<PAGE> 1
MUNICIPAL FUND FOR
NEW YORK INVESTORS, INC.
("New York Money Fund")
<TABLE>
<S> <C>
Bellevue Park Corporate Center For purchase and redemption orders call:
400 Bellevue Parkway 800-441-7450 (in Delaware: 302-791-5350);
Suite 100 For current yield information call: 800-821-6006
Wilmington, Delaware 19809 (Code: New York Money-53; New York Money Dollar-55;
New York Money Plus-56).
For other information call: 800-821-7432 OR VISIT OUR
WEB SITE AT WWW.PIF.com.
</TABLE>
Municipal Fund for New York Investors, Inc. (the "Fund") is a no-load,
open-end investment company. It is designed primarily to provide New York
institutional investors and their customers with as high a level of current
interest income that is exempt from federal income tax and, to the extent
possible, from New York State and New York City personal income taxes as is
consistent with the preservation of capital and relative stability of principal.
Portfolio securities held by the Fund will generally have remaining maturities
of 13 months or less and will be determined by the Fund's investment adviser to
have minimal credit risk. (See "Investment Objective and Policies.")
BlackRock Institutional Management Corporation ("BIMC") serves as the Fund's
adviser. PFPC Inc. ("PFPC") and Provident Distributors, Inc. ("PDI") serve as
the Fund's administrators. PDI also serves as the Fund's distributor. PNC Bank,
National Association ("PNC Bank") serves as the Fund's custodian. Shares may not
be purchased by individuals directly but, as indicated above, institutional
investors, such as banks and broker-dealers, may purchase shares for accounts
maintained by individuals.
THE FUND MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE
ISSUER. THEREFORE, INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN
OTHER TYPES OF MONEY MARKET FUNDS.
------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR
ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES OF
THE FUND ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED. THERE CAN BE NO ASSURANCE
THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
------------------------
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information has been filed with the
Securities and Exchange Commission. The current Statement of Additional
Information is available to investors without charge by calling the Fund at
800-821-7432. The Prospectus and Statement of Additional Information are also
available for reference, along with other related materials, on the SEC Internet
Web Site (http://www.sec.gov). The Statement of Additional Information, as may
be amended from time to time, is incorporated by reference in its entirety into
this Prospectus.
------------------------
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.
------------------------
November 30, 1998
<PAGE> 2
BACKGROUND AND EXPENSE INFORMATION
The Fund was organized as a Maryland corporation on March 4, 1983 and
currently offers three separate series of shares--New York Money ("Money"), New
York Money Dollar ("Dollar") and New York Money Plus ("Plus"). The public
offering of Money shares commenced on August 22, 1983, and the public offering
of Dollar and Plus shares commenced on October 8, 1985. Shares of each series
represent equal pro rata interests in a single portfolio of high quality,
short-term, tax-exempt obligations maintained by the Fund (See "Investment
Objective and Policies"), except that Dollar and Plus shares bear service fees
payable by the Fund (at the rate of .25% per annum) to institutional investors
for distribution and/or support services they provide to the beneficial owners
of such shares. (See "Management of the Fund--Service Organizations.") Because
of the service fees borne by Dollar and Plus shares, the net yield on such
shares can be expected, at any given time, to be approximately .25% lower than
the net yield on Money shares.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
PLUS
MONEY DOLLAR SHARES
SHARES SHARES (ESTIMATED)
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------
(as a percentage of average net assets)
Management Fees After Fee Waivers.................. .06% .06% .06%
12b-1 Fees......................................... -- -- .25%
Other Expenses..................................... .14% .39% .14%
Administration Fees After Fee Waivers......... .06% .06% .06%
Non-12b-1 Fees................................ -- .25% --
Other Expenses................................ .08% .08% .08%
==== ==== ====
Total Fund Operating
Expenses After
Fee Waivers...................................... .20% .45% .45%
</TABLE>
- ---------------
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) a hypothetical 5% annual
return and (2) redemption at the end of each time
period with respect to the following shares:
Money Shares........................................ $2 $ 6 $11 $26
Dollar Shares....................................... $5 $14 $25 $57
Plus Shares......................................... $5 $14 $25 $57
</TABLE>
The foregoing tables are intended to assist investors in understanding the
expenses the Fund pays. Investors bear these expenses indirectly since they
reduce the amount of income paid by the Fund to investors as dividends. In
addition, institutional investors may charge their customers fees for providing
services in connection with investments in the Fund's Dollar and Plus shares.
(For more complete descriptions of the various costs and expenses, see
"Management of the Fund" in the Prospectus and Statement of Additional
Information.) For the fiscal year ended July 31, 1998, absent
2
<PAGE> 3
voluntary fee waivers by the Fund's service providers, "Total Fund Operating
Expenses" for the Fund's Money, Dollar and Plus shares would have been .48%,
.73%, and .73% (estimated), respectively, of the Fund's average daily net
assets. The investment advisor and administrators may from time to time waive
the advisory and administration fees otherwise payable to them or may reimburse
the Fund for its operating expenses. The Fund has received a No-Action Letter
from the SEC that will permit the Fund to receive credits from its custodian, an
affiliate of the Fund's investment adviser, for certain cash balances held by
the custodian. If implemented, such credits may reduce custodian fees payable by
the Fund but may not reduce the Fund's operating expense ratio. The foregoing
table has not been audited by the Fund's independent accountants.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
3
<PAGE> 4
FINANCIAL HIGHLIGHTS
The tables of "Financial Highlights" below, a part of the Fund's financial
statements, set forth certain information concerning the historic investment
results for Money, Dollar and Plus shares. The financial highlights for the
fiscal years ended July 31, 1998, 1997, 1996, 1995 and 1994 have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, whose report
thereon is incorporated by reference into the Statement of Additional
Information along with the financial statements. This information should be read
in conjunction with the Fund's financial statements and notes for the year ended
July 31, 1998. More information about the performance of the Fund is also
contained in the Annual Report to Shareholders, which may be obtained without
charge by calling 800-821-7432.
FINANCIAL HIGHLIGHTS
(For a Fund share outstanding throughout each period)
<TABLE>
<CAPTION>
MONEY SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------- --------------- --------------- --------------- ---------------
Income From Investment Operations:
Net Investment Income................. 0.0336 0.0334 0.0339 0.0338 0.0226
--------------- --------------- --------------- --------------- ---------------
Total From Investment Operations...... 0.0336 0.0334 0.0339 0.0338 0.0226
--------------- --------------- --------------- --------------- ---------------
Less Distributions:
Dividends From Net Investment
Income.............................. (0.0336) (0.0334) (0.0339) (0.0338) (0.0226)
--------------- --------------- --------------- --------------- ---------------
Total Distributions............... (0.0336) (0.0334) (0.0339) (0.0338) (0.0226)
--------------- --------------- --------------- --------------- ---------------
Net Asset Value, End of Year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============== =============== =============== =============== ===============
Total Returns............................ 3.41% 3.39% 3.44% 3.43% 2.29%
Ratios/Supplemental Data:
Net Assets, End of Year $(000).......... 318,091 269,821 272,145 246,650 279,483
Ratios of Expenses to Average Net
Assets(1)............................. 0.20% 0.20% 0.20% 0.20% 0.20%
Ratios of Net Investment Income to
Average Daily Net Assets.............. 3.35% 3.34% 3.37% 3.36% 2.28%
<CAPTION>
MONEY SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
7/31/93 7/31/92 7/31/91 7/31/90 7/31/89
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------- --------------- --------------- --------------- ---------------
Income From Investment Operations:
Net Investment Income................. 0.0230 0.0321 0.0441 0.0535 0.0548
--------------- --------------- --------------- --------------- ---------------
Total From Investment Operations...... 0.0230 0.0321 0.0441 0.0535 0.0548
--------------- --------------- --------------- --------------- ---------------
Less Distributions:
Dividends From Net Investment
Income.............................. (0.0230) (0.0321) (0.0441) (0.0535) (0.0548)
--------------- --------------- --------------- --------------- ---------------
Total Distributions............... (0.0230) (0.0321) (0.0441) (0.0535) (0.0548)
--------------- --------------- --------------- --------------- ---------------
Net Asset Value, End of Year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============== =============== =============== =============== ===============
Total Returns............................ 2.33% 3.26% 4.50% 5.48% 5.62%
Ratios/Supplemental Data:
Net Assets, End of Year $(000).......... 204,670 267,655 284,834 310,289 287,641
Ratios of Expenses to Average Net
Assets(1)............................. 0.25% 0.30% 0.30% 0.30% 0.30%
Ratios of Net Investment Income to
Average Daily Net Assets.............. 2.31% 3.20% 4.42% 5.35% 5.45%
</TABLE>
- ---------------
(1) Annualized operating expense ratios before waivers of fees by the Investment
Adviser and Administrator for Money shares for the years ended July 31,
1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990 and 1989 were .48%
.49%, .50%, .49%, .48%, .51%, .49%, .49%, .49%, and .49%, respectively.
4
<PAGE> 5
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DOLLAR SHARES
----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/98(1) 7/31/97 7/31/96(1) 7/31/95(1) 7/31/94(1) 7/31/93 7/31/92
---------- -------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------ -------- -------- --------
Income From Investment Operations:
Net Investment Income................ 0.0303 0.0309 0.0089 0.000 0.0127 0.0205 0.0296
-------- -------- -------- ------ -------- -------- --------
Total From Investment Operations..... 0.0303 0.0309 0.0089 0.000 0.0127 0.0205 0.0296
-------- -------- -------- ------ -------- -------- --------
Less Distributions:
Dividends From Net Investment
Income............................. (0.0303) (0.0309) (0.0089) 0.00 (0.0127) (0.0205) (0.0296)
-------- -------- -------- ------ -------- -------- --------
Total Distributions................ (0.0303) (0.0309) (0.0089) 0.00 (0.0127) (0.0205) (0.0296)
-------- -------- -------- ------ -------- -------- --------
Net Asset Value, End of Year............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ====== ======== ======== ========
Total Returns........................... 3.16%(2) 3.14% 3.05%(2) -- 1.96%(2) 2.08% 3.01%
Ratios/Supplemental Date:
Net Assets, End of Year $(000)......... -- 1,148 20 -- -- 46,509 50,094
Ratios of Expenses to Average Net
Assets(3)............................ .45%(2) 0.45% 0.45%(2) -- 0.45%(2) 0.50% 0.55%
Ratios of Net Investment Income to
Average Daily Net Assets............. 3.11%(2) 3.09% 3.07%(2) -- 1.94%(2) 2.06% 2.95%
<CAPTION>
DOLLAR SHARES
------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
7/31/91 7/31/90 7/31/89
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year...... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income................ 0.0416 0.0510 0.0523
-------- -------- --------
Total From Investment Operations..... 0.0416 0.0510 0.0523
-------- -------- --------
Less Distributions:
Dividends From Net Investment
Income............................. (0.0416) (0.0510) (0.0523)
-------- -------- --------
Total Distributions................ (0.0416) (0.0510) (0.0523)
-------- -------- --------
Net Asset Value, End of Year............ $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Returns........................... 4.25% 5.23% 5.37%
Ratios/Supplemental Date:
Net Assets, End of Year $(000)......... 54,613 69,705 70,839
Ratios of Expenses to Average Net
Assets(3)............................ 0.55% 0.55% 0.55%
Ratios of Net Investment Income to
Average Daily Net Assets............. 4.17% 5.10% 5.20%
</TABLE>
- ---------------
(1) There were no Dollar shares outstanding during the period from March 28,
1994 to April 14, 1996 and July 21, 1998 to July 31, 1998.
(2) Annualized.
(3) Annualized operating expense ratios before waivers of fees by the Investment
Adviser and Administrator for Dollar shares for the years ended July 31,
1998, 1997, 1996, 1994, 1993, 1992, 1991, 1990 and 1989 were .73%
(annualized), .74%, .75% (annualized), .73% (annualized), .76%, .74%, .74%,
.74% and .74%, respectively.
5
<PAGE> 6
<TABLE>
<CAPTION>
PLUS SHARES
----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/98(1) 7/31/97(1) 7/31/96(1) 7/31/95(1) 7/31/94 7/31/93 7/31/92
---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year... $1.00 $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ------ ------- -------- -------- --------
Income From Investment Operations:
Net Investment Income............. 0.00 0.00 0.00 0.0090 0.0201 0.0205 0.0296
----- ----- ------ ------- -------- -------- --------
Total From Investment
Operations...................... 0.00 0.00 0.00 0.0090 0.0201 0.0205 0.0296
----- ----- ------ ------- -------- -------- --------
Less Distributions:
Dividends From Net Investment
Income.......................... 0.00 0.00 0.00 (0.0090) (0.0201) (0.0205) (0.0296)
----- ----- ------ ------- -------- -------- --------
Total Distributions............. 0.00 0.00 0.00 (0.0090) (0.0201) (0.0205) (0.0296)
----- ----- ------ ------- -------- -------- --------
Net Asset Value, End of Year......... $1.00 $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ====== ======= ======== ======== ========
Total Returns........................ -- -- -- 2.69%(2) 2.04% 2.08% 3.01%
Ratios/Supplemental Data:
Net Assets, End of Year $(000)...... -- -- -- -- 435 1,481 243
Ratios of expenses to Average Net
Assets(3)......................... -- -- -- 0.45%(2) 0.45% 0.50% 0.55%
Ratios of Net Investment Income to
Average Daily Net Assets.......... -- -- -- 2.64%(2) 2.03% 2.06% 2.95%
<CAPTION>
PLUS SHARES
------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
7/31/91 7/31/90 7/31/89
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income............. 0.0416 0.0510 0.0523
-------- -------- --------
Total From Investment
Operations...................... 0.0416 0.0510 0.0523
-------- -------- --------
Less Distributions:
Dividends From Net Investment
Income.......................... (0.0416) (0.0510) (0.0523)
-------- -------- --------
Total Distributions............. (0.0416) (0.0510) (0.0523)
-------- -------- --------
Net Asset Value, End of Year......... $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Returns........................ 4.25% 5.23% 5.37%
Ratios/Supplemental Data:
Net Assets, End of Year $(000)...... 461 404 513
Ratios of expenses to Average Net
Assets(3)......................... 0.55% 0.55% 0.55%
Ratios of Net Investment Income to
Average Daily Net Assets.......... 4.17% 5.10% 5.20%
</TABLE>
- ---------------
(1) There were no Plus shares outstanding during the period from December 2,
1994 to July 31, 1998.
(2) Annualized.
(3) Annualized operating expense ratios before waivers of fees by the Investment
Adviser and Administrator for Plus shares for the years ended July 31, 1995,
1994, 1993, 1992, 1991, 1990 and 1989 were .73% (annualized), .73%, .76%,
.74%, .74%, .74% and .74%, respectively.
6
<PAGE> 7
INVESTMENT OBJECTIVE AND POLICIES
IN GENERAL
The Fund is a no-load, open-end, non-diversified investment company which
has an investment objective to provide investors with as high a level of current
interest income that is exempt from federal income tax and, to the extent
possible, from New York State and New York City personal income taxes as is
consistent with the preservation of capital and relative stability of principal.
There can be, of course, no assurance that the Fund will achieve its investment
objective. The Fund has a distribution plan applicable to one class of its
shares and a service plan applicable to another class of its shares. (See
"Service Organizations.")
Substantially all of the Fund's assets are invested in debt obligations
issued by or on behalf of the State of New York and other states, territories,
and possessions of the United States, the District of Columbia, and their
respective authorities, agencies, instrumentalities and political subdivisions,
and tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests
("Municipal Obligations"). Dividends paid by the Fund that are derived from
interest on obligations that is exempt from taxation under the Constitution or
statutes of New York ("New York Municipal Obligations") are exempt from regular
federal, New York State and New York City personal income tax. New York
Municipal Obligations include municipal securities issued by the State of New
York and its political sub-divisions, as well as certain other governmental
issuers such as the Commonwealth of Puerto Rico. Dividends derived from interest
on Municipal Obligations other than New York Municipal Obligations are exempt
from federal income tax but may be subject to New York State and New York City
personal income tax. (See, however, "Taxes" below concerning treatment of
exempt-interest dividends paid by the Fund for purposes of the federal
alternative minimum tax applicable to particular classes of investors.) The Fund
expects that, except during temporary defensive periods or when acceptable
securities are unavailable for investment by the Fund, the Fund's assets will be
invested primarily in New York Municipal Obligations, although the amount of the
Fund's assets invested in such securities will vary from time to time.
The Fund will not knowingly purchase securities the interest on which is
subject to federal income tax; however, the Fund may hold uninvested cash
reserves pending investment during temporary defensive periods or, if in the
opinion of the Fund's investment adviser, suitable tax-exempt obligations are
unavailable. Uninvested cash reserves will not earn income.
The Fund invests in Municipal Obligations which are determined by the
Fund's investment adviser to present minimal credit risks pursuant to guidelines
approved by the Fund's Board of Directors pursuant to Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act"). Pursuant to these
guidelines, the Fund is authorized to purchase instruments that are determined
to have minimum credit risk and which are "Eligible Securities" under the Rule.
"Eligible securities" are (i) instruments which are rated at the time of
purchase in one of the top two rating categories by two unaffiliated nationally
recognized statistical rating organizations ("Rating Organizations"), (ii)
instruments rated in one of the top two rating categories by one such Rating
Organizations (if only one such organization rates the instrument), (iii)
instruments issued by issuers with short-term debt having such ratings, (iv)
unrated instruments determined by the investment adviser, pursuant to procedures
approved by the Board of Directors, to be of comparable quality to such
instruments and (v) in certain cases instruments guaranteed by guarantors which
meet the criteria in classes (i), (ii) or (iii), (See the Appendix to the
Statement of Additional Information for a description of applicable ratings of
the Rating Organizations).
7
<PAGE> 8
The Fund intends to use its best efforts to maintain its net asset value at
$1.00 per share, and computes its net asset value using the amortized cost
method. In connection with its use of this valuation method, the Fund limits the
dollar-weighted average maturity of its portfolio to not more than 90 days and
the remaining maturity of each portfolio security to not more than 13 months
(with certain exceptions).
The Fund's investment objective and the policies described herein may be
changed by its Board of Directors without the affirmative vote of the holders of
a majority of the Fund's outstanding shares, except that the Fund may not change
the following investment limitations without such a vote of shareholders. The
Fund may not:
1. Invest less than 80% of its assets in securities on which the
interest is exempt from federal income tax, except during defensive periods
or during periods of unusual market conditions.
2. Purchase the securities of any issuer if, as a result, more than 5%
of the value of the Fund's total assets would be invested in the securities
of such issuer, except that (a) up to 50% of the value of the Fund's total
assets may be invested without regard to this 5% limitation provided that
no more than 25% of the value of the Fund's total assets are invested in
the securities of any one issuer and (b) this 5% limitation does not apply
to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this limitation, a security is
considered to be issued by the governmental entity (or entities) whose
assets and revenues back the security, or, with respect to a private
activity bond that is backed only by the assets and revenues of a
non-governmental user, by such non-governmental user. In certain
circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee, except that a
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Fund, does not exceed 10% of the value of the
Fund's total assets.
3. Borrow money except from banks for temporary purposes and then in
amounts not in excess of 10% of the value of the Fund's assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of the Fund's
assets at the time of such borrowing. (This borrowing provision is not
intended for investment leverage, but solely to facilitate management of
the Fund's portfolio by enabling the Fund to meet redemption requests when
the liquidation of portfolio securities is deemed to be disadvantageous or
inconvenient, and hence the Fund may not purchase any portfolio securities
while its borrowings are outstanding.)
4. Invest more than 10% of the value of the Fund's total assets in
illiquid securities which may be illiquid due to legal or contractual
restrictions on resale or the absence of readily available market
quotations.
5. Purchase any securities except securities issued by the United
States, any state territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause more than
25% of the value of the Fund's total assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry.
Opinions relating to validity of Municipal Obligations and to the exemption
of interest thereon from federal income tax (and, with respect to New York
Municipal Obligations, to the exemption of
8
<PAGE> 9
interest thereon from New York State and New York City personal income taxes)
are rendered by bond counsel to the respective issuers at the time of issuance,
and opinions relating to the validity of and the tax-exempt status of payments
received by the Fund from tax-exempt derivatives are rendered by counsel to the
respective sponsors of such derivatives. The Fund and its investment adviser
will rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations that may be held
by the Fund are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities may include private activity bonds.
Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities.
The Fund's portfolio may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality that
created the issuer.
OTHER INVESTMENT PRACTICES
Municipal Obligations purchased by the Fund may include variable and
floating rate demand instruments issued by industrial development authorities
and other governmental entities and which provide for adjustments in the
interest rate on certain reset dates or whenever a specified interest rate index
changes, respectively. Variable and floating rate instruments are subject to the
credit quality standards described above. In some cases the Fund may require
that the obligation to pay the principal of the instrument be backed by a letter
or line of credit or guarantee. Adverse developments affecting the banking
industry generally or a particular bank or financial institution that has
provided its credit or guarantee with respect to a Municipal Obligation held by
the Fund, including a change in the credit quality of any such bank or financial
institution, could result in a loss to the Fund and adversely affect the value
of its shares. Such instruments may carry stated maturities in excess of 13
months provided that the maturity-shortening provisions stated in Rule 2a-7 are
satisfied. Although a particular variable or floating rate demand instrument may
not be actively traded in a secondary market, in some cases, the Fund may be
entitled to principal on demand and may be able to resell such instruments in
the dealer market.
The Fund may also purchase Municipal Obligations on a "when-issued" basis.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield. The Fund generally will not pay for
such securities or start earning interest on them until they are received.
Securities purchased on a when-issued basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. The Fund expects that commitments to purchase when-issued securities will
not exceed 25% of the value of its total assets
9
<PAGE> 10
absent unusual market conditions, and that a commitment by the Fund to purchase
when-issued securities will not exceed 45 days. The Fund does not intend to
purchase when-issued securities for speculative purposes but only in furtherance
of its investment objective.
In addition, the Fund may acquire "stand-by commitments" with respect to
Municipal Obligations held in its portfolio. Under a stand-by commitment, a
dealer agrees to purchase at the Fund's option specified Municipal Obligations
at a price equal to their amortized cost value plus accrued interest. The Fund
will acquire stand-by commitments solely to facilitate portfolio liquidity and
does not intend to exercise its rights thereunder for trading purposes.
RISK FACTORS
The Fund is concentrated in securities issued by the State of New York or
entities within the State of New York and therefore, investment in the Fund may
be riskier than an investment in other types of money market funds.
The Fund intends to follow the diversification standards set forth in the
1940 Act except to the extent, in the investment adviser's judgment, that
non-diversification is appropriate in order to maximize the percentage of the
Fund's assets that are New York Municipal Obligations. The investment return on
a non-diversified portfolio typically is dependent upon the performance of a
smaller number of issuers relative to the number of issuers held in a
diversified portfolio. In the event of changes in the financial condition of or
in the market's assessment of certain issuers, the Fund's maintenance of large
positions in the obligations of a small number of issuers may affect the value
of the Fund's portfolio to a greater extent than that of a diversified
portfolio.
Although the Fund does not presently intend to do so on a regular basis, it
may invest more than 25% of its assets in Municipal Obligations the interest on
which is paid solely from revenues of similar projects if such investment is
deemed necessary or appropriate by the Fund's investment adviser. To the extent
that the Fund's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the Fund will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the Fund's
assets were not so concentrated.
Certain other risks with respect to portfolio securities which may be held
by the Fund from time to time are discussed herein and in the Statement of
Additional Information.
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and the Fund's other service providers, or
persons with whom they deal, do not properly process and calculate date-related
information and data from and after January 1, 2000. This possibility is
commonly known as the "Year 2000 Problem." The Fund has been advised by the
Adviser, the Administrators and the Custodian that they are taking steps to
address the Year 2000 Problem with respect to the computer systems that they use
and to obtain assurances that comparable steps are being taken by the Fund's
other service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Fund.
SPECIAL CONSIDERATIONS AFFECTING THE FUND
The Fund's ability to achieve its investment objective is dependent upon
the ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York State
and New York City face long-term economic problems that could
10
<PAGE> 11
seriously affect their ability and that of other issuers of New York Municipal
Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowings abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowing and fewer markets for their outstanding debt obligations. Although,
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc.
("Moody's"), in recent years, the most recent actions of S&P and Moody's have
been to place the debt obligations of New York State and New York City on Credit
Watch with positive implications and to upgrade the debt obligations of New York
City respectively. Strong demand for New York Municipal Obligations has also at
times had the effect of permitting New York Municipal Obligations to be issued
with yields relatively lower, and after issuance, to trade in the market at
prices relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those issuers' existing obligations
and, possibly, in the obligations of other issuers of New York Municipal
Obligations. Although as of the date of this Prospectus, no issuers of New York
Municipal Obligations are in default with respect to the payment of their
Municipal Obligations, the occurrence of any such default could affect adversely
the market values and marketability of all New York Municipal Obligations and,
consequently, the net asset value of the Fund's portfolio.
Other considerations affecting the Fund's investments in New York Municipal
Obligations are summarized in the Statement of Additional Information.
PURCHASE OF SHARES
The Fund's shares are sold to institutional investors at the net asset
value per share next determined after receipt of a purchase order by PFPC, the
Fund's transfer agent.
Purchase orders for shares will be accepted by the Fund only on a day on
which both the New York Stock Exchange and the Federal Reserve Bank of
Philadelphia are open for business (a "Business Day"), and must be transmitted
to PFPC by telephone at 800-441-7450 (in Delaware: 302-791-5350) or through the
Fund's computer access program. Orders accepted by PFPC by Noon, Eastern Time,
will be executed the same day if PNC Bank, the Fund's Custodian, has received
payment by 4:00 P.M., Eastern Time, that day. Orders received after Noon,
Eastern Time and orders for which payment has not been received by 4:00 P.M.
Eastern Time, will not be accepted and notice thereof will be given to the
institution placing the order. Payment for shares may be made only in Federal
funds or other funds immediately available to PNC Bank. Payment for orders which
are not received or accepted will be returned after prompt inquiry by PNC Bank
to the sending institution.
The minimum initial investment is $5,000; however, broker-dealers and other
institutional investors may set a higher minimum for their customers. There is
no minimum subsequent investment. The Fund may in its discretion limit or reject
any order for shares.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Dollar or Plus shares. Institutions,
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<PAGE> 12
including banks regulated by the Comptroller of the Currency and investment
advisers and other money managers subject to the jurisdiction of the Securities
and Exchange Commission, the Department of Labor or state securities
commissions, should consult legal counsel before investing in Dollar or Plus
shares. (See also "Management of the Fund -- Banking Laws.")
REDEMPTION OF SHARES
REDEMPTION PROCEDURES
Redemption orders must be transmitted to PFPC by telephone in the manner
described under "Purchase of Shares." Shares are redeemed at the net asset value
per share next determined after receipt of the redemption order by PFPC. While
the Fund intends to use its best efforts to maintain the net asset value per
share of each of its series at $1.00, the proceeds paid upon redemption may be
more or less than the amount invested depending upon a share's net asset value
at the time of redemption.
Payment for redeemed shares for which a redemption order is accepted by
PFPC prior to Noon, Eastern Time, on a Business Day is normally made in Federal
funds wired to the redeeming shareholder on the same Business Day. Payment for
redeemed shares for which a redemption order is accepted by PFPC after Noon,
Eastern Time, on such a Business Day or on a day that PNC Bank is closed is
normally made in Federal funds wired to the redeeming shareholder on the next
Business Day that PNC Bank is open. The Fund reserves the right to wire
redemption proceeds within 7 days after receiving the redemption order if, in
the judgment of the Fund's administrator, an earlier payment could adversely
affect the Fund.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend or postpone the recordation of the
transfer of its shares) for such periods as are permitted under the 1940 Act.
The Fund reserves the right to redeem the shares of the Fund owned by a
shareholder at their net asset value if the value of such shares is less than
$4,000. Any such shareholder will first be notified in writing that its shares
have a value of less than $4,000 and be allowed 60 days to make an additional
investment before the redemption is processed by the Fund. The Fund may also
redeem shares involuntarily (and restrict the transfer of the shares) under
certain special circumstances described in the Statement of Additional
Information under "Additional Purchase and Redemption Information."
OTHER MATTERS
The Fund's net asset value per share for purposes of pricing purchase and
redemption orders is determined by BIMC as of Noon and 4:00 P.M., Eastern Time,
on each Business Day (excluding those holidays on which the Federal Reserve Bank
of Philadelphia or the New York Stock Exchange is closed). Currently, the
holidays which the New York Stock Exchange and the Federal Reserve Bank of
Philadelphia observe are New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
Additionally, the Federal Reserve Bank of Philadelphia is closed on Veterans'
Day and Columbus Day. The net asset value per share of each of the Fund's series
is the same and is calculated by adding the value of all of the Fund's portfolio
securities and other assets, subtracting liabilities (including the liability
for the expenses of each series and dividends declared with respect to each
series) and dividing the result by the number of the Fund's outstanding shares
of such series. Portfolio
12
<PAGE> 13
securities are valued on the basis of amortized cost. Under this method, the
Fund values a portfolio security at cost on the date of purchase and thereafter
assumes a constant amortization of any discount or premium until maturity of the
security. As a result, the value of the security for purposes of determining net
asset value normally does not change in response to fluctuating interest rates.
While the amortized cost method seems to provide certainty in portfolio
valuation, it may result in periods during which values, as determined by
amortized cost, are higher or lower than the amount the Fund would receive if it
sold the securities.
Shares of each of the Fund's series are sold and redeemed without charge by
the Fund, although Service Organizations (see below) and other institutional
investors purchasing or holding Fund shares for their customers' accounts may
charge customers for cash management and other services provided in connection
with their accounts including, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Such charges will reduce the yield of the Fund to such
customers. A customer should therefore read this Prospectus in light of the
terms governing its account with a Service Organization (or other institution)
before purchasing Fund shares. An institution purchasing or redeeming Fund
shares on behalf of its customers is responsible for transmitting orders to the
Fund in accordance with its agreements with the customers.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction
of its Board of Directors.
The directors of the Fund are as follows:
Francis E. Drake, Jr. is the retired Chairman of the Board and Chief
Executive Officer of Rochester Gas and Electric Corp.
Rodney D. Johnson is President of Fairmount Capital Advisors, Inc.
Thomas A. Melfe is Of Counsel at the law firm of Piper & Marbury LLP.
Anthony M. Santomero is the Richard K. Mellon Professor of Finance at
The Wharton School, University of Pennsylvania.
INVESTMENT ADVISER
BIMC, a majority-owned indirect subsidiary of PNC Bank, serves as the
Fund's investment adviser. BIMC is one of the largest bank managers of mutual
funds with assets currently under management in excess of $46 billion. BIMC was
organized in 1977 by PNC Bank to perform advisory services for investment
companies and has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809. PNC Bank is one of the largest bank managers of investments for
individuals in the United States, and together with its predecessors has been in
the business of managing the investments of fiduciary and other accounts since
1847. PNC Bank is a wholly-owned, indirect subsidiary of PNC Bank Corp. and has
its principal offices at 1600 Market Street, Philadelphia, Pennsylvania 19103.
In 1973, Provident National Bank (predecessor to PNC Bank) commenced advising
the first institutional money market mutual fund -- a U.S. dollar-denominated
constant net asset value fund -- offered in the United States.
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<PAGE> 14
PNC Bank Corp., a multi-bank holding company headquartered in Pittsburgh,
Pennsylvania, is one of the largest financial services organizations in the
United States, with banking subsidiaries in Pennsylvania, New Jersey, Delaware,
Ohio, Kentucky, Indiana, Massachusetts and Florida. Its major businesses include
corporate banking, consumer banking, real estate banking, mortgage banking and
asset management.
As investment adviser, BIMC manages the Fund's portfolio and is responsible
for all purchases and sales of the Fund's portfolio securities. BIMC also
maintains certain of the Fund's financial accounts and records and computes the
Fund's net asset value and net income. For the investment advisory services
provided and expenses assumed by it, BIMC is entitled to receive a fee, computed
daily and payable monthly at the annual rate of .20% of the Fund's average net
assets. BIMC and the administrators may from time to time reduce the investment
advisory and administration fees otherwise payable to them or may reimburse the
Fund for its operating expenses. For the fiscal year ended July 31, 1998, the
Fund paid advisory fees to BIMC (after fee waivers) of .06% of the Fund's
average daily net assets.
PNC Bank formerly provided research, credit analysis and recommendations
with respect to the Fund's investments and supplied BIMC with certain computer
facilities, personnel and other services. The facilities, personnel services and
related expenses were transferred to BIMC and in return BIMC's obligation to pay
a portion of the sub-advisory fee to PNC Bank was terminated. The services
provided by BIMC and the fees payable by the Fund for these services are
described further in the Statement of Additional Information under "Management
of the Company."
ADMINISTRATORS
PFPC, whose principal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809 and PDI, whose principal business address is Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania 19428, serve as
co-administrators. PFPC is an indirect wholly-owned subsidiary of PNC Bank Corp.
All of the outstanding stock of PDI is owned by Monroe Haegele, PDI's chief
executive officer. The administrative services provided by the administrators,
which are described more fully in the Statement of Additional Information,
include providing and supervising the operation of an automated data processing
system to process purchase and redemption orders; assisting in maintaining the
Fund's Wilmington, Delaware office; performing administrative services in
connection with the Fund's computer access program maintained to facilitate
shareholder access to the Fund; accumulating information for and coordinating
the preparation of reports to the Fund's shareholders and the SEC; and
maintaining the registration or qualification of the Fund's shares for sale
under state securities laws. PFPC and PDI are each responsible for carrying out
the duties undertaken pursuant to the Administration Agreement with the Fund.
For their administrative services, the administrators are entitled jointly
to receive a fee computed daily and payable monthly of .20% of the Fund's
average daily net assets. (For information regarding the administrators'
waivers, see "Investment Adviser" above.) The Fund also reimburses each
administrator for its reasonable out-of-pocket expenses incurred in connection
with the Fund's computer access program. For the fiscal year ended July 31,
1998, the Fund paid PFPC and PDI administrative fees (after fee waivers)
aggregating .06% of its average daily net assets.
PFPC also serves as transfer agent, registrar and dividend disbursing
agent. PFPC's address is P.O. Box 8950, Wilmington, Delaware 19885-9628. The
services provided by PFPC and PDI and the fees
14
<PAGE> 15
payable by the Fund for these services are described further in the Statement of
Additional Information under "Management of the Company."
DISTRIBUTOR
PDI, whose principal business address is set forth above under
"Administrators," also serves as distributor of the Fund's shares. Fund shares
are sold on a continuous basis by the Distributor as agent. The Distributor pays
the cost of printing and distributing prospectuses to persons who are not
shareholders of the Fund (excluding preparation and printing expenses necessary
for the continued registration of the Fund's shares) and of printing and
distributing all sales literature. No compensation is payable by the Fund to the
distributor for its distribution services.
CUSTODIAN
PNC Bank serves as the custodian of the Fund's assets. The Fund pays PNC
Bank a fee for its custodial services equal to $.25 per annum for each $1,000 of
the Fund's average gross assets.
SERVICE ORGANIZATIONS
As stated above, institutional investors ("Service Organizations") may
purchase Dollar or Plus shares for their customers. Dollar shares are sold to
institutions other than broker/dealers, and Plus shares are sold to
broker/dealers, both of which enter into servicing agreements with the Fund
requiring them to provide support services to their customers who are the
beneficial owners of such shares in consideration for .25% (on an annualized
basis) of the average daily net asset value of the Dollar or Plus shares held by
the Service Organizations for the benefit of their customers. Such services,
which are described more fully in the Statement of Additional Information under
"Management of the Fund -- Service Organizations," include aggregating and
processing purchase and redemption requests from customers and placing net
purchase and redemption orders with PFPC; processing dividend payments from the
Fund on behalf of customers; providing information periodically to customers
showing their positions in Dollar or Plus shares; and providing sub-accounting
with respect to shares beneficially owned by customers or the information
necessary for sub-accounting. In addition, broker-dealers purchasing Plus shares
may be requested to provide from time to time assistance (such as the forwarding
of sales literature and advertising to their customers) in connection with the
distribution of Plus shares. Under the terms of the agreements, Service
Organizations are required to provide to their customers a schedule of any fees
that they may charge such customers relating to the investment of such
customers' assets in Dollar or Plus shares. Money shares offered by the Fund may
be purchased by any type of institutional investor (including banks and
broker/dealers) which do not wish to enter into such servicing agreements with
the Fund in connection with their investments.
EXPENSES
Except as noted above, the Fund's service contractors bear all expenses in
connection with the performance of their services. The Fund bears the expenses
incurred in its operations. The ratios of the Fund's expenses to its average
annual net assets for the fiscal year ended July 31, 1998 were .20% for the
Fund's Money shares, and .45% (annualized) for the Dollar shares. The estimated
ratio of the Fund's expenses to its average annual net assets for the fiscal
year ended July 31, 1998 for Plus Shares was .45%. No Plus shares were
outstanding after December 1, 1994.
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<PAGE> 16
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but such banking
laws and regulations do not prohibit such a holding company or affiliate or
banks generally from acting as the investment adviser, transfer agent or
custodian to such an investment company, or from purchasing shares of such a
company as agent for and upon the order of customers. PNC Bank, BIMC, PFPC, as
well as certain Service Organizations (i.e., banks), are subject to such banking
laws and regulations.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of bank Service Organizations in connection with the
provision of support services to their customers, the Fund might be required to
alter or discontinue its arrangements with Service Organizations generally and
change its method of operations. It is not anticipated, however, that any change
in the Fund's method of operations would affect its net asset value per share or
result in a financial loss to any customer.
DIVIDENDS
The Fund's net income is declared daily as a dividend to the holders of
record of each of the Fund's series of shares at the close of business on the
day of declaration. Dividends for each series are equal to net income available
for the particular class involved and are determined in the same manner across
series. Net income available for dividends on the Dollar shares is after
deduction of all fees paid to Service Organizations for their services with
respect to Dollar shares, and for the Plus shares is after deduction of all fees
paid to Service Organizations with respect to Plus shares. (See "Management of
the Fund -- Service Organizations.") Shares of each series begin accruing
dividends on the day the purchase order for the shares is executed and continue
to accrue dividends through, and including, the day before the redemption order
for the shares is executed. Dividends are paid monthly by check, or by wire
transfer if requested in writing by the shareholder, within 5 business days
after the end of the month or within 5 business days of the redemption of all of
a shareholder's shares of a particular series. The Fund does not expect to
realize net long-term capital gains.
Institutional shareholders may elect to have their dividends reinvested in
additional full and fractional shares of the same series with respect to which
dividends are declared valued at their net asset value on the payment date.
Reinvested dividends receive the same tax treatment as dividends paid in cash.
Such election, or any revocation thereof, must be made in writing to PFPC, and
will become effective with respect to dividends paid after its receipt by PFPC.
TAXES
The Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended (the "Code"). Such qualification generally relieves the Fund
of liability for Federal income taxes to the extent its earnings are distributed
in accordance with the Code. Qualification as a regulated investment company for
a taxable year requires, among other things, that the Fund distribute an amount
equal to at least the sum of (a) 90% of its net exempt-interest income, if any,
for the year, and (b) 90% of its investment
16
<PAGE> 17
company taxable income, if any, for such year, which the Fund intends to do.
Federal exempt-interest dividends may be treated by the Fund's shareholders as
items of interest excludable from their gross income under Section 103(a) of the
Code, unless under the circumstances applicable to the particular shareholder
exclusion would be disallowed. (See Statement of Additional Information under
"Additional Information Concerning Taxes.")
If the Fund should hold certain "private activity bonds" issued after
August 7, 1986, the portion of dividends attributable to interest on such bonds
must be included in a shareholder's Federal alternative minimum taxable income,
as an item of tax preference, for the purpose of determining liability, if any,
for the 26% to 28% alternative minimum tax for individuals and the 20%
alternative minimum tax applicable to corporations. Corporate shareholders also
must take all exempt-interest dividends into account in determining certain
adjustments for Federal alternative minimum tax purposes. Shareholders receiving
Social Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
Exempt-interest dividends derived from interest on New York Municipal
Obligations will be exempt from New York State and New York City personal income
taxes (but not corporate franchise taxes), provided the interest on such
obligations is and continues to be excluded or exempt from applicable Federal
income taxation and New York State and New York City income taxation. Dividends
and distributions derived from taxable income and capital gains, if any, are not
exempt from Federal income tax or from New York State and New York City taxes.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for Federal, New York State or New
York City personal income tax purposes. Except as noted with respect to New York
State and New York City personal income taxes, dividends and distributions paid
to shareholders that are derived from income on Municipal Obligations may be
taxable income under state or local law even though all or a portion of such
dividends or distributions may be derived from interest on tax-exempt
obligations that, if paid directly to shareholders, would be tax-exempt income.
Shareholders will be advised at least annually as to the Federal income
tax, as well as the New York State and New York City personal income tax, status
and consequences of dividends and distributions made each year.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Fund and its shareholders. No attempt is
made to present a detailed explanation of the Federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisers with specific reference to their own
tax situations.
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Fund's Charter authorizes the Board of Directors to issue up to 2
billion full and fractional shares of capital stock, $.001 par value per share,
and to classify or reclassify any unissued shares of the Fund into one or more
classes or series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority, the Board of Directors has classified
1.4 billion of its shares as Money shares (Class A Common Stock), 300 million of
its shares as Dollar shares (Class A Common Stock-Special Series 1) and 300
million of its shares as Plus shares (Class A Common Stock-Special Series 2).
17
<PAGE> 18
Each New York Money, Dollar and Plus share represents an equal
proportionate interest in the assets of the Fund. Shareholders of each series
are entitled to participate equally in any dividend or distribution declared by
the Fund's Board of Directors except as provided under "Dividends" and in the
net distributable assets of the Fund on liquidation. Fund shares have no
pre-emptive rights and only such conversion and exchange rights as the Board may
grant in its discretion. When issued for payment as described in this
Prospectus, the Fund's shares will be fully paid and non-assessable. Further,
shareholders of each series are entitled to one vote for each full share held
and proportionate fractional votes for fractional shares held, and will vote in
the aggregate and not by series, except where otherwise required by law and
except that only Dollar shares will be entitled to vote on matters submitted to
a vote of shareholders pertaining to the Fund's arrangements with Service
Organizations with respect to Dollar shares, and Plus shares will enjoy similar
voting rights on matters pertaining to the Fund's arrangements with Service
Organizations with respect to Plus shares. (See "Management of the
Fund -- Service Organizations.") Shares of the Fund have non-cumulative voting
rights and, accordingly, the holders of more than 50% of the Fund's outstanding
shares (irrespective of series) may elect all of the directors.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Redemption of Shares."
YIELD AND TOTAL RETURN
From time to time the Fund may advertise the "yields," "effective yields,"
"tax-equivalent yields" and "total return" of its Money, Dollar and Plus shares.
Yield and total return figures are based on historical earnings and are not
intended to indicate future performances. The "yield" for each series of Fund
shares refers to the income generated by an investment in the shares of such
series over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during the week is assumed to be generated each week
over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in a series of Fund shares is assumed to be reinvested
in shares of that series. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. The
"tax-equivalent yield" shows the level of taxable yield necessary to produce an
after-tax yield equivalent to the Fund's tax-free yield. It is calculated by
increasing the Fund's yield (calculated as above) by the amount necessary to
reflect the payment of Federal and New York income taxes at a stated tax rate.
The "tax-equivalent yield" will always be higher than the "yield."
The yield and total return of any investment is generally a function of
portfolio quality and maturity, type of investment and operating expenses. The
yield and total return on Money, as well as Dollar and Plus, shares will
fluctuate and are not necessarily representative of future results. Any fees
charged by broker-dealers, banks or others directly to their customers in
connection with investments in the Fund are not reflected in the yields or total
return on the Fund's shares, and such fees, if charged, will reduce the actual
return received by customers on their investments. Investors may call
800-821-6006 to obtain the current yields on each series of the Fund's shares.
18
<PAGE> 19
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS,
OR THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION
INCORPORATED HEREIN BY
REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN
OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE
MADE.
---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Background and Expense
Information.................... 2
Financial Highlights............. 4
Investment Objective and
Policies....................... 7
Purchase of Shares............... 11
Redemption of Shares............. 12
Management of the Fund........... 13
Dividends........................ 16
Taxes............................ 16
Description of Shares and
Miscellaneous.................. 17
Yield and Total Return........... 18
</TABLE>
PIF-P-012-02
NEW YORK
MONEY FUND
AN INVESTMENT PORTFOLIO OFFERED BY
MUNICIPAL FUND FOR
NEW YORK INVESTORS, INC.
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Prospectus
November 30, 1998
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MUNICIPAL FUND FOR NEW YORK INVESTORS, INC.
(the "Fund")
Statement of Additional Information
November 30, 1998
Table of Contents
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Investment Objective And Policies........................... 1
Municipal Obligations....................................... 6
Additional Purchase And Redemption Information.............. 19
Management Of The Fund...................................... 21
Additional Information Concerning Taxes..................... 28
Dividends................................................... 30
Counsel..................................................... 34
Independent Accountants..................................... 34
Miscellaneous............................................... 34
Financial Statements........................................ 35
Appendix.................................................... A-1
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This Statement of Additional Information is meant to be read in
conjunction with the Fund's Prospectus dated November 30, 1998 and is
incorporated by reference in its entirety into that Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no investment in
shares of the Fund should be made solely upon the information contained herein.
Copies of the Fund's Prospectus may be obtained by calling 800-821-7432.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
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INVESTMENT OBJECTIVE AND POLICIES
As stated in the Fund's Prospectus, the investment objective of the
Fund is to provide investors with as high a level of current interest income
that is exempt from federal income tax and, to the extent possible, from New
York State and New York City personal income taxes as is consistent with the
preservation of capital and relative stability of principal. The following
policies supplement the description of the Fund's investment objective and
policies in the Prospectus.
Additional Information on Investment Practices.
Variable and Floating Rate Demand Instruments. Variable and floating
rate demand instruments held by the Fund may have maturities of more than 13
months provided: (i) the Fund is entitled to the payment of principal at any
time or during specified intervals not exceeding 13 months, subject to notice of
no more than 30 days, and (ii) the rate of interest on such instruments is
adjusted (based upon a pre-selected market sensitive index such as the prime
rate of a major commercial bank) at periodic intervals not exceeding 13 months.
In determining the Fund's average weighted portfolio maturity and whether a
variable or floating rate demand instrument has a remaining maturity of 13
months or less, the maturity of each instrument will be computed in accordance
with guidelines established by the Securities and Exchange Commission (the
"SEC"). In determining whether an unrated variable or floating rate demand
instrument is of comparable quality at the time of purchase to instruments with
minimal credit risks, the Fund's investment adviser will consider the earning
power, cash flow and other liquidity ratios of the issuer of the instrument and
will continuously monitor its financial condition. In addition, the Fund will
sometimes require that the issuer's obligation to pay the principal of the
instrument be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
Variable and floating rate notes that do not provide for payment
within seven days may be deemed illiquid and subject to the 10% limitation on
such investments.
When-Issued Securities. As stated in the Prospectus, the Fund may
purchase Municipal Obligations on a "when-issued" basis (i.e., for delivery
beyond the normal settlement date at a stated price and yield). When the Fund
agrees to purchase when-issued securities, its custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund will set aside cash or liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might be affected in the event its
commitments to purchase when-issued securities ever exceeded 25% of the value of
its assets.
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When the Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Stand-By Commitments. The Fund may acquire "stand-by commitments"
with respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Obligations at their amortized cost value to the Fund plus accrued
interest, if any. (Stand-by commitments acquired by the Fund may also be
referred to as "put" options.) Stand-by commitments may be sold, transferred or
assigned only with the underlying instruments.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio is not
expected to exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
The Fund intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a stand-by commitment, the investment adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. Stand-by commitments acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a stand-by commitment, its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Fund.
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Portfolio Transactions.
Subject to the general control of the Fund's Board of Directors,
BlackRock Institutional Management Corporation ("BIMC"), the Fund's investment
adviser, is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities. Purchases and sales of
portfolio securities are usually principal transactions without brokerage
commissions. Purchases, if any, from underwriters may include a commission or
concession paid by the issuer to the underwriter and purchases from dealers
serving as market markers may include the spread between the bid and asked
prices. In transactions with dealers, BIMC seeks to obtain the best net price
and the most favorable execution of orders. To the extent that the execution and
price offered by more than one dealer are comparable, BIMC may, in its
discretion, effect transactions in portfolio securities with dealers who provide
the Fund with research advice or other services such as information relating to
the price of portfolio securities.
Investment decisions for the Fund are made independently from those
for other investment company portfolios advised by BIMC. Such other investment
company portfolios may invest in the same securities as the Fund. When purchases
or sales of the same security are made at substantially the same time on behalf
of such other investment company portfolios, transactions are averaged as to
price, and available investments allocated as to amount, in a manner which BIMC
believes to be equitable to each investment company portfolio, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained for the
Fund. To the extent permitted by law, BIMC may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
investment companies in order to obtain best execution.
Portfolio securities will not be purchased from or sold to BIMC, PNC
Bank, National Association ("PNC Bank"), PFPC Inc. ("PFPC"), Provident
Distributors, Inc. ("PDI"), or any affiliated person of any of them (as such
term is defined in the Investment Company Act of 1940, hereinafter "1940 Act")
except to the extent permitted by the SEC. In addition, the Fund will not
purchase Municipal Obligations during the existence of any underwriting or
selling group relating thereto of which PNC Bank is a member, except to the
extent permitted by the SEC. Under certain circumstances, the Fund may be at a
disadvantage because of these limitations in comparison with other investment
company portfolios which have a similar investment objective but are not subject
to such limitations. Furthermore, with respect to such transactions, securities
and deposits, the Fund will not give preference to Service Organizations with
whom the Fund enters into agreements concerning the provision of support
services to customers who beneficially own shares of New York Money Dollar
("Dollar shares") or New York Money Plus ("Plus shares"). (See the Prospectus,
"Management of the Fund - Service Organizations.")
The Fund may participate, if and when practicable, in bidding for
the purchase of Municipal Obligations directly from an issuer in order to take
advantage of the lower purchase price available to members of such a group. The
Fund will engage in this practice, however,
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only when BIMC, in its sole discretion, believes such practice to be otherwise
in the Fund's interest.
The Fund does not intend to seek profits through short-term trading.
The Fund's annual portfolio turnover will be relatively high because of the
short-term nature of the instruments in which it invests, but the Fund's
portfolio turnover is not expected to have a material effect on its net income.
The Fund's portfolio turnover is expected to be zero for regulatory reporting
purposes.
Additional Investment Limitations.
In addition to the investment limitations disclosed in the
Prospectus, the Fund is subject to the following investment limitations, which
may only be changed by a vote of the holders of a majority of the Fund's
outstanding shares (as defined below under "Miscellaneous").
The Fund may not:
1. Make loans except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations.
2. Underwrite any issue of securities except to the extent that the
purchase of debt obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.
3. Purchase or sell real estate except that the Fund may invest in
debt obligations secured by real estate or interests therein.
4. Purchase securities on margin, make short sales of securities or
maintain a short position.
5. Write or sell puts, calls, straddles, spreads or combinations
thereof.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs.
7. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization.
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Portfolio Valuation.
The Fund's portfolio securities are valued on the basis of amortized
cost. In connection with its use of amortized cost valuation, the Fund limits
the dollar-weighted average maturity of its portfolio to not more than 90 days
and does not purchase any instrument with a remaining maturity of more than 13
months (with certain exceptions). The Fund's Board of Directors has also
established procedures that are intended to stabilize the net asset value per
share of each of the Fund's series of shares for purposes of sales and
redemptions at $1.00. Such procedures include the determination, at such
intervals as the Board deems appropriate, of the extent, if any, to which the
Fund's net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1%,
the Board will promptly consider what action, if any, should be initiated. If
the Board believes that the amount of any deviation from the Fund's $1.00
amortized cost price per share may result in material dilution or other unfair
results to investors or existing shareholders, it will take such steps as it
considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity; shortening the Fund's average portfolio
maturity; withholding or reducing dividends; redeeming shares in kind; reducing
the number of the Fund's outstanding shares without monetary consideration; or
utilizing a net asset value per share determined by using available market
quotations.
MUNICIPAL OBLIGATIONS
In General.
Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Private activity bonds that are
issued by or on behalf of public authorities to finance various
privately-operated facilities are included within the term Municipal Obligations
if the interest paid thereon is (subject to the federal alternative minimum tax)
exempt from regular federal income tax.
The Fund may hold tax-exempt derivatives which may be in the form of
tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have been
used. For example, interests in long-term fixed-rate Municipal Obligations, held
by a bank as trustee or custodian, are coupled with tender option, demand and
other features when the tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put) the underlying
Municipal Obligation to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, Municipal Obligations are represented
by custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal security at its face
value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender
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option, to trade at par on the date of a rate adjustment. The Fund may hold
tax-exempt derivatives, such as participation interests and custodial receipts,
for Municipal Obligations which give the holder the right to receive payment of
principal subject to the conditions described above. The Internal Revenue
Service has not ruled on whether the interest received on tax-exempt derivatives
in the form of participation interests or custodial receipts is tax-exempt, and
accordingly, purchases of any such interests or receipts are based on the
opinion of counsel to the sponsors of such derivative securities. Neither the
Fund nor its investment adviser will independently review the underlying
proceedings related to the creation of any tax-exempt derivatives or the bases
for such opinion.
Before purchasing a tax-exempt derivative for the Fund, the Adviser is
required by the Fund's procedures to conclude that the tax-exempt security and
the supporting short-term obligation involve minimal credit risks and are
Eligible Securities under the Fund's Rule 2a-7 procedures. In evaluating the
creditworthiness of the entity obligated to purchase the tax-exempt security,
the investment adviser will review periodically the entity's relevant financial
information. Currently, the Directors have authorized the purchase of tax-exempt
derivatives by the Fund so long as after any purchase not more than 10% of the
Fund's assets are invested in such securities.
As described in the Fund's Prospectus, the two principal
classifications of Municipal Obligations consist of "general obligation" and
"revenue" issues, and the Fund's portfolio may include "moral obligation"
issues, which are normally issued by special purpose authorities. There are, of
course, variations in the quality of Municipal Obligations, both within a
particular classification and between classifications, and the yields on
Municipal Obligations depend upon a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions of
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The ratings of Moody's and S&P
represent their opinions as to the quality of Municipal Obligations. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality, and Municipal Obligations with the same maturity, interest rate and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by the Fund, an issue of Municipal Obligations may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Fund's investment adviser will consider such an
event in determining whether the Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Obligations are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
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Among other types of Municipal Obligations, the Fund may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term loans. Such instruments are issued with
a short-term maturity in anticipation of the receipt of tax funds, the proceeds
of bond placements or other revenues. In addition, the Fund may invest in other
types of tax-exempt instruments, including general obligation and private
activity bonds, provided they have remaining maturities of 13 months or less at
the time of purchase.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Obligations are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
STATE ECONOMY. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The State economic forecast has been raised slightly from the
enacted budget forecast. Continued growth is projected in 1998 and 1999 for
employment, wages, and personal income, although the growth rates of personal
income and wages are expected to
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be lower than those in 1997. The growth of personal income is projected to
decline from 5.7 percent in 1997 to 4.8 percent in 1998 and 4.2 percent in 1999,
in part because growth in bonus payments is expected to slow down, a distinct
shift from the torrid rate of the last few years. Overall employment growth is
expected to be 1.9 percent in 1998, the strongest in a decade, but will drop to
1.0 percent in 1999, reflecting the slowing growth in the national economy,
continued restraint in governmental spending, and restructuring in the health
care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
STATE BUDGET. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the
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1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts
and disbursements for the 2000-01 and 2001-02 fiscal years as a part of the
1999-00 Executive Budget process, as required by law. The revised expectations
for years 2000-01 and 2001-02 will reflect the cumulative impact of tax
reductions and spending commitments enacted over the last several years as well
as new 1999-00 Executive Budget recommendations. The School Tax Relief Program
("STAR") program, which dedicates a portion of personal income tax receipts to
fund school tax reductions, has a significant impact on General Fund receipts.
STAR is projected to reduce personal income tax revenues available to the
General Fund by an estimated $1.3 billion in 2000-01. Measured from the 1998-99
base, scheduled reductions to estate and gift, sales and other taxes, reflecting
tax cuts enacted in 1997-98 and 1998-99, will lower General Fund taxes and fees
by an estimated $1.8 billion in 2000-01. Disbursement projections for the
outyears currently assume additional outlays for school aid, Medicaid, welfare
reform, mental health community reinvestment, and other multi-year spending
commitments in law.
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On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps could become
a significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and ends on
March 31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to grow by
$2.43 billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the STAR, expansion of the child
care income-tax credit for middle-income families, a phased-in reduction of the
general business tax, and reduction of several other taxes and fees, including
an accelerated phase-out of assessments on medical providers. The enacted budget
also provides for significant increases in spending for public schools, special
education programs, and for the State and City university systems. It also
allocates $50 million for a new Debt Reduction Reserve Fund ("DRRF") that may
eventually be used to pay debt service costs on or to prepay outstanding
State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund ("TSRF"), a
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balance of $158 million in the Community Projects Fund ("CPF"), and a balance of
$100 million in the Contingency Reserve Fund ("CRF"). The TSRF can be used in
the event of an unanticipated General Fund cash operating deficit, as provided
under the State Constitution and State Finance Law. The CPF is used to finance
various legislative and executive initiatives. The CRF provides resource to help
finance any extraordinary litigation costs during the fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates
several Executive Budget tax proposals that, if enacted, would further reduce
receipts otherwise available to the General Fund by approximately $700 million
during 1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that are projected to further reduce receipts available to the
General Fund by over $200 million. These initiatives include reducing the fee to
register passenger motor vehicles and earmarking a larger portion of such fees
to dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutual tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99
Financial Plan includes approximately $62 million in non-recurring resources,
comprising less than two-tenths of one percent of General Fund disbursements.
The non-recurring resources projected for use in 1998-99 consist of $27 million
in retroactive federal welfare reimbursements for family assistance recipients
with HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated
at $4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending
plan includes: $2.51 billion in disbursements for transportation purposes,
including the State and local highway and bridge program; $815 million for
environmental activities; $379 million for correctional services; $228 million
for the State University of New York ("SUNY") and the City University of New
York ("CUNY"); $290 million for mental hygiene projects; and $375 million for
CEFAP. Approximately 28 percent of capital projects are proposed to be financed
by "pay-as-you-go" resources. State-supported bond issuances finance 46 percent
of capital projects, with federal grants financing the remaining 26 percent.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces
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may affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that are not subject
to the State's control. The State Financial Plan is also necessarily 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. The DOB 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 their projections, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
DOB believes it could take similar actions should variances occur in its
projections for the current fiscal year.
RECENT FINANCIAL RESULTS. 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.
On March 31, 1998, the State recorded, on a GAAP-basis, its
first-ever, accumulated positive balance in its General Fund. This "accumulated
surplus" was $567 million. The improvement in the State's GAAP position is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-98 fiscal year. Much of that surplus is reserved for future requirements,
but a portion is being used to meet spending needs in 1998-99. Thus, the State
expects some deterioration in its GAAP position, but expects to maintain a
positive GAAP balance through the end of the current fiscal year.
The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset in
part by an operating deficit of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of $1.56 billion
for the 1997-98 fiscal year, as compared to an operating surplus of $1.93
billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of
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$195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by
which the State of New York 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
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.
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, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently
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resumed its lending activities under a revised set of lending programs and
underwriting guidelines.
On January 13, 1992, Standard & Poor's Ratings Services ("Standard &
Poor's") reduced its ratings 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. On August 28, 1997,
Standard & Poor's revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 2, 1998, Standard
& Poor's affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's Investors Service, Inc. ("Moody's")
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness. On March 20, 1998, Moody's assigned the highest commercial paper
rating of P-1 to the short-term notes of the State. On July 6, 1998, Moody's
assigned an A2 rating with a stable outlook to the State's general obligations.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and its public authorities in the 1998-99
fiscal year. Information on the State's five-year Capital Program and Financing
Plan for the 1998-99 through 2002-03 fiscal years, updated to reflect actions
taken in the 1998-99 State budget, will be released on or before July 30, 1998.
The projection of State borrowings for the 1998-99 fiscal year is subject to
change as market conditions, interest rates and other factors vary throughout
the fiscal year.
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The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
The proposed 1997-98 through 2002-03 Capital Program and Financing
Plan was released with the 1998-99 Executive Budget on January 20, 1998. As a
part of that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York 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.
LITIGATION. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances.
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Among the more significant of these cases are those that involve (1) the
validity of agreements and treaties by which various Indian tribes transferred
title to New York State of certain land in central and upstate New York; (2)
certain aspects of New York State's Medicaid policies, including its rates,
regulations and procedures; (3) action against New York State and New York City
officials alleging inadequate shelter allowances to maintain proper housing; (4)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (5) challenges to regulations promulgated by
the Superintendent of Insurance establishing certain excess medical malpractice
premium rates; (6) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(7) action seeking enforcement of certain sales and excise taxes and tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations; (8)
a challenge to the constitutionality of Clean Water/Clean Air Bond Act; and (9)
a challenge to the Governor's application of his constitutional line item veto
authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1997-98 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial
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plan for the payment of judgments and, therefore, could affect the ability of
the State to maintain a balanced financial plan.
Although other litigation is pending against New York State, except
as described herein, no current litigation involves New York State's authority,
as a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
AUTHORITIES. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
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.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State
may also be impacted by the fiscal health of its localities, particularly the
City, which has required and continues to require significant financial
assistance from the State. The City depends on State aid both to enable the City
to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal budget
negotiation process
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could result in a reduction in or a delay in the receipt of Federal grants which
could have additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, Standard & Poor's
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 Standard & Poor's.
On July 2, 1985, Standard & Poor's revised its rating of City bonds
upward to BBB+ and on November 19, 1987, to A-. On February 3, 1998 and again on
May 27, 1998, Standard & Poor's assigned a BBB+ rating to the City's general
obligation debt and placed the ratings on CreditWatch with positive
implications.
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. On February 25, 1998,
Moody's upgraded nearly $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's again assigned on A3 rating to the City's
general obligations and stated that its outlook was stable.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay
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such aid revenues and the reduction of such aid revenues below a specified level
are included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP.
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The 1998-99 Financial Plan projects General Fund receipts (including transfers
from other funds) of $36.22 billion, an increase of $1.02 billion over the
estimated 1997-987 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the
impact of scheduled tax reductions that will lower receipts by $38 million, as
well as the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to
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show a GAAP-basis surplus of $131 million for 1997-98 and a GAAP-basis deficit
of $1.3 billion for 1998-99 in the General Fund, primarily as a result of the
use of the 1997-98 cash surplus. In 1998-99, the General Fund GAAP Financial
Plan shows total revenues of $34.68 billion, total expenditures of $35.94
billion, and net other financing sources and uses of $42 million.
Although the City has maintained balanced budgets in each of its
last seventeen fiscal years and is projected to achieve balanced operating
results for the 1998 fiscal year, there can be no assurance that the gap-closing
actions proposed in the 1998-2001 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.
The projections set forth in the 1998-2001 Financial Plan were based
on various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent
upon the City's ability to market its securities successfully. The City's
financing program for fiscal years 1998 through 2001 contemplates the issuance
of $5.7 billion of general obligation bonds and $5.7 billion of bonds to be
issued by the proposed New York City Transitional Finance Authority (the
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"Finance Authority") to finance City capital projects. The Finance Authority,
was created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, 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 entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
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. Although the City's current financial plan projects
$2.4 billion of seasonal financing for the 1998 fiscal year, the City expects to
undertake only approximately $1.4 billion of seasonal financing. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. 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 in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York 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 State's projections of its receipts and disbursements for the
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers 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
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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. Troy MAC has issued bonds to effect a
restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in
unrestricted aid targeted to 57 municipalities across the State. Other
assistance for municipalities with special needs totals more than $25.6 million.
Twelve upstate cities will receive $24.2 million in one-time assistance from a
cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
From time to time, 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 localities and require increasing the State assistance in
the future.
YEAR 2000 COMPLIANCE. The State is currently addressing "Year 2000"
data processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19". Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to
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enter data into computer programs and the ability of such programs to correctly
process data.
The Office for Technology is monitoring compliance on a quarterly
basis and is providing assistance and assigning resources to accelerate
compliance for mission critical systems, with most compliance testing expected
to be completed by mid-1999. There can be no guarantee, however, that all of the
State's mission-critical and high-priority computer systems will be Year 2000
compliant and that there will not be an adverse impact upon State operations or
State finances as a result.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
In General.
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectus. The issuance of shares is
recorded on the books of the Fund, and share certificates are not issued unless
expressly requested in writing. Certificates are not issued for fractional
shares.
Prior to effecting a redemption of shares represented by
certificates, PFPC must have received such certificates at its principal office.
All such certificates must be endorsed by the redeeming shareholder or
accompanied by a signed stock power, in each instance the signature must be
guaranteed. A signature guarantee may be obtained from a domestic bank or trust
company, broker, dealer, clearing agency or saving association who are
participants in a medallion program recognized by the Securities Transfer
Association. The three recognized medallion programs are Securities Transfer
Agents Medallion Program (STAMP), Stock Exchange Medallion Signature Program
(MSP) and New York Stock Exchange, Inc. Medallion Securities Program (MSP).
Signature programs that are not part of these programs would not be accepted.
The Fund may require any additional information reasonably necessary to evidence
that a redemption has been duly authorized.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition, if, in the opinion of the directors of the Fund,
ownership of shares has or may become concentrated to an extent which would
cause the Fund to be deemed a personal holding company, the Fund may compel the
redemption of, reject any order for or refuse to give effect on the books of the
Fund to the transfer of the Fund's shares in an effort to prevent that
consequence. The Fund may also redeem shares involuntarily if such redemption
appears appropriate in light of the Fund's responsibilities under the 1940 Act
or otherwise. If the Fund's
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Board of Directors determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other property. In certain instances,
the Fund may redeem shares pro rata from each shareholder of record without
payment of monetary consideration. (See Statement of Additional Information --
"Investment Objective and Policies (Portfolio Valuation)" for an example of when
such redemption or form of payment might be appropriate.)
Any institution purchasing shares on behalf of separate accounts
will be required to hold the shares in a single nominee name (a "Master
Account"). Institutions investing in more than one series of the Fund's shares
must maintain a separate Master Account for each series. Institutions may
arrange with PFPC for certain sub-accounting services (such as purchase,
redemption and dividend recordkeeping) paid for by the Fund, if PFPC is provided
with the information necessary for sub-accounting. Sub-accounts may be
established by name or number.
The customary national business holidays which the Federal Reserve
Bank of Philadelphia and the New York Stock Exchange observe are New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day and the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or Sunday
respectively. The Federal Reserve Bank of Philadelphia is also closed on
Veterans' Day and Columbus Day.
Net Asset Value.
As stated in the Fund's Prospectus, the Fund's net asset value per
share is calculated by adding the value of all of the Fund's portfolio
securities and other assets belonging to the Fund, subtracting the liabilities
charged to the Fund including dividends that have been declared but not paid,
and dividing the result by the number of the Fund's shares outstanding
(irrespective of series). The value of the Fund's assets is calculated using the
amortized cost method pursuant to procedures adopted by the Board of Directors
under Rule 2a-7. "Assets belonging to" the Fund consist of the consideration
received upon the issuance of the Fund's shares together with all income,
earnings, profits and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments and any funds or payments derived
from any re-investment of such proceeds. Assets belonging to the Fund are
charged with the direct liabilities of the Fund.
MANAGEMENT OF THE FUND
Directors and Officers.
The Fund's directors and officers, their addresses, principal
occupations during the past 5 years and other affiliations are as follows:
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<PAGE> 46
<TABLE>
<CAPTION>
Principal Occupations
during past 5 years
Name and Address Position and Other Affiliations(1)
- ---------------- -------- -------------------------
<S> <C> <C>
Thomas A. Melfe Chairman Of Counsel of the law firm of
1251 Ave. of the Americas and Piper & Marbury LLP,
New York, NY 10020-1104 Director Director, Warburg
Age: 66 Pincus Funds.
Francis E. Drake, Jr. Director Retired; Chairman of Executive and
90 Knollwood Drive Finance Committee, Rochester Gas and
Rochester, NY 14618 Electric Corp. until December, 1988;
Age: 83 Chairman of the Board and Chief
Executive Officer, Rochester Gas
and Electric Corp. until 1980.
Rodney D. Johnson(2) Director President, Fairmount Capital
Fairmount Capital Advisors, Inc. (financial advising)
Advisors, Inc. since 1987.
1435 Walnut Street
Drexel Building,
Philadelphia, PA
19102
Age: 56
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
Principal Occupations
during past 5 years
Name and Address Position and Other Affiliations(1)
- ---------------- -------- -------------------------
<S> <C> <C>
Anthony M. Santomero Director Richard K. Mellon Professor of
310 Keithwood Road Finance, since April 1984 and Dean's
Wynnewood, PA 19096 Advisory Council Member since July
Age: 52 1984, The Wharton School, University
of Pennsylvania; Director, Wharton
Financial Institutions Center, since
July 1995; Associate Editor, Journal
of Banking and Finance, since June
1978; Associate Editor, Journal of
Economics and Business, since October
1979; Associate Editor, Journal of
Money, Credit and Banking, since
January 1989; Research Associate, New
York University Center for Japan-US
Business and Economic Studies, since
July 1989; Editorial Advisory Board,
Open Economics Review, since November
1990; Director, The Zweig Fund and The
Zweig Total Return Fund.
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
Principal Occupations
during past 5 years
Name and Address Position and Other Affiliations(1)
- ---------------- -------- -------------------------
<S> <C> <C>
Thomas H. Nevin(1) President President and Chief Investment
Bellevue Park Officer, BIMC.
Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Age: 50
Lisa M. Buono(1) Treasurer Treasurer Vice President, Provident
Bellevue Park Advisors, Inc. since 1997, prior
Corporate Center hereto, Director of Finance and Compliance,
400 Bellevue Parkway PDI (1993-1996); Field Supervisor,
Wilmington, DE 19809 National Association of Securities
Age: 33 Dealers, Inc. (1987-1993).
W. Bruce McConnel, III(1) Secretary Partner of the law firm of Drinker
1345 Chestnut Street Biddle & Reath LLP.
Suite 1100
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
1 Additional affiliations with investment companies advised by BIMC or PNC Bank
are set forth below.
2 Mr. Johnson is an "interested person" of the Fund as defined in the 1940 Act.
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<PAGE> 49
----------------------------
Mr. Johnson serves as a director of Temporary Investment Fund,
Inc. ("TempFund") and as a trustee of Trust for Federal Securities
("FedFund") and Municipal Fund for Temporary Investment ("MuniFund").
Messrs. Johnson and Santomero serve as directors of Municipal Fund for
California Investors, Inc. ("Cal Muni"). Mr. Santomero serves as a trustee
of BlackRock Funds ("BlackRock"). Each of these funds shares the same
investment adviser and/or sub-adviser as the Fund.
Mr. Melfe is Chairman of the Board. Mr. Nevin is President and
Ms. Buono is Treasurer. In addition, Mr. Nevin is President of Muni Fund, Fed
Fund, Temp Fund and Cal Muni. Ms. Buono is Treasurer of Muni Fund, Fed Fund,
Temp Fund and Cal Muni. Mr. McConnel is Secretary of Muni Fund, Fed Fund,
Temp Fund and Cal Muni. Each of the investment companies named above
receives various advisory or other services from BIMC or PNC Bank. Of the
above-mentioned funds, PDI and PFPC provide distribution and administration
services to TempFund, FedFund, MuniFund, BlackRock and Cal Muni.
Each director is paid $5,000 annually, plus $250 for each Board
meeting attended, and is reimbursed for expenses incurred in connection with his
attendance at Board meetings. The Chairman of the Board receives an additional
$2,500 per annum for his services in such capacity.
The following table sets forth information about the fees received
by the Fund's directors for the fiscal year ended July 31, 1998, the Fund's most
recently completed fiscal year.
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<PAGE> 50
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Benefits Annual from Fund
Aggregate Accrued as Benefits and Fund
Name of Person Compensation Part of Fund Upon Complex(1) Paid
Position from Fund Expenses Retirement to Directors
-------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Thomas A. Melfe 8,750 0.00 N/A (1)(2) 8,750
Director and Chairman
Rodney D. Johnson 6,250 0.00 N/A (6)(2) 56,250
Director
Francis E. Drake, Jr. 6,250 0.00 N/A (1)(2) 6,250
Director
Anthony M. Santomero 6,250 0.00 N/A (3)(2) 60,800
------ -------
Director 27,500 132,050
</TABLE>
(1) A "fund complex" means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser or
have an investment adviser that is an affiliated person of the investment
adviser of any of the other investment companies. The fund complex
consists of the Fund, Muni Fund, FedFund, Compass, TempFund, Cal Muni,
Chestnut Street Exchange Fund and Independence Square Income Securities,
Inc.
(2) Total number of investment companies each director serves on within the
fund complex.
In addition, the Fund contributed $341 for its last fiscal year to
its retirement plan for employees. Effective December 31, 1997, the Fund
terminated its participation in the retirement plan. No employee of PDI, BIMC,
PFPC or PNC Bank receives any compensation from the Fund for acting as an
officer or director of the Fund. The directors and officers of the Fund own less
than 1% of the Fund's shares.
By virtue of the responsibilities assumed by PDI, BIMC, PNC Bank and
PFPC under their respective agreements with the Fund, the Fund itself requires
only one part-time employee in addition to its officers. Drinker Biddle & Reath
LLP, of which Mr. McConnel is a partner, receives legal fees as counsel to the
Fund.
-30-
<PAGE> 51
Adviser and Administrators.
The advisory and administrative services provided and the expenses
assumed by BIMC and the administrators, as well as the fees payable to each of
them, are described in the Prospectus. For the fiscal years ended July 31, 1996,
1997 and 1998 the Fund paid $133,705, $150,755 and $202,771 respectively, in
advisory fees to BIMC (net of waivers). For the fiscal years ended July 31,
1996, 1997 and 1998 the Fund paid administration fees to PFPC and PDI (net of
waivers) totalling $133,705, $150,755 and $202,770 respectively. During the
fiscal years ended July 31, 1996, 1997 and 1998 BIMC and PFPC and PDI each
voluntarily waived advisory and administration fees in amounts totalling
$391,595 and $391,594, respectively; $420,034 and $420,034, respectively; and
$450,543 and $450,544, respectively.
Banking Laws.
Certain banking laws and regulations with respect to investment
companies are discussed in the Fund's Prospectus. BIMC, PFPC and PNC Bank
believe that they may perform the services for the Fund contemplated by their
respective Agreements with the Fund without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. However, changes in legal
requirements relating to the permissible activities of banks and their
affiliates, as well as further interpretations of present and future
requirements, could prevent BIMC, PNC Bank and PFPC from continuing to perform
such services for the Fund. If BIMC, PFPC or PNC Bank were prohibited from
continuing to perform such services, it is expected that the Board of Directors
would recommend that the Fund enter into new agreements with other qualified
firms. Any new advisory agreement would be subject to shareholder approval.
Custodian and Transfer Agent.
As custodian of the Fund's assets, PNC Bank (i) maintains a separate
account or accounts in the name of the Fund, (ii) holds and disburses portfolio
securities on account of the Fund, (iii) makes receipts and disbursements of
money on behalf of the Fund, (iv) collects and receives all income and other
payments and distributions on account of the Fund's portfolio securities, (v)
responds to correspondence from security brokers and others relating to its
duties and (vi) makes periodic reports to the Fund's Board of Directors
concerning the Fund's operations. PNC Bank is authorized to select one or more
banks or trust companies to serve as sub-custodian on behalf of the Fund,
provided that PNC Bank remains responsible for the performance of all its duties
under its Custody Agreement with the Fund and holds the Fund harmless from the
acts and omissions of any sub-custodian chosen by PNC Bank.
As the Fund's transfer and dividend disbursing agent, PFPC (i)
issues and redeems shares of the Fund, (ii) addresses and mails all
communications by the Fund to its shareholders, including reports to
shareholders, dividend and distribution notices and proxy material for its
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<PAGE> 52
meetings of shareholders, (iii) responds to correspondence by shareholders and
others relating to its duties, (iv) maintains shareholder accounts and
sub-accounts, (v) provides installation and other services in connection with
the Fund's computer access program maintained to facilitate shareholder access
to the Fund, and (vi) makes periodic reports to the Fund's Board of Directors
concerning the Fund's operations. PFPC may, on 30 days' notice to the Fund,
assign its duties thereunder to any other affiliate of PNC Bank Corp. For its
transfer agency, dividend disbursing and sub-accounting services, the Fund pays
PFPC $12.00 per account and sub-account per annum plus $1.00 for each purchase
or redemption transaction by an account (other than a purchase transaction made
in connection with the automatic reinvestment of dividends).
PFPC sends each shareholder of record a monthly statement showing
the total number of shares owned as of the last business day of the month (as
well as the dividends paid during the current month and year), and provides each
shareholder of record with a daily transaction report for each day on which a
transaction occurs in the shareholder's Master Account with the Fund. Further,
an institution establishing sub-accounts with PFPC is provided with a daily
transaction report for each day on which a transaction occurs in a sub-account
and, as of the last calendar day of each month, a report which sets forth the
share balance for the sub-account at the beginning and end of the month and
income paid or reinvested during the month.
Service Organizations.
As stated in the Fund's Prospectus, the Fund enters into agreements
with institutional investors ("Service Organizations") requiring them to provide
support services to their customers who beneficially own Dollar or Plus shares
in consideration of .25% (on an annualized basis) of the average daily net asset
value of the Dollar or Plus shares held by the Service Organizations for the
benefit of their customers. Such services include: (i) aggregating and
processing purchase and redemption requests from customers and placing net
purchase and redemption orders with the transfer agent; (ii) providing customers
with a service that invests the assets of their accounts in Dollar or Plus
shares; (iii) processing dividend payments from the Fund on behalf of customers;
(iv) providing information periodically to customers showing their positions in
Dollar and Plus shares; (v) arranging for bank wires; (vi) responding to
customer inquiries relating to the services performed by the Service
Organizations; (vii) providing sub-accounting with respect to Dollar and Plus
shares beneficially owned by customers or the information necessary for
sub-accounting; (viii) forwarding shareholder communications from the Fund (such
as proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to customers, if required by law; and
(ix) other similar services if requested by the Fund. In addition,
broker/dealers purchasing Plus shares may be requested to provide from time to
time assistance (such as the forwarding of sales literature and advertising to
customers) in connection with the distribution of Plus shares. For the period
from August 1, 1994 through December 1, 1994, the Fund paid a total of $302 to
Service Organizations with respect to Plus shares (no Plus Shares were
outstanding from December 2, 1994 through July 31, 1997). For the period from
April 15, 1996 through July 31, 1996, the Fund paid a total of $22 to Service
Organizations with respect to Dollar shares. For the year ended July 31, 1997
and the year ended July 31, 1998 the fund paid a total of $8,458 and $504,
respectively, to Service Organizations with respect to Dollar shares.
-32-
<PAGE> 53
The Fund's agreements with Service Organizations are governed by
Plans (called "non-12b-1 Shareholder Services Plan" and "12b-1 Services Plan"
for the Dollar shares and Plus shares, respectively), which have been adopted by
the Fund's Board of Directors pursuant to applicable rules and regulations of
the SEC and an exemptive order granted by the SEC in connection with the
creation of the Dollar and Plus shares. Pursuant to the Plans, the Board of
Directors reviews, at least quarterly, a written report of the amounts expended
under the Fund's agreements with Service Organizations and the purposes for
which the expenditures were made. In addition, the Fund's arrangements with
Service Organizations must be approved annually by a majority of the Fund's
directors, including a majority of the directors who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Directors").
The Board of Directors has approved the Fund's arrangements with
Service Organizations based on information provided to the Board that there is a
reasonable likelihood that the arrangements will benefit the Fund and its
shareholders by affording the Fund greater flexibility in connection with the
servicing of the accounts of the beneficial owners of its shares in an efficient
manner. Any material amendment to the Fund's arrangements with Service
Organizations must be made in a manner approved by a majority of the Fund's
Board of Directors (including a majority of the Disinterested Directors), and
any amendment to increase materially the costs under the 12b-1 Services Plan
adopted by the Board with respect to Plus shares must be approved by the holders
of a majority of the outstanding Plus shares. (It should be noted that while the
annual service fee with respect to Plus shares is currently set at .25%, the
Plan adopted by the Board of Directors permits the Board to increase this fee to
.40% without shareholder approval.) So long as the Fund's arrangements with
Service Organizations are in effect, the selection and nomination of the members
of the Fund's Board of Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund will be committed to the discretion of such
non-interested directors.
Expenses.
Except as noted in the Prospectus, the Fund's service contractors
bear all expenses in connection with performance of their services. The Fund
bears the expenses incurred in its operations. Fund expenses include taxes,
interest, fees and salaries of its directors and officers, SEC fees, state
securities fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to shareholders, advisory and administration fees,
charges of the custodian, transfer agent and dividend disbursing agent, Service
Organization fees, certain insurance premiums, outside auditing and legal
expenses, costs of independent pricing service, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase of
portfolio securities.
-33-
<PAGE> 54
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning. Investors should consult their tax advisers with specific
reference to their own tax situations.
As described above and in the Fund's Prospectus, the Fund is
designed to provide New York institutional investors and their customers with
current tax-exempt interest income. The Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Fund's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Fund may
not be an appropriate investment for persons that are either "substantial users"
of facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business and (i) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (ii) who occupies more than 5% of the usable
area of such facilities, or (iii) for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related persons"
include certain related natural persons, affiliated corporations, a partnership
and its partners and an S corporation and its shareholders.
The percentage of total dividends paid by the Fund with respect to
any taxable year which qualifies as federal exempt-interest dividends will be
the same for all shareholders receiving dividends during such year. In order for
the Fund to pay exempt-interest dividends during any taxable year, at the close
of each fiscal quarter at least 50% of the aggregate value of the Fund's
portfolio must consist of federal tax-exempt interest obligations. In addition,
the Fund must distribute an amount that is equal to at least the sum of 90% of
its net exempt-interest income, if any, and 90% of its investment company
taxable income, if any, with respect to each taxable year. After the close of
its taxable year, the Fund will notify each shareholder of the portion of the
dividends paid by the Fund to the shareholder with respect to such taxable year
which constitutes an exempt-interest dividend. However, the aggregate amount of
dividends so designated cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Fund during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for federal and New York State and
New York City personal
-34-
<PAGE> 55
income tax purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year.
While the Fund does not expect to earn any investment company
taxable income, any such income earned by the Fund will be distributed. In
general, the Fund's investment company taxable income will be its taxable income
(including, for example, its short-term capital gains) subject to certain
adjustments and excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such year. To the
extent such income is distributed, it will be taxable to shareholders as
ordinary income, whether paid in cash or additional shares.
The Fund does not expect to realize long-term capital gains and
therefore does not expect to distribute any capital gain dividends.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date before the end of the year
will be deemed for federal income tax purposes to have been received by the
shareholders and paid by the Fund in that year in the event such dividends are
actually paid during January of the following year.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute with respect to each calendar year at least
98% of their ordinary taxable income and capital gain net income (excess of
capital gains over capital losses) for the 1-year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. The Fund intends to make sufficient distributions or deemed
distributions of any ordinary taxable income and any capital gain net income to
avoid liability for this excise tax.
Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
the Fund may be subject to the tax laws of states or localities depending upon
the extent of its activities in such states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, including amounts derived from interest on tax-exempt
obligations, would be taxable to shareholders to the extent of current and
accumulated earnings and profits, and would be eligible for the dividends
received deduction in the case of corporate shareholders for corporations.
The Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund that
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<PAGE> 56
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
DIVIDENDS
General.
Net income for dividend purposes consists of interest accrued and
original discount earned on the Fund's assets for the applicable dividend
period, less amortization of market premium on such assets and accrued expenses
for such period. Net income for each of the Fund's three series of shares is
determined in the same manner, except that Dollar and Plus shares bear the fees
payable to Service Organizations for the services to the beneficial owners of
such shares. (See the Fund's Prospectus under "Dividends.") Realized and
unrealized gains and losses on portfolio securities are reflected in net asset
value.
Should the Fund incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the income of
the Fund for a particular period, the Board of Directors would at that time
consider whether to adhere to the present dividend policy with respect to the
Fund or to revise it in order to mitigate to the extent possible the
disproportionate effect of such expense or loss on the income of the Fund. Such
expense or loss may result in the shareholder's receiving no dividends for the
period during which it held shares of the Fund and in it receiving upon
redemption a price per share lower than that which it paid.
Yield Information.
The "yields," "effective yields" and "tax-equivalent yields" of the
Fund's series of shares as described and shown in the Prospectus are calculated
according to formulas prescribed by the SEC. The standardized seven-day yield
for each of the Fund's three series of shares is computed separately for each
series by determining the net change in the value of a hypothetical pre-existing
account in the Fund having a balance of one share of the series involved at the
beginning of the period, dividing the net change by the value of the account at
the beginning of the period to obtain the base period return, and multiplying
the base period return by 365/7. The net change in the value of an account in
the Fund includes the value of additional shares purchased with dividends from
the original share and dividends declared on the original share and any such
additional shares, net of all fees charged to all shareholder accounts in
proportion to the length of the base period and the Fund's average account size,
but does not include gains and losses or unrealized appreciation and
depreciation. The Fund's "effective yield" is calculated by compounding the
unannualized base period return for each series of shares (calculated as above),
by adding one to the base period return for the series involved,
-36-
<PAGE> 57
raising that sum to a power equal to 365/7, and subtracting one from the result.
The Fund's "tax-equivalent" yield is computed by: (a) dividing the portion of
the Fund's yield (calculated as above) that is exempt from both federal and New
York State income taxes by one minus a stated combined federal and New York
State income tax rate; (b) dividing the portion of the Fund's yield (calculated
as above) that is exempt from federal income tax only by one minus a stated
federal income tax rate; and (c) adding the figures resulting from (a) and (b)
above to that portion, if any, of the Fund's yield that is not exempt from
federal income tax.
For the seven-day period ended July 31, 1998, the yield on Money
Shares was 3.32%, the compounded effective yield on Money Shares was 3.38% and
the tax-equivalent yield on Money shares was 5.14%. At fiscal year end July 31,
1998 there were no Dollar or Plus Shares outstanding. The tax-equivalent yield
assumes a marginal Federal income tax rate of 28%, a New York State and New York
City marginal income tax rate of 10.25% and an overall tax rate taking into
account the federal tax deduction for state and local taxes paid of 35.38%.
Because actual income may vary considerably from those assumptions, each
investor should consider their own tax rate in evaluating yields.
From time to time, in advertisements or in reports to shareholders,
the yields of the Fund may be quoted and compared to those of other mutual funds
with similar investment objectives and to stock or other relevant indices. For
example, the yield of the Fund may be compared to IBC Money Fund Average, which
is an average compiled by IBC Money Fund Report, a widely recognized independent
publication that monitors the performance of money market funds, or to the data
prepared by Lipper Analytical Services, Inc. ("Lipper"), a widely-recognized
independent service that monitors the performance of mutual funds.
The Fund may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Materials"),
discussions or illustrations of the effects of compounding. "Compounding" refers
to the fact that, if dividends or other distributions on an investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials discussions
and/or illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on certain assumptions and action plans
offering investment alternatives), investment management strategies, techniques,
policies or investment suitability of the Fund, economic and political
conditions, the relationship between sectors of the economy and the economy as a
whole, various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities, and hypothetical investment returns based on
certain assumptions. From time to time, Materials may summarize the substance of
information
-37-
<PAGE> 58
contained in shareholder reports (including the investment composition of the
Fund), as well as the views of the adviser and/or sub-adviser as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to the Fund. In addition, selected indices may be used to
illustrate historical performance of select asset classes. The Fund may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Materials may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), shareholder profiles and hypothetical investor scenarios, timely
information on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
Materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein. Materials may
include designations assigned the Fund by various rating or ranking
organizations, and Fund identifiers (such as CUSIP numbers or NASDAQ symbols).
Materials may include lists of representative clients of the Fund's investment
adviser, may include discussions of other products and services (of the Fund's
investment adviser and affiliates of the investment adviser), may contain
information regarding average weighted maturity or other maturity
characteristics, and may contain information regarding the background,
expertise, etc. of the investment adviser of the Fund's portfolio manager. The
following information has been provided by the Fund's distributor: In managing
the Fund's portfolio, the investment adviser utilizes a "pure and simple"
approach, which may include disciplined research, stringent credit standards and
careful management of maturities.
From time to time, the Fund may compare its total returns to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, such
data is found in IBC Money Fund Report and reports prepared by Lipper Analytical
Services, Inc. Total return is the change in value of an investment in the Fund
over a particular period, assuming that all distributions have been reinvested.
SUCH RANKINGS REPRESENT THE FUND'S PAST PERFORMANCE AND SHOULD NOT BE CONSIDERED
AS REPRESENTATIVE OF FUTURE RESULTS.
The Fund's yields and total return will fluctuate and any quotation
of the Fund's yield and total return should not be considered as representative
of the future performance of the Fund. Since yields and total return fluctuate,
yield and total return data cannot necessarily be used to compare an investment
in the Fund's shares with bank deposits, savings accounts, and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
and total return for a stated period of time. Shareholders should remember that
yield and total return are generally a function of kind and quality of the
investments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by banks or other financial institutions to
customer accounts investing in shares of the Fund will not
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<PAGE> 59
be included in calculations of yield and total return; such fees would reduce
the actual yield and total return from that quoted.
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<PAGE> 60
COUNSEL
Drinker Biddle & Reath LLP, 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, of which Mr. McConnel, Secretary of the Fund,
is a partner, will pass upon certain legal matters for the Fund as its counsel.
Willkie Farr & Gallagher, 787 7th Avenue, New York, New York 10019, acts as
special New York counsel for the Fund and has reviewed the portions of this
Statement of Additional Information and the Fund's Prospectus concerning New
York taxes and the description of special considerations relating to New York
Municipal Obligations.
INDEPENDENT ACCOUNTANTS
The financial statements of the Fund incorporated by reference in
this Statement of Additional Information and the Financial Highlights which
appear in the Fund's Prospectus have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon is incorporated by reference
herein, and have been included in the Fund's Prospectus in reliance upon the
report of said firm of independent accountants given upon their authority as
experts in accounting and auditing. PricewaterhouseCoopers LLP has offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
MISCELLANEOUS
The Fund was organized as a Maryland corporation on March 4, 1983
under the name of New York Municipal Fund for Temporary Investment, Inc. On July
18, 1983, the Fund changed its name to Municipal Fund for New York Investors,
Inc.
As used in this Statement of Additional Information and the Fund's
Prospectus, a "majority of the outstanding shares of the Fund" means, with
respect to the approval of an investment advisory agreement, distribution plan
or a change in an investment objective or fundamental investment policy, the
lesser of (1) 67% of the Fund's shares, irrespective of series, represented at a
meeting at which the holders of more than 50% of the outstanding shares are
present in person or by proxy, or (2) more than 50% of the Fund's outstanding
shares, irrespective of series.
As stated in the Prospectus, holders of the Fund's Money, Dollar and
Plus shares will vote in the aggregate and not by series on all matters, except
where otherwise required by law, except that only Dollar shares will be entitled
to vote on matters submitted to a vote of shareholders pertaining to the Fund's
arrangements with Service Organizations with respect to Dollar shares and only
Plus shares will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's arrangements with Service Organizations
with respect to Plus shares.
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<PAGE> 61
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted by the provisions of such Act or applicable state law, or
otherwise, to the holders of the outstanding securities of an investment company
such as the Fund shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each series
affected by the matter. Rule 18f-2 further provides that a series shall be
deemed to be affected by a matter unless it is clear that the interests of each
series in the matter are identical or that the matter does not affect any
interest of the series. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to a series only if approved by the holders of a
majority of the outstanding voting securities of such series. However, the Rule
also provides that the ratification of the selection of independent accountants,
the approval of principal underwriting contracts and the election of directors
are not subject to the separate voting requirements and may be effectively acted
upon by shareholders of the investment company voting without regard to series.
As of October 31, 1998, the name, address and percentage of
ownership of each institutional investor that owned of record 5% or more of the
outstanding shares of the Fund were as follows: Trulin & Co., c/o Chase
Manhattan Bank, N.A., Attn: Pooled Funds, P.O. Box 1412, Rochester, New York
14603, 24.38%; Fleet New York, Fleet Investment Services, Attn: Barbara Lumba,
159 East Main Street NY/RO/TO3C, Rochester, New York 14638, 15.48%; Marine
Midland Bank NA, Marine Midland General Account #10, Collective Trust Funds 17th
Floor, Attn: Christine Mincel, 1 Marine Midland Center, Buffalo, New York 14203,
06.37%; Chase Manhattan Bank, Administrative Services, Client Service Dept.,
Attn: Sevan Marinos, 33rd Fl., 1211 Avenue of the Americas, New York, New York
10017, 28.32%. The Fund does not know whether the entities named above are the
beneficial owners of the shares held by them.
The Fund does not currently intend to hold annual meetings of
shareholders (except as required by the 1940 Act or other applicable law). The
law under certain circumstances provides shareholders with the right to call for
a meeting of shareholders to consider the removal of one or more directors. To
the extent required by law, the Fund will assist in shareholder communication in
such matters.
Notwithstanding any provision of Maryland law requiring a greater
vote of the Fund's shares in connection with any corporate action, unless
otherwise provided by law or by the Fund's Charter, the Fund may take or
authorize such action upon the favorable vote of the holders of more than 50% of
the Fund's outstanding shares voting without regard to class or series. (See,
however, the Fund's Prospectus under "Description of Shares" regarding certain
special voting rights of Dollar and Plus shares on matters pertaining to the
Fund's arrangements with Service Organizations.)
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<PAGE> 62
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended
July 31, 1998 has been filed with the Securities and Exchange Commission. The
financial statements in such Annual Report (the "Financial Statements") are
incorporated by reference into this Statement of Additional Information. The
Financial Statements included in the Annual Report have been audited by the
Fund's independent accountants, PricewaterhouseCoopers LLP, whose report thereon
also appears in such Annual Report and is incorporated herein by reference. The
Financial Statements in such Annual Report have been incorporated herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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<PAGE> 63
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such
B-1
<PAGE> 64
grace period. The "D" rating will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
B-2
<PAGE> 65
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
B-3
<PAGE> 66
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
B-4
<PAGE> 67
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
B-5
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"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes
B-6
<PAGE> 69
probable credit stature upon completion of construction or elimination of basis
of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
B-7
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"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
B-8
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"CCC", "CC", "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
B-9
<PAGE> 72
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection that are ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
B-10
<PAGE> 73
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
B-11
