As filed via EDGAR with the Securities and Exchange Commission on December 19,
1996
File No. 811-7841
Registration No. 333-13319
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | |
Pre-Effective Amendment No. 2 |X|
Post-Effective Amendment No. |_|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | |
Amendment No. 2 |X|
-------------------------------
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
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(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>
[Vista Logo]
PROSPECTUS
VISTA(SM) 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
--------------------------------------
December __, 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 December __, 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.
<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 .......................................... 15
How Distributions Are Made; Tax Information ............................... 15
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 Vista
Select Vista Select New Vista Select
Intermediate Select Tax York New Jersey
Tax Free 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 dollar-weighted maturity of the Fund's portfolio will be greater
than three years but will not exceed ten years.
The Fund is classified as a "non-diversified" fund under federal securities
law.
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.
The Fund is classified as a "non-diversified" fund under federal securities law.
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
4
<PAGE>
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 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.
The Fund is classified as a "non-diversified" fund under federal securities
law.
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.
The Fund is classified as a "non-diversified" fund under federal securities
law.
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 F-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. Bonds rated in the category Baa or BBB are generally
considered to be investment grade obligations which are neither highly protected
nor poorly secured; obligations rated MIG-3, VMIG-3, SP-2 or F-3 are generally
considered to have satisfactory capacity to pay principal and interest.
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.
5
<PAGE>
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 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
6
<PAGE>
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 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 in which the Funds may invest
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. Each Fund's advisers will evaluate the
liquidity of municipal lease obligations in accordance with procedures
established by the Funds.
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.
7
<PAGE>
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 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 stripped obligations where the underlying obligations are 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
8
<PAGE>
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 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. The market value of an
inverse floater will vary inversely with changes in market interest rates, and
will be more volatile in response to interest rate changes than that of a
fixed-rate obligation. 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)
9
<PAGE>
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 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 losses that may exceed the original investments of the
Fund. 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
10
<PAGE>
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 a Fund's 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 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 the banking 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
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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 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 invest 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 FUNDS' 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 Funds pursuant to a
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Sub-Investment Advisory Agreement between CAM and Chase. CAM is a wholly-owned
operating subsidiary of Chase. CAM makes investment decisions for the Funds 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 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 Carolyn J. Gill, Vice President and Senior Portfolio Manager
of Chase, are responsible for the day-to-day management of the New Jersey 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.
Ms. Hunter and Ms. Gill are responsible for the day-to-day management for the
Intermediate Tax Free Income Fund.
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"). 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 accompanied by payment in
federal funds. 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
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Identification Number upon opening an account.
ELIGIBLE INVESTORS
Qualified investors are defined as trusts and fiduciary accounts. Financial
Institutions may establish additional eligibility requirements, including
minimum investment requirements, for qualified investors. Financial Institutions
are required to maintain at least $5,000,000 in an omnibus account with one or
more of the Vista Select Funds. Financial Institutions may offer investors that
cease to be qualified investors the ability to continue to hold their shares in
the Vista Select Funds through a separate account, for which a separate account
fee and transaction costs may be charged to the investor. Financial Institutions
that do not offer this feature may redeem an investor's shares if the investor
ceases to be qualified.
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
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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 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
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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 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.
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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.
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
17
<PAGE>
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.
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
18
<PAGE>
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
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.
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
believe 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. In the event a Fund adopts a master/feeder structure and
invests all of its investable assets in a Porfolio, shareholders of that Fund
will be given at least 30 days' prior written notice.
PERFORMANCE
INFORMATION
- -----------
Each Fund's investment performance may from time to time be included in
advertisements about the Fund. "Yield" is calculated by
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<PAGE>
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.
Because each Fund is the successor to one or more common trust funds, the assets
of which it acquired on a tax free basis at the time the Fund commenced
operations, a Fund's portfolio may include net unrealized appreciation
comparable to that of a mutual fund which has been in existence for the life of
the predecessor common trust fund or funds. Additional information on unrealized
appreciation is included under "Performance Information" in the SAI.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of a Fund's portfolio and a Fund's 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.
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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, NY 10178
VSTF-1-1196
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
December __, 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
<PAGE>
Table of Contents Page
- -------------------------------------------------------------------------------
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
Certain Regulatory Matters ............................................. 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
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
3
<PAGE>
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
periodic
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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
appre-
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ciation 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 instru-
11
<PAGE>
ment, the price of the underlying security is determined by a multiple (based on
a formula) of the price of such underlying 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.
12
<PAGE>
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, 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.
13
<PAGE>
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 purposes 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 regulatory policies, as a matter of
operating policy, each Fund will not invest for the purpose of exercising
control or management.
14
<PAGE>
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 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
15
<PAGE>
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 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
16
<PAGE>
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 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.
17
<PAGE>
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 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 the result.
The average annual total rate of return figures for the following Funds,
reflecting the initial investment and assuming the reinvestment of all
distributions (but excluding the effects of any applicable sales charges) for,
where applicable, the one, five and ten year periods ended August 31, 1996, and,
for the New Jersery Tax Free Income Fund, for the period from commencement of
business operations of such Fund to August 31, 1996, were as follows:
One Five Ten Since Date of
Fund Year Years Years Inception Inception
- ---- ---- ----- ----- --------- ---------
Intermediate Tax Free Income Fund 4.27 7.08 7.33 N/A
New Jersey Tax Free Income Fund 3.97 6.17 -- 6.69 5/1/90
New York Tax Free Income Fund 4.90 6.73 7.07 N/A
Tax Free Income Fund 5.18 7.03 7.66 N/A
- ----------
Performance presented in the table above and in each table that follows is based
upon the performance of their respective predecessor funds (which had fiscal
years ending on August 31) 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.
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
18
<PAGE>
rate of 46.80% for the New York Tax Free Income Fund and a combined New
Jersey State and federal income tax rate of 45.97% for the New Jersey Tax
Free Income Fund.
The Funds will not quote yields for periods prior to the consummation of
the CTF Reorganization.
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 ten-year period of business of the
predecessor common trust fund ending August 31, 1996, or, in the case of the New
Jersey Tax Free Income Fund, from the commencement of operation of the
predecessor common trust fund on May 1, 1990. 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
Initial Capital Value of
Period Ended $10,000 Gains Reinvested Total
August 31, 1996 Investment Distribution Dividends Value
--------------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Intermediate Tax Free Income Fund $ 20,279 N/A N/A $20,279
New Jersey Tax Free Income Fund 14,993 N/A N/A 14,993
New York Tax Free Income Fund 19,797 N/A N/A 19,797
Tax Free Income Fund 20,914 N/A N/A 20,914
</TABLE>
Certain Information Regarding Unrealized Appreciation
Because each Fund is the successor to one or more common trust funds, the
assets of which it acquired on a tax-free basis at the time the Fund commenced
operations, a Fund's portfolio may include net unrealized appreciation
comparable to that of a mutual fund which has been in existence for the life of
the predecessor common trust fund or funds. Assuming the assets had been
acquired at August 31, 1996 each Fund's pro forma net unrealized appreciation,
and the percentage of each Fund's pro forma net assets that this appreciation
represents, in each case unaudited, would be as follows:
Percentage
Unrealized of Net
Gain Assets
---------- ---------
Intermediate Tax Free Income Fund $27,890,390 4.52%
New Jersey Tax Free Income Fund 2,336,474 4.14
New York Tax Free Income Fund 5,457,091 2.71
Tax Free Income Fund 14,651,050 2.27
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
19
<PAGE>
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 redemption 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
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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 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
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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 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
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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.
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
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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 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.
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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 shareholder (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
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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 advisers 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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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: 64. 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: 62. 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: 67. 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: 65. 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: 65. 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: 69. 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: 64. 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: 69.
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:33. 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: 36. 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,
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the 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.
Highest Annual Compensation Paid by All Vista Funds
-----------------------------------------------------------
$40,000 $45,000 $50,000 $55,000
Years of
Service Estimated Annual Benefits Upon Service Retirement
- ----------- -----------------------------------------------------------
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
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 October 31, 1996
they had contributed $17,400, $45,000, and $67,500, 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 December 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
29
<PAGE>
Funds. The Advisory Agreement for the Funds will continue in effect from year to
year only if such continuance 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 regu-
31
<PAGE>
lations 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, 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
32
<PAGE>
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.
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.
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 the Prospectus and this Statement of Additional Information
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 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 my 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
decision, 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.
33
<PAGE>
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 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
34
<PAGE>
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 has been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
such persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions, pre-clearance
requirements and blackout periods.
Principal Holders
As of December 1, 1996, no person owned of record, directly or indirectly,
5% or more of the outstanding shares of any Funds.
35
<PAGE>
Mutual Fund Select Trust
Statement of Assets and Liabilities
December 18, 1996
<TABLE>
<CAPTION>
Vista Select Intermediate Vista Select Vista Select New York Vista Select New Jersey
Tax Free Income Fund Tax Free Income Fund Tax Free Income Fund Tax Free Income
<S> <C> <C> <C> <C>
Assets:
Cash
Deferred organization
costs (Note 3) $25,000 $25,000 $25,000 $25,000
49,846 54,662 21,314 10,659
------- ------- ------- -------
Total Assets 74,846 79,662 46,314 35,659
------- ------- ------- -------
Liabilities:
Organization Costs Payable 49,846 54,662 21,314 10,659
------- ------- ------- -------
Commitments (Note 2)
Total Liabilities 49,846 54,662 21,314 10,659
------- ------- ------- -------
Net Assets:
(constituting
paid-in capital) $25,000 $25,000 $25,000 $25,000
------- ------- ------- -------
Shares outstanding (.001 par
value; unlimited number of
shares authorized) 25 25 25 25
Net Asset Value Per Share $ 1,000 $ 1,000 $ 1,000 $ 1,000
</TABLE>
See accompanying notes to statement of assets and liabilities.
<PAGE>
Note 1. Organization
Mutual Fund Select Trust (the "Trust") is an open-end management investment
company organized as a business trust under the laws of the Commonwealth of
Massachusetts on October 1, 1996. The Trust comprises four separate investment
portfolios: 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 (each a "Fund," or together "Funds"). The Funds
have been established to accept the assets being converted from common trust
funds (the "Predecessor Funds") to registered investment companies which is
expected to occur in January 1997. The Trust is registered with the Securities
and Exchange Commission, under the Investment Company Act of 1940, as amended.
The Funds had no operations other than the issuance to Vista Fund Distributors,
Inc. ("VFD"), the Distributor, at $1,000 per share, of the shares of the Funds
as shown on the statement of assets and liabilities.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
Note 2. Agreements
The Trust will enter into an Investment Advisory Agreements with The Chase
Manhattan Bank ("Chase") pursuant to which Chase will be responsible for
providing investment management services to the Funds. For its services under
the Investment Advisory Agreement, Chase will receive an annual fee, calculated
daily and payable monthly at the rate of .30% of the average daily net assets
of the Fund. Chase will enter into a Sub-Investment Advisory Agreement with
Chase Asset Management, Inc. ("CAM"), pursuant to which CAM will provide
investment advisory services and assist in making investment decisions for the
Funds on a day to day basis. CAM will be entitled to receive a fee, payable
by Chase from its advisory fee, at an annual rate equal to .15% of the average
daily net assets of each Fund.
The Trust will enter into an Administrative Agreement with Chase pursuant to
which Chase will provide certain administrative services including, among
other responsibilities, coordinating the Funds' relationships with service
providers, filing various documents required to maintain compliance with
certain laws and regulations, arranging for the maintenance of the Funds' books
and records, preparing the Funds' financial statements and providing office
facilities necessary to carry out the foregoing. For its administrative
services, Chase will receive an annual fee of .10% of the average daily net
assets of each Fund.
The Trust will enter into a custody agreement with Chase under which Chase will
provide custody and fund accounting services.
Chase intends to enter into a distribution and sub-administration agreement
with VFD pursuant to which VFD will provide officers, clerical staff and office
space for a fee equal to .05% of each Fund's average daily net assets.
Note 3.
Costs incurred in connection with the organization and initial registration of
the Trust, amounting to $136,481, which were initially paid by VFD and will be
reimbursed by the Funds at a later date, have been deferred and will be
amortized on a straight-line basis over sixty months beginning with each Fund's
commencement of operations. Such costs have been allocated in proportion to the
relative net assets of the Predecessor Funds expected to be converted into the
Funds. If any of the initial shares of any class of the Funds are redeemed by a
holder thereof during such amortization period, the proceeds will be reduced by
the unamortized organization expenses in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption.
<PAGE>
December 18, 1996
Report of Independent Accountants
To the Trustees and Shareholder
of Mutual Fund Select Trust
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position 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 (separately managed portfolios of Mutual Fund Select Trust, hereafter
referred to as the "Trust") at December 18, 1996, in conformity with generally
accepted accounting principles. This financial statement is the responsibility
of the Trust's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this
financial statement in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
<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.
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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 three 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.
A short-term rating may also be assigned on an issue having a demand feature-
variable rate demand obligation or commercial paper programs; such ratings will
be designated as "VMIG." Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Symbols used are as follows:
MIG-1/VMIG-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/VMIG-2--Notes bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
MIG-3/VMIG-3--Notes bearing this designation are of favorable quality, where
all security elements are accounted for but there is lacking the undeniable
strength of the preceding grade, liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
- --------
* 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.
F-3--Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, although
near term adverse changes could cause these securities to be rated below
investment grade.
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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 New York Municipal Bond 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.
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 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. State-guaranteed bonds issued by the
Thruway Authority were fully retired on July 1, 1995.
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
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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 State 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
interested in acquiring operational equipment, or in certain cases, real
property. Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the Director of the
Budget, over the issuance of COPs representing the State's contractual
obligation, subject to annual appropriation by the Legislature and availability
of money, to make installment or lease-purchase payments for the State's
acquisition of such equipment or 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 although there can be no assurance that such a default or call
will not occur in the future.
The State also employs moral obligation 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 statutory provisions require 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 although there can be no assurance that
such a default will not occur in the future.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1996-97 fiscal
year. The State expects to issue $411 million in general obligation bonds
(including $153.6 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $101 million in COPs during the State's 1996-97
fiscal year for equipment purchases. The projection of the State regarding its
borrowings for the 1996-97 fiscal year may change if circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1996-97
capital projects. Included therein are borrowings by (i) DASNY for SUNY, The
City University of New York ("CUNY"), health facilities, and mental health
facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iii) UDC (doing business as
the Empire State Development Corporation) for prison and youth facilities; (iv)
the Housing Finance Agency ("HFA") for housing programs; and (v) borrowings by
the Environmental Facilities Corporation ("EFC") or other authorities. In
addition, the Legislature has authorized DASNY to refinance a $787 million
pension obligation of the State.
In the 1996 legislative session, the Legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. If the Clean Water, Clean Air Bond Act is approved by the
voters, the amount of general obligation bonds issued during the 1996-97 fiscal
year may increase above the $411 million currently included in the 1996-97
Borrowing Plan to finance a portion of this new program.
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") was created to provide financing assistance to New York
City (the "City"). 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
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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 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 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
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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, 1996, and ends on March
31, 1997, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the State's 1996-97 fiscal year, commencing on April
1, 1996, was enacted by the Legislature on July 13, 1996. The State Financial
Plan for the 1996-97 fiscal year was formulated on July 25, 1996 and is based on
the State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current fiscal
year. The 1996-97 State Financial Plan is updated in October and January. The
1996-97 State Financial Plan is projected to be balanced on a cash basis. Total
General Fund receipts and transfers from other funds are projected to be $33.17
billion, while total General Fund disbursements and transfers to other funds are
projected to be $33.12 billion. After adjustments for comparability, the adopted
1996-97 budget projects a year-over-year increase in General Fund disbursements
of 0.2 percent. As compared to the Governor's proposed budget as revised on
March 20, 1996, the State's adopted budget for 1996-97 increases General Fund
spending by $842 million, primarily from increases for education, special
education and higher education ($563 million). Resources used to fund these
additional expenditures include $540 million in increased revenues projected for
1996-97 based on higher than projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new State tax amnesty
program, and other resources including certain non-recurring resources.
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, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the Federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, federal fiscal
and monetary policies, the level of interest rates, and the condition of the
world economy, which could have an adverse effect on the State. Actual results
could differ materially and adversely from projections and those projections may
be changed materially and adversely from time to time.
The 1996-97 State Financial Plan includes actions that will have an effect on
the budget outlook for State fiscal year 1996-97 and beyond. The State Division
of the Budget estimates that the 1996-97 State Financial Plan contains actions
that provide non-recurring resources or savings totaling approximately $1.3
billion, or 3.9% of total General Fund receipts. These include the use of $481
million in surplus funds available from the Medical Malpractice Insurance
Association, $134 million in savings from a refinancing of certain pension
obligations, $88 million in projected savings from bond refundings, and $36
million in surplus fund
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transfers. The balance is composed of $314 million in resources carried forward
from the State's 1995-96 fiscal year and various other actions, including that
portion of the proposed tax amnesty program that is projected to be
non-recurring.
The State closed projected budget gaps of $5.0 billion and $3.9 billion for
its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of December
1995. As a result of changes made in the enacted budget, that gap is now
expected to be larger.
The out-year projection will be impacted by a variety of factors. Enacted tax
reductions, which reduced receipts in the 1996-97 State fiscal year by an
incremental $2.4 billion, are projected to reduce receipts in the 1997-98 State
fiscal year by an additional increment of $2.1 billion. The use of up to $1.3
billion of non- recurring resources in 1996-97, and the annualized costs of
certain program increases in the 1996-97 enacted budget, will both add
additional pressure in closing the 1997-98 gap. However, actions undertaken in
the State's 1996-97 fiscal year, such as workforce reductions, health care and
education reforms, and strict controls on State agency spending, are expected to
provide larger recurring savings in State fiscal year 1997- 98. Sustained growth
in the State's economy and continued declines in welfare caseload and Medicaid
costs would produce additional savings in the 1997-98 Financial Plan.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the Federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
On October 29, 1996, the State issued its second quarterly update to the
1996-97 State Financial Plan based on updated economic forecasts, actual
receipts and disbursements for the first six months of the fiscal year and an
assessment of changing program requirements. The update reflects a balanced
1996-97 State Financial Plan, with a reserve for contingencies in the General
Fund of $300 million, which will be utilized to help offset a variety of
potential risks and other unexpected contingencies that the State may face
during the balance of the 1996-97 fiscal year. Actual receipts through the first
two quarters of the 1996-97 State fiscal year reflect stronger-than-expected
growth in most taxes, with actual receipts exceeding expectations by $276
million, and, based on the revised economic outlook and actual receipts for the
first six months of 1996- 97, projected General Fund receipts for the 1996-97
State fiscal year have been increased by $420 million.
Uncertainties with regard to the economy, as well as the outcome of certain
litigation now pending against the State, could produce adverse effects on the
State's projections of receipts and disbursements. For example, changes to
current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1996-97 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
On August 13, 1996, the State Comptroller released a report in which he
identified several risks to the State Financial Plan and estimated that the
State faces a potential imbalance in receipts and disbursements of approximately
$3 billion for the State's 1997-98 fiscal year and approximately $3.2 billion
for the State's 1998-99 fiscal year. The 1997-98 fiscal year estimate by the
State Comptroller is within the range previously discussed by the State Division
of the Budget.
The Governor is required to submit a balanced budget to the State Legislature
and has indicated that he will close any potential imbalance in the 1997-98
Financial Plan primarily through General Fund expen-
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diture reductions and without increases in taxes or deferrals of scheduled tax
reductions. It is expected by the State Division of the Budget that the State's
1997-98 Financial Plan will reflect a continuing strategy of substantially
reduced State spending, including agency consolidations, reductions in the State
workforce, and efficiency and productivity initiatives. The division of the
Budget intends to update the State Financial Plan and provide an update to the
Annual Information Statement upon release of the 1997-98 Executive Budget.
On August 22, 1996, the President signed into law the Personal Responsibility
and Work Opportunity Reconciliation Act of 1996. On October 16, 1996, the
Governor submitted the State's TANF implementation plan to the federal
government, as required under the new federal welfare law. Legislation will be
required to implement the State's TANF plan. The Governor has indicated that he
plans to introduce legislation necessary to conform with federal law shortly,
and that he may submit amendments to the State plan if necessary. The Governor's
proposals will be available for consideration by the Legislature either before
the end of calendar 1996 or in the 1997 legislative session. It is expected by
the State that funding levels provided under the federal TANF block grant will
be higher than currently anticipated in the State's financial plan. However, the
net fiscal impact of any changes to the State's welfare programs that are
necessary to conform with federal law will be dependent upon such factors as the
ability of the State to avoid any federal fiscal penalties, the level of
additional resources required to comply with any new State and/or federal
requirements, and the division of non-federal welfare costs between the State
and its localities. States are required to comply with the new federal welfare
reform law no later than July 1, 1997. Given the size and scope of the changes
required under federal law, it is likely that these proposals will produce
extensive public discussions. There can be no assurances that the State
Legislature will enact welfare reform proposals as submitted by the Governor and
as required under federal law.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A 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, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
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 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.
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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. There can be no assurance that
these gap-closing measures can be implemented as planned.
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.
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
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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 1996-97 fiscal year,
activity in these funds is expected to comprise 6 percent of total governmental
receipts and disbursements.
Total receipts in this fund type are projected at $3.58 billion.
Disbursements from this fund type are projected to be $3.85 billion, a decrease
of $120 million (3.1 percent) over prior-year levels, due in part to a
reclassification of economic development projects to the category of grants to
local governments in the General Fund. The Dedicated Highway and Bridge Trust
Fund is the single largest dedicated fund, comprising an estimated $920 million
(24 percent) of the activity in this fund type. Total spending for capital
projects will be financed through a combination of sources: federal grants (28
percent), public authority bond proceeds (34 percent), general obligation bond
proceeds (12 percent), and pay-as-you-go revenues (26 percent).
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 1996-97 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
other funds established to accumulate moneys for the payment of debt service. In
the 1996-97 fiscal year, total disbursements in this fund type are projected at
$2.58 billion, an increase of $164 million or 16.8 percent. The projected
transfer from the General Fund of $1.59 billion is expected to finance 62
percent of these payments.
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. General
Fund moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types. A narrative
description of cash-basis results in the General Fund is presented below,
followed by a tabular presentation of the actual General Fund results for the
prior three fiscal years.
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. A national recession, followed by the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits during those years. During its last four fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below.
The State ended its 1995-96 fiscal year on March 31, 1996 with a General Fund
cash surplus. The DOB reported that revenues exceeded projections by $270
million, while spending for social service programs was lower than forecast by
$120 million and all other spending was lower by $55 million. From the resulting
benefit of $445 million, a $65 million voluntary deposit was made into the TSRF,
and $380 million was used to reduce 1996-97 Financial Plan liabilities by
accelerating 1996-97 payments, deferring 1995-96 revenues, and making a deposit
to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State Finance Law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
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temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which $521 million was
necessary to complete the restructuring of the State's cash flow under the LGAC
program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent from
1994-95 levels. This decrease reflects the impact of tax reductions enacted and
effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies.
Together with decreased social services spending, this management review
accounts for the bulk of the decline in spending.
The State ended its 1994-95 fiscal year with the General Fund in balance. The
$241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million to
the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent from
1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 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.
The State ended its 1993-94 fiscal year with a General Fund cash surplus,
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. A deposit of $268 million was made to the CRF, with a
withdrawal during the year of $3 million, and a deposit of $67 million was made
to the TSRF. These three transactions result in the change in fund balance of
$332 million. In addition, a deposit of $1.14 billion was made to the tax refund
reserve account, of which $1.03 billion was available for budgetary purposes in
the 1994-95 fiscal year. (For more information on the personal income tax refund
reserve account, see Table 5.) 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 General Fund closing balance was $399 million, of which $265
million was on deposit in the CRF and $134 million in the TSRF. The CRF was
initially funded with a transfer of $100 million attributable to a positive
margin recorded in the 1992-93 fiscal year.
General Fund receipts totaled $32.23 billion, an increase of 2.6 percent from
1992-93 levels. General Fund disbursements totaled $31.90 billion for the
1993-94 fiscal year, 3.5 percent higher than the previous fiscal year. Receipts
were higher in part due to improved tax collections from renewed State economic
growth although the State continued to lag behind the national economic
recovery. Disbursements were higher due in part to increased local assistance
costs for school aid and social services, accelerated payment of certain
Medicaid expenses, and the cost of an additional payroll for State employees.
Activity in the three other governmental funds has remained relatively stable
over the last three fiscal years, with federally-funded programs comprising
approximately two-thirds of these funds. The most significant change in the
structure of these funds has been the redirection, beginning in the 1993-94
fiscal year, of a portion of transportation-related revenues from the General
Fund to two new dedicated funds in the Special Revenue and Capital Projects Fund
types. These revenues are used to support the capital programs of the Department
of Transportation and the MTA.
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In the Special Revenue Funds, disbursements increased from $22.72 billion to
$26.26 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds grew from $3.10 billion to $3.97
billion over the last three years, as spending for transportation and mental
hygiene programs increased, partially offset by declines for corrections and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. These factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. For example, various proposals relating to federal tax and
spending policies that are currently being publicly discussed and debated could,
if enacted, have a significant impact on the State's financial condition in the
current and future fiscal years. Because of the uncertainty and unpredictability
of the changes, their impact cannot, as a practical matter, be included in the
assumptions underlying the State's projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based on
the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on a computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, levels of disbursements for various services
provided by local governments (where the cost is partially reimbursed by the
State), and the results of various administrative and statutory mechanisms in
controlling disbursements for State operations. Factors that may affect the
level of disbursements in the fiscal year include uncertainties relating to the
economy of the nation and the State, the policies of the federal government, and
changes in the demand for and use of State services.
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The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
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 August 5, 1996, 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 July 26, 1996,
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 public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public 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, 1995 there were 17
Authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $73.45 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 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.
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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 HFA, 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 1996-97 fiscal year, total State assistance to the MTA is estimated by the
State to be approximately $1.09 billion.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of a new $11.98 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"), and authorized the MTA to submit
the 1995-99 Capital Program to the Capital Program Review Board for approval.
This plan will supersede the overlapping portion of the MTA's 1992-96 Capital
Program. This is the fourth capital plan since the Legislature authorized
procedures for the adoption, approval and amendment of MTA capital programs and
is designed to upgrade the performance of the MTA's transportation systems by
investing in new rolling stock, maintaining replacement schedules for existing
assets and bringing the MTA system into a state of good repair. The 1995-99
Capital Program assumes the issuance of an estimated $5.1 billion in bonds under
this $6.5 billion aggregate bonding authority. The remainder of the plan is
projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for the
1995-99 Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the
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1995-99 Capital Program, or parts thereof, will not be delayed or reduced. If
the 1995-99 Capital Program is delayed or reduced, ridership and fare revenues
may decline, which could, among other things, impair the MTA's ability to meet
its operating expenses without additional assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipal Indebtedness. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1994, the total indebtedness
of all localities in the State other than the City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
State enabling 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 1994.
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 effect on State
finances. Among the more significant of these cases are those that involve: (i)
employee welfare benefit plans seeking a declaratory judgment nullifying on the
ground of federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans; (ii) several challenges to provisions of
Chapter 81 of the Laws of 1995 which alter 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 New York; (iv) challenges to the practice of using patients'
Social Security benefits for the costs of care of patients of State Office of
Mental Health facilities; (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
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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 SS 301; and (xii) an action for reimbursement from the State for certain
costs arising out of the provision of preschool services and programs for
children with handicapping conditions, pursuant to Sections 4410 (10) and (11)
of the Education Law.
Adverse developments in the proceedings described above or the initiation of
new proceedings could affect the ability of the State to maintain a balanced
1996-97 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1996, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $474
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1996-97 State Financial
Plan reserves for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1996-97 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 continues to require significant
financial assistance from the State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
State could also be affected by the ability of the City to market its securities
successfully in the public credit markets. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards. The City's financial plans
are usually prepared quarterly, and the annual financial report for its most
recent completed fiscal year is prepared at the end of October of each year.
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 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 the City prepares annually and updates
periodically 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 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
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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. Unforseen developments and changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements.
Implementation of the Financial Plan is also dependent upon the ability of
the City and certain Covered Organizations to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
The City currently projects that if no action is taken, it will exceed its State
Constitutional general debt limit beginning in City fiscal year 1998. The
current Financial Plan includes certain alternative methods of financing a
portion of the City's capital program which require State or other outside
approval. Future developments concerning the City or its Covered Organizations,
and public discussion of such developments, as well as prevailing market
conditions and securities credit ratings, may affect the ability or cost to sell
securities issued by the City or such Covered Organizations and may also affect
the market for their outstanding securities.
The staffs of the Control Board, OSDC and the City Comptroller issue periodic
reports on the City's Financial Plans which analyze the City's forecasts of
revenues and expenditures, cash flow, and debt service requirements for, and
Financial Plan compliance by, the City and its Covered Organizations. According
to recent staff reports, the City's economy has experienced weak employment and
moderate wage and income growth throughout the mid-1990s. Although this trend is
expected to continue for the rest of the decade, there is the risk of a slowdown
in the City's economy in the next few years, which would depress revenue growth
and put further strains on the City's budget. These reports have also indicated
that recent City budgets have been balanced in part through the use of
non-recurring resources; that the City's Financial Plan tends to rely on actions
outside its direct control; that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth; and that the City is
therefore likely to continue to face substantial future budget gaps that must be
closed with reduced expenditures and/or increased revenues.
The 1997-2000 Financial Plan projects revenues and expenditures for the 1997
fiscal year balanced in accordance with GAAP. The projections for the 1997
fiscal year reflect proposed actions to close a previously projected gap of
approximately $2.6 billion for the 1997 fiscal year. The proposed actions for
the 1997 fiscal year include (i) additional agency actions totaling $1.2
billion; (ii) a revised tax reduction program which would increase projected tax
revenues by $385 million due to the four year extension of the 12.5% personal
income tax surcharge and other actions; (iii) savings resulting from cost
containment in entitlement programs to reduce City expenditures and additional
proposed State aid of $75 million; (iv) the assumed receipt of revenues relating
to rent payments for the City's airports totaling $269 million, which are
currently the subject of a dispute with the Port Authority; (v) the sale of the
City's television station for $207 million; and (vi) pension cost savings
totaling $134 million resulting from a proposed increase in the earnings
assumption for pension assets from 8.5% to 8.75%, $40 million of which the City
currently does not expect to be achieved. There can be no assurance that these
gap-closing measures can be implemented as planned.
The Financial Plan also sets forth projections for the 1998 through 2000
fiscal years and projects gaps of $1.7 billion, $2.7 billion and $3.4 billion
for the 1998, 1999 and 2000 fiscal years, respectively.
The projections for the 1997 through 2000 fiscal years assume (i) approval by
the Governor and the State Legislature of the extension of the 12.5% personal
income tax surcharge, which is projected to provide revenue of $171 million,
$447 million, $478 million and $507 million in the 1997 through 2000 fiscal
years, respectively, (ii) collection of the projected rent payments for the
City's airports, which may depend on the successful completion of negotiations
with the Port Authority or the enforcement of the City's rights under the
existing leases thereto through pending legal actions; (iii) the ability of HHC
and BOE to identify actions to offset substantial City and State revenue
reductions and the receipt by BOE of additional State aid; and (iv)
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State approval of the cost containment initiatives and State aid proposed by the
City. The Financial Plan does not reflect any increased costs which the City
might incur as a result of welfare legislation recently enacted by Congress.
The City's financial plans have been the subject of extensive public comment
and criticism. On July 16, 1996, the staff of the City Comptroller issued a
report on the Financial Plan. The report concluded that the City's fiscal
situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for fiscal year 2000.
In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1998 through 2000 fiscal years to substantially reduce the
remaining $1.7 billion, $2.7 billion and $3.4 billion projected budget gaps for
such fiscal years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase revenues by $674
million, $959 million and $1.1 billion in the 1998 through 2000 fiscal years,
respectively; additional reductions in entitlement cost of $400 million, $750
million and $1.0 billion in the 1998 through 2000 fiscal years, respectively;
additional savings of $250 million, $300 million and $500 million in the 1998
through 2000 fiscal years, respectively, resulting from restructuring City
government by consolidating operations, privatization and mandate management and
other initiatives; additional proposed federal and State aid of $105 million,
$200 million and $300 million in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of $155 million,
$350 million and $400 million in the 1998 through 2000 fiscal years,
respectively; and the availability in each of the 1998 through 2000 fiscal years
of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget gaps
for the 1999 and 2000 fiscal years.
Although the City has maintained balanced budgets in each of its last sixteen
fiscal years, and is projected to achieve balanced operating results for the
1997 fiscal year, there can be no assurance that the gap- closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
Assumptions
The 1997-2000 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 1997-2000 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 1997 through 2000 fiscal years; continuation of projected
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; 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; 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.
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The projections and assumptions contained in the 1997-2000 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. The principal projections and assumptions described below are based on
information available in May 1996.
Substantially all of the City's full-time employees are members of labor
unions. The Financial Emergency Act requires that all collective bargaining
agreements entered into by the City and the Covered Organizations be consistent
with the City's current financial plan, except for certain awards arrived at
through impasse procedures. During a Control Period, and subject to the
foregoing exception, the Control Board would be required to disapprove
collective bargaining agreements that are inconsistent with the City's current
financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i) during
the period of negotiations between the City and a union representing municipal
employees concerning a collective bargaining agreement; (ii) if an impasse panel
is appointed, then during the period commencing on the date on which such panel
is appointed and ending sixty days thereafter or thirty days after it submits
its report, whichever is sooner, subject to extension under certain
circumstances to permit completion of panel proceedings; or (iii) during the
pendency of an appeal to the Board of Collective Bargaining. Although State law
prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
The 1997-2000 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds, will decrease from an estimated level of
206,716 on June 30, 1996 to an estimated level of 203,793 by June 30, 2000,
before implementation of the gap closing program outlined in the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately two-thirds of the City's workforce. The Financial Plan reflects
the costs of the settlements and assumes similar increases for all other
City-funded employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement. Legislation passed in February 1996 will place collective
bargaining matters relating to police and firefighters, including impasse
proceedings, under the jurisdiction of the State Public Employment Relations
Board ("PERB"), instead of the New York City Office of Collective Bargaining
("OCB"). OCB considers wage levels of municipal employees in similar cities in
the United States in reaching its determinations, while PERB's determinations
take into account wage levels in both private and public employment in
comparable communities, particularly within the State. In addition, PERB can
approve only two-year contracts, unlike OCB which can approve longer contracts.
For these reasons, among others, PERB jurisdiction could result in labor
settlements which impose higher costs on the City than those reached under
existing procedures. 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 Uniformed Firefighters Association ("UFA"). In
addition, on February 29, 1996, the City commenced an action in the State
Supreme Court seeking a declaratory judgment confirming that OCB, rather than
PERB, has jurisdiction over collective bargaining matters relating to police. On
April 10, 1996, the Court issued a decision which found the legislation in
violation of the home rule provisions of the State Constitution, and held that
OCB and not PERB had jurisdiction over collective bargaining matters relating to
police. On September 12, 1996, the Appellate Division, First Department affirmed
this decision. The PBA has appealed the Apellate Division decision.
The projections for the 1997 through 2000 fiscal years reflect the costs of
the settlements with the United Federation of Teachers ("UFT") and a coalition
of unions headed by District Council 37 of the American Federation of State,
County and Municipal Employees ("District Council 37"), which together represent
approximately two-thirds of the City's workforce, and assume that the City will
reach agreement with its
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remaining municipal unions under terms which are generally consistent with such
settlements. 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. Additional benefit increases would raise the total cumulative effective
increase to 13% above present costs. Costs associated with similar settlements
for all City-funded employees would total $49 million, $459 million and $1.2
billion in the 1997, 1998 and 1999 fiscal years, respectively, and exceed $2
billion in each fiscal year after the 1999 fiscal year. There can be no
assurance that the City will reach an agreement with the unions that have not
yet reached a settlement with the City 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 PBA and the 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 July 16, 1996, the City Comptroller issued a report on the Financial Plan,
which concluded that the City's fiscal situation remains serious. With respect
to the 1997 fiscal year, the report identified between $787 million and $941
million in potential risks, including (i) $319 million in airport related
payments from the Port Authority that are the subject of arbitration; (ii) $202
million to $266 million in risks related to BOE resulting primarily from
unidentified expenditure reductions and projected State aid which has not been
appropriated by the State Legislature; (iii) possible tax revenue shortfalls
totaling $69 million, reflecting the potential impact that rising interest rates
may have on the economy; and (iv) $144 million relating to projected overtime
savings. In addition, the report noted that HHC has not provided any details
with respect to assumed expenditure reductions and revenue enhancements to close
a projected deficit for the 1997 fiscal year, and that HHC faces additional
uncertainties, including the impact of reform of the State's health care
reimbursement methodology, lower Medicaid and Medicare revenues due to proposed
reductions by the Federal Government and the impact of proposals to privatize
certain hospital facilities. The report also noted that the City's capital
budget includes risks in the 1997 fiscal year of $777 million, including $607
million in capital from the proposed sale of the City's water and sewer system,
which the City Comptroller has opposed and which was ruled unconstitutional in a
unanimous decision of the Appellate Division of the State Supreme Court.
With respect to fiscal years 1998 through 2000, the report identified total
risks of between $2.47 billion and $2.58 billion for the 1998 fiscal year, $3.38
billion and $3.53 billion for the 1999 fiscal year and $4.16 billion and $4.31
billion for fiscal year 2000, which include the gaps identified in the Financial
Plan and the same categories of risks for fiscal years 1998 through 2000 that
the report identified for the 1997 fiscal year. With respect to the City's
capital budget for the 1998 through 2000 fiscal years, the report identified
risks of $1.5 billion, $1.7 billion and $1.4 billion, respectively, including
the risk that the proposed Infrastructure Finance Agency may not be approved by
the State Legislature. The report also noted that the City's reliance on $1.5
billion of nonrecurring actions for the 1997 fiscal year to close current year
budget gaps and, therefore, defer them into future fiscal years, has resulted in
a rapid increase in the size of estimated budget gaps for the later years of the
Financial Plan. The largest of these recent budget actions include City labor
contracts, which defer major costs until the end of the contract period, bond
refundings, and the sale of Mitchell-Lama mortgages. In a subsequent report, the
City Comptroller set forth various proposals to relieve overcrowding in the
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public schools, including year-round schooling, double shifts, busing to
nearby schools with available space, and federal funding for new school
construction and renovation projects.
On July 18, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that, while the City will end the 1996 fiscal year
with a balanced budget, the City has made no progress towards structural budget
balance, despite its headcount and entitlement reduction programs and higher
revenue collections. The report noted that the City relied on $1.4 billion in
non-recurring resources to achieve budget balance in the 1996 fiscal year and,
as a result, future projected gaps have increased to the largest the City has
ever faced. The report projected budget gaps of $74 million, $1.8 billion, $2.7
billion and $3.5 billion, and identified additional risks of $774 million, $1.3
billion, $1.0 billion and $1.1 billion, for the 1997 through 2000 fiscal years,
respectively. The principal risks identified in the report relate to (i)
uncertain State education aid and mandate relief, and unspecified expenditure
reductions, relating to BOE, totaling $327 million in the 1997 fiscal year and
$402 million in each of the 1998, 1999 and 2000 fiscal years; (ii) the receipt
of Port Authority lease payments totaling $314 million and $226 million in the
1997 and 1998 fiscal years, respectively; (iii) State approval of a four-year
extension to the City's personal income tax surcharge which would generate
revenues of $171 million, $447 million, $478 million and $507 million in the
1997 through 2000 fiscal years, respectively; and (iv) the receipt of $200
million in the 1998 fiscal year in connection with a proposed sale of the New
York Coliseum. The report noted that the large future budget gaps result
primarily from tax cuts and the cost of labor agreements, and that revenues are
projected to increase 1.2% per year during the period covered by the Financial
Plan, while expenditures are projected to increase 6% per year. The report
further noted that the City's economy is heavily dependent on profits in the
securities sector, which are volatile, and that there is a strong likelihood of
a downturn in the national and local economies during the period of the
Financial Plan, which creates a risk to City tax collections beyond those
quantified in the report. In addition, the report noted that HHC could face a
budget gap of approximately $370 million for the 1997 fiscal year, resulting
from lower hospital utilization and other factors, and, with respect to the
capital plan, the report noted that the City anticipates funding over the next
four years of approximately $5.7 billion which is uncertain, including financing
from the proposed sale of the water and sewer system, savings from amendments to
the Wicks Law and the proceeds from the sale of bonds issued by the proposed
Infrastructure Finance Authority.
On July 18, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $594 million, $1.1 billion,
$851 million and $813 million, for the 1997 fiscal year, the 1998 fiscal year,
the 1999 fiscal year and fiscal year 2000, respectively. The principal risks
identified in the report included (i) revenues from the proposed extension of
the 12.5% personal income tax surcharge totaling $171 million, $394 million,
$419 million and $445 million in the 1997 through 2000 fiscal years,
respectively, which requires State legislation; (ii) implementation by BOE of
various actions, totaling $56 million in the 1997 fiscal year and $334 million
in each of the 1998 through 2000 fiscal years, which include unspecified
reductions and uncertain State funding; (iii) the receipt of $314 million and
$226 million from the Port Authority in the 1997 and 1998 fiscal years,
respectively, which is the subject of arbitration; and (iv) the potential for
greater than forecast overtime spending totaling between $71 and $77 million in
each of the 1997 through 2000 fiscal years. Taking into account the risks
identified in the report and the unprecedented gaps projected in the Financial
Plan, the Control Board identified projected gaps of $2.8 billion, $3.5 billion
and $4.2 billion for the 1998 fiscal year, the 1999 fiscal year and fiscal year
2000, respectively. The report concluded that the City has not addressed its
underlying problems, which include inadequate and unstable revenue growth, high
debt service expenditures and increasing costs of health care and employee
fringe benefits. The report noted that by fiscal year 2000, City-funded revenues
will have grown by only 6.1% since the 1996 fiscal year, which is substantially
below the expected rate of inflation, while expenditures are expected to grow at
about the expected rate of inflation. The report noted that this problem is
increased by the volatility and cyclicality of the City's tax revenues, which do
not grow uniformly from one year to the next and which are sensitive to
fluctuations of the securities industry. The report further noted that the City
is approaching the limit on outstanding general obligation debt permitted under
the State Constitution and, as a result, has proposed the creation of the
Infrastructure Finance Authority. In addition, the report stated that the City's
structural imbalance has led
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to insufficient funding for maintaining the existing capital plant through the
expense budget, and questioned whether the current capital plan is affordable
over the long term.
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 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.
On December 17, 1996, the Control Board issued a report noting that the
City's general tax revenues are growing much more slowly than the City's
expenditures, which will make it increasingly difficult to balance the budget.
On the same day, the staff of the City Comptroller issued a report which tended
to support the Control Board report, finding that the rate of growth of personal
income in the City was much lower than the national rate.
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 has issued $2.4 billion of short-term obligations for
fiscal year 1997 to finance the current estimate of its seasonal cash flow needs
for the 1997 fiscal year. Seasonal financing requirements for the 1996 fiscal
year increased to $2.4 billion from $2.2 billion and $1.75 billion in the 1995
and 1994 fiscal years, respectively. Seasonal financing requirements were $1.4
billion and $2.25 billion in the 1993 and 1992 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes exceeding those expected early in
such fiscal years.
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 1997-2000 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, 1996 amounted to approximately $2.8 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 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
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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. On November 5, 1996,
Fitch removed the City's general obligation bonds from FitchAlert although Fitch
stated that the outlook remains negative. 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-.
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APPENDIX D
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 1,071 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 1995 New Jersey ranked second among
the states in per capita personal income ($29,848).
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 8.5% during
1992. The unemployment rate fell to an average of 6.4% in 1995 and 6.1% for the
four-month period from May 1996 through August 1996.
During the recovery period as a whole, May 1992 to August 1996, New Jersey
experienced an employment gain of 200,700, a recovery of 77% of the jobs lost
during the recession. Employment growth was particularly strong in business
services and its personnel supply component with increases of 17,500 and 8,100,
respectively, in the 12-month period ended August 1996. 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. There can be no assurance that New Jersey's
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
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. There are presently $550 million of tax and revenue anticipation notes
outstanding, which mature on June 13, 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 in
Trenton 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, (iii) two parking lots,
certain infrastructure improvements and related elements located at Liberty
State Park in the City of Jersey City and (iv) the New Jersey Performing Arts
Center in Newark. 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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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 amount 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, 1996.
Maximum Annual
Debt Service
Subject to
Moral
Outstanding Obligation
----------- -------------
New Jersey Housing and Mortgage
Finance Agency $408,960,591.18 $37,344,151.04
South Jersey Port Corporation 81,260,000.00 7,365,446.25
Higher Education Assistance Authority 98,991,064.00 12,829,640.45
--------------- --------------
$589,211,655.18 $57,539,237.74
=============== ==============
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 1996,
New Jersey
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has made appropriations totalling $89,126,084.25 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 $112,996,064 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, 1996 there were approximately $463,310,000
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 made by the New Jersey Legislature and there is no
requirement that the Legislature make such appropriations. On May 30, 1995, the
New Jersey Legislature 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.
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SUMMARY OF OTHER NEW JERSEY RELATED OBLIGATIONS
AS OF JUNE 30, 1995
Type of Issue Outstanding
------------- -----------
Lease Financing
MCIA .................................................... $ 89,090,000.00
EDA ..................................................... 142,300,202.20
NJBA .................................................... 496,594,928.57
State COP ............................................... 147,045,000.00
EFA ...................................................... 305,330,000.00
Market Transition Facility ............................... 705,270,000.00
State-Supported School and County
College Bonds ........................................... 71,814,649.00
Moral Obligation ......................................... 589,211,655.18
Sports Authority ......................................... 591,200,000.00
TTFA ..................................................... 1,875,360,000.00
Economic Recovery Fund Bonds ............................. 229,892,868.90
......................................................... -----------------
TOTAL .................................................... 5,243,109,303.85
=================
Subsequent Issues Since June 30, 1996 Par Amount Date of Issue
- ------------------------------------- ---------- -------------
EDA(1) $ 62,910,000 8/15/96
TTFA 714,340,000 10/30/96
(1) A portion of 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 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
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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; appropriations of private and public
dedicated funds; 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 Laws of 1991 of New Jersey 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 funded by Fiscal Year Adjustment
Bonds. 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. The Local
Finance Board must confirm the actual deficit experienced by the municipality.
The municipality may then issue Fiscal Year Adjustment Bonds to finance the
deficit on a permanent basis.
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, 1995. No New Jersey municipality or county has defaulted on the
payment of interest or principal on any outstanding debt obligation since the
1930's.
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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-15 et seq. (the "School Act"). The State-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
State-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
State-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 must 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 current 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 may order remedial action. If necessary, the
Commissioner is authorized to order changes in the school district's budget.
In State-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
D-7
<PAGE>
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 State-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 150,000, 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 but not more than 150,000 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 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.
D-8
<PAGE>
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 $208,642,750 by various school districts as of June 30, 1996 and
$899,586,220 by various municipalities as of June 30, 1996.
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 for 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, 1996, the
book value of the Fund's assets aggregated $88,816,968 and the reserve, computed
as of June 30, 1996, amounted to $40,363,607. 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 oversight 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, 1995 there were 195 locally created authorities with a total
outstanding capital debt of $7,149,326,992 (figures do not include housing
authorities and redevelopment agencies). This amount reflects outstanding bonds,
notes and loans payable by the authorities as of their respective fiscal years
ended nearest to June 30, 1995.
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
D-9
<PAGE>
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 requires that a funding formula be enacted by December 31, 1996 which
would close the spending gap between poor urban school districts and wealthy
suburban school districts by fiscal year 1998; 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; Camden Co. v. Waldman et al., consolidated
with similar suits filed by fourteen other 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; the counties filed notices of
Petition for Certification to the New Jersey Supreme Court; 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; Affiliated FM Insurance Company et al. v. State of New
Jersey et al., an 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; and C. F. et al. v. Fauver et al., a class action in federal
district court by prisoners with serious mental disorders who are confined
within the facilities of New Jersey Department of Corrections seeking injunctive
relief in the form of changes to the manner in which mental health services are
provided to inmates.
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 Jersey authorities,
counties, municipalities and school districts, which have potential for either a
significant loss of revenue or significant unanticipated expenditures.
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
D-10
<PAGE>
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 Form of Proposed Custodian Agreement. (1)
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. (4)
11 Consent of Price Waterhouse LLP (4)
12 None.
13 Form of Share Purchase Agreement. (3)
14 None.
15 None.
16 Schedule for Computation for Each Performance Quotation. (4)
18 Not Applicable
24 Powers of Attorney (4)
27 Financial Data Schedules (4)
- --------------------
(1) Filed as an exhibit to the Registration Statement on Form N-1A of the
Registrant (File No. 333-13319) as filed with the Securities and Exchange
Commission on October 2, 1996.
(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) Filed as an exhibit to Pre-Effective Amendment No. 1 as filed with the
Securities and Exchange Commission on November 15, 1996.
(4) Filed herewith
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 December 1, 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 Pre-Effective Amendment
to its 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 18th day of December, 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 December 18, 1996
- ------------------------------
Fergus Reid, III
/s/ H. Richard Vartabedian President December 18, 1996
- ------------------------------ and Trustee
H. Richard Vartabedian
/s/ Martin R. Dean Treasurer and December 18, 1996
- ------------------------------ Principal Financial
Martin R. Dean Officer
/s/ Richard E. Ten Haken Trustee December 18, 1996
- ------------------------------
Richard E. Ten Haken
/s/ William J. Armstrong Trustee December 18, 1996
- ------------------------------
William J. Armstrong
/s/ John R.H. Blum Trustee December 18, 1996
- ------------------------------
John R.H. Blum
/s/ Joseph J. Harkins Trustee December 18, 1996
- ------------------------------
Joseph J. Harkins
/s/ Stuart W. Cragin, Jr. Trustee December 18, 1996
- ------------------------------
Stuart W. Cragin, Jr.
/s/ Irving L. Thode Trustee December 18, 1996
- ------------------------------
Irving L. Thode
/s/ W. Perry Neff Trustee December 18, 1996
- ------------------------------
W. Perry Neff
/s/ Roland R. Eppley, Jr. Trustee December 18, 1996
- ------------------------------
Roland R. Eppley, Jr.
/s/ W.D. MacCallan Trustee December 18, 1996
- ------------------------------
W.D. MacCallan
C-8
<PAGE>
Exhibit
Number
- --------
10 Opinion Regarding Legality of Securities Being Registered
11 Consent of Price Waterhouse LLP
16 Schedule for Computation for Each Performance Quotation
24 Powers of Attorney
27 Financial Data Schedules
PEABODY & BROWN
101 Federal Street
Boston, Massachusetts 02110-1832
(617) 345-1000
December 17, 1996
Securities and Exchange Commission
450 Fifth St., N.W.
Washington, DC 20549
Re: Mutual Fund Select Trust
Vista Select Intermediate Tax Free Income Fund
Vista Select New Jersey Tax Free Income Fund
Vista Select New York Tax Free Income Fund
Vista Select Tax Free Income Fund
Ladies and Gentleman:
We have acted as special Massachusetts counsel to Mutual Fund Select
Trust, a Massachusetts business trust (the "Trust") currently consisting of the
above-referenced four series (the "Funds") on various general matters. This
opinion is written in reference to the shares of beneficial interest, $0.001
par value (the "Shares") of the Funds, to be offered and sold pursuant to a
Registration Statement on Form N-1A (registration no. 333-13319 and 811-7841)
filed by the Trust pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "Registration Statement").
We have reviewed, insofar as it relates or pertains to each of the Funds,
the Registration Statement. We have also examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents,
records and other instruments we have deemed necessary or appropriate for the
purposes of this opinion. For purposes of such examination, we have assumed the
genuineness of all signatures and original documents and the conformity to
original documents of all copies submitted.
Based upon the foregoing, we are of the opinion that the Shares have been
duly and validly authorized and, when issued and sold in accordance with the
Trust's Declaration of Trust and Registration Statement, will be legally issued,
fully paid and non-assessable.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
/s/ Peabody & Brown
PEABODY & BROWN
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 2 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 18, 1996, relating to the statement of assets and liabilities 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 (constituting Mutual Fund Select Trust) which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Independent
Accountants" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 18, 1996
VISTA SELECT INTERMEDIATE TAX FREE INCOME FUND
BEGINNING ENDING
TOTAL REDEMPTION REDEMPTION
RETURN VALUE/NAV VALUE/NAV
1 YEAR 4.27 10.70 10.60
5 YEAR 7.08 9.81 10.60
10 YEAR 7.33 9.07 10.60
SINCE
INCEPTION N/A N/A N/A
The net change in the value of an assumed initial investment of $10,000 for the
ten year period of business of the predecessor common trust fund ending August
31, 1996 would be $20,279.
Page 1
<PAGE>
VISTA SELECT TAX FREE INCOME FUND
BEGINNING ENDING
TOTAL REDEMPTION REDEMPTION
RETURN VALUE/NAV VALUE/NAV
1 YEAR 5.18 12.74 12.65
5 YEAR 7.03 12.20 12.65
10 YEAR 7.66 11.95 12.65
SINCE
INCEPTION N/A N/A N/A
The net change in the value of an assumed initial investment of $10,000 for the
ten year period of business of the predecessor common trust fund ending August
31, 1996 would be $20,914.
Page 2
<PAGE>
VISTA SELECT NEW YORK TAX FREE INCOME FUND
BEGINNING ENDING
TOTAL REDEMPTION REDEMPTION
RETURN VALUE/NAV VALUE/NAV
1 YEAR 4.90 7.06 7.02
5 YEAR 6.73 6.72 7.02
10 YEAR 7.07 6.61 7.02
SINCE
INCEPTION N/A N/A N/A
The net change in the value of an assumed initial investment of $10,000 for the
ten year period of business of the predecessor common trust fund ending August
31, 1996 would be $19,797.
Page 3
<PAGE>
VISTA SELECT NEW JERSEY TAX FREE INCOME FUND
BEGINNING ENDING
TOTAL REDEMPTION REDEMPTION
RETURN VALUE/NAV VALUE/NAV
1 YEAR 3.97 109.51 9.96
5 YEAR 6.17 103.51 9.96
10 YEAR N/A N/A N/A
SINCE
INCEPTION 6.69 100.00 9.96
The net change in the value of an assumed initial investment of $10,000 for the
ten year period of business of the predecessor common trust fund ending August
31, 1996 would be $14,993.
Page 4
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints H. Richard Vartabedian,
Lee Schultheis, Ann Bergin, Martin Dean and George Martinez and each of them,
with full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement on Form N-1A, and any and all amendments thereto, filed by Mutual Fund
Select Group or Mutual Fund Select Trust (the "Trusts") with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended, and any and all instruments which such
attorneys and agents, or any of them, deem necessary or advisable to enable the
Trusts to comply with such Acts, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Fergus Reid, III
--------------------------
Fergus Reid, III
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, Lee
Schultheis, Ann Bergin, Martin Dean and George Martinez and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement on Form N-1A, and any and all amendments thereto, filed by Mutual Fund
Select Group or Mutual Fund Select Trust (the "Trusts") with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended, and any and all instruments which such
attorneys and agents, or any of them, deem necessary or advisable to enable the
Trusts to comply with such Acts, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction and the undersigned hereby ratifies and confirms as
his own act and deed any and all that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ H. Richard Vartabedian
--------------------------
H. Richard Vartabedian
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ William J. Armstrong
--------------------------
William J. Armstrong
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ John R.H. Blum
--------------------------
John R.H. Blum
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Stuart W. Cragin, Jr.
--------------------------
Stuart W. Cragin, Jr.
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Joseph J. Harkins
--------------------------
Joseph J. Harkins
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Richard E. Ten Haken
--------------------------
Richard E. Ten Haken
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Irving L. Thode
--------------------------
Irving L. Thode
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ W. Perry Neff
--------------------------
W. Perry Neff
<PAGE>
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian, Lee Schultheis, Ann Bergin, Martin Dean and George Martinez
and each of them, with full powers of substitution as his true and lawful
attorneys and agents to execute in his name and on his behalf in any and all
capacities the Registration Statement on Form N-1A, and any and all amendments
thereto, filed by Mutual Fund Select Group or Mutual Fund Select Trust (the
"Trusts") with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trusts to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction and the
undersigned hereby ratifies and confirms as his own act and deed any and all
that such attorneys and agents, or any of them, shall do or cause to be done by
virtue hereof. Any one of such attorneys and agents have, and may exercise, all
of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of December, 1996.
/s/ Roland R. Eppley, Jr.
--------------------------
Roland R. Eppley, Jr.
<TABLE> <S> <C>
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<NET-CHANGE-FROM-OPS> 0
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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