, readjustment or
other change in the capital structure of the Fund
requiring a change in the form of share
certificates, DST will issue or register
certificates in the new form in exchange for, or
in transfer of, the outstanding certificates in
the old form, upon receiving:
<PAGE>
15
A. Written instructions from an officer of the
Fund;
B. Certified copy of the amendment to the
Articles of Incorporation or other document
effecting the change;
C. Certified copy of the order or consent of
each governmental or regulatory authority,
required by law to the issuance of the shares
in the new form, and an opinion of counsel
that the order or consent of no other
government or regulatory authority is
required;
D. Specimens of the new certificates in the form
approved by the Board of Trustees of the
Fund, with a certificate of the Clerk of the
Fund as to such approval;
E. Opinion of counsel for the Fund stating:
(1) The status of the shares of stock of the
Fund in the new form under the Securities Act of
1933, as amended and any other applicable federal
or state statute; and
(2) That the issued shares in the new form are, and
all unissued shares will be, when issued, validly
issued, fully paid and nonassessable.
11. Stock Certificates.
<PAGE>
16
The Fund will furnish DST with a sufficient supply of blank
stock certificates and from time to time will renew such
supply upon the request of DST. Such certificates will be
signed manually or by facsimile signatures of the officers of
the Fund authorized by law and by bylaws to sign share
certificates, and if required, will bear the Funds's seal or
facsimile thereof.
12. Death, Resignation or Removal of Signing Officer.
------------------------------------------------
The Fund will file promptly with DST written
notice of any change in the officers authorized to
sign share certificates, written instructions or
requests, together with two signature cards
bearing the specimen signature of each newly
authorized officer. In case any officer of the
Fund who will have signed manually or whose
facsimile signature will have been affixed to
blank share certificates will die, resign, or be
removed prior to the issuance of such
certificates, DST may issue or register such share
certificates as the share certificates of the Fund
notwithstanding such death, resignation, or
removal, until specifically directed to the
contrary by the Fund in writing. In the absence
of such direction, the Fund will file promptly
with DST such approval, adoption, or ratification
as may be required by law.
<PAGE>
17
13. Future Amendments of Articles of Incorporation and
Bylaws.
The Fund will promptly file with DST copies of all
material amendments to its Articles of
Incorporation or bylaws made after the date of
this Agreement.
14. Instructions, Opinion of Counsel and Signatures.
-----------------------------------------------
Except as otherwise provided for in a written
memorandum signed by both parties hereto, at any
time DST may apply to any officer of the Fund, The
Chase Manhattan Bank ("Chase") or Mutual Fund
Select Trust for instructions, and if such
instructions are not received within a reasonable
time following subsequent notification with the
Fund's Chief Executive Officer, then DST may
consult with legal counsel for the Fund or its own
legal counsel at the expense of the Fund, with
respect to any matter arising in connection with
the agency and it will not be liable for any
action taken or omitted by it in good faith in
reliance upon such instructions or upon the
opinion of such counsel. DST will be protected in
acting upon any paper or document reasonably
believed by it to be genuine and to have been
signed by the proper person or persons and will
not be held to have notice of any change of
authority of any person, until receipt of written
<PAGE>
18
notice thereof from the Fund. It will also be protected in
recognizing share certificates which it reasonably believes to
bear the proper manual or facsimile signatures of the officers
of the Fund, and the proper countersignature of any former
Transfer Agent or Registrar, or of a co-Transfer Agent or
co-Registrar.
15. Papers Subject to Approval of Counsel.
-------------------------------------
The acceptance by DST, of its appointment as
Transfer Agent and Dividend Disbursing Agent and
all documents filed in connection with such
appointment and thereafter in connection with the
agencies, will be subject to the approval of legal
counsel for DST (which approval will be not
unreasonably withheld).
16. Certification of Documents.
The required copy of the Articles of Incorporation of the Fund
and copies of all amendments thereto may be duplicates of the
original certified by the Secretary of State (or other
appropriate official) of the Commonwealth of Massachusetts.
The copy of the Bylaws, copies of all amendments thereto, and
copies of resolutions or Votes of the Board of Trustees of the
Fund, will be certified by the Clerk or an Assistant Clerk of
the Fund under the Fund's seal, if any.
17. Records.
<PAGE>
19
DST will maintain customary records in connection with its
agency, and particularly will maintain those records required
to be maintained pursuant to subparagraph (2)(iv) of paragraph
(b) of Rule 31a-1 under the Investment Company Act of 1940, if
any.
18. Disposition of Books, Records and Cancelled
-------------------------------------------
Certificates. DST may send periodically to the
------------
Fund, or to where designated by the Clerk or an
Assistant Clerk of the Fund, all books, documents,
and all records no longer deemed by it as needed
for current purposes and stock certificates which
have been cancelled in transfer or in exchange.
At a minimum all such records will be maintained
for the periods required by applicable law and
under and in compliance with the requirements of
17 C.F.R. Section 240.17Ad-7(g), adopted under the
------
Securities and Exchange Act of 1934.
19. Provisions Relating to DST as Transfer Agent.
A. DST will make original issues of stock
certificates upon written request of an
officer of the Fund and upon being furnished
with a certified copy of a resolution of the
Board of Directors authorizing such original
issue, an opinion of counsel as outlined in
paragraphs 1.D. and G. of this Agreement, any
documents required by paragraphs 5. or 10. of
<PAGE>
20
this Agreement, and necessary funds for the
payment of any original issue tax.
B. Before making any original issue of
certificates the Fund will furnish DST with
sufficient funds to pay all required taxes on
the original issue of the stock, if any. The
Fund will furnish DST such evidence as may be
required by DST to show the actual value of
the stock. If no taxes are payable DST will
be furnished with an opinion of outside
counsel to that effect.
C. Stock certificates will be transferred and
new certificates issued in transfer, or stock
certificates accepted for redemption and
funds remitted therefor, upon surrender of
the old certificates in form deemed by DST
properly endorsed for transfer or redemption
accompanied by such documents as DST may deem
necessary to evidence that authority of the
person making the transfer or redemption, and
bearing satisfactory evidence of the payment
of any applicable transfer taxes. DST
reserves the right to refuse to transfer or
redeem shares until it is satisfied that the
endorsement or signature on the Certificate
or any other document is valid and genuine,
and for that purpose it may require a
<PAGE>
21
guarantee of signature by a bank, broker or dealer,
municipal securities dealer or broker, government
securities dealer or broker, credit union, national
securities exchange, registered securities association,
clearing agency, savings association (including savings
bank and savings and loan) or any entity which affixes a
medallion which reasonably appears to be that of a
Signature Guarantee Program (collectively an "Eligible
Guarantor Institution"). DST will incur no liability and
shall be indemnified and held harmless by the Fund for
any action taken by it in accordance with an instruction
bearing what purports to be a signature guarantee or
medallion of an Eligible Guarantor Institution or
otherwise in accordance with DST's Signature Guarantee
Procedures adopted pursuant to 17 C.F.R. Section
240.17Ad-15 under the Securities and Exchange Act of
1934. DST also reserves the right to refuse to transfer
or redeem shares until it is satisfied that the
requested transfer or redemption is legally authorized,
and it will incur no liability and shall be indemnified
and held harmless by the Fund for the refusal in good
faith to make transfers or
<PAGE>
22
redemptions which, in its judgment, are improper or
unauthorized. DST may, in effecting transfers or
redemptions, rely upon Simplification Acts or other
statutes which protect it and the Fund in not requiring
complete fiduciary documentation. In cases in which DST
is not directed or otherwise required to maintain the
consolidated records of shareholder's accounts, DST will
not be liable for any loss which may arise by reason of
not having such records, provided that such loss could
not have been prevented by the exercise of ordinary
diligence. DST will be under no duty to use a greater
degree of diligence by reason of not having such
records.
D. D. When mail is used for delivery of stock
certificates DST will forward share
certificates in "nonnegotiable" form by first
class or registered mail and share
certificates in "negotiable" form by
registered mail, all such mail deliveries to
be covered while in transit to the addressee
by insurance arranged for by DST.
E. DST will issue and mail subscription
warrants, certificates representing
dividends, exchanges or split ups, or act as
<PAGE>
23
Conversion Agent upon receiving written instructions
from any officer of the Fund and such other documents as
DST deems necessary.
F. DST will issue, transfer, and split up
certificates and will issue certificates
representing full shares upon surrender of
scrip certificates aggregating one full share
or more when presented to DST for that
purpose upon receiving written instructions
from an officer of the Fund and such other
documents as DST may deem necessary.
G. DST may issue new certificates in place of
certificates represented to have been lost,
destroyed, stolen or otherwise wrongfully
taken upon receiving instructions from the
Fund and indemnity satisfactory to DST and
the Fund, and may issue new certificates in
exchange for, and upon surrender of,
mutilated certificates.
H. DST will supply a shareholder's list to the Fund for one
meeting of shareholders upon receiving a request
therefor from an officer of the Fund. It will also
supply lists at such other times as may be requested by
an officer of the Fund, but may, in its discretion,
charge therefor.
<PAGE>
24
I. Upon receipt of written instructions of an
officer of the Fund, DST will address and
mail notices to shareholders.
J. In case of any request or demand for the
inspection of the shareholder records of the
Fund or any other books in the possession of
DST, DST will endeavor to notify the Fund and
endeavor to secure instructions as to
permitting or refusing such inspection. DST
reserves the right, however, to exhibit the
shareholder records or other books to any
person in case it is advised by its counsel
that it may be held responsible for the
failure to exhibit the shareholder records or
other books to such person.
20. Provisions Relating to Dividend Disbursing Agency.
A. DST will, at the expense of the Fund, provide
a special form of check containing the imprint of any
device or other matter desired by the Fund. Said checks
must, however, be of a form and size convenient for use
by DST.
B. If the Fund desires to include additional printed
matter, financial statements, etc., with the dividend
checks, the same will be furnished DST within a
reasonable time prior to the date of mailing of the
dividend checks, at the expense of the Fund.
<PAGE>
25
C. If the Fund desires its distributions mailed
in any special form of envelopes, sufficient
supply of the same will be furnished to DST
but the size and form of said envelopes will
be subject to the approval of DST. If
stamped envelopes are used, they must be
furnished by the Fund; or if postage stamps
are to be affixed to the envelopes, the
stamps or the cash necessary for such stamps
must be furnished by the Fund (prior to
mailing if so requested by DST).
D. DST will maintain one or more deposit accounts as Agent
for the Fund, into which the funds for payment of
dividends, distributions, redemptions or other
disbursements provided for hereunder will be deposited,
and against which checks will be drawn.
E. DST is authorized and directed to stop
payment of checks issued hereunder, but not
presented for payment, when the payees
thereof allege either that they have not
received the checks or that such checks have
been mislaid, lost, stolen, destroyed or
through no fault of theirs, are otherwise
beyond their control, and cannot be produced
by them for presentation and collection, and,
<PAGE>
26
to issue and deliver duplicate checks in replacement
thereof. DST shall bear no liability if payment upon
stopped checks is subsequently compelled by a Holder in
Due Course (or a Bona Fide Purchaser for Value).
21. Assumption of Duties By the Fund.
--------------------------------
The Fund or its agent or affiliate may assume
certain duties and responsibilities of DST or
those usual and ordinary services of Transfer
Agent and Dividend Disbursement Agent as those
terms are referred to in Section 4.E. of this
Agreement including but not limited to accepting
shareholder instructions and transmitting orders
based on such instructions to DST, preparing and
mailing confirmations, obtaining certified TIN
numbers, answering telephones, and disbursing
monies of the Fund. To the extent the Fund or its
agent or affiliate assumes such duties and
responsibilities, DST shall be relieved from all
responsibility and liability therefor.
22. Termination of Agreement.
A. This Agreement may be terminated by either
party upon receipt of six (6) months prior
written notice from the other party.
B. The Fund, in addition to any other rights and
remedies, shall have the right to terminate
<PAGE>
27
this Agreement forthwith upon the occurrence
at any time of any of the following events:
(1) Any interruption or cessation of
operations by DST or its assigns which
materially interferes with the business
operation of the Fund;
(2) The bankruptcy of DST or its assigns or
the appointment of a receiver for DST or
its assigns;
(3) Any merger, consolidation or sale of
substantially all the assets of DST or
its assigns;
(4) The acquisition of a controlling interest in DST
or its assigns, by any broker, dealer, investment
adviser or investment company except as may
presently exist; or
(5) Failure by DST or its assigns to perform its
duties in accordance with the Agreement, which
failure materially adversely affects the business
operations of the Fund and which failure continues
for thirty (30) days after receipt of written
notice from the Fund.
C. In the event of termination, the Fund will
promptly pay DST all amounts due to DST
hereunder.
<PAGE>
28
D. In the event of termination, DST will use its
best efforts to transfer the books and
records of the Fund to the designated
successor transfer agent and to provide other
information relating to its service provided
hereunder for reasonable compensation
therefore. In this connection, DST's
conversion assistance shall be billed at its
then current rates. DST's present rates are:
(i) for clerical assistance, __________
dollars ($__________) per hour; (ii) for
Supervisor/Manager assistance, __________
dollars ($__________) per hour; and (iii) for
programming assistance, to the extent DST
agrees thereto, __________ ($__________),
__________ ($__________) and __________
($__________) dollars per hour for
non-technical, mainframe and work station
personnel.
E. Nothing herein is intended to, nor does it, compel DST
to disclose non-public information or to provide
programming assistance or information which might tend
to improve, enhance or add functionality to anyone
else's operating systems, respectively.
23. Assignment.
<PAGE>
29
A. Neither this Agreement nor any rights or
obligations hereunder may be assigned by
either party hereto without the written
consent of the other party. In the event of
a mutually agreed to assignment, each party
shall remain liable for the performance of
its assignee(s). DST may, however, employ
agents to assist it in performing its duties
hereunder. Notwithstanding anything herein
to the contrary, DST shall have no
responsibility or liability hereunder for
services provided or omissions to provide by
unaffiliated, nationally recognized third
parties such as federal Express, Airborne
Services, UPS, the U.S. Mails,
telecommunications companies, etc.
B. This Agreement will inure to the benefit of
and be binding upon the parties and their
respective successors and assigns.
24. Confidentiality.
A. DST agrees that, except as provided in the last sentence
of Section 19.H hereof, or as otherwise required by law,
DST will keep confidential all records of and
information in its possession relating to the Fund or
its shareholders or shareholder accounts and will
<PAGE>
30
not disclose the same to any person except at
the request or with the consent of the Fund.
B. The Fund agrees to keep confidential all
financial statements and other financial
records (other than statements and records
relating solely to the Fund's business
dealings with DST) and all manuals, systems
and other technical information and data, not
publicly disclosed, relating to DST's
operations and programs furnished to it by
DST pursuant to this Agreement and will not
disclose the same to any person except at the
request or with the consent of DST.
C. The Fund acknowledges that DST and DST have
proprietary rights in and to the computerized
data processing recordkeeping system used by
DST to perform services hereunder including,
but not limited to the maintenance of
shareholder accounts and records, processing
of related information and generation of
output (the "MFS System"), including, without
limitation any changes or modifications of
the MFS System and any other DST or DST
programs, data bases, supporting
documentation, or procedures ("collectively
DST Protected Information") which the Fund's
access to the MFS System or computer hardware
<PAGE>
31
or software may permit the Fund or its employees or
agents to become aware of or to access and that the DST
Protected Information constitutes confidential material
and trade secrets of DST. The Fund agrees to maintain
the confidentiality of the DST Protected Information.
The Fund acknowledges that any unauthorized use, misuse,
disclosure or taking of DST Protected Information which
is confidential as provided by law, or which is a trade
secret, residing or existing internal or external to a
computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be
accessed of any computer, computer system, or computer
network, may be subject to civil liabilities and
criminal penalties under applicable state law. The Fund
will advise all of its employees and agents who have
access to any DST Protected Information or to any
computer equipment capable of accessing DST or DST
hardware or software of the foregoing. DST is intended
to be, and shall be, a third party beneficiary of the
Fund's obligations and undertakings contained in this
Section.
<PAGE>
32
25. Survival of Representations and Warranties,
Indemnifications and Miscellaneous Provisions.
A. All representations and warranties by either
party herein contained will survive the
execution and delivery of this Agreement.
B. All indemnifications and undertakings of
(i) confidential treatment of the other's
information, data, systems, materials, etc.
and (ii) of non-solicitation and
non-employment of employees of the other (and
of affiliates of the other) shall survive the
termination of this agreement.
26. Miscellaneous.
A. This Agreement is executed and delivered in
the State of Missouri and is intended to be
and shall be governed by the laws of said
state.
B. All the terms and provisions of this
Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the
respective successor and assigns of the
parties hereto.
C. No provisions of the Agreement may be amended
or modified, in any manner except by a
written agreement properly authorized and
executed by both parties hereto.
<PAGE>
33
D. The captions in this Agreement 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.
E. This Agreement 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.
F. If any part, term or provision of this
Agreement is by the courts held to be
illegal, in conflict with any law or
otherwise invalid, the remaining portion or
portions shall be considered severable and
not be affected, and the rights and
obligations of the parties shall be construed
and enforced as if the Agreement did not
contain the particular part, term or
provision held to be illegal or invalid.
G. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not
be binding upon any Director, officer or shareholder of
the Fund individually.
H. Each party hereto agrees not to offer
employment to, solicit employment by or
<PAGE>
34
employ any employee of the other or, in the case of DST,
of the Fund and its affiliated companies or, in the case
of the Fund, of DST or DST or either of their affiliated
companies. For purposes hereof, an "affiliated company"
shall be any entity which directly or indirectly
controls, is controlled by or is under common control
with the Fund or payment thereof to DST and for
internally determining the appropriate allocation
thereof among the Portfolios.
I. Notice is hereby given that a copy of the
Fund's Agreement and Declaration of Trust and
all amendments thereto is on file with the
Secretary of the Commonwealth of
Massachusetts; that this Agreement has been
executed on behalf of the Fund by the
undersigned duly authorized representative of
the Fund in his/her capacity as such and not
individually; and that the obligations of
this Agreement shall only be binding upon the
assets and property of the Fund and shall not
be binding upon any trustee, officer or
shareholder of the Fund individually.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers.
<PAGE>
35
DST SYSTEMS, INC.
By______________________________
ATTEST:
- ------------------------------
MUTUAL FUND SELECT TRUST
By:______________________________
Title:___________________________
ATTEST:
- ------------------------------
Secretary
<PAGE>
36
EXHIBIT A
TRANSFER AGENCY SERVICES AND SYSTEMS FEATURES
FUNCTIONS
A. Issuance of stock certificates
B. Recording of non-certificate shares
C. Purchase, redemptions, exchanges, transfers and legal
D. Changes of address, etc.
E. Daily balancing of the Fund
F. Dividend calculation and disbursement
G. Mailing of quarterly and annual reports, if requested
H. Filing of 1099/1042 information to shareholders and
government
I. Provide N1R information
[J. Systematic withdrawal plans]
K. Pre-authorized checks
L. Purchase reminders
M. Reconcilement of dividend and disbursement accounts
N. Provide research and correspondence to shareholder's
inquiries
O. Daily communication of reports to the Fund
P. Provide listings, labels and other special reports
Q. Proxy issuance and tabulation
R. Annual statements of shareholders on microfilm
S. Blue-sky reports
T. Wire order processing
[U. 12B-1 processing]
<PAGE>
37
EXHIBIT B
INSURANCE COVERAGE
Insurance coverages maintained by DST effective May 1, 1993, subject to
deductibles DESCRIPTION OF POLICY:
Brokers Blanket Bond, Standard form 14 Covering losses caused by
dishonesty of employees, physical loss of securities on or outside
of premises while in possession of authorized person, loss caused by
forgery or alteration of checks or similar instruments.
Coverage: $75,000,000
Errors and Omissions Insurance
Covering replacement of destroyed records and computer errors and
omissions.
Coverage. $10,000,000
Special Forgery Bond
Covering losses through forgery or alteration of checks or drafts of
customers processed by insured but drawn on or against them.
Coverage: $1,000,000
Mail Insurance (apples to all full service operations)
Provides indemnity for security lost in the mails.
Coverage:
$10,000,000 nonnegotiable securities mailed
to domestic locations via registered mail.
<PAGE>
38
$1,000,000 nonnegotiable securities mailed to
domestic locations via first-class or
certified mail.
$1,000,000 nonnegotiable securities mailed to
foreign locations via registered mail.
$1,000,000 negotiable securities mailed to
all locations via registered mail.
<PAGE>
ADMINISTRATION AGREEMENT
THIS AGREEMENT made this __th day of _________, 1996, by and between
MUTUAL FUND SELECT TRUST (the "Trust"), a Massachusetts business trust and THE
CHASE MANHATTAN BANK (the "Administrator").
WITNESSETH:
In consideration of the mutual covenants herein contained and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
FIRST: The Trust on behalf of each of its series and any new series
to be created hereby authorizes the Administrator to provide administrative
services to the Trust in accordance with the terms and conditions of this
Agreement. The Administrator's services shall be subject to the direction and
control of the Board of Trustees of the Trust and shall be performed under the
direction of the appropriate Trust officers.
The Administrator's functions shall be entirely ministerial in nature, and it
shall not have any responsibility or authority for the management of the Trust,
the determination of its policies, or for any matter pertaining to the
distribution of securities issued by the Trust.
SECOND: The Administrator shall provide certain
administration services including:
(A) arranging for the maintenance of the Trust's books and records
except for: accounting books and records, sales literature and other documents
relating to the sale of securities
1
<PAGE>
issued by the Trust (other than copies of such documents preserved as a record
of presentations to the Board of Trustees or Trust officers), and records
pertaining to the ownership of securities issued by the Trust;
(B) preparing applications for insurance for the
Trust and claims under any insurance policy;
(C) preparing for the signature of the appropriate Trust officer (or
assist counsel and auditors in the preparation of) all required Trust tax
returns, proxy statements, semiannual reports to the Trust's shareholders,
semiannual reports to be filed with the Securities and Exchange Commission, and
updates to the Trust's Registration Statement under the Investment Company Act
of 1940 (the "Act");
(D) arranging for the printing and mailing (at the Trust's expense)
of proxy statements and other reports or other materials provided to the Trust's
shareholders;
(E) preparing (beginning January 1, 1997)
applications and reports which may be necessary to maintain on behalf of the
Trust any registration of the Trust and/or the shares of any series of the Trust
under the securities or "Blue Sky" laws of any state, province, or foreign
country (the Trust shall pay for any filing or legal fees in connection with
such filings);
(F) preparing agendas and supporting documentation
for, and minutes of, Trustee and shareholder meetings;
(G) arranging for the computation of performance data
including net asset value and yield;
2
<PAGE>
(H) arranging for the publication of current price
information in newspapers and publications;
(I) responding to all inquires or other
communications from shareholders of the Trust and other parties or, if the
inquiry is more properly responded to by the Trust's transfer agent or
distributor, referring the individual making the inquiry to the appropriate
person;
(J) reviewing from time to time the portfolios of each series of the
Trust and transactions with brokers and dealers for compliance with applicable
law and Trust policy;
(K) coordinating all relationships between the Trust and its
contractors, including coordinating the negotiation of agreements, the review of
performance of agreements, and the exchange of information, provided that
coordination with the distributor shall be limited to the exchange of
information necessary for the administration of the Trust and the reporting of
that information to the Board of Trustees and Trust officers.
THIRD: Any activities performed by the Administrator
under this Agreement shall at all times conform to, and be in
accordance with, any requirements imposed by: (1) the
provisions of the Act and of any rules or regulations in force thereunder;
(2) any other applicable provision of law; (3) the provisions of
the Agreement and Declaration of Trust and By-Laws of the Trust as amended from
time to time; (4) any policies and determinations of the Board of Trustees of
the Trust; and (5) the fundamental policies of each series of the Trust, as
reflected in the then current Registration Statement of the Trust. As used in
3
<PAGE>
this Agreement, the term "Registration Statement" shall mean the Registration
Statement most recently filed by the Trust with the
Securities and Exchange Commission and effective under the Securities Act of
1933, as amended, as such Registration Statement is amended at such time, and
the term "Prospectus" and
"Statement of Additional Information" shall mean for the purposes of this
Agreement the form of the then current prospectus and statement of additional
information for each series of the Trust.
FOURTH: Nothing in this Agreement shall prevent the
Administrator or any officer thereof from acting as
administrator for any other person, firm or corporation and shall not in any
way limit or restrict the Administrator or any of its directors,
officers, employees or affiliates from buying, selling or trading any
securities for its own or their own accounts or for the accounts of others for
whom it or they may be acting, provided, however, that the Administrator
expressly represents that it will undertake no activities which, in its
judgment, will adversely affect the performance of its obligations to the Trust
under the Agreement.
FIFTH: The Administrator shall, at its own expense,
provide office space and facilities, equipment and personnel for
the performance of its functions hereunder.
SIXTH: The Trust shall pay the Administrator, as full
compensation for all services rendered hereunder, an annual fee
on behalf of each series payable monthly and computed on the net
asset value of the series at the end of each business day at the annual rates
set forth in Exhibit A hereto.
4
<PAGE>
SEVENTH: In the event the operating expenses of any series of the
Trust, including all investment advisory, administration and sub-administrator
fees, but excluding brokerage commissions and fees, taxes, interest and
extraordinary expenses such as litigation, for any fiscal year ending on a date
on which this Agreement is in effect exceed the most restrictive expense
limitation applicable to the series imposed by the securities laws or
regulations thereunder of any state in which the shares of the series are
qualified for sale, as such limitations may be raised or lowered from time to
time, the Administrator shall reduce its administration fee to the extent of its
share of such excess expenses. The amount of any such reduction to be borne by
the Administrator shall be deducted from the monthly administration fee
otherwise payable to the Administrator during such fiscal year; and if such
amounts should exceed the monthly fee, the Administrator shall pay to such
series its share of such excess expenses no later than the last day of the first
month of the next succeeding fiscal year. For the purposes of this paragraph,
the term "fiscal year" shall exclude the portion of the current fiscal year
which shall have elapsed prior to the date hereof and shall include the portion
of the then current fiscal year which shall have elapsed at the date of
termination of this Agreement.
EIGHTH:
(A) This Agreement shall go into effect at the close of the business
on the date hereof, and, unless terminated as hereinafter provided, shall
continue in effect for two years thereafter and from year to year thereafter,
5
<PAGE>
but only so long as such continuance is specifically approved at least annually
by the Trust's Board of Trustees, including the vote of a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party cast in person at a meeting called for the
purpose of voting on such approval, or by the vote of the holders of a
"majority" (as so defined) of the outstanding voting securities of the
applicable series and by such vote of the Trustees.
(B) This Agreement may be
terminated by the Administrator at any
time without penalty upon giving the Board of Trustees of the Trust sixty (60)
days' written notice (which notice may be waived by the Trust) and may be
terminated by the Board of Trustees of the Trust at any time without penalty
upon giving the Administrator sixty (60) days' written notice (which notice may
be waived by the Administrator), provided that such termination by the Board of
Trustees of the Trust shall be directed or approved by the vote of a majority of
all of its Trustees in office at the time, including a majority of the Trustees
who are not interested persons (as defined in the Act) of the Trust, or by the
vote of the holders of a majority (as defined in the Act) of the voting
securities of each series of the Trust at the time outstanding and entitled to
vote. This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the Act.
6
<PAGE>
NINTH: In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Administrator or any of its officers, directors or employees, the Trust
shall indemnify the Administrator against any and all claims, demands and
liabilities and expenses (including reasonable attorney's fees) which the
Administrator may incur based on any omission in the course of, or connected
with, rendering services hereunder.
TENTH: The Trust hereby reserves the right to use the
name "Vista" as part of its name. In the event this Agreement
is terminated, the Trust shall be entitled to continue to use that
name and to grant to other investment companies, administrators,
investment advisers or broker-dealers the right to use that name in connection
with the business of operating or providing services to management investment
companies as defined in the Act.
ELEVENTH: A copy of the Agreement and Declaration of Trust of the
Trust 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
Trustees of the Trust 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 Trust.
TWELFTH: Any notice under this Agreement shall be in writing,
addressed and delivered, or mailed, postage paid, to the other party at such
address as such other party may designate for
7
<PAGE>
the receipt of such notices. Until further notice to the other party, it is
agreed that the address of the Trust shall be 101 Park Avenue, New York, NY
10178, and the address of the Administrator shall be 1 Chase Square, Rochester,
NY 14643.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to
be executed by their duly authorized officers as of
the day and year first above written.
ATTEST: MUTUAL FUND SELECT TRUST
____________________ By:___________________________
ATTEST: THE CHASE MANHATTAN BANK
____________________ By:___________________________
8
