<PAGE>
HSBC Mutual Funds Trust Prospectus
HSBC Asset Management [LOGO]
- --------------------------------------------------------------------------------
Cash Management Fund
Government Money Market Fund
U.S. Treasury Money Market Fund
New York Tax-Free Money
Market Fund
Managed by HSBC Asset Management (Americas) Inc.
April 28, 2000
- --------------------------------------------------------------------------------
An investment in the Fund is not a deposit in a
bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other
government agency.
The Securities and Exchange Commission has not
approved or disapproved the shares described in
this prospectus or determined whether this
prospectus is accurate or complete. Any
representation to the contrary is criminal offense.
Questions?
Call 1-800-634-2536 or your
Investment Representative.
HSBC1P0400
<PAGE>
HSBC Funds Trust Prospectus Table of Contents
<TABLE>
<CAPTION>
[GRAPHIC]
Risk/Return Summary and Fund Expenses
- ----------------------------------------------------------------
<S> <C>
Carefully 3 Objective, Principal Investment
review this Strategy and Principal Risks
important 5 Cash Management Fund
section, which 8 Government Money Market Fund
summarizes 11 U.S. Treasury Money Market Fund
each Fund's 14 New York Tax-Free Money Market Fund
investments,
risks, past
performance
and fees.
[GRAPHIC]
Investment Objectives, Strategies and Risk
- ----------------------------------------------------------------
Review this 17 Cash Management Fund
section for 18 Government Money Market Fund
information on 18 U.S. Treasury Money Market Fund
investment 18 New York Tax-Free Money Market Fund
strategies and 19 Risk Considerations
their risks.
[GRAPHIC]
Fund Management
- ----------------------------------------------------------------
Review this 21 The Investment Adviser
section for 21 The Distributor and Administrator
details on the
people and
organizations
who oversee
the Funds.
[GRAPHIC]
Shareholder Information
- ----------------------------------------------------------------
Review this 22 Pricing of Fund Shares
section for 23 Purchasing and Adding to Your Shares
details on how 26 Selling Your Shares
shares are 30 Distribution Arrangements/Sales Charge
valued, how to 34 Exchanging Your Shares
purchase, sell 36 Dividends, Distributions and Taxes
and exchange
shares,
related
charges and
payments of
dividends and
distributions.
[GRAPHIC]
Financial Highlights
- ----------------------------------------------------------------
37
[GRAPHIC]
Back Cover
- ----------------------------------------------------------------
Where to learn more about this Fund
</TABLE>
2
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
The following is a summary of certain key information about the Funds. You will
find additional information about the Funds, including a detailed description
of the risks of an investment in the Funds, after this summary.
Each Fund has three different classes of shares; Class A shares, Class B
shares, and Class C shares. All shares purchased prior to the introduction of
multiple classes in May, 1999 are Class A shares. While all classes of shares
are presented in this prospectus, only the Cash Management Fund currently
offers Class B or Class C shares.
Objective The investment objective of each Fund (except the New York
Tax-Free Money Market Fund) is to provide as high a level of
current income as is consistent with preservation of capital
and liquidity. The New York Tax-Free Money Market Fund seeks
to provide as high a level of current income that is exempt
from Federal, New York State and New York City personal
income taxes as is consistent with preservation of capital
and liquidity.
Principal The Funds are "money market funds" that seek to maintain a
Investment stable net asset value of $1.00 per share. Each Fund pursues
Strategy its objective by investing in short-term, high-quality money
market instruments:
. Cash Management Fund Invests in high quality obligations
of banks, the U.S. Government and corporations. The Fund
may concentrate its investments in bank obligations.
. Government Money Market Fund Invests exclusively in
obligations of the U.S. Government and its agencies and
related repurchase agreements.
. U.S. Treasury Money Market Fund Invests exclusively in
obligations of the U.S. Government and related repurchase
agreements.
. New York Tax-Free Money Market Fund Invests in high
quality municipal securities that are exempt from Federal,
New York State and New York City income taxes.
Principal Risks The principal risks of investing in the Funds are:
. Interest Rate Risk Risk that changes in interest rates
will affect the value of a Fund's investments in income-
producing or fixed-
income or debt securities. Increases in interest rates may
cause the value of a Fund's investments to decline.
. Credit Risk Risk that the issuer or guarantor of a
security will be unable or unwilling to make timely
interest or principal payments, or to otherwise honor its
obligations. The degree of risk for a particular security
may be reflected in its credit rating. Credit risk
includes the possibility that any of the Funds'
investments will have their credit ratings downgraded.
. Municipal Market Risk (New York Tax-Free Money Market
Fund) Risk that special factors may adversely affect the
value of municipal securities and have a significant
effect on the value of the Fund's investments. These
factors include political or legislative changes,
uncertainties related to the tax status of municipal
securities, or the rights of investors in these
securities.
3
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Other important things for you to note:
. Although the Funds seek to preserve the value of your
investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
. An investment in the Funds is not a deposit in a bank and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Who may want to
invest? Consider investing in the Funds if you:
. are seeking preservation of capital
. are investing short-term reserves
. in the case New York Tax-Free Money Market, are an
individual seeking tax free income
These Funds will not be appropriate if you are:
. seeking high total returns
. pursuing a long-term goal or investing for retirement
. investing through a tax advantaged retirement plan or are
not an individual (in the case of New York Tax-Free Money
Market only)
4
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Cash Management Fund
Performance Information
Bar Chart
The Risk/Return Year-by-Year Total Returns as of 12/31 for
Summary of the Cash Class A Shares
Management Fund
includes a bar chart
showing the Fund's
annual returns and a
table showing the
Fund's average annual
returns. The bar chart
and table provide an
indication of the
historical risk in
each Fund by showing:
. changes in the
Fund's performance
from year to year
for the past ten
years in the bar
chart; and
. the Fund's average
annual returns for
one, five and ten
year periods.
If fee waivers or
expense reimbursements
had not been reflected
in both the chart and
the table, the Fund's
performance would have
been lower.
Both the chart and
table assume
reinvestment of
dividends.
[BAR CHART]
1990 91 92 93 94 95 96 96 98 99
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
8.01% 5.92% 3.77% 3.11% 3.95% 5.41% 5.00% 5.18% 5.15% 4.75%
--------------------------
Past performance does not
You may obtain current indicate how the Fund
yield information for will perform in the
any Fund by calling future.
1-800-634-2563. Each
Fund's yield appears
in The Wall Street
Journal each Thursday.
<TABLE>
<S> <C> <C>
Best quarter: Q2 1990 1.96%
Worst quarter: Q3 1993 .71%
</TABLE>
-------------------------
Performance Table
Average Annual Total Returns (for the periods ended December 31, 1999)*
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Management Fund
Class A** 6/30/82 4.75% 5.10% 5.02%
-----------------------------------------------------------
Lipper Money Market Fund N/A 4.49% 4.95% 4.79%
</TABLE>
- --------------------------------------------------------------------------------
* As of December 31, 1999 the 7-day yield was 5.26%. Without expense
limitations, the Fund's yield would have been 5.13% for this time period.
** Returns are for Class A shares only; Class B and C shares commenced offering
on July 1, 1999.
5
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Cash Management Fund
Fees and Expenses
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses
(fees paid by you directly) A Shares B Shares/1/ C Shares/2/
As an investor in
the Cash
Management Fund,
you will pay the
following fees
and expenses.
Shareholder
transaction fees
are paid from
your account.
Annual Fund
operating
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases None None None
------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/3/ 1.00%/4/
------------------------------------------------------------
<CAPTION>
Annual Fund Operating Expenses
(fees paid from Fund assets) A Shares B Shares C Shares
Contingent Deferred
Sales Charge <S> <C> <C> <C>
Management fee/5/ .35% .35% .35%
------------------------------------------------------------
Administrative Services fee/6/ .15% .15% .15%
------------------------------------------------------------
Distribution (12b-1) fee .20% .75% .75%
------------------------------------------------------------
Service Organization fee/7/ .35% .50% .50%
------------------------------------------------------------
Other expenses .19% .19% .19%
------------------------------------------------------------
Total Fund Operating expenses 1.24% 1.94% 1.94%
------------------------------------------------------------
Fee Waivers/5/,/6/ .59% .29% .29%
------------------------------------------------------------
Net Expense/7/ .65% 1.65% 1.65%
------------------------------------------------------------
</TABLE>
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called
a Contingent
Deferred Sales
Charge.
/1/Class B shares are not offered for sale but are only offered as an exchange
option (see "Exchanging Your Shares").
/2/Class C shares can be purchased by customers of HSBC Bank USA Commercial
Sweep. All other shareholders may exchange their Class C shares from another
HSBC Fund to Class C shares of the Cash Management Fund.
/3/A CDSC on Class B shares declines over four years starting with year one and
ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/4/A CDSC of 1% applies to redemptions of Class C shares within the first year.
This is being waived for customers of HSBC Bank USA Commercial Sweep.
/5/The Advisor has contractually agreed to waive or reimburse its Management
fee to the extent the Fund's ordinary operating expenses exceed .65% for
Class A shares and 1.65% for Class B and Class C shares of the Fund's average
daily net assets.
/6/The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/7/The Service Organization fee is being contractually limited to .10% for
Class A shares and contractually limited to .25% for Class B and Class C
shares.
/8/The contractual expense limitations are in effect through December 31, 2000.
6
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Cash Management
Fund
Expense Example <TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $ 66 $335 $ 624 $1,448
---------------------------------------------------
Class B Shares
Assuming redemption $568 $781 $1,020 $1,892
Assuming no redemption $168 $581 $1,020 $1,892
---------------------------------------------------
Class C Shares
Assuming redemption $268 $581 $1,020 $2,241
Assuming no redemption $168 $581 $1,020 $2,241
---------------------------------------------------
</TABLE>
Use the table to
compare fees and
expenses with those
of other Funds.
It illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in the
Fund's operating
expenses except
the expiration of
the current
contractual fee
waiver on
December 31,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
7
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Government Money Market Fund
Performance Information
Bar Chart
The Risk/Return Year-by-Year Total
Summary of the Returns as of 12/31
Government Money for Class A Shares
Market Fund includes a
bar chart showing the
Fund's annual returns
and a table showing
the Fund's average
annual returns. The
bar chart and table
provide an indication
of the historical risk
in each Fund by
showing:
. changes in
the Fund's
performance
from year to
year for the
past ten
years in the
bar chart;
and
. the Fund's
average
annual
returns for
one, five
and ten year
periods.
If fee waivers or
expense reimbursements
had not been reflected
in both the chart and ---------------------------
the table, the Fund's
performance would have
been lower.
Past performance does not
indicate how the Fund
will perform in the
future.
Both the chart and
table assume <TABLE>
reinvestment of <S> <C> <C>
dividends. Best quarter: Q2 1990 1.96%
Worst quarter: Q1 1994 0.69%
</TABLE>
You may obtain current
yield information for -------------------------
any Fund by calling
1-800-634-2563. Each
Fund's yield appears
in The Wall Street
Journal each Thursday.
[BAR CHART]
1990 91 92 93 94 95 96 97 98 99
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.92% 5.79% 3.80% 2.99% 3.83% 5.32% 4.87% 5.05% 5.01% 4.65%
Performance Table
Average Annual Total Returns (for the periods ended December 31, 1999)*
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
-----------------------------------------------------
<S> <C> <C> <C> <C>
Government Money Market 6/30/82 4.65% 4.98% 4.91%
Fund Class A**
-----------------------------------------------------
Lipper Government Money N/A 4.58% 4.98% 4.79%
Market Fund
</TABLE>
- --------------------------------------------------------------------------------
* As of December 31, 1999 the 7-day yield was 5.06%. Without expense
limitations, the Fund's yield would have been 4.94% for this time period.
** Returns are for Class A shares only. As of the date of this prospectus,
Class B and C share have not commenced offering.
8
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Government Money Market Fund
Fees and Expenses
As an investor in
the Government
Money Market
Fund, you will
pay the following
fees and
expenses.
Shareholder
transaction fees
are paid from
your account.
Annual Fund
operating
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses
(fees paid
by you directly) A Shares B Shares/1/ C Shares/1/
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases None None None
------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/2/ 1.00%/3/
------------------------------------------------------------
Contingent
Deferred Sales
Charge <CAPTION>
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called a
Contingent
Deferred Sales
Charge.
<S> <C> <C> <C>
Management fee/4/ .35% .35% .35%
------------------------------------------------------------
Administrative Services fee/5/ .15% .15% .15%
------------------------------------------------------------
Distribution (12b-1) fee .20% .75% .75%
------------------------------------------------------------
Service Organization fee .35% .50% .50%
------------------------------------------------------------
Other expenses .24% .24% .24%
------------------------------------------------------------
Total Fund Operating expenses 1.29% 1.99% 1.99%
------------------------------------------------------------
Fee Waivers & Expense
Reimbursements/4/, /5/ .64% .34% .34%
------------------------------------------------------------
Net Expense/6/ .65% 1.65% 1.65%
------------------------------------------------------------
</TABLE>
/1/ As of the date of this prospectus, Class B and Class C shares are not being
offered.
/2/ A CDSC on Class B shares declines over four years starting with year one
and ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares within the first
year.
/4/ The Adviser has contractually agreed to waive or reimburse its Management
fee to the extent the Fund's ordinary operating expenses exceed .65% for Class
A shares and 1.65% for Class B and Class C shares of the Fund's average daily
net assets.
/5/ The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/6/ The Service Organization fee is being contractually limited to .10% for
Class A shares and contractually limited to .25% for Class B and Class C
shares.
/7/ The contractual expense limitations and reimbursements are in effect
through December 31, 2000.
9
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
Government Money Market Fund
Expense Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming Redemption $ 66 $346 $ 646 $1,500
---------------------------------------------------
Class B Shares
Assuming redemption $568 $792 $1,041 $1,942
Assuming no redemption $168 $592 $1,041 $1,942
---------------------------------------------------
Class C Shares
Assuming redemption $268 $592 $1,041 $2,289
Assuming no redemption $168 $592 $1,041 $2,289
---------------------------------------------------
</TABLE>
Use the table to
compare fees and
expenses with those
of other Funds.
It illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in the
Fund's operating
expenses except
the expiration of
the current
contractual fee
waiver on
December 31,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
10
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
U.S. Treasury Money Market Fund
Performance Information Bar Chart
Year-by Year Total
The Risk/Return Returns
Summary of the U.S.
Treasury Money Market
Fund includes a bar as of 12/31 for
chart showing the Class A Shares
Fund's annual returns
and a table showing
the Fund's average
annual returns. The
bar chart and table
provide an indication
of the historical risk
in each Fund by
showing:
. changes in the
Fund's performance
from year to year
for the past ten
years in the bar
chart; and
. the Fund's average
annual returns for
one, five and ten
year periods.
If fee waivers or
expense reimbursements
had not been reflected
in both the chart and
the table, the Fund's
performance would have
been lower.
[BAR CHART]
1990 91 92 93 94 95 96 97 98 99
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.94% 5.60% 3.27% 2.65% 3.60% 5.04% 4.68% 4.98% 4.86% 4.39%
---------------------------
Both the chart and Past performance does not
table assume indicate how the Fund
reinvestment of will perform in the
dividends. future.
You may obtain current <TABLE>
yield information for <S> <C> <C>
any Fund by calling Best quarter: Q3 1990 1.95%
1-800-634-2563. Each Worst quarter: Q1 1993 0.64%
Fund's yield appears </TABLE>
in The Wall Street -------------------------
Journal each Thursday.
Performance Table
Average Annual Total Returns (for the periods ended December 31, 1999)*
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market 5/31/83 4.39% 4.79% 4.69%
Fund Class A**
------------------------------------------------------
Lipper Treasury Money N/A 4.30% 4.81% 4.69%
Market Fund
</TABLE>
- --------------------------------------------------------------------------------
* As of December 31, 1999 the 7-day yield was 4.30%. Without expense
limitations, the Fund's yield would have been 4.21% for this time period.
** Returns are for Class A shares only. Class B and Class C shares have
commenced offering on July 1, 1999.
11
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
U.S. Treasury Money Market Fund
Fees and Expenses
As an investor in
the U.S. Treasury
Money Market
Fund, you will
pay the following
fees and
expenses.
Shareholder
transaction fees
are paid from
your account.
Annual Fund
operating
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses (fees paid
by you directly) A Shares B Shares/1/ C Shares/1/
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases None None None
------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/2/ 1.00%/3/
------------------------------------------------------------
Annual Fund Operating
Expenses (fees paid
from Fund assets) A Shares B Shares C Shares
Contingent Deferred
Sales Charge
Management fee/4/ .35% .35% .35%
------------------------------------------------------------
Administrative Services fee/5/ .15% .15% .15%
------------------------------------------------------------
Distribution (12b-1) fee .20% .75% .75%
------------------------------------------------------------
Service Organization fee .35% .50% .50%
------------------------------------------------------------
Other expenses .26% .26% .26%
------------------------------------------------------------
Total Fund Operating expenses 1.31% 2.01% 2.01%
------------------------------------------------------------
Fee Waivers & Expense
Reimbursements/4/, /5/ .66% .36% .36%
------------------------------------------------------------
Net Expense/6/ .65% 1.65% 1.65%
------------------------------------------------------------
</TABLE>
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called a
Contingent
Deferred Sales
Charge.
/1/ As of the date of this prospectus, Class B and Class C shares are not being
offered.
/2/ A CDSC on Class B shares declines over four years starting with year one
and ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares within the first
year.
/4/ The Adviser has contractually agreed to waive or reimburse its Management
fee to the extent the Fund's ordinary operating expenses exceed .65% for Class
A shares and 1.65% for Class B and Class C shares of the Fund's average daily
net assets.
/5/ The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/6/ The Service Organization fee is being contractually limited to .10% for
Class A shares and contractually limited to .25% for Class B and Class C
shares.
/7/ The contractual expense limitations and reimbursements are in effect
through December 31, 2000.
12
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
U.S. Treasury Money
Market Fund
Expense
Example <TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $ 66 $350 $ 655 $1,521
---------------------------------------------------
Class B Shares
Assuming redemption $568 $796 $1,050 $1,962
Assuming no redemption $168 $596 $1,050 $1,962
---------------------------------------------------
Class C Shares
Assuming redemption $268 $596 $1,050 $2,309
Assuming no redemption $168 $596 $1,050 $2,309
---------------------------------------------------
</TABLE>
Use the table to
compare fees and
expenses with those
of other Funds.
It illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in the
Fund's operating
expenses except
the expiration of
the current
contractual fee
waiver on
December 31,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
13
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Money Market Fund
Performance Information Bar Chart
Year-by-Year Total Returns
The Risk/Return as
Summary of the New of 12/31 for Class A
York Tax-Free Money Shares
Market Fund includes a
bar chart showing the
Fund's annual returns
and a table showing
the Fund's average
annual returns. The
bar chart and table
provide an indication
of the historical risk
in each Fund by
showing:
. changes in the
Fund's performance
from year to year
for the past ten
years in the bar
chart; and
. the Fund's average
annual returns for
one, five and ten
year periods.
If fee waivers or
expense reimbursements
had not been reflected
in both the chart and
the table, the Fund's
performance would have
been lower.
[BAR CHART]
1990 91 92 93 94 95 96 97 98 99
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
5.25% 3.85% 2.44% 1.86% 2.23% 3.17% 2.92% 3.14% 2.83% 2.64%
--------------------------
Past performance does not
indicate how the Fund
will perform in the
future.
Both the chart and
table assume
reinvestment of
dividends.
<TABLE>
You may obtain current <S> <C> <C>
yield information for Best quarter: Q4 1990 1.29%
any Fund by calling Worst quarter: Q1 1994 0.42%
1-800-634-2563. Each </TABLE>
Fund's yield appears
in The Wall Street -------------------------
Journal each Thursday.
Performance Table
Average Annual Total Returns (for the periods ended December 31, 1999)*
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Past 10 Years
----------------------------------------------------
<S> <C> <C> <C> <C>
New York Tax-Free Money
Market Fund Class A** 1/31/86 2.64% 2.94% 3.02%
----------------------------------------------------
Lipper New York Tax-Exempt
Money Market Fund N/A 2.62% 2.95% 3.05%
</TABLE>
- --------------------------------------------------------------------------------
* As of December 31, 1999 the 7-day yield was 3.74%. Without expense
limitations, the Fund's yield would have been 3.68% for this time period.
** Returns are for Class A shares only. As of the date of this prospectus,
Class B and C shares are not currently being offered.
14
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Money Market Fund
Fees and Expenses
As an investor in
the New York Tax-
Free Money Market
Fund, you will
pay the following
fees and
expenses.
Shareholder
transaction fees
are paid from
your account.
Annual Fund
operating
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
<TABLE>
<CAPTION>
Shareholder Transaction
Expenses
(fees paid by you directly) A Shares B Shares/1/ C Shares/1/
<S> <C> <C> <C>
Maximum sales charge (load)
on purchases None None None
------------------------------------------------------------
Maximum deferred sales charge
(load) None 4.00%/2/ 1.00%/3/
Annual Fund Operating Expenses
(fees paid from Fund assets) A Shares B Shares C Shares
Contingent Deferred
Sales Charge
Management fee/4/ .35% .35% .35%
------------------------------------------------------------
Administrative Services fee/5/ .15% .15% .15%
------------------------------------------------------------
Distribution (12b-1) fee .20% .75% .75%
------------------------------------------------------------
Service Organization fee .35% .50% .50%
------------------------------------------------------------
Other expenses .19% .19% .19%
------------------------------------------------------------
Total Fund Operating expenses 1.24% 1.94% 1.94%
------------------------------------------------------------
Fee Waivers & Expense
Reimbursements/4/, /5/ .59% .29% .29%
------------------------------------------------------------
Net Expense/6/ .65% 1.65% 1.65%
------------------------------------------------------------
</TABLE>
Some share
classes impose a
back end sales
charge (load) if
you sell your
shares before a
certain period of
time has elapsed.
This is called
a Contingent
Deferred Sales
Charge.
/1/ As of the date of this prospectus, Class B and Class C shares are not being
offered.
/2/ A CDSC on Class B shares declines over four years starting with year one
and ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/3/ A CDSC of 1% applies to redemptions of Class C shares within the first
year.
/4/ The Adviser has contractually agreed to waive or reimburse its Management
fee to the extent the Fund's ordinary operating expenses exceed .65% for Class
A shares and 1.65% for Class B and Class C shares of the Fund's average daily
net assets.
/5/ The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/6/The Service Organization fee is being contractually limited to .10% for
Class A shares and contractually limited to .25% for Class B and Class C
shares.
/7/ The contractual expense limitations and reimbursements are in effect
through December 31, 2000.
15
<PAGE>
Risk/Return Summary and Fund Expenses
[GRAPHIC]
New York Tax-Free Money Market Fund
Expense
Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares
Assuming redemption $ 66 $335 $ 624 $1,448
---------------------------------------------------
Class B Shares
Assuming redemption $568 $781 $1,020 $1,892
Assuming no redemption $168 $581 $1,020 $1,892
---------------------------------------------------
Class C Shares
Assuming redemption $268 $581 $1,020 $2,241
Assuming no redemption $168 $581 $1,020 $2,241
---------------------------------------------------
</TABLE>
Use the table to
compare fees and
expenses with those
of other Funds. It
illustrates the
amount of fees and
expenses you would
pay, assuming the
following:
. $10,000
investment
. 5% annual return
. no changes in the
Fund's operating
expenses except
the expiration of
the current
contractual fee
waiver on
December 31,
2000.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
16
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
This section of the prospectus provides a more complete description of the
principal investment objectives, policies, and principal risks of the Funds.
Additional descriptions of the Funds' risks, strategies, and investments, as
well as other strategies and investments not described below, may be found in
the Funds' Statement of Additional Information or SAI. Of course, there can be
no assurance that any Fund will achieve its investment objective.
Investment Objective, Policies and Strategies
Investment Objectives
The investment objective of each Fund (except the New York Tax-Free Money
Market Fund) is to provide as high a level of current income as is consistent
with preservation of capital and liquidity. New York Tax-Free Money Market Fund
seeks to provide as high a level of current income that is exempt from Federal,
New York State and New York City income taxes as is consistent with
preservation of capital and liquidity.
Investment Policies and Strategy
As a money market fund, each Fund must meet the requirements of Rule 2a-7 of
the Investment Company Act of 1940. This Rule imposes strict requirements on
the investment quality, maturity, and diversification of the Fund's
investments. Under Rule 2a-7, each Fund's investments must have a remaining
maturity of no more than 397 days and its investments must maintain an average
weighted maturity that does not exceed 90 days.
Each of the Funds will attempt to increase their yields by trading to take
advantage of short-term market variations. The Funds' Adviser evaluates
investments based on credit analysis and the interest rate outlook.
Cash Management Fund
Ticker Symbol: Class A MHMXX Class B
N/A Class C N/A
The Cash Management Fund invests in a broad range of short-term money market
instruments including:
. obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
. variable rate demand and master demand notes;
. certain repurchase agreements;
. negotiable certificates of deposit, bankers' acceptances, time deposits,
and other obligations issued or supported by U.S. (including foreign
branches) banks that have more than $1 billion in total assets at the time
of investment;
. U.S. Dollar-denominated obligations of foreign banks (including U.S.
branches) which at the time of investment (i) have more than $10 billion,
or the equivalent in other currencies, in total assets, (ii) have branches
or agencies in the United States, and (iii) in the opinion of the Fund's
investment adviser, are of an investment quality comparable to obligations
of U.S. banks which may be purchased by the Fund and present minimal credit
risk;
. domestic and foreign commercial paper rated in the highest category by one
or more nationally recognized statistical rating organizations or rating
agencies, or if unrated, determined to be of comparable quality by the
Adviser; and
17
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
. investment grade corporate debt securities.
The Fund may invest more than 25% of the current value of its total assets in
domestic bank obligations (including bank obligations subject to repurchase
agreements).
Government Money Market Fund
Ticker Symbol: MGFXX
The Government Money Market Fund invests exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements with respect to these types of obligations.
The Fund will invest in:
. issues of the U.S. Treasury, such as bills, notes and bonds.
. issues of U.S. Government agencies and instrumentalities established under
the authority of an Act of Congress, including obligations:
* supported by the "full faith and credit" of the United States (e.g.,
obligations guaranteed by the Export-Import Bank of the United States).
* supported by the right of the issuer to borrow from the U.S. Treasury
(e.g., obligations of the Federal National Mortgage Association).
* supported only by the credit of the issuing agency or instrumentality
(e.g., obligations of the Student Loan Marketing Association).
U.S. Treasury Money Market Fund
Ticker Symbol: MUSXX
The U.S. Treasury Money Market Fund invests exclusively in direct obligations
of the U.S. Treasury and certain repurchase agreements. The Fund will not
invest in obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government and will not enter into loans of its portfolio securities.
New York Tax-Free Money Market Fund
Ticker Symbol: MNFXX
The New York Tax-Free Money Market Fund invests primarily in a broad range of
high-quality municipal obligations that are exempt from regular Federal, New
York State, and New York City municipal income taxes. The Fund will maintain at
least 80% of its net assets in high-quality, tax-exempt municipal obligations.
Municipal obligations purchased by the Fund are debt obligations issued by or
on behalf of states, cities, municipalities, and other public authorities.
18
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
The Fund may invest in:
. upper medium or higher grade municipal bonds and high quality, notes, and
commercial paper;
. debt obligations that have a floating or variable rate of interest, which
varies with changes in specified market rates or indices;
. when-issued securities with delivery and payment normally taking place 15
to 45 days after the date of the commitment to purchase; and
. securities with put rights.
The Fund will invest primarily in New York municipal obligations and
participation certificates in these obligations purchased from banks, insurance
companies and other financial institutions. The Fund will invest at least 80%
of its net assets in New York municipal obligations.
The Fund may invest 25% or more of its assets in municipal obligations that are
related in ways such that an economic, business or political development or
change affecting one obligation could also affect the other obligations; for
example, municipal obligations the interest on which is paid from revenues of
similar types of projects.
The Fund may invest up to 20% of the current value of its total assets in money
market instruments subject to the Federal alternative minimum tax. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
taxable money market instruments or cash reserves. While investing for
temporary defensive purposes, the Fund may not achieve its investment
objectives.
Risk Considerations
General Risk Factors: All Money Market Funds
The Funds' primary risks are interest rate risk and credit risk. Because the
Funds invest in short-term securities, a decline in interest rates will affect
the Funds' yields as these securities mature or are sold and the Funds purchase
new short-term securities with lower yields. Generally, an increase in interest
rates causes the value of a debt instrument to decrease. The change in value
for shorter-term securities is usually smaller than for securities with longer
maturities. Because the Funds invest in securities with short maturities and
seek to maintain a stable net asset value of $1.00 per share, it is possible,
that an increase in interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating will be
downgraded or that the issuer of the security will default (fail to make
scheduled interest and principal payments). The Funds invest in highly-rated
securities to minimize credit risk. Under Rule 2a-7, 95% of a money market
fund's holdings, must be rated in the highest credit category (e.g., A-1 or
A-1+) and the remaining 5% must be rated no lower than the second highest
credit category.
19
<PAGE>
Investment Objectives, Strategies and Risk
[GRAPHIC]
Specific Risk Factors: Cash Management Fund
The Cash Management Fund's investments in U.S. Dollar-denominated obligations
(or credit and liquidity enhancements) of foreign banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and commercial paper of foreign
companies may be subject to foreign risk. Foreign securities issuers are
usually not subject to the same degree of regulation as U.S. issuers.
Reporting, accounting, and auditing standards of foreign countries differ, in
some cases, significantly from U.S. standards. Foreign risk includes
nationalization, expropriation or commandeering taxation, political changes or
diplomatic developments that could adversely affect a Fund's investments.
To the extent that the Fund concentrates in the domestic banking industry, it
may be impacted by economic and other factors affecting that industry unlike
other mutual funds which do not concentrate in bank obligations.
Specific Risk Factors: New York Tax-Free Money Market Fund
The New York Tax-Free Money Market Fund faces municipal market risk. Because
the Fund will concentrate its investments in New York and may invest up to 25%
of its assets in the securities of a single issuer or sector, investment in
this Fund may pose investment risks greater than those posed by a more broadly
diversified portfolio. Consequently, unlike a more diversified portfolio, the
Fund's assets could lose significant value due to the poor performance of a
single issuer or sector.
The Fund may also be subject to credit risks. Historically, New York State and
other issuers of New York Municipal Obligations have experienced periods of
financial difficulties. Factors affecting New York State and its
municipalities, including economic, political, or regulatory occurrences, may
have a significant effect on the Fund's net asset value.
The New York Tax-Free Money Market Fund's investments in certain municipal
securities with principal and interest payments that are made from the revenues
of a specific project or facility, and not general tax revenues, may have
increased risks. Factors affecting the project or facility, such as local
business or economic conditions, could have a significant effect on the
project's ability to make payments of principal and interest on these
securities.
20
<PAGE>
Fund Management
[GRAPHIC]
The Investment Adviser
HSBC Asset Management Americas Inc. (the "Adviser") is the North American
investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking
Corporation) and HSBC Bank USA. As of December 31, 1999, the Adviser managed
more than $6.1 billion in assets. Through its fund management team, the Adviser
makes the day-to-day investment decisions and continuously reviews, supervises
and administers the Funds' investment programs.
For these advisory services, the Funds paid the Advisor as follows:
<TABLE>
<CAPTION>
Percentage of
average net assets
for the year ended
12/31/99*
- -------------------------------------------------------
<S> <C>
Cash Management Fund .25%
- -------------------------------------------------------
Government Money Market Fund .28%
- -------------------------------------------------------
U.S. Treasury Money Market Fund .18%
- -------------------------------------------------------
New York Tax-Free Money Market Fund .29%
- -------------------------------------------------------
</TABLE>
*If the adviser had not waived fees, they would have been: Cash Management Fund
.35%, Government Money Market Fund .35%, U.S. Treasury Money Market Fund .35%,
and New York Tax-Free Money Market .35%.
Code of Ethics
The Code of Ethics of the Adviser and the Funds prohibits all affiliated
persons from engaging in personal investment activities which compete with or
attempt to take advantage of a Fund's planned portfolio transactions. Both
organizations maintain careful monitoring with the Code of Ethics. The Code of
Ethics are on public file and are available from the SEC.
The Distributor and Administrator
BISYS Fund Services Limited Partnership ("BISYS"), whose address is 3435
Stelzer Road, Columbus, Ohio 43219-3035, serves as the Funds' administrator.
BISYS also serves as the distributor of the Funds' shares. BISYS may provide
financial assistance in connection with pre-approved seminars, conferences and
advertising to the extent permitted by applicable state or self-regulatory
agencies, such as the National Association of Securities Dealers.
The Statement of Additional Information has more detailed information about the
Investment Adviser and other service providers.
21
<PAGE>
Shareholder Information
[GRAPHIC]
Pricing of Fund Shares
- ---------------------
How NAV is
Calculated
Each of the Funds' net asset value, or NAV, is expected
The NAV is to be constant at $1.00 per share, although this value
calculated by adding is not guaranteed. The NAV is determined at 12 noon,
the total value of Eastern time on days the New York Stock Exchange,
the Fund's Funds' custodian and transfer agent are open. The Funds
investments and value their securities at their amortized cost. This
other assets, method involves valuing an instrument at its cost and
subtracting its thereafter applying a constant amortization to maturity
liabilities and then of any discount or premium, regardless of the impact of
dividing that figure fluctuating interest rates on the market value of the
by the number of instrument.
outstanding shares
of the Fund: Your order for purchase, sale or exchange of shares is
priced at the next NAV calculated after your order is
NAV = accepted by the Fund.
Total Assets-
Liabilities Orders will become effective when Federal funds are
------------- available to the Trust's custodian for investment.
Number of Shares --------------------------------------------------------
Outstanding
- ---------------------
22
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding to Your Shares
<TABLE>
<CAPTION>
Minimum Minimum
Initial Subsequent
Account type Investment Investment
-------------------------------------------
<S> <C> <C>
Regular $1,000 $50
-------------------------------------------
Automatic Investment Plan $ 250 $25
-------------------------------------------
</TABLE>
You may purchase
shares through the
Distributor or
through banks,
brokers and other
investment
representatives,
which may charge
additional fees and
may require higher
minimum investments
or impose other
limitations on
buying and selling
shares. If you
purchase shares
through an
investment
representative, that
party is responsible
for transmitting
orders by close of
business and may
have an earlier cut-
off time for
purchase and sale
requests. Consult
your investment
representative or
institution for
specific
information.
* The New York Tax-Free Money Market Fund is not
recommended as an investment for a retirement plan.
Class B shares and Class C shares of the Cash
Management Fund are offered as an exchange option for
Class B and Class C shareholders of the Trust's other
investment portfolios. Class C shares are also offered
to certain investors who desire enhanced shareholder
services which include cash sweeps. As of the date of
this prospectus, Class B and Class C shares are not
currently being offered in the Government Money Market
Fund, the U.S. Treasury Money Market Fund and the New
York Tax-Free Money Market Fund.
- --------------------------------------------------------------------------------
Orders will become effective when Federal funds are available to the Trust's
custodian for investment. If payment is transmitted by wire (which may take two
or more hours to complete), the order will become effective upon receipt of
Federal funds. In order for a wire purchase to be effective on the same day it
is received, both the trading instructions and the wire must be received before
4 p.m. Eastern time. Payments transmitted by bank wire other than the Federal
Reserve Wire System may take longer to be converted into Federal funds.
All purchases must be in U.S. dollars. A fee will be charged for any checks
that do not clear. Third-party checks are not accepted.
There are no minimum investment requirements with respect to investments
effected through certain automatic purchase and redemption arrangements on
behalf of customer accounts maintained at Service Organizations. The minimum
investment requirements may be waived or lowered for investments effected on a
group basis by certain other institutions and their employees, such as pursuant
to a payroll deduction plan. All funds will be invested in full and fractional
shares. The Funds reserve the right to reject any purchase order.
Avoid 31% Tax Withholding
The Funds are required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
23
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding To Your Shares
By Regular Mail
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
By Regular Mail: By Express Mail:
HSBC Family of Funds HSBC Family of Funds
PO Box 163850 3435 Stelzer Road
Columbus, OH 43216-3850 Columbus, OH 43219
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "HSBC Family of Funds".
3. Mail or deliver application and payment to the address above.
Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
. Fund
. Amount invested
. Account name and number
2. Make check, bank draft or money order payable to "HSBC Family of Funds".
3. Mail or deliver investment slip and payment to the address above.
Electronic Purchases
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-634-2536. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-634-2536 to arrange a transfer from your bank account.
24
<PAGE>
Shareholder Information
[GRAPHIC]
Purchasing and Adding To Your Shares
Electronic vs. Wire Transfer
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to eight days to
clear. There is generally no fee for ACH transactions.
By Wire Transfer
Telephone the Transfer Agent at 1-800-634-2536 for instructions. Please note
your bank may charge you a fee for handling this transaction.
You can add to your account by using the convenient options described below.
The Funds reserve the right to change or eliminate these privileges at any time
with 60 days notice.
Automatic Investment Plan
You can make automatic investments in the Funds from your bank account, through
payroll deduction or from your federal employment, Social Security or other
regular government checks. Automatic investments can be as little as $50, once
you've invested the $1000 minimum required to open the account.
To invest regularly from your bank account:
. Complete the Automatic Investment Plan portion on your Account Application.
Make sure you note:
- Your bank name, address and account number
- The amount you wish to invest automatically (minimum $50)
- How often you want to invest (every month, 4 times a year, twice a year or
once a year)
. Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-634-2536 for an enrollment form.
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends for the Cash Management Fund are higher for Class A shares than for
Class B and C shares, because Class A shares have lower distribution expenses.
Capital gains are distributed at least annually.
Questions?
Call 1-800-634-2536 or your investment representative.
25
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
You may sell Withdrawing Money from Your Fund Investment
your shares at
any time. Your As a mutual fund shareholder, you are technically selling
sales price will shares when you request a withdrawal in cash. This is also
be the next NAV known as redeeming shares or a redemption of shares.
after your sell
order is -------------------------------------------------------------
received by the
Fund, its Contingent Deferred Sales Charge
transfer agent,
or your When you sell Class B or C shares of the Cash Management
investment Fund, you will be charged a fee for any shares that have not
representative. been held for a sufficient length of time. These fees will
Normally you be deducted from the money paid to you. The Contingent
will receive Deferred Sales Charge will be waived for customers of HSBC
your proceeds Bank USA Commercial Sweep who are redeeming Class C shares.
within a week See the section on "Distribution Arrangements/Sales Charges"
after your on page 31 for details.
request is
received.
- --------------------------------------------------------------------------------
Instructions for selling shares
If selling your shares through your financial adviser or
broker, ask him or her for redemption procedures. Your
adviser and/or broker may have transaction minimums and/or
transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
By telephone 1. Call 1-800-634-2536 with instructions as to how you wish
(unless you have to receive your funds (mail, wire, electronic transfer).
declined
telephone sales
privileges)
- --------------------------------------------------------------------------------
By mail (See 1. Call 1-800-634-2536 to request redemption forms or write
"Selling Your a letter of instruction indicating:
Shares-- .your Fund and account number
Redemptions in .amount you wish to redeem
Writing .address where your check should be sent
Required") .account owner signature
2. Mail to:
HSBC Family of Funds
P.O. Box 163850
Columbus, Ohio 43216-3850.
- --------------------------------------------------------------------------------
By express See instruction 1 above.
delivery (See
"Selling Your 2. Send to:
Shares-- HSBC Family of Funds
Redemptions in Attn: T.A. Operations
Writing 3435 Stelzer Road
Required") Columbus, OH 43219
26
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
Wire transfer
Call 1-800-634-2536 to request a wire transfer.
You must If you call in your redemption request of $1,000 or more by
indicate this 12:00 noon Eastern time, your payment will normally be wired
option on to your bank on the same business day. Otherwise, it will
your account normally be wired on the next business day after your call.
application.
Your
financial
institution
may charge a
wire transfer
fee.
- --------------------------------------------------------------------------------
Electronic Call 1-800-634-2536 to request an electronic redemption.
Redemptions
If you call by 4 p.m. Eastern time, the NAV of your shares
will normally be determined on the same day and the proceeds
Your bank credited within 7 days.
must
participate
in the
Automated
Clearing
House (ACH)
and must be a
U.S. bank.
- --------------------------------------------------------------------------------
Systematic Withdrawal Plan
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
. Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-634-2536.
. Include a voided personal check.
. Your account must have a value of $10,000 or more to start withdrawals.
. If the value of your account falls below $500, you may be asked to add
sufficient funds to bring the account back to $500, or the Fund may close
your account and mail the proceeds to you.
Redemption By Check Writing
You may write checks for amounts of $500 or more to make payments to any person
or business from your account. To obtain checks, complete the check writing
section of the Account Application or contact the Fund to obtain a signature
card. Dividends and distributions will continue to be paid up to the day the
check is presented for payment. You must maintain the minimum required account
balance of $500 per Fund and you may not close your account by writing a check.
27
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
Redemptions In Writing Required
You must request redemption in writing in the following situations:
1. Redemption requests requiring a signature guarantee which include each of
the following.
. Redemptions over $5,000
. Your account registration or the name(s) in your account has changed within
the last 15 days
. The check is not being mailed to the address on your account
. The check is not being made payable to the owner of the account
. The redemption proceeds are being transferred to another Fund account with
a different registration.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP (Securities
Transfer Agents Medallion Program), MSP (New York Stock Exchange Medallion
Signature Program) or SEMP (Stock Exchanges Medallion Program). Members are
subject to dollar limitations which must be considered when requesting their
guarantee. The Transfer Agent may reject any signature guarantee if it believes
the transaction would otherwise be improper.
Verifying Telephone Redemptions
The Funds make every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity. Given
these precautions, unless you have specifically indicated on your application
that you do not want the telephone redemption feature, you may be responsible
for any fraudulent telephone orders. If appropriate precautions have not been
taken, the Transfer Agent may be liable for losses due to unauthorized
transactions. Telephone redemption privileges will be suspended for a 30-day
period following a telephone address change.
Redemptions Within 15 Days of Investment
When you have made an investment by check, payment on redemption requests will
be delayed until the Transfer Agent is satisfied that the check has cleared
(which may require up to 15 days from purchase date). You can avoid this delay
by purchasing shares with a certified check.
Refusal of Redemption Request
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
Redemption in Kind
The Funds reserve the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of a Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
28
<PAGE>
Shareholder Information
[GRAPHIC]
Selling Your Shares
Closing of Small Accounts
If your account falls below $500, the Fund may ask you to increase your
balance. If it is still below $500 after 30 days, the Fund may close your
account and send you the proceeds.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be considered void. The check will be
canceled and the money reinvested in the Fund.
29
<PAGE>
Shareholder Information
[GRAPHIC]
Distribution Arrangements/Sales Charges
This section describes the sales charges and fees you will pay as an investor
in different share classes offered by the Funds.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Charge (Load) No front-end sales No front-end sales No front-end sales
charge. charge. A contingent charge. A contingent
deferred sales deferred sales charge
charge (CDSC) may be (CDSC) may be imposed
imposed on shares on shares redeemed
redeemed within four within one year after
years after purchase.
purchase; shares
automatically
convert to Class A
shares after 6
years.
- -----------------------------------------------------------------------------------------
Distribution (12b-1) Fee Subject to aggregate Subject to annual Subject to annual
annual distribution distribution fee of distribution fee of
fee of up to .20% of up to .75% of the up to .75% of the
the Fund's net Fund's net assets. Fund's net assets.
assets.
- -----------------------------------------------------------------------------------------
Service Organization Fee Subject to annual Subject to annual Subject to annual
service organization service organization service organization
fee of up to .35% of fee of up to .50% of fee of up to .50% of
the Fund's net the Fund's net the Fund's net
assets assets.* assets.*
- -----------------------------------------------------------------------------------------
Fund Expenses Lower annual Higher annual Higher annual
expenses than Class expenses than Class expenses than Class A
B or C shares. A shares. shares.
- -----------------------------------------------------------------------------------------
</TABLE>
* The service organization fee is being contractually limited to .25% for Class
B and Class C shares of the Cash Management Fund.
Class B Shares and Class C Shares
Class B shares and Class C shares are generally not being sold but are only
offered as an exchange option for Class B shareholders and Class C shareholders
of other funds in the HSBC Family of Funds who wish to exchange some or all of
those shares for Class B shares or Class C shares, respectively, of the Cash
Management Fund. Customers of HSBC Bank USA Commercial Sweep are able to
purchase Class C shares of the Cash Management Fund. As of the date of this
prospectus, Class B and Class C shares are not being offered for the Government
Money Market Fund, the U.S. Treasury Money Market Fund and the New York Tax-
Free Money Market Fund. Although Class B shares and Class C shares are not
subject to a sales charge when a shareholder exchanges Class B shares and Class
C shares of another fund, they may be subject to a contingent deferred sales
charge (CDSC) when redeemed. See "Exchanging Your Shares" below. In addition,
Class B and Class C shares are subject to an aggregate annual distribution fee
of up to .75% and a service organization fee of up to .50% of each Fund's net
assets. Shareholders of Class B shares and Class C shares pay higher annual
expenses than shareholders of Class A shares.
30
<PAGE>
Shareholder Information
[GRAPHIC]
Distribution Arrangements/Sales Charges
Class B Shares
The Cash Management Fund's shares will continue to be subject to a declining
CDSC if Class B shares are exchanged for Class B shares of any other HSBC Fund
and redeemed within 4 years. The CDSC will be as illustrated in the chart on
the right:
<TABLE>
<CAPTION>
CDSC as a % of
Years Since Dollar Amount
Purchase Subject to Charge
- -----------------------------------
<S> <C>
0-1 4.00%
- -----------------------------------
1-2 3.00%
- -----------------------------------
2-3 2.00%
- -----------------------------------
3-4 1.00%
- -----------------------------------
more than 4 None
- -----------------------------------
</TABLE>
The CDSC will be based upon the lower of the NAV at the time of purchase or the
NAV at the time of redemption. There is no CDSC on reinvested dividends or
distributions.
Class C Shares
Similarly, if you exchange Class C shares of the Cash Management Fund for Class
C shares of other HSBC Funds and wish to sell your shares, your redemption may
be subject to a 1.00% CDSC if the shares are redeemed less than one year after
the original purchase of the Class C shares. The 1.00% CDSC will be waived for
customers of HSBC Bank USA Commercial Sweep. The CDSC will be assessed on the
lesser of the current NAV or the NAV at the time of purchase. Unlike Class B
shares; Class C shares do not convert to Class A shares.
Conversion Feature--Class B Shares
. Class B shares of the Cash Management Fund will convert automatically to
Class A shares of the same Fund after six years from the beginning of the
calendar month in which the Class B shares were originally purchased.
. After conversion, your shares will be subject to the lower distribution and
shareholder servicing fees charged on Class A shares of the Cash Management
Fund which will increase your investment return compared to the Class B
shares.
. You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
31
<PAGE>
Shareholder Information
[GRAPHIC]
Distribution Arrangements/Sales Charges
. If you purchased Class B shares of another HSBC Fund which you exchanged
for Class B shares of the Cash Management Fund, your holding period will be
calculated from the time of your original purchase of Class B shares. The
dollar value of Class A shares you receive will equal the dollar value of
the Class B shares converted.
Waiver of Sales Charges--Class B Shares and Class C Shares
The following qualify for waivers of sales charges:
. Distributions following the death or disability of a Shareholder.
. Redemptions representing the minimum distribution from an IRA or Custodial
Account to a Shareholder who has reached age 70 1/2.
. Redemptions representing the minimum distribution from 401(k) retirement
plans where such redemptions are necessary to make distributions to plan
participants.
. Redemptions made by HSBC Bank USA Commercial Sweep customers.
If you sell some but not all of your Class B and Class C shares, shares not
subject to the CDSC (i.e., shares purchased with reinvested dividends) will be
redeemed first, followed by shares subject to the lowest CDSC (typically shares
held for the longest time).
Distribution (12b-1) Fees
The Funds have adopted a plan under SEC Rule 12b-1. The plan allows the Funds
to pay fees for services and expenses relating to the sale and distribution of
the Funds' shares. For Class A shares of the Funds, the amount of the fee is
.20% of the average daily net assets of the Funds. Class B and Class C shares
of the Cash Management Fund pay a distribution fee not to exceed .75% of the
average daily net assets of the Fund. Because these fees are paid from the
Funds' assets on an ongoing basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales fees.
Service Organizations
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organizations") may provide certain
administrative services for its customers who invest in the Funds through
accounts maintained at that Service Organization. The Funds will pay the
Service Organization a fee at an annual rate of up to .35% for Class A shares
and up to .50% for Class B and Class C shares (with contractual waivers, the
fees for the Class B and Class C shares of the Cash Management Fund are .25%)
of the average daily net asset value of shares for which the Service
Organization from time to time performs these services, which include:
. receiving and processing shareholder orders
. performing the accounting for the customers sub-accounts
32
<PAGE>
Shareholder Information
[GRAPHIC]
Distribution Arrangements/Sales Charges
. maintaining retirement plan accounts
. answering questions and handling correspondence for an individual accounts
. acting as the sole shareholder of record for individual
. issuing shareholder reports and transaction confirmations
. performing daily "sweep" functions
Investors who purchase, sell or exchange shares for the Funds through a
customer account maintained at a Service Organization may be charged extra for
other services which are not specified in the servicing agreement with the
Funds but are covered under separate fee schedules provided by the Service
Organization to their customers. Customers with accounts at Service
Organizations should consult their Service Organization for information
concerning their sub-accounts. The Adviser or Administrator also may pay
Service Organizations for rendering services to shareholders sub-accounts.
Questions?
Call 1-800-634-2536 or your investment representative.
33
<PAGE>
Shareholder Information
[GRAPHIC]
Exchanging Your Shares
You can exchange your shares that have been held for at least seven days in the
Fund for shares of the same class of another HSBC Fund, usually without paying
additional sales charges (see "Notes on Exchanges"). No transaction fees are
charged for exchanges.
Instructions for exchanging shares
Exchanges may be made by sending a written request to HSBC Family of Funds, PO
Box 163850, Columbus OH 43216-3850, or by calling 1-800-634-2536. Please
provide the following information:
. Your name and telephone number
. The exact name on your account and account number Taxpayer identification
number (usually your Social Security number)
. Dollar value or number of shares to be exchanged
. The name of the Fund from which the exchange is to be made.
. The name of the Fund into which the exchange is being made.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from the Fund to another are taxable. You should
review the prospectus of the HSBC Fund before making an exchange.
See "Selling your Shares" for important information about telephone
transactions. The Funds reserve the right to modify or terminate the exchange
privilege upon 60 days written notice.
To prevent disruption in the management of the Funds, due to market timing
strategies, exchange activity may be limited to 4 exchanges within a 12-month
period.
Automatic Exchanges
You can use the Funds' Automatic Exchange feature to purchase shares of other
HSBC Funds at regular intervals through regular, automatic redemptions from
your account. To participate in the Automatic Exchange:
. Complete the appropriate section of the Account Application.
. Keep a minimum of $10,000 in the Fund and $1,000 in the HSBC Fund whose
shares you are buying.
To change the Automatic Exchange instructions or to discontinue the feature,
you must send a written request to HSBC Family of Funds, P.O. Box 163850,
Columbus, Ohio 43216-3850.
Notes on exchanges
When exchanging from a Fund that has no sales charge or a lower sales charge to
a Fund with a higher sales charge, you will pay the difference.
34
<PAGE>
Shareholder Information
[GRAPHIC]
Exchanging Your Shares
The registration and tax identification numbers of the two accounts must be
identical.
The Exchange Privilege (including automatic exchanges) may be changed or
eliminated at any time upon a 60-day notice to shareholders.
Be sure to read the Prospectus carefully of any HSBC Fund into which you wish
to exchange shares.
Investors purchasing shares of the Cash Management Fund will ordinarily
purchase Class A shares, with the exception of HSBC Bank USA Commercial Sweep
customers who may also purchase Class C shares. Other investors will only
receive Class B shares or Class C shares by exchanging from the Class B shares
or Class C of other HSBC Funds. If you exchange shares of other HSBC Funds for
shares of the Funds and wish to sell your shares, Class B and Class C shares
may be subject to a contingent deferred sales charge ("CDSC").
35
<PAGE>
Shareholder Information
[GRAPHIC]
Dividends, Distributions and Taxes
Dividends, Distributions and Taxes
Any income a Fund receives in the form of interest is paid out, less expenses,
to its shareholders as dividends. Each Fund declares dividends from net
investment income at 12:00 noon on every business day. Shares purchased will
begin earning dividends on the day the purchase order is executed and shares
redeemed will earn dividends through the previous day. Dividends on the Funds
are generally paid within 5 business days after the end of each month. Capital
gains, if any, for the Funds are distributed at least annually.
Dividends and distributions are treated in the same manner for federal income
tax purposes whether you receive them in cash or in additional shares.
The Funds expect that their dividends will primarily consist of net income or,
if any, short-term capital gains as opposed to long-term capital gains.
Dividends paid by the Cash Management, Government and U.S. Treasury Funds that
are derived from taxable investments are taxable as ordinary income.
During normal market conditions, the New York Tax-Free Money Market Fund
expects that substantially all of its dividends will be excluded from gross
income for federal income tax purposes and from New York state tax purposes.
The Fund may invest in certain securities with interest that may be a
preference item for the purposes of the alternative minimum tax or a factor in
determining whether Social Security benefits are taxable. In such event, a
portion of the Fund's dividends would not be exempt from federal income taxes.
Dividends are taxable as ordinary income. Dividends are taxable in the year in
which they are paid, even if they appear on your account statement the
following year.
You will be notified in January each year about the federal tax status of
distributions made by the Funds. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a penalty on certain pre-retirement distributions from retirement accounts.
Consult your tax adviser about the federal, state and local tax consequences in
your particular circumstances.
Questions?
Call 1-800-634-2536 or your investment representative.
36
<PAGE>
Financial Highlights
[GRAPHIC]
The financial highlights table is intended to help you understand the Funds'
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Funds (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report, along with the
Fund's financial statements, are included in the annual report and incorporated
by reference in the SAI, which is available upon request
Cash Management Fund
<TABLE>
<CAPTION>
Class A
For the Year Ended December 31, Class C
------------------------------------------------ ----------------
Period ended
1999 1998 1997 1996 1995 Dec. 31, 1999(c)
-------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------
Investment Activities
Net investment income.. 0.046 0.050 0.051 0.049 0.053 0.023
Distributions
From net investment
income................ (0.046) (0.050) (0.051) (0.049) (0.053) (0.023)
-------- -------- -------- -------- -------- -------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== =======
Total Return............ 4.75% 5.15% 5.18% 5.00% 5.41% 2.28%(a)
Ratios/Supplemental
Data:
Net assets at end of
period (000).......... $382,296 $317,552 $184,205 $220,960 $170,869 $ 5
Ratio of expenses to
average net assets.... 0.65% 0.65% 0.63% 0.68% 0.79% 1.02%(b)
Ratio of net investment
income to average
net assets............ 4.66% 5.01% 5.06% 4.88% 5.29% 4.47%(b)
Ratio of expenses to
average net assets*... 0.90% 0.87% 0.83% 0.80% 0.80% 1.17%(b)
</TABLE>
- ------
* During the period, certain fees were voluntarily or contractually reduced
and/or reimbursed. If such fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
(a) Not annualized.
(b) Annualized.
(c) Class C commenced offering on July 1, 1999
37
<PAGE>
Financial Highlights
[GRAPHIC]
Government Money Market Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- -------- ------- -------
Investment Activities
Net investment income........... 0.046 0.049 0.049 0.048 0.052
Distributions
From net investment income...... (0.046) (0.049) (0.049) (0.048) (0.052)
------- ------- -------- ------- -------
Net Asset Value, End of Year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======== ======= =======
Total Return..................... 4.65% 5.01% 5.05% 4.87% 5.32%
Ratios/Supplemental Data:
Net assets at end of
period (000)................... $53,048 $77,354 $100,862 $87,392 $86,850
Ratio of expenses to average net
assets......................... 0.65% 0.62% 0.63% 0.72% 0.76%
Ratio of net investment income
to average net assets.......... 4.54% 4.86% 4.94% 4.75% 5.21%
Ratio of expenses to average net
assets*........................ 0.85% 0.80% 0.79% 0.84% 0.78%
</TABLE>
- ------
* During the period, certain fees were voluntarily or contractually reduced
and/or reimbursed. If such fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
38
<PAGE>
Financial Highlights
[GRAPHIC]
U.S. Treasury Money Market Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment Activities
Net investment income............ 0.043 0.048 0.049 0.046 0.049
Distributions
From net investment income....... (0.043) (0.048) (0.049) (0.046) (0.049)
------- ------- ------- ------- -------
Net Asset Value, End of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return...................... 4.39% 4.86% 4.98% 4.68% 5.04%
Ratios/Supplemental Data:
Net assets at end of
period (000).................... $32,452 $25,876 $25,507 $28,962 $32,500
Ratio of expenses to average net
assets.......................... 0.65% 0.65% 0.65% 0.78% 0.82%
Ratio of net investment income to
average net assets.............. 4.30% 4.75% 4.86% 4.57% 4.94%
Ratio of expenses to average net
assets*......................... 0.91% 0.94% 0.94% 0.95% 0.84%
</TABLE>
- ------
* During the period, certain fees were voluntarily or contractually reduced
and/or reimbursed. If such fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
39
<PAGE>
Financial Highlights
[GRAPHIC]
New York Tax-Free Money Market Fund
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
Investment Activities
Net investment income........... 0.026 0.028 0.031 0.029 0.031
Distributions
From net investment income...... (0.026) (0.028) (0.031) (0.029) (0.031)
-------- ------- ------- ------- -------
Net Asset Value, End of Year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= =======
Total Return..................... 2.64% 2.83% 3.14% 2.92% 3.17%
Ratios/Supplemental Data:
Net assets at end of
period (000)................... $106,893 $94,259 $86,729 $70,339 $64,884
Ratio of expenses to average net
assets......................... 0.65% 0.64% 0.52% 0.59% 0.69%
Ratio of net investment income
to average net assets.......... 2.61% 2.78% 3.09% 2.88% 3.13%
Ratio of expenses to average net
assets*........................ 0.88% 0.82% 0.80% 0.87% 0.85%
</TABLE>
- ------
* During the period, certain fees were voluntarily or contractually reduced
and/or reimbursed. If such fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
40
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
For more information about the Funds, the following documents are available
free upon request:
Annual/Semi-annual Reports (Reports):
The Funds' annual and semi-annual reports to shareholders contain detailed
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of Reports and the SAI, Prospectuses of other Funds in
the HSBC Family, or request other information and discuss your questions about
the Funds by contacting a broker or bank that sells the Funds. Or contact the
Funds at:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43219
Telephone: 1-800-634-2536
----------------------------
Information about the Funds (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's public reference room in Washington,
D.C. Information about the operation of the public reference room can be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the Funds are available on the Commission's Internet site at
http://www.sec.gov. Copies of information on the Commission's Internet site can
be obtained for a fee by writing to: Securities and Exchange Commission, Public
Reference Section, Washington D.C. 20549-6009.
(Investment Company Act file no. 811-04453)
<PAGE>
HSBC FUNDS TRUST
HSBC Money Market Funds
3435 Stelzer Road
Columbus, Ohio 43219
Information: (800) 634-2536
STATEMENT OF ADDITIONAL INFORMATION
HSBC Funds Trust (the "Trust"), is an open-end, diversified management
investment company organized in Massachusetts on October 31, 1985, with multiple
investment portfolios, each having its own investment objective and policies
including the following: Cash Management Fund, Government Money Market Fund,
U.S. Treasury Money Market Fund, and The New York Tax-Free Money Market Fund.
Each Fund has three classes of shares: Class A shares, Class B shares and
Class C shares. Currently only the Cash Management Fund offers Class B or Class
C shares. Class A shares of each Fund are subject to shareholder servicing and
Rule 12b-1 fees. Ordinarily, investors purchasing shares of any of the Funds
will purchase Class A shares. Investors will generally only receive Class B or
Class C shares by exchanging Class B shares or Class C shares of other HSBC
Funds, although customers of certain entities affiliated with HSBC Asset
Management Americas, Inc. (the "Adviser") are able to purchase Class C shares of
the Cash Management Fund. If an investor exchanges Class B or Class C shares of
another HSBC Fund for Class B or Class C shares of a Fund, these Class B and
Class C shares may be subject to a contingent deferred sales charge when the
investor sells his or her shares.
The Cash Management Fund, Government Money Market Fund and U.S. Treasury
Money Market Fund are herein referred to collectively as, the "Money Market
Funds." New York Tax-Free Money Market Fund is herein referred to as the "New
York Tax-Free Fund".
The Cash Management Fund invests in a variety of high-quality, short-term
money market instruments, with remaining maturities of thirteen months or less,
including obligations in which the Government Money Market Fund invests.
The Government Money Market Fund invests exclusively in short-term
obligations issued or guaranteed by the United States Government or its agencies
or instrumentalities, with remaining maturities of thirteen months or less, and
repurchase agreements.
The U.S. Treasury Money Market Fund invests exclusively in short-term,
direct obligations of the United States Treasury, with remaining maturities of
thirteen months or less, and repurchase agreements.
The New York Tax-Free Money Market Fund invests primarily in high quality
securities exempt from regular Federal, New York State and New York City income
taxes as is consistent with preservation of capital and liquidity.
Shares of each Fund are primarily offered for sale by BISYS Fund Services,
the Sponsor and Distributor, as an investment vehicle for institutions,
corporations, fiduciaries and individuals. Certain banks, broker-dealers,
financial institutions and corporations ("Participating Organizations") have
agreed to act as shareholder servicing agents for investors who maintain
accounts at the Participating Organizations and to perform certain services for
the Funds.
1
<PAGE>
This Statement of Additional Information (the "SAI") is not a prospectus
and is only authorized for distribution when preceded or accompanied by the
Trust's Prospectus for the Funds, dated April 28, 2000 (the "Money Funds
Prospectus"). This SAI contains additional and more detailed information than
that set forth in the Money Funds' Prospectus and should be read in conjunction
with the Money Funds' Prospectus, additional copies of which may be obtained
without charge from the Trust by writing to the address above.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT POLICIES.................................. 2
INVESTMENT RESTRICTIONS.............................. 25
MANAGEMENT........................................... 28
COMPENSATION TABLE................................... 29
SERVICES ORGANIZATION................................ 32
CALCULATION OF YIELDS AND PERFORMANCE
INFORMATION.......................................... 34
DETERMINATION OF NET ASSET VALUE..................... 36
PORTFOLIO TRANSACTIONS............................... 37
PURCHASE OF SHARES................................... 37
EXCHANGE PRIVILEGE................................... 37
REDEMPTIONS.......................................... 38
FEDERAL INCOME TAXES................................. 38
SHARES OF BENEFICIAL INTEREST........................ 41
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT.. 42
INDEPENDENT AUDITORS................................. 44
FUND COUNSEL......................................... 44
FINANCIAL STATEMENTS................................. 45
</TABLE>
3
<PAGE>
INVESTMENT POLICIES
The following information supplements the discussion of the investment
objective and policies of the Funds found under "Investment Objective and
Policies" in the Funds' Prospectus.
Cash Management Fund
The Cash Management Fund ("Cash Management Fund") invests in a broad range
of short-term money market instruments which have remaining maturities not
exceeding thirteen months and certain repurchase agreements. These money market
instruments may include obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities and the following other kinds of
investments:
Bank Obligations. These obligations include negotiable certificates of
deposit, bankers' acceptances and fixed time deposits and other obligations
issued or supported by banks. The Cash Management Fund may invest more than
25%of the current value of its total assets in domestic bank obligations
(including bank obligations subject to repurchase agreements). The Cash
Management Fund will not invest in any obligations of HSBC Holdings plc or its
affiliates (as defined under the Investment Company Act of 1940). The Cash
Management Fund is permitted to invest in obligations of correspondent banks of
HSBC Holdings plc which are not affiliates of the Trust, but the Fund will not
give preference in its investment selections to those obligations.
The Cash Management Fund limits its investments in United States bank
obligations to obligations of United States banks (including foreign
branches)which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation. The Cash Management Fund limits its investments in
foreign bank obligations to United States dollar denominated obligations of
foreign banks(including United States branches) which at the time of investment
(i) have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii)have branches or agencies in the United States; and (iii) in the
opinion of the Fund's investment adviser, are of an investment quality
comparable to obligations of United States banks which may be purchased by the
Fund and present minimal credit risk.
Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. The Cash Management
Fund may not invest in fixed time deposits subject to withdrawal penalties
maturing in more than seven calendar days; investments in fixed time deposits
subject to withdrawal penalties maturing from two business days through seven
calendar days may not exceed 10% of the value of the total assets of the Fund.
Obligations of foreign banks involve somewhat different investment risks than
those affecting obligations of United States banks, including the possibilities
that their liquidity could be impaired because of future political and economic
developments, that the obligations may be less marketable than comparable
obligations of United States banks, that a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations, that foreign
deposits may be seized or nationalized, that foreign governmental restrictions
like exchange controls may be adopted which might adversely affect the payment
of principal and interest on those obligations and that the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to United States banks. In that connection, foreign
banks are not subject to examination by any United States Government agency or
instrumentality.
A certificate of deposit is a short-term, interest-bearing negotiable
certificate issued by a commercial bank against funds deposited in the bank. A
bankers' acceptance is a short-term draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment
4
<PAGE>
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of foreign
branches of United States banks or foreign banks which are payable on a stated
maturity date and bear a fixed rate of interest. Although fixed time deposits do
not have a market, there are no contractual restrictions on the right to
transfer a beneficial interest in the deposit to a third party.
Commercial Paper. Commercial paper includes short-term unsecured promissory
notes, variable rate demand notes and variable rate master demand notes issued
by domestic and foreign bank holding companies, corporations, financial
institutions and government agencies and instrumentalities (but only in the case
of taxable securities). All commercial paper purchased by the Cash Management
Fund is, at the time of investment, required to be rated (or issued by an issuer
with a similar security rated) in the highest short-term rating category by two
or more Nationally Recognized Statistical Ratings Organizations ("NRSROs"), or
the only NRSRO rating the security, or if unrated, determined to be of
comparable credit quality by the Adviser. Because variable rate master demand
notes are direct lending arrangements between the lender and the borrower, it is
not generally contemplated that they will be traded. There is no secondary
market for variable rate master demand notes, although they are redeemable, and
thus immediately repayable by the borrower, at principal amount, plus accrued
interest, at any time. See "Variable Rate Master Demand Notes" below.
Corporate Debt Securities. Cash Management Fund's investments in these
securities are limited to non-convertible corporate debt securities such as
bonds and debentures which have thirteen months or less remaining to maturity
and which are rated "A" or better by Standard & Poor's and "A" or better by
Moody's and of comparable high quality ratings by other NRSROs that have rated
such securities.
The rating "P-1" is the highest commercial paper rating assigned by Moody's
and the ratings "A-1" and "A-1+" are the highest commercial paper ratings
assigned by Standard & Poor's. Debt securities rated "Aa" or better by Moody's
or "AA" or better by Standard & Poor's are generally regarded as high-grade
obligations. Those rated "Aaa" by Moody's or "AAA" by Standard & Poor's are
judged to be of the highest quality and exhibit an extremely strong ability to
pay interest and repay principal. Those rated "Aa" by Moody's or "AA" by
Standard & Poor's are judged to be of high quality by all standards and differ
from higher rated issues only in a small degree with respect to their ability to
pay interest and repay principal. Those rated A by Moody's and Standard &
Poor's possess many favorable attributes and are to be considered as upper
medium grade obligations, although they may be more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
After purchase by the Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require a sale of such security by the Fund. However if the security
is downgraded to a level below that permitted for money market funds under Rule
2a-7 of the Investment Company Act of 1940, as amended (the "1940 Act"), the
Fund's adviser must report such event to the Board of Trustees as soon as
possible to permit the Board to reassess the security promptly to determine
whether it may be retained as an eligible investment for the Fund. To the extent
the ratings given by a NRSRO may change as a result of changes in such
organizations or their rating systems, the Cash Management Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in the Money Funds' Prospectus and in this SAI.
Government Money Market Fund
The Government Money Market Fund ("Government Fund") invests exclusively in
obligations issued or guaranteed by the United States Government or its agencies
or instrumentalities which have remaining maturities not exceeding thirteen
months and certain repurchase agreements. United States Government agency and
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instrumentality obligations are debt securities issued by United States
Government sponsored enterprises and Federal agencies. Some obligations of
agencies and instrumentalities of the United States Government are supported by
the full faith and credit of the United States or United States Treasury
guarantees; others, by the right of the issuer to borrow from the United States
Treasury; others, by discretionary authority of the United States Government to
purchase certain obligations of the agency or instrumentality; and others, only
by the credit of the agency or instrumentality issuing the obligation. In the
case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment. United States Government agency and
instrumentality obligations include master notes issued by Federal agencies or
instrumentalities (see the "Variable Rate Demand Notes" below for further
details about master notes).
Agencies and instrumentalities which issue or guarantee debt securities and
which have been established or sponsored by the United States Government include
the Banks for Cooperatives, the Export- Import Bank, the Federal Farm Credit
System, the Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation,
the Federal Intermediate Credit Banks, the Federal Land Banks, the Federal
National Mortgage Association and the Student Loan Marketing Association. United
States Government agency and instrumentality obligations include master notes
issued by these entities but do not include obligations of the World Bank, The
Inter-American Development Bank or the Asian Development Bank.
U.S. Treasury Money Market Fund
The U.S. Treasury Money Market Fund ("U.S. Treasury Fund") invests
exclusively in direct obligations of the United States Treasury which have
remaining maturities not exceeding thirteen months and certain repurchase
agreements. The United States Treasury issues various types of marketable
securities consisting of bills, notes, bonds and other debt securities. They are
direct obligations of the United States Government and differ primarily in the
length of their maturity. Treasury bills, the most frequently issued marketable
United States Government security, have a maturity of up to one year and are
issued on a discount basis. The U.S. Treasury Fund may not enter into loans of
its portfolio securities.
New York Tax-Free Money Market Fund
To attain its objective, the New York Tax-Free Money Market Fund ("New York
Tax-Free Fund") invests primarily in a broad range of Municipal Obligations
which meet the rating standards described in the Fund's Prospectus. The tax-
exempt status of a Municipal Obligation is determined by the issuer's bond
counsel at the time of the issuance of the security. Municipal Obligations,
which pay interest that is excludable from gross income for Federal income tax
purposes and which are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities, include:
Municipal Bonds. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of schools, highways and other
public facilities, for general operating expenses and for making loans to other
public institutions. Industrial development and pollution control bonds are
municipal bonds which are issued by or on behalf of public authorities to
provide funding for the construction, equipment, repair and improvement of
various privately-operated facilities.
Municipal bonds may be categorized as "general obligation" or "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. Revenue bonds
are secured by the net revenue derived from a particular facility or group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source, but not by the general taxing power. Industrial development and
pollution control bonds (now generally referred to as "private activity bonds")
are, in most cases, revenue bonds and do not generally carry the pledge of the
credit of the issuing municipality or public authority.
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Municipal bonds generally have a maturity at the time of issuance of more
than a year. Investments in municipal bonds are limited to bonds with a
remaining maturity of thirteen months or 397 days or less and which are rated at
the date of purchase "A" or better by S&P and "A" or better by Moody's or have
comparably high quality ratings by other nationally recognized statistical
rating organizations that have rated such bonds, or which if not rated, are, in
the opinion of the Fund's Adviser, of comparable investment quality. (See the
Appendix for a description of the ratings.)
Municipal Notes. Municipal notes include, but are not limited to, tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and project notes. Notes sold as interim financing in
anticipation of collection of taxes, a bond sale or receipt of other revenues
are usually general obligations of the issuer. Project notes are issued by local
housing authorities to finance urban renewal and public housing projects and are
secured by the full faith and credit of the United States Government.
Municipal notes generally have maturities at the time of issuance of
thirteen months or less. Investments in municipal notes are limited to notes
which are rated at the date of purchase "MIG 1" or "VMIG-1" or "MIG 2" or "VMIG
2" by Moody's and/or (if only rated by one agency) "SP-1" or "SP-2" by S&P or
"FIN-1" or "FIN-2" by Fitch or of comparable high quality as determined by IBCA
or Duff & Phelps Credit Rating Co., or, if not rated, are, in the opinion of the
Fund's Adviser, of comparable investment quality. (See the Appendix for a
description of the ratings.)
Municipal Commercial Paper. Municipal commercial paper is a debt obligation
with a stated maturity of thirteen months or less which is issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer-term debt. It is paid from the general revenues of the issuer or
refinanced with additional issuances of commercial paper or long-term debt.
Investments in municipal commercial paper are limited to commercial paper which
is at the time of purchase rated (or issued by an issuer with a similar security
rated) in the highest short-term rating category by two or more NRSROs, or the
only NRSRO rating the security, or if unrated, determined to be of comparable
credit quality by the Adviser.
For purposes of diversification under the 1940 Act, the identification of
the issuer of Municipal Obligations depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision and the obligation is backed only by the assets and
revenues of the subdivision, such subdivision would be regarded as the sole
issuer. Similarly, in the case of an industrial development bond or pollution
control bond, if the bond is backed only by the assets and revenues of the non-
governmental user, the non-governmental user would be deemed to be the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be considered a separate security and be
treated as an issue of such government or entity.
After purchase by the Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require a sale of such security by the Fund. However, if the security
is downgraded to a level below that permitted for money market funds under Rule
2a-7 of the 1940 Act, the Fund's Adviser must report such event to the Board of
Trustees as soon as possible to permit the Board to reassess the security
promptly to determine whether it may be retained as an eligible investment for
the Fund. To the extent the ratings given by a NRSRO may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in this SAI.
Although an investment in the New York Tax-Free Fund is not insured,
certain of the Municipal Obligations purchased by the Tax-Free Fund may be
insured as to principal and interest by, among others, the Municipal Bond
Insurance Association. Insured obligations are identified in the New York Tax-
Free Fund's financial statements.
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Opinions relating to the validity of Municipal Obligations (including New
York Municipal Obligations) and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective issuers at
the time of issuance. Neither the Funds, the Trust nor the Adviser will review
the proceedings relating to the issuance of Municipal Obligations or the basis
for such opinions. The New York Tax-Free Fund is permitted to invest more than
5% (but not more than 25%) of its total assets in the securities of any one
issuer, which otherwise satisfies that Fund's other investment restrictions. To
the extent that the New York Tax-Free Fund invests up to 25% of its total assets
in the securities of any one issuer, there may be an increased risk of loss to
that Fund.
As described in the Fund's Prospectus, the New York Tax-Free Fund may,
under limited circumstances, elect to invest in certain taxable securities and
repurchase agreements with respect to those securities. The New York Tax-Free
Fund will enter into repurchase agreements only with dealers, domestic banks or
recognized financial institutions which, in the opinion of the New York Tax-Free
Fund's investment adviser, present minimal credit risks. In the event of default
by the seller under a repurchase agreement, the New York Tax-Free Fund may have
problems in exercising their rights to the underlying securities and may incur
costs and experience time delays in connection with the disposition of such
securities. In such event, the New York Tax-Free Fund will also have to take
into account the maturities of the underlying securities in calculating the
Fund's dollar-weighted average portfolio maturities. The adviser will monitor
the value of the underlying security at the time the transaction is entered into
and at all times during the term of the repurchase agreement to ensure that the
value of the security always equals or exceeds the agreed upon repurchase price.
Repurchase agreements are considered to be loans under the 1940 Act,
collateralized by the underlying securities.
The New York Tax-Free Fund may engage in the following investment activity:
Securities with Put Rights. The New York Tax-Free Fund may, without
restriction, enter into put transactions, sometimes referred to as stand-by
commitments, with respect to Municipal Obligations held in their portfolios.
When the New York Tax-Free Fund purchases municipal obligations it may obtain
the right to resell them, or "put" them, to the seller at an agreed upon price
within a specific period prior to the maturity date.
If necessary and advisable, the Fund may pay for certain puts either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a put (thus reducing the yield to maturity
otherwise available for the same securities).
The Fund's ability to exercise a put will depend on the ability of the
broker-dealer or bank to pay for the underlying securities at the time the put
is exercised. In the event that a broker-dealer or bank should default on its
obligation to repurchase an underlying security, the Fund might be unable to
recover all or a portion of any loss sustained from having to sell the security
elsewhere. The amount payable to the New York Tax-Free Fund by the seller upon
its exercise of a put will normally be (i) the New York Tax-Free Fund's
acquisition cost of the securities (excluding any accrued interest which the New
York Tax- Free Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the New York Tax-Free Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during the period
the securities were owned by the New York Tax-Free Fund. Absent unusual
circumstances, the New York Tax-Free Fund values the underlying securities at
their amortized cost. Accordingly, the amount payable by a broker-dealer or bank
during the time a put is exercisable will be substantially the same as the value
of the underlying securities.
The New York Tax-Free Fund's right to exercise a put is unconditional and
unqualified.
A put is not transferable by the New York Tax-Free Fund, although the New
York Tax-Free Fund may sell the underlying securities to a third party at any
time. The New York Tax-Free Fund expects that puts will generally be available
without the payment of any direct or indirect consideration. However, if
necessary and
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advisable, the New York Tax-Free Fund may pay for certain puts either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to such a put (thus reducing the yield to maturity otherwise available
for the same securities).
The New York Tax-Free Fund may enter into put transactions only with
broker-dealers and banks which, in the opinion of the Adviser, present minimal
credit risks. The New York Tax-Free Fund's ability to exercise a put will depend
on the ability of the broker-dealer or bank to pay for the underlying securities
at the time the put is exercised. In the event that a broker-dealer or bank
should default on its obligation to repurchase an underlying security, the New
York Tax-Free Fund might be unable to recover all or a portion of any loss
sustained from having to sell the security elsewhere.
The New York Tax-Free Fund intends to enter into put transactions solely to
maintain portfolio liquidity and does not intend to exercise their rights
thereunder for trading purposes. The acquisition of a put will not affect the
valuation of the underlying security which will continue to be valued in
accordance with the amortized cost method. The actual put will be valued at zero
in determining net asset value. Where the New York Tax-Free Fund pays directly
or indirectly for a put, its cost will be reflected as an unrealized loss for
the period during which the put is held by the New York Tax-Free Fund and will
be reflected in realized gain or loss when the put is exercised or expires.
If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the put.
Concentration. The New York Tax-Free Fund does not intend to concentrate
its investments in any industry. The New York Tax-Free Fund may, however, invest
25% or more of its assets in municipal obligations that are related in other
ways such that an economic, business or political development or change
affecting one such obligation could also affect the other obligations; for
example, municipal obligations the interest on which is paid from revenues of
similar types of projects.
Floating Rate Instruments. Certain of the Municipal Obligations which the
New York Tax-Free Fund may purchase have a floating or variable rate of
interest. Such obligations bear interest at rates which are not fixed, but which
vary with changes in specified market rates or indices, such as a Federal
Reserve composite index. Certain of such obligations may carry a demand or "put"
feature which would permit the holder to tender them back to the issuer (or to a
third party) at par value prior to maturity. The New York Tax-Free Fund may
invest in floating and variable rate Municipal Obligations even if they carry
stated maturities in excess of thirteen months, upon certain conditions
contained in Rule 2a-7 of the Investment Company Act of 1940, as amended. It is
the present position of the Securities and Exchange Commission that the maturity
of a short term (the principal amount must unconditionally be paid in 397 days
or less) floating rate security is one day and the maturity of a long term (the
principal amount is scheduled to be paid in more than 397 days) floating rate
security that is subject to a demand feature shall be deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand. The New York Tax-Free Fund will limit their purchases of
floating and variable rate Municipal Obligations to those meeting the quality
standards set forth above. The New York Tax-Free Fund's investment adviser will
monitor on an ongoing basis the earning power, cash flow and other liquidity
ratios of the issuers of such obligations, and will similarly monitor the
ability of an issuer of a demand instrument to pay principal and interest on
demand. The New York Tax-Free Fund's right to obtain payment at par on a demand
instrument could be affected by events occurring between the date the New York
Tax-Free Fund elects to demand payment and the date payment is due, which may
affect the ability of the issuer of the instrument to make payment when due.
Taxable Securities. The New York Tax-Free Fund may invest up to 20% of the
current value of its total assets in securities subject to the Federal
alternative minimum tax. In addition, the New York Tax-Free Fund may invest up
to 100% of its total assets in these and other taxable securities to maintain a
temporary "defensive" posture
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when, in the opinion of the Adviser, it is advisable to do so. The conditions
for which such a posture would be undertaken include adverse market conditions
or the unavailability of suitable tax-exempt securities. During these times when
the New York Tax-Free Fund is maintaining a temporary "defensive" posture, it
may be unable to achieve fully its investment objective.
The types of taxable securities (in addition to "alternative minimum tax"
securities) in which the New York Tax-Free Fund may invest are limited to the
following money market instruments which have remaining maturities not exceeding
thirteen months: (i) obligations of the United States Government, its agencies
or instrumentalities; (ii) negotiable certificates of deposit, bankers'
acceptances, time deposits and other obligations issued or supported by United
States banks which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation (iii) domestic and foreign commercial paper rated in
accordance with the standards set forth above under "Cash Management Fund--
Commercial Paper" and (iv) repurchase agreements. The New York Tax-Free Fund
also has the right to hold cash reserves of up to 100% of their total assets
when the Adviser deems it necessary for temporary defensive purposes.
When-Issued Securities. The New York Tax-Free Fund may, without
restriction, purchase Municipal Obligations on a when-issued basis, in which
case delivery and payment normally take place 15 to 45 days after the date of
the commitment to purchase. The New York Tax-Free Fund will make commitments
only to purchase Municipal Obligations on a when-issued basis with the intention
of actually acquiring the securities but may sell them before the settlement
date if it is deemed advisable. The when-issued securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
Municipal Obligations on a when-issued basis is a form of leveraging and can
involve a risk that the yields available in the market when the delivery takes
place may actually be higher than those obtained in the transaction itself, in
which case there could be an unrealized loss at the time of delivery.
The New York Tax-Free Fund will maintain liquid assets in segregated
accounts in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
Risk Factors For the New York Tax-Free Fund
The liquidity of the New York Tax-Free Fund may not be equal to that of a
money market fund which invests exclusively in short-term taxable money market
instruments. The taxable money market is a broader and more liquid market with a
greater number of investors, issuers and market makers than the market for
short-term Municipal Obligations. The limited marketability of short-term
tax-exempt Municipal Obligations may make it difficult in certain circumstances
to dispose of large investments advantageously. Nonetheless, the Adviser has
determined that there is a sufficient market to invest in short-term tax- exempt
Municipal Obligations.
In general, tax-exempt Municipal Obligations are subject to credit risks
such as the loss of credit ratings or possible default. Recent changes in the
Federal income tax law as a result of the Tax Reform Act of 1986 may affect the
value and availability of Municipal Obligations and New York Municipal
Obligations.
The value of municipal securities may be affected by uncertainties in the
municipal market related to legislation or litigation involving the taxation of
municipal securities or the rights of municipal securities holders in the event
of a bankruptcy. Municipal bankruptcies are relatively rare, and certain
provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear
and remain untested. Further, the application of state law to municipal issuers
could produce varying results among the states or among municipal securities
issuers within a state.
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These legal uncertainties could affect the municipal securities market
generally, certain specific segments of the market, or the relative credit
quality of particular securities. Any of these effects could have a significant
impact on the prices of some or all of the municipal securities held by the
Fund, making it more difficult for the Funds to maintain a stable net asset
value per share.
Investors should be aware that certain substantial issuers of New York
Municipal Obligations (including issuers whose obligations may be acquired by
the New York Tax-Free Fund), have experienced serious financial difficulties in
recent years. These difficulties have at times jeopardized the credit standing
and impaired the borrowing abilities of all New York issuers and have generally
contributed to higher interest rates and lower market prices for their debt
obligations. A recurrence of the financial difficulties previously experienced
by such issuers could result in defaults or declines in the market values of
their existing obligations and, possibly, in the obligations of other issuers of
New York Municipal Obligations.
The ability of the New York Tax-Free Fund to meet its objective is affected
by the ability of issuers to meet their payment obligations. There are
additional risks associated with an investment which concentrates in issues of
one state. Since the New York Tax-Free Fund invests primarily in obligations of
New York issuers, the marketability and market value of these obligations may be
affected by long-term economic problems which face New York City and New York
State. In particular, the ability of the State and the City to finance
independently have been adversely affected in the past by their inability to
achieve or maintain favorable credit ratings. There can also be an effect on the
market price of securities of other New York issues if the City receives less
favorable credit ratings and if certain of its economic problems continue. If
these problems are not resolved, or if new ones develop, they could adversely
affect the various New York issuers' ability to meet their financial
obligations. There can be no assurance that New York City or the local entities,
or the State, will not face budget gaps in future years.
The following information as to certain New York risk factors is given to
investors in view of the New York Fund's policy of concentrating its investments
in New York Municipal Obligation issuers. The factors affecting the financial
conditions of the State of New York (the "State") are complex, and the following
description constitutes only a brief summary; it does not purport to be a
complete description and is based on information from official statements
relating to general obligation bonds issued by the State of New York. The
accuracy and completeness of the information contained in such offering
statements has not been independently verified.
Since the New York Fund invests primarily in obligations of New York
issuers, the marketability and market value of these obligations may be affected
by long-term economic problems which face New York City and New York State. In
particular, the ability of the State and the City to finance independently has
been adversely affected in the past by their inability to achieve or maintain
favorable credit ratings. There can also be an effect on the market price of
securities of other New York issuers if the City receives less favorable credit
ratings and if certain of its economic problems continue. If these problems are
not resolved, or if new ones develop, they could adversely affect the various
New York issuers' ability to meet their financial obligations. There can be no
assurance that New York City or the local entities, or the State, will not face
budget gaps in future years. The ability of the New York Fund to meet its
objective is affected by the ability of issuers to meet their payment
obligations. A
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default by an issuer of an obligation held by the New York Fund could result in
a substantial loss of principal with respect to that obligation and a potential
decline in the New York Fund's net asset value.
The New York Fund is permitted to invest up to 25% of the value of its
total assets in the securities of any one issuer without adhering to the 5%
issuer limitation described under "Investment Restrictions". To the extent that
the New York Fund invests up to 25% of its total assets in the securities of any
one issuer, there may be an increased risk of loss to the New York Fund.
The State's fiscal year begins on April 1st and ends on March 31st. On
March 31, 1999, the State adopted the debt service portion of the State budget
for the 1999-2000 fiscal year; four months later, on August 4, 1999, it enacted
the remainder of the budget. The Governor approved the budget as passed by the
legislature. Prior to passing the budget in its entirety for the 1999-2000
fiscal year, the State enacted appropriations that permitted the State to
continue its operations.
Following enactment of the 1999-2000 budget, the State prepared a
Financial Plan for the 1999-2000 fiscal year (the "1999-2000 Financial Plan")
that sets forth projected receipts and disbursements based on the actions taken
by the Legislature. For fiscal year 1999-2000, General Fund disbursements,
including transfers to support capital projects, debt service and other funds,
are estimated at $37.36 billion, an increase of $868 million or 2.38 % over
1998-99. Projected spending under the 1999-2000 enacted budget is $215 million
above the Governor's Executive Budget recommendations. The increase in General
Fund spending is comprised of $1.1 billion in legislative additions to the
Executive Budget (primarily in education), offset by various actions, including
reestimates of required spending based on year-to-date results and the
identification of certain other resources that offset spending, such as $250
million from commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of the Debt
Reduction Reserve Fund within the General Fund and about $100 million in excess
fund balances. The MMIA was established in 1983 to provide excess liability
insurance to doctors and medical providers. Legislation enacted with the 1999-
2000 budget initiates the process of MMIA privatization and transfers excess
fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion in
the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund
(CRF), and $200 million in the Community Projects Fund (CPF), which finances
legislative initiatives. The State expects to close fiscal year 1999-2000 with
cash balances in these funds at their highest levels ever.
Many complex political, social and economic forces influence the State's
economy and finances, which in turn may affect the State Financial Plan. These
forces 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 also is based upon
forecasts of national and State economic activity. Economic forecasts frequently
have failed to predict accurately the timing and magnitude of changes in the
national and State economies. The Division of Budget (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
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materially and adversely from the projections set forth below, and those
projections may be changed materially and adversely from time to time. 1999-2000
State Financial Plan
Four governmental fund types comprise the State Financial Plan: the General
Fund, the Special Revenue Funds, the Capital Projects Funds, and the Debt
Service Funds. The State's fund structure adheres to the accounting standards of
the Governmental Accounting Standards Board.
General Fund
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1999-2000 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 47.1 % of All Governmental Funds
disbursements and 69.3 % of total State Funds disbursements. General Fund moneys
also are transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
Total receipts and transfers from other funds are projected to be $39.31
billion in 1999-2000, an increase of $2.57 billion over 1998-99. Total General
Fund disbursements and transfers to other funds are projected to be $37.36
billion, an increase of $868 million over 1998-99.
Projected General Fund Receipts - Total General Fund receipts and transfers
in 1999-2000 are projected to be $39.31 billion, an increase of $2.57 billion
from the $36.74 billion recorded in 1998-99. This total includes $35.93 billion
in tax receipts, $1.36 billion in miscellaneous receipts, and $2.02 billion in
transfers from other funds. The transfer of the $1.82 billion surplus recorded
in 1998-99 to the 1999-2000 fiscal period has the effect of exaggerating the
growth in State receipts from year to year by depressing reported 1998-99
figures and inflating 1999-2000 projections.
The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based, with certain modifications, on federal definitions of
income and deductions. Net General Fund personal income tax collections are
projected to reach $22.95 billion in 1999-2000, well over half of all General
Fund receipts and nearly $2.87 billion above the reported 1998-99 collection
total. Much of this growth is associated with the $1.82 billion net impact of
the transfer of the surplus from 1998-99 to the current year as partially offset
by the diversion of an additional $661 million in income tax receipts to the
School Tax Relief (STAR) fund. The STAR program was created in 1997 as a State-
funded local property tax relief program funded through the use of personal
income tax receipts. Adjusted for these transactions, the growth in net income
tax receipts is roughly $1.8 billion, an increase of almost 9 %.
This growth is largely a function of two factors: (i) the 8 % growth in
income tax liability projected for 1999; and (ii) the impact of the 1998 tax
year settlement recorded early in the 1999-2000 fiscal year.
The most significant statutory change made this year provides for an
increase, phased-in over two years, in the earned income tax credit from 20% to
25% of the federal credit.
User taxes and fees are comprised of three-quarters of the State's 4% sales
and use tax, cigarette, alcoholic beverage, container, and auto rental taxes,
and a portion of the motor fuel excise levies. This category also includes
receipts from the motor vehicle registration fees and alcoholic beverage license
fees. Dedicated transportation funds outside of the General Fund receive a
portion of motor fuel tax and motor vehicle registration fees and all of the
highway use taxes.
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Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6%. Modest increases in motor fuel and auto rental
tax receipts over 1998-99 levels are also expected. However, receipts from other
user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast, reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes made in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross-receipts-
based taxes on utilities and gallonage-based petroleum business taxes. Beginning
in 1994, a 15% surcharge on these levies began to be phased out and, for most
taxpayers, there is no surcharge liability for taxable period sending in 1997
and thereafter.
Total business tax collections in 1999-2000 are now projected to be $4.63
billion, $230 million below results for the prior fiscal year. The year-over-
year decline in projected receipts in this category is largely attributable to
statutory changes. These include the first year of a scheduled corporation
franchise tax rate reduction, the alternative minimum tax rate reduction, the
fixed dollar minimum rate reduction, and the expansion of the investment tax
credit to financial service companies. Ongoing tax reductions include the second
year of the "Power for Jobs" utility tax credit program, the gross receipts tax
rate reduction, and scheduled additional diversion of General Fund petroleum
business and utility tax receipts to dedicated transportation funds.
Legislation enacted this year affecting receipts in this category includes:
a phased reduction in the net income tax rate applicable to bank and insurance
companies from 9% to 7.5%; reforms to the corporation franchise subsidiary
capital tax; a further reduction in the alternative minimum tax rate from 3% to
2.5%; doubling the economic development zone and zone equivalent area wage tax
credits; and providing further reforms to the apportionment of income for the
airline industry.
Other taxes include the estate and gift tax, the real property gains tax
and pari-mutuel taxes. Taxes in this category are now projected to total $1
billion, $137 million below last year's amount. The primary factors accounting
for most of the expected decline include: an adverse tax tribunal decision
resulting in significant refunds of the now repealed real property gains tax;
pari-mutuel tax reductions enacted with the 1999-2000 budget; and the effects of
the already enacted reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget affecting
these sources include both the extension of and an increase in certain temporary
tax reductions at the State's race tracks and conformity with new federal estate
tax provisions. Miscellaneous receipts include investment income, abandoned
property receipts, medical provider assessments, minor federal grants, receipts
from public authorities, and certain other license and fee revenues.
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Miscellaneous receipts are expected to total $1.36 billion, down $142
million from the prior year amount. This reflects the loss of non-recurring
receipts received in 1998-99 and the growing effects of the phase-out of the
medical provider assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, including the 1% sales tax used
to support payments to Local Government Assistance Corporation (LGAC). Transfers
from other funds are expected to total $2.02 billion, or $99 million more than
total receipts from this category during 1998-99. Total transfers of sales taxes
in excess of LGAC debt service requirements are expected to increase by
approximately $93 million, while transfers from all other funds are expected to
increase by $6 million.
Projected General Fund Disbursements - General Fund disbursements, including
transfers to support capital projects, debt service and other funds, are
estimated at $37.36 billion in 1999-2000, an increase of $868 million or 2.38%
over 1998-99.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58% over 1998-99
levels (on a State fiscal year basis). Outside of education, the largest growth
in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183
million); and mental hygiene programs, including funding for a cost of living
increase for care providers ($114 million). These increases were offset, in
part, by spending reductions or actions in health and social welfare ($280
million), and in general State charges ($222 million).
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and not-
for-profit corporations, as well as entitlement benefits to individuals. The
largest areas of spending in this category are for aid to elementary and
secondary schools (41%) and for the State's share of Medicaid payments to
providers (22%). Grants to Local Governments are projected at $25.60 billion in
1999-2000, an increase of $910 million or 3.68% over 1998-99.
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Spending for Medicaid in 1999-2000 is projected to total $5.54 billion,
essentially unchanged from 1998-99, due in part to the use of $145 million in
other available funds that lowers disbursements in this area. Disbursements for
all other health and social welfare programs are projected to total $2.70
billion, a decrease of $252 million. Lower welfare spending, driven by State and
federal reforms and a robust economy, accounts for most of the decline.
The remaining disbursements primarily support community-based mental
hygiene programs, local transportation programs, and revenue sharing payments to
local governments. Revenue sharing and other general purpose aid to local
governments is projected at $825 million.
State operations pays for the costs of operating the Executive,
Legislature, and Judicial branches of government, including the prison system,
mental hygiene institutions, and the State University system (SUNY). Personal
service costs account for approximately 73% of spending in this category.
Spending in State operations is projected to increase by $207 million or
3.1% over the prior year. The growth reflects $100 million in projected spending
for new collective bargaining agreements that the State expects
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to be ratified in the current year. Funding for this expense will come from the
Collective Bargaining Reserve. The annualized costs of current collective
bargaining agreements, growth in the Legislative and Judiciary budgets, and
staffing costs for the State's Year 2000 compliance programs also contribute to
the year-to-year growth in spending. The State's overall workforce is expected
to remain stable at around 191,300 employees.
General State charges account for the costs of providing fringe benefits to
State employees and retirees of the Executive, Legislature, and Judiciary. These
payments, many of which are mandated by statute and collective bargaining
agreements, include employer contributions for pensions, social security, health
insurance, workers' compensation, and unemployment insurance. General State
charges also cover State payments-in-lieu-of-taxes to local governments for
certain State-owned lands, and the costs of defending lawsuits against the State
and its public officers. Disbursements in this category are estimated at $2.04
billion, a decrease of $222 million from the prior year. The change primarily
reflects projected growth of $27 million in a variety of programs offset by the
use of proceeds from the privatization of the MMIA, which is expected to offset
certain General Fund fringe benefit costs over the next two fiscal years by
approximately $250 million annually.
This category accounts for debt service on short-term obligations of the
State, i.e., the interest costs of the State's commercial paper program. The
commercial paper program is expected to have an average of approximately $185
million outstanding during 1999-2000. The majority of the State's debt service
is for long-term bonds, and is shown in the Financial Plan as a transfer to the
general Debt Service Fund.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources. Long-term
debt service transfers are projected at $2.27 billion in 1999-2000, an increase
of $183 million from 1998-99. The increase reflects debt service costs from
prior-year bond sales (net of refunding savings), and certain sales planned to
occur during the 1999-2000 fiscal year.
Transfers for capital projects provide General Fund support for projects
that are not financed with bond proceeds, dedicated taxes, other revenues, or
federal grants. Transfers in this category are projected to total $168 million
in 1999-2000. The decline of $78 million from the prior year is due primarily to
the delay of the receipt of payment of certain reimbursements in 1998-99.
Receipts of $50 million transferred to DRRF in 1998-99 will be used in the
Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF. All other
transfers (excluding DRRF), which reflect the remaining transfers from the
General Fund to other funds, are estimated to total $385 million in 1999-2000, a
decline of $84 million from 1998-99, primarily because of certain non-recurring
transfers that occurred last year.
Non-Recurring Resources
The DOB estimates that the 1999-2000 State Financial Plan contains actions
that provide non-recurring resources or savings totaling approximately $500
million, or 1.3% of General Fund resources, the largest of which is the first
phase of the privatization of MMIA. To the greatest extent possible, one-time
resources are expected to be utilized to finance one-time costs, including Year
2000 compliance costs and certain capital spending.
Outyear Projections of Receipt and Disbursements
State law requires the Governor to propose a balanced budget each year.
Preliminary analysis by DOB indicates that the State will have a 2000-01 budget
gap of approximately $1.9 billion, or about $300 million above the 1999-2000
Executive Budget estimate (after adjusting for the projected costs of collective
bargaining). This
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estimate includes an assumption for the projected costs of new collective
bargaining agreements, $500 million in assumed operating efficiencies, as well
as the planned application of approximately $615 million of the $1.82 billion
tax reduction reserve. In recent years, the State has closed projected budget
gaps which DOB estimates at $5.0 billion (1995-96), $3.9 billion (1996-97), $2.3
billion (1997-98), and less than $1 billion (1998-99). DOB will formally update
its projections of receipts and disbursements for future years as part of the
Governor's 2000-01 Executive Budget submission. The revised expectations for
these years will reflect the cumulative impact of tax reductions and spending
commitments enacted over the last several years as well as new 2000-01 Executive
Budget recommendations.
The State and the United University Professionals (UUP) union have reached
a tentative agreement on a new four-year labor contract. The State is continuing
negotiations with other unions representing State employees, the largest of
which is the Civil Service Employees Association (CSEA). CSEA previously failed
to ratify a tentative agreement on a new four-year contract earlier in 1999. The
1999-2000 Financial Plan has reserved $100 million for possible collective
bargaining agreements, and reserves are contained in the preliminary outyear
projection for 2000-01 to cover the recurring costs of any new agreements. To
the extent these reserves are inadequate to finance such agreements, the costs
of new labor contracts could increase the size of future budget gaps.
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. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
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 help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
Other Governmental Funds
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds which are discussed
below. Amounts below do not include other sources and uses of funds transferred
to or from other fund types.
Special Revenue Funds Total disbursements for programs supported by Special
Revenue Funds are projected at $30.94 billion, an increase of $1.29 billion or
4.35% over the prior year. Special Revenue Funds include federal grants and
State special revenue funds.
Federal grants are projected to comprise 72% of all Special Revenue Funds
spending in 1999-2000, comparable to prior years. Disbursements from federal
funds are estimated at $22.17 billion, an increase of $741 million or
3.46%. Medicaid is the largest program within federal funds, accounting for 56%
of total spending in this category. In 1999-2000, Medicaid spending is projected
at $14.32 billion, an increase of $711 million over 1998-99. The remaining
growth in federal funds is primarily for the Child Health Plus program, which is
estimated at $117 million in 1999-2000. This growth is offset by decreased
spending in certain social services programs resulting from more recent spending
reestimates.
State special revenue spending is projected to be $8.77 billion, an
increase of $550 million or 6.69% from the last fiscal year. The spending growth
is primarily due to $661 million for the next phase of the STAR program and $250
million in additional general State charges funded by proceeds from the MMIA
transaction, offset by a decrease of $185 million in projected educational
spending as a result of lower projected Lottery proceeds and a decline of $112
million in transportation disbursements. The remainder reflects the net impact
of spending reestimates.
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Capital Projects Funds - Spending from Capital Projects Funds in 1999-2000
is projected at $4.18 billion, an increase of $114 million or 2.80% from last
fiscal year. Transportation, environmental, education and mental hygiene
programs are the major sources of year-to-year spending growth in this category.
Debt Service Funds - Spending from Debt Service Funds are estimated at
$3.64 billion in 1999-2000, up $370 million or 11.31% from 1998-99.
Transportation purposes, including debt service on bonds issued for State and
local highway and bridge programs financed through the New York State Thruway
Authority and supported by the Dedicated Highway and Bridge Trust Fund, account
for $124 million of the year-to-year growth. Debt service for educational
purposes, including State and City University programs financed through the
Dormitory Authority, will increase by $80 million. The remaining growth is for a
variety of programs in mental health and corrections, and for general obligation
finances.
Special Considerations
General - 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 may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and events that are not
subject to the State's control. The Financial Plan also is 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 State economies.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of
national and State economic forecasts prepared by commercial forecasting
services and other public and private forecasters. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and State economies. Many uncertainties exist in forecasts of both
the national and State economies, including consumer attitudes toward spending,
the extent of corporate and governmental restructuring, the condition of the
financial sector, federal, fiscal and monetary policies, the level of interest
rates, and the condition of the world economy, which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience results in the current fiscal year that are worse than predicted,
with corresponding material and adverse effects on the State's projections of
receipts and disbursements.
Projections of total State receipts in the Financial Plan are based on the
state tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, potential collective bargaining agreements,
levels of disbursements for various services provided by local governments
(where the cost is partially reimbursed by the State), and the results of
various administrative and statutory mechanisms in controlling disbursements for
State operations. Factors that may affect the level of disbursements in the
fiscal year include uncertainties relating to the economy of the nation and the
State, the policies of the federal government, collective bargaining
negotiations and changes in the demand for and use of State services.
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An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Additional risks to the Financial Plan arise out of potential actions at
the federal level. Potential changes to federal tax law currently under
discussion as part of the federal government's efforts to enact a multi-year tax
reduction package could alter the federal definitions of income on which certain
State taxes rely. Certain proposals, if enacted, could have a significant impact
on State revenues in the future.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. This law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements. Any
future reduction could have an adverse impact on the State's Financial Plan.
However, the State has been able to demonstrate compliance with TANF work
requirements to date and does not now expect to be subject to associated federal
fiscal penalties.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from projections. In the past, the State has taken
management actions to address potential Financial Plan shortfalls, and may take
similar actions should adverse variances occur in its projections for the
current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the state and
regional economy, and actions by the federal government could impact projected
budget gaps for the State. These gaps would result from a disparity between
recurring revenues and the costs of increasing the level of support for State
programs. For example, the fiscal effects of tax reductions adopted in the last
several fiscal years are projected to grow more substantially in the forecast
period, continuing to restrain receipts levels and placing pressure on future
spending levels. To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and, under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years. To help guard against these risks, the
State has projected reserves of $2.4 billion in 1999-2000.
Cash-Basis Results for Prior Fiscal Years
General Fund 1996-97 Through 1998-99 - New York State's financial
operations have improved during recent fiscal years. During its last seven
fiscal years, the State has recorded balanced budgets on a cash basis, with
positive year-end fund balances. A description of cash-basis results in the
General Fund for the prior three fiscal years is presented below.
1998-99 Fiscal Year - The State ended its 1998-99 fiscal year on March 31,
1999 in balance on a cash basis, with a General Fund cash surplus as reported by
the DOB of $1.82 billion. The cash surplus was derived
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primarily from higher-than-projected tax collections as a result of continued
economic growth, particularly in the financial markets and the securities
industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited
into the tax refund reserve account at the close of 1998-99 to pay for tax
refunds in 1999-2000 of which $521 million was made available as a result of the
Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000. General Fund
receipts and transfers from other funds (net of tax refund reserve account
activity) for the 1998-99 fiscal year totaled $36.74 billion, an increase of
6.34% from 1997-98 levels. General Fund disbursements and transfers to other
funds totaled $36.49 billion for the 1998-99 fiscal year, an increase of 6.23%
from 1997-98 levels.
1997-98 Fiscal Year - The State ended its 1997-98 fiscal year in balance on
a cash basis, with a General Fund cash surplus as reported by DOB of
approximately $2.04 billion. The cash surplus was derived primarily from higher-
than-anticipated receipts and lower spending on welfare, Medicaid, and other
entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The TSRF closing balance was $400 million,
following a required deposit of $15 million (repaying a transfer made in 1991-
92) and an additional deposit of $68 million made from the 1997-98 surplus. The
CRF closing balance was $68 million, following a $27 million deposit from the
surplus. The CPF closed the fiscal year with a balance of $170 million. The
General Fund closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a result of the
LGAC financing program and was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.55 billion, an
annual increase of 4.57% over 1996-97. General Fund disbursements and transfers
to other funds were $34.35 billion, an annual increase of 4.41%.
1996-97 Fiscal Year - The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported by
DOB of approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million (repaying a transfer made in 1991-
92) and an additional deposit of $65 million in 1996-97. In addition, $41
million remained on deposit in the CRF. The remaining $75 million reflected
amounts then on deposit in the CPF. The General Fund closing balance did not
include $1.86 billion in the tax refund reserve account, of which $521 million
was made available as a result of the LGAC financing program and was required to
be on deposit as of March 31, 1997. General Fund receipts and transfers from
other funds (net of tax refund reserve account activity) for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7% from the previous fiscal year.
General Fund disbursements and transfers to other funds totaled $32.90 billion
for the 1996-97 fiscal year, an increase of 0.7% from the 1995-96 fiscal year.
Other Governmental Funds (1996-97 Through 1998-99)
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Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two dedicated funds in
the Special Revenue and Capital Projects fund types. These revenues are used to
support the capital programs of the Department of Transportation, the
metropolitan Transportation Authority (MTA) and other transit entities.
In the Special Revenue Funds, disbursements increased from $26.02 billion
to $29.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid and the initial costs of the STAR
program. Other activity reflected dedication of taxes for mass transportation
purposes, new lottery games, and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds increased over the three-year period
from $3.54 billion to $4.06 billion, primarily for education, environment,
public protection and transportation programs. The composition of this fund
type's receipts also has changed as dedicated taxes, federal grants and
reimbursements from public authority bonds increased, while general obligation
bond proceeds declined.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
ongoing costs of the LGAC fiscal reform program. The increases were moderated by
the refunding savings achieved by the State over the last several years using
strict present value savings criteria. Disbursements in this fund type increased
from $2.53 billion to $3.27 billion over the three-year period.
The State Financial Plan is based upon a June 1999 projection by DOB of
national and State economic activity. The information in this section summarizes
the national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1999-2000 Financial Plan.
The national economy has maintained a robust rate of growth during the past
six quarters as the expansion, which is well into its ninth year, continues. The
national expansion, if it continues through February 2000, will be the longest
on record. Since early 1992, approximately 19 million jobs have been added
nationally. Output growth has averaged 3.2% over this period, essentially the
same as the 3.3% average annual growth during the post-World War II period. The
State economy also has continued to expand, with over 600,000 jobs added since
late 1992. Employment growth has been slower than in the nation during this
period, although the State's relative performance has improved in the last two
years. Growth in average wages in New York has generally outperformed the
nation, while growth in personal income per capita has kept pace with the
nation.
DOB expects that national economic growth will be quite robust throughout
calendar year 1999. Growth in real Gross Domestic Product for 1999 is projected
to be 4.0%, with a decline in net exports overwhelmed by continued strong
consumer spending. The projected overall growth rate of the national economy for
calendar year 1999 is nearly identical to the consensus forecast of a widely
followed survey of national economic forecasters. Inflation, as measured by the
Consumer Price Index, is projected to be about 2.1%, a modest increase despite
strong economic growth. Personal income and wages are projected to increase by
5.1% and 6.3% respectively.
The forecast of the State's economy shows continued expansion during The
1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing sector is expected to post a
modest decline. On an average annual basis, the employment growth rate in the
state is expected to be somewhat lower than in 1998 and the unemployment rate is
expected to drop further to 5.1%. Personal income is expected to record moderate
gains in 1999. Wage growth in 1999 is expected to be slower than in the previous
year as the recent robust growth in bonus payments moderates. The forecast for
continued growth, and any resultant impact on the State's 1999-2000 Financial
Plan, contains some uncertainties. Stronger-than-expected gains in employment
and wages or in stock market prices could lead to unanticipated strong growth in
consumer spending. Inventory investment due to Y2K
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may be significantly stronger than expected towards the end of this year
possibly followed by significant weakness early next year. Also, improvements in
foreign economies may be weaker than expected and therefore, may have
unanticipated effects on the domestic economy. The inflation rate may differ
significantly from expectations due to the conflicting impacts of a tight labor
market and improved productivity growth as well as to the future direction and
magnitude of fluctuations of oil prices. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments,
financial sector profits or inflation growth, resulting in unexpected economic
impacts. Similarly, the State forecast could fail to correctly estimate the
amount of employment change in the banking, financial and other business service
sectors as well as the direction of employment change that is likely to
accompany telecommunications and energy deregulation.
The New York 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.
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related services,
such as information processing, law and accounting, is the State's leading
economic sector. The services sector accounts for more than three of every 10
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in importance
in New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this sector accounts
for under one-tenth of all nonagricultural jobs in the State, it contributes
about one-fifth of all nonfarm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions
of the State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total State and local government employment.
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Economic and Demographic Trends
In the calendar years 1987 through 1998, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1987. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the US Bureau of Economic Analysis, personal income in the State
has risen more slowly since 1988 than personal income for the nation as a whole,
although preliminary data suggests that, in 1998, the State personal income rose
more rapidly. Total State nonagricultural employment has declined as a share of
national nonagricultural employment. State per capita personal income has
historically been significantly higher than the national average, although the
ratio has varied substantially. Because New York 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.
Public Authorities
Fiscal stability of the State is related in part to the fiscal stability of
its public authorities. For the purposes of this summary, public authorities
refer to public benefit corporations, created pursuant to State law, other than
local authorities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt that apply to the State itself and may
issue bonds and notes within the amounts and restrictions set forth in
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 its public authorities were to default on their
respective obligations. As of December 31, 1998, there were 17 public
authorities that had outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of these State public authorities
was $94 billion, only a portion of which constitutes State-supported or State-
related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue-producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electric and gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for public authorities.
Also, there are statutory arrangements providing for State local assistance
payments otherwise payable to localities to be made under certain circumstances
to public authorities. Although the State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to public authorities under these arrangements, the affected localities may
seek additional State assistance if local assistance payments are diverted. Some
authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to provide transit and commuter
services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $5 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State-supported or
State-related debt.
Metropolitan Transportation Authority - The MTA oversees the operation of
subway and bus lines in New York City by its affiliates, the New York City
Transit Authority and the Manhattan and Bronx Surface Transit Operating
Authority (collectively, the TA). The MTA operates certain commuter rail and bus
services in the New
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York metropolitan area through the MTA's subsidiaries, the Long Island Rail Road
Company, the Metro-North Commuter Railroad Company, and the Metropolitan
Suburban Bus Authority. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated agency, the Triborough Bridge and Tunnel Authority
(TBTA), the MTA operates certain intrastate toll bridges and tunnels. Because
fare revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended on, and will continue to depend on, operating
support from the State, local governments and TBTA, including loans, grants and
subsidies. If current revenue projections are not realized and/or operating
expenses exceed current projections, the TA or commuter railroads may be
required to seek additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1% regional sales and use tax--that provide
revenues for mass transit purposes, including assistance to the MTA. Since 1987,
State law also has required that the proceeds of a one-quarter of 1% mortgage
recording tax paid on certain mortgages in the Metropolitan Transportation
Region be deposited in a special MTA fund for operating or capital expenses. In
1993, the State dedicated a portion of certain additional State petroleum
business tax receipts to fund operating or capital assistance to the MTA. The
1999-2000 enacted budget provides State assistance to the MTA totaling
approximately $1.4 billion, an increase of $55 million over the 1998-99 fiscal
year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the 1995-99 Capital Program). In July 1997, the Capital Program
Review Board (CPRB) approved the 1995-99 Capital Program and subsequently
amended it in August 1997 and in March 1999. The MTA plan now totals $12.55
billion. The 1995-99 Capital Program was the fourth capital plan since the
Legislature authorized procedures for the adoption, approval and amendment of
MTA capital programs and is designed to upgrade the performance of the MTA's
transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumed the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan was projected to be financed with
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that the MTA's capital plan for 2000 through 2004 will
be adequate to finance the MTA's capital needs over the plan period, or that
funding sources identified in the approved plan will not be reduced or
eliminated.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 2000-04 Capital Program or
parts thereof will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 2000-04 Capital Program
accordingly. If the 2000-04 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.
The City of New York
The fiscal health of the State also may be affected by the fiscal health of
New York City, which continues to receive significant financial assistance from
the State. State aid contributes to the City's ability to balance its budget and
meet its cash requirements. The State also may be affected by the ability of the
City and certain entities issuing debt for the benefit of the City to market
their securities successfully in the public credit markets.
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Fiscal Oversight
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York
(NYCMAC) to provide financing assistance to the City; the New York State
Financial Control Board (the Control Board) to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New York
(OSDC) to assist the Control Board in exercising its powers and
responsibilities. A"control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily-prescribed fiscal controls. The Control
Board terminated the control period 1986 when certain statutory conditions were
met. State law requires the Control Board to reimpose a control period upon the
occurrence, or "substantial likelihood and imminence" of the occurrence, of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the City's Financial Plan. The City's
Financial Plan summarizes its capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps. The
City's projections set forth in its Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain entities
issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In City fiscal year 1997-98, the State constitutional debt limit would have
prevented the City from entering into new capital contracts. Therefore, in 1997,
the State created the New York City Transitional Finance Authority (TFA) in
order to finance a portion of the City's capital program. Despite this
additional financing mechanism, the City currently projects that, if no further
action is taken, it will reach its debt limit in City's current fiscal year
1999-2000. To continue its capital plan without interruption, the City is
proposing an amendment to the State Constitution to change the methodology used
to calculate the debt limit. Since an amendment to the Constitution to raise the
debt limit could not take effect until City fiscal year 2001-02 at the earliest,
the City has decided to securitize a portion of its share of the proceeds from
the settlement with the nation's tobacco companies. However, a number of
potential developments may affect both the availability and level of funding
that the City will receive from the tobacco settlement. City officials have
indicated that, should their efforts to securitize a portion of City tobacco
settlement proceeds fail or not be accomplished in a timely manner, the City
will request that the State increase the borrowing authority of the TFA.
Monitoring Agencies - The staffs of the Control Board, OSDC and the City
Comptroller issue periodic reports on the City's Financial Plans. The reports
analyze the City's forecasts of revenues and expenditures, cash flow, and debt
service requirements, as well as evaluate compliance by the City and its Covered
Organizations with its Financial Plan. According to staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and produced a substantial surplus for the City in City fiscal year 1997-98.
Recent staff reports also indicate that the City projects a surplus for City
fiscal year 1998-99. Although several sectors of the City's economy have
expanded over the last several years, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the performance of the
national economy. In addition, the size of recent tax reductions has increased
to over $2 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110. Staff
reports have indicated that recent City budgets have been balanced in part
through the use of nonrecurring resources and that the City's Financial Plan
relies in part on actions outside its direct control. These reports also have
indicated that the City has not yet brought its long-term expenditure
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growth in line with recurring revenue growth and that the City is likely to
continue to face substantial gaps between forecast revenues and expenditures in
future years that must be closed with reduced expenditures and/or increased
revenues. In addition to these monitoring agencies, the Independent Budget
Office (IBO) has been established pursuant to the City Charter to provide
analysis to elected officials and the public on relevant fiscal and budgetary
issues affecting the city.
Other Localities - Certain localities outside New York City have
experienced financial problems and have requested and received additional State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional oversight or
financial assistance is not included in the projections of the State's receipts
and disbursements for the State's 1999-2000 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have been
determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to agree
on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged
insubstantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State, other than New York City, was
approximately $21.0 billion. A small portion (approximately $80 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) authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities also may face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, also may adversely
affect localities and necessitate State assistance.
Litigation
General
The legal proceedings listed below involve State finances and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1999-2000
fiscal year or thereafter.
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As of August 24, 1999, except as described below, no current litigation
involves the State's authority, as a matter of law, to contract indebtedness,
issue its obligations, or pay such indebtedness when due, or affects the State's
power or ability, as a matter of law, to impose or collect significant amounts
of taxes and revenues.
The State is party to other claims and litigation which its legal counsel
has advised are not probable of adverse court decisions or are not deemed
adverse and material. Although the amounts of potential losses resulting from
this litigation, if any, are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material and adverse effect on the State's financial position in the 1999-2000
fiscal year or thereafter. The General Purpose Financial Statements for the
1998-99 fiscal year report estimated probable awarded and anticipated
unfavorable judgments of $895 million, of which $132 million is expected to be
paid during the 1999-2000 fiscal year. Adverse developments in the proceedings
described below, 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 1999-2000 Financial Plan.
The State believes that the 1999-2000 Financial Plan includes sufficient
reserves to offset the costs associated with the payment of judgments that may
be required during the 1999-2000 fiscal year. These reserves include (but are
not limited to) amounts appropriated for court of claims payments and projected
fund balances in the General Fund. In addition, any amounts ultimately required
to be paid by the State may be subject to settlement or may be paid over a
multi-year period. There can be no assurance, however, that adverse decisions in
legal proceedings against the State would not exceed the amount of all potential
1999-2000 Financial Plan resources available for the payment of judgments, and
could therefore affect the ability of the State to maintain a balanced 1999-2000
Financial Plan.
Tax Law
In New York Association of Convenience Stores, et al. v. Urbach, et al.,
petitioners, New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. are
seeking to compel respondents, the Commissioner of Taxation and Finance and the
Department of Taxation and Finance, to enforce sales and excise taxes imposed,
pursuant to Tax Law Articles 12-A, 20 and 28, on tobacco products and motor fuel
sold to non-Indian consumers on Indian reservations. In orders dated August
13, 1996 and August 24, 1996, the Supreme Court, Albany County, ordered, inter
alia, that there be equal implementation and enforcement of said taxes for sales
to non-Indian consumers on and off Indian reservations, and further ordered
that, if respondents failed to comply within 120 days, no tobacco products or
motor fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternately, the collection and enforcement of such taxes would
be suspended statewide. Respondents appealed to the Appellate Division, Third
Department, and invoked CPLR 5519(a)(1), which provides that the taking of the
appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioners' motion to vacate the stay was denied. In a decision entered May
8, 1997, the Third Department modified the orders by deleting the portion
thereof that provided for the statewide suspension of the enforcement and
collection of the sales and excise taxes on motor fuel and tobacco products. The
Third Department held, inter alia, that petitioners had not sought such relief
in their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners' motion for leave to cross appeal from the portion of the
Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco. On July 9, 1998, the New York Court of Appeals reversed the order of
the Appellate Division, Third Department, and remanded the matter to the Supreme
court, Albany County, for further proceedings. The Court held that the
petitioners had standing to assert an equal protection claim, but that their
claim did not implicate racial discrimination. The Court remanded the case to
Supreme Court, Albany County, for resolution of the question of whether there
was a rational basis for the Tax Department's policy of non-enforcement of the
sales and excise taxes on reservation sales of cigarettes and motor fuel to non-
Indians. In a footnote, the Court stated that, in view of its disposition of the
case, petitioners' cross-appeal regarding the statewide suspension of the taxes
is "academic." By decision and judgment dated July 9, 1999, the Supreme court,
Albany
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County, granted judgment dismissing the petition. The time in which to appeal
the July 9, 1999 decision and judgment has not yet expired.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver
v. Pataki, Supreme Court, New York County), the Speaker challenges the
Governor's application of his constitutional line item veto authority to certain
portions of budget bills adopted by the State Legislature contained in Chapters
56, 57 and 58 of the Laws of 1998. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the Court denied the
State's motion to dismiss. On January 27, 1999, the State appealed that order.
On April 27, 1999, the Appellate Division, First Department, held that the
state's automatic stay of litigation pending the resolution of the appeal would-
be vacated unless the State perfected its appeal for the Court's September 1999
appellate term. The State perfected its appeal on July 12, 1999.
Medicaid
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April
1, 1995. Included are New York State Health Facilities Association, et al.
v. DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New
York Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry Nursing
Home et al. v. Pataki, et al. Plaintiffs allege that the changes in methodology
have been adopted in violation of procedural and substantive requirements of
State and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York
County). In a related case, Rodriguez v. DeBuono, on April 19, 1999, the United
States district Court for the Southern District of New York enjoined the State's
use oft ask based assessment, which is similar to the HARRI, unless the State
assesses safety monitoring as a separate task based assessment, on the grounds
that its use without such additional assessment violated federal Medicaid law
and the Americans with Disabilities Act. The State appealed from the April 19,
1999 order and on July 12, 1999 argued the appeal before the Second Circuit.
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September
5, 1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. In a decision
entered December 15, 1998, the Appellate Division, First Department, dismissed
the remaining cases in accordance with the result in Matter of New York State
Radiological Society v. Wing. By decision dated July 8, 1999, the Court of
Appeals denied leave to appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss.2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax
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assessments were not uniformly applied, in violation of federal regulations. In
a decision dated June 30, 1997, the Court held that the 1.2% and 3.8%
assessments on gross receipts imposed pursuant to Public Health Law ss.ss. 2807-
d(2)(b)(ii) and 2807-d(2)(b)(iii), respectively, are unconstitutional. An order
entered August 27, 1997 enforced the terms of the decision. The State appealed
that order. By decision and order dated August 31, 1998, the Appellate Division,
Second Department, affirmed that order. On September 30, 1998, the State moved
for re-argument or, in the alternative, fora certified question for the Court of
Appeals to review. By order dated January 7, 1999, the motion was denied. A
final order was entered in Supreme Court on January 26, 1999. On February 23,
1999, the State appealed that order to the Court of Appeals. The case is
scheduled to be argued on October 20, 1999. In Dental Society, et al. v. Pataki,
et al. (United States District Court, Northern District of New York, commenced
February 2, 1999), plaintiffs challenge the State's reimbursement rates for
dental care provided under the State's dental Medicaid program. Plaintiffs claim
that the State's Medicaid fee schedule violates Title XIX of the Social Security
Act (42 U.S.C. ss. 1396a et seq.) and the federal and State Constitutions. On
June 25, 1999, the State filed its answer.
Shelter Allowance
In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York
County), plaintiffs allege that the shelter allowance granted to recipients of
public assistance is not adequate for proper housing. In a decision dated April
16, 1997, the Court held that the shelter allowance promulgated by the
Legislature and enforced through the State Department of Social Services
regulations is not reasonably related to the cost of rental housing in New York
City and results in homelessness to families in New York City. A judgment was
entered on July 25, 1997, directing, inter alia, that the State (i) submit a
proposed schedule of shelter allowances (for the Aid to Dependent Children
program and any successor program) that bears a reasonable relation to the cost
of housing in New York City; and (ii) compel the New York City Department of
Social Services to pay plaintiffs a monthly shelter allowance in the full amount
of their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State appealed to the Appellate Division, First
Department from each and every provision of this judgment except that portion
directing the continued provision of interim relief. By decision and order dated
May 6, 1999, the Appellate Division, First Department, affirmed the July 25,
1997 judgment. By order dated July 8, 1999, the Appellate Division denied the
State's motion for leave to appeal to the Court of Appeals from the May 6, 1999
decision and order. The State's motion for leave to appeal to the Court of
Appeals is pending in that court.
Real Property Claims
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United States
Court of Appeals for the Second Circuit holding that the Oneida Indians have a
common-law right of action against Madison and Oneida Counties for wrongful
possession of 872 acres of land illegally sold to the State in 1795. At the same
time, however, the Court reversed the Second Circuit by holding that a third-
party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.
In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions were argued March 29, 1999 and are still awaiting
determination. The District Court has not yet rendered a decision. By order
dated February 24, 1999,
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the District Court appointed a federal settlement master. A conference scheduled
by the District Court for May 26, 1999 to address the administration of this
case has been adjourned indefinitely.
Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York,
et al., both in the United States District Court for the Northern District of
New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions, but may
enhance others. In the Cayuga Indian Nation of New York case, by order dated
March 29, 1999, the United States District Court for the Northern District of
New York appointed a federal settlement master. In June 1999, the federal
government moved to have the State held jointly and severally liable for any
damages owed to the plaintiffs. This motion was argued before the District Court
on July 8, 1999. The damages phase of the trial of this case is scheduled to
begin on December 1, 1999. In the Canadian St. Regis Band of Mohawk Indians
case, the United States District Court for the Northern District of New York has
directed the parties to rebrief outstanding motions to dismiss brought by the
defendants. The State filed its brief on July 1, 1999. The motions are scheduled
for argument on September 21, 1999.
Civil Rights Claims
In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan (EIP I). On January
19, 1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the State) in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss.1983 and the
Equal Educational Opportunity Act, 20 U.S.C. ss.ss.1701, et seq., for the
unlawful dual school system, because the State, inter alia, had taken no action
to force the school district to desegregate despite its actual or constructive
knowledge of de jure segregation. By order dated October 8, 1997, the District
Court held that vestiges of the prior segregated school system continued to
exist and that, based on the State's conduct in creating and maintaining that
system, the State is liable for eliminating segregation and its vestiges in
Yonkers and must fund a remedy to accomplish that goal. Yonkers presented a
proposed educational improvement plan (EIP II) to eradicate these vestiges of
segregation. The October 8, 1997 order of the District Court ordered that EIP II
be implemented and directed that, within 10 days of the entry of the order, the
State make available to Yonkers $450,000 to support planning activities to
prepare the EIPII budget for 1998-99 and the accompanying capital facilities
plan. A final judgment to implement EIP II was entered on October 14, 1997. On
November 7, 1997, the State appealed that judgment to the Second Circuit. The
appeal is pending. Additionally, the Court adopted a requirement that the State
pay to Yonkers approximately $9.85 million as its pro rata share of the funding
of EIPI for the 1996-97 school year. The requirement for State funding of EIP I
was reduced to an order on December 2, 1997 and reduced to a judgment on
February 10, 1998. The State appealed that order to the Second Circuit on
December 31, 1997 and amended the notice of appeal after entry of the judgment.
By decision dated June 22, 1999, as discussed below, the Second Circuit affirmed
the District Court's order requiring the State to pay one-half of the cost of
EIP I for the 1996-97 school year and remanded the case to the District Court
for further proceedings consistent with its decision.
On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06. That opinion was
reduced to an order on July 27, 1998. The order directed the State to pay $37.5
million by August 1, 1998 for
30
<PAGE>
estimated EIP costs for the 1997-98 school year. The State made this payment, as
directed. On August 24, 1998, the State appealed that order to the Second
Circuit. The city of Yonkers and the Yonkers Board of Education cross appealed
to the Second Circuit from that order. By stipulation of the parties approved by
the Second Circuit on November 19, 1998, the appeals from the July 27, 1998
order were withdrawn without prejudice to reinstatement upon determination of
the State's appeal of the October 14, 1997 judgment discussed above.
On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million by
May 1, 1999, as the State's remaining share of EIP costs for the 1997-98 school
year. The second order directed the State to pay to Yonkers $69.1 million as its
share of the estimated EIP costs for the 1998-99 school year. The State made
both payments on April 30, 1999.
In a decision dated June 22, 1999, the Second Circuit found no basis for
the District Court's findings that vestiges of a dual system continued to exist
in Yonkers and reversed the order directing the implementation of EIP II. The
Second Circuit also affirmed the District Court's order requiring the State to
pay one-half of the cost of EIP I for the 1996-97 school year and remanded the
case to the District Court for further proceedings consistent with its decision.
On July 2, 1999 the NAACP filed a petition for rehearing of the June 22, 1999
decision before the Second Circuit, en banc. The State has joined in the City of
Yonker's motion to stay further implementation of EIP II pending the decision on
the petition for rehearing. By order dated August 5, 1999, the Second Circuit
granted the motion staying further implementation of EIP II pending appeal.
On July 27, 1999, the City of Yonkers moved in the District Court to modify
the July 27, 1998 order to require the State to make payments for EIP expenses
each month from July 1999 through April 2000 of $9.22 million per month instead
of paying $92.2 million by May 1, 2000. By memorandum and order dated July 29,
1999, the District Court denied this motion.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
Repurchase Agreements
Securities held by the Funds may be subject to repurchase agreements. A
repurchase agreement is a transaction in which the seller of a security commits
itself at the time of the sale to repurchase that security from the buyer at a
mutually agreed upon time and price. The repurchase price exceeds the sale
price, reflecting an agreed upon interest rate effective for the period the
buyer owns the security subject to repurchase. The agreed upon rate is
unrelated to the interest rate on that security. Each Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the Adviser, present minimal credit risks.
Where the securities underlying a repurchase agreement are not U.S. Government
securities, they must be of the highest quality at the time the repurchase
agreement is entered into (e.g., a long- term debt security would be required to
be rated by S&P as "AAA" or its equivalent). While the maturity of the
underlying securities in a repurchase agreement transaction may be more than one
year, the term of the repurchase agreement is always less than thirteen months.
The maturities of the underlying securities will have to be taken into account
in calculating the Fund's dollar-weighted average portfolio maturities if the
seller of the repurchase agreement fails to perform under such agreement. In
these transactions, the securities acquired
31
<PAGE>
by each Fund are held by the Fund's custodian bank until they are repurchased.
The Adviser will monitor the value of the underlying security at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the security always equals or exceeds the
repurchase price. In the event of default by the seller under the repurchase
agreement, a Fund may have problems in exercising its rights to the underlying
securities and may incur costs and experience time delays in connection with the
disposition of such securities. Repurchase agreements are considered to be loans
under the 1940 Act, as amended, collateralized by the underlying securities.
Repurchase agreements may involve certain risks. If the seller in the
transaction becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code, recent amendments to the Code permit the Funds to exercise
a contractual right to liquidate the underlying securities. However, if the
seller is a stockbroker or other entity not afforded protection under the Code,
an agency having jurisdiction over the insolvent entity may determine that a
Fund does not have the immediate right to liquidate the underlying securities.
If the seller defaults, a Fund might incur a loss if the value of the underlying
securities declines. A Fund may also incur disposition costs in connection with
the liquidation of the securities. While the Funds' management acknowledges
these risks, it is expected that they can be controlled through selection
criteria established by the Board of Trustees and careful monitoring procedures.
Income from repurchase agreements is taxable.
Loans of Portfolio Securities
Portfolio securities of the Cash Management, Government and New York Tax-
Free Funds may be lent to brokers, dealers and financial institutions if
collateral, in the form of cash, U.S. Government securities, or other liquid
high grade debt obligations, including letters of credit, equal to at least 100%
of the current market value of the securities loaned (including accrued
dividends and interest thereon) plus the interest payable with respect to the
loan is maintained by the borrower with the lending Fund in a segregated account
maintained by a custodian. In determining whether to lend a security to a
particular broker, dealer or financial institution, the investment adviser will
consider all relevant facts and circumstances, including the creditworthiness of
the broker, dealer or financial institution. No Fund will enter into any
portfolio security lending arrangement having a duration of longer than one
year. Any securities which the lending Fund may receive as collateral will not
become part of the Fund's portfolio at the time of the loan and, in the event of
a default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof which is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the lending Fund an amount equal to any accrued income on those securities,
and that Fund may invest the cash collateral and earn additional income or
receive an agreed upon fee from a borrower which has delivered cash equivalent
collateral. The Fund will not lend securities having a value which exceeds 33
1/3 % of the current value of its total assets. There may be a risk of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. Loans of securities will be subject to termination at the lender's
or the borrower's option. Each Fund may pay reasonable administrative and
custodial fees in connection with a securities loan and may pay a negotiated
portion of the interest or fee earned with respect to the collateral to the
borrower or the placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly, with the Trust, its investment adviser or
distributor.
Variable Rate Demand Notes
The Cash Management Fund may from time to time buy variable rate demand
notes issued by corporations, bank holding companies, financial institutions and
government agencies and instrumentalities (but only in the case of taxable
securities). These securities will typically have a maturity in the 5-20 year
range but carry with them the right of the holder to put the securities to a
remarketing agent or other entity on short notice, typically 30 days or less.
The obligation of the issuer of the put to repurchase the securities is backed
up by a letter of credit or other obligation issued by a bank. The purchase
price is ordinarily par plus accrued and unpaid interest. Ordinarily, the
remarketing agent will adjust the interest rate every seven days (or at other
intervals corresponding to the notice period for the put), in order to maintain
the interest rate at the prevailing market rate for securities with a 7-day
32
<PAGE>
maturity.
Variable Rate Master Demand Notes
The obligations which the Cash Management Fund and Government Fund may buy
include variable rate master demand notes. The terms of these obligations permit
the investment of fluctuating amounts by these Funds at varying rates of
interest pursuant to direct arrangements between the Funds, as lenders, and the
borrower. They permit weekly, and in some instances, daily, changes in the
amounts borrowed. The Funds have the right to increase the amount under the note
at any time up to the full amount provided by the note agreement, or to decrease
the amount, and the borrower may prepay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
Because the notes are direct lending arrangements between the lender and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and thus
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. The Funds have no limitations on the type of issuer from
which the notes will be purchased, except that in the case of the Government
Fund the issuer must be a Federal agency or instrumentality. However, in
connection with such purchases and on an ongoing basis, the Adviser will
continually monitor the earning power, cash flow and other liquidity ratios of
the issuer, and its ability to pay principal and interest on demand, including a
situation in which all holders of such notes made demand simultaneously. While
master demand notes, as such, are not typically rated by credit rating agencies,
if not so rated, the Funds may, under their minimum rating standards, invest in
them only if at the time of an investment the issuer meets the criteria set
forth in the Funds' Prospectus for all other debt obligations.
Other Mutual Funds
The Funds may invest in shares of other open-end management investment
companies that are money market funds reasonably believed to comply with Rule
2a-7 under the Investment Company Act of 1940, subject to the limitations of the
Investment Company Act of 1940 and subject to such investments being consistent
with the overall objective and policies of the Fund, provided that any such
purchases will be limited to shares of unaffiliated investment companies. The
purchase of securities of other mutual funds results in duplication of expenses
such that investors indirectly bear a proportionate share of the expenses of
such mutual funds including operating costs and investment advisory and
administrative fees.
The investment objective of each of the Funds and related policies and
activities are not fundamental and may be changed by the Board of Trustees of
the Trust without the approval of shareholders. See "Shares of Beneficial
Interest" in this SAI.
INVESTMENT RESTRICTIONS
For each Fund, the following investment restrictions are fundamental
policies which may be changed only when permitted by law and approved by the
holders of a majority of the outstanding voting securities of that Fund, as
described under "Shares of Beneficial interest" in this SAI.
None of the Funds may:
(1) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short sales of
securities (the deposit or payment by the Funds of initial or
33
<PAGE>
maintenance margin in connection with futures contracts or related
options transactions is not considered the purchase of a security on
margin);
(2) underwrite securities of other issuers, except with respect to the
New York Tax-Free Fund and to the extent that the purchase of
municipal obligations, or other permitted investments, directly from
the issuer thereof or from an underwriter for an issuer and the
later disposition of such securities in accordance with a Fund's
investment program may be deemed to be an underwriting; or
(3) may invest an amount equal to 10% or more of the value of its net
assets in investments which are illiquid (including repurchase
agreements and fixed time deposits not subject to withdrawal
penalties having maturities of more than seven calendar days).
(4) issue senior securities, borrow money or pledge or mortgage its
assets, except that each Fund may borrow from banks up to 33 1/3% of
the current value of the total assets of that Fund and pledge up to
33 1/3% of its assets to secure such borrowings; and
(5) make loans, except that the each Fund (except the U.S. Treasury
Money Market Fund) may make loans or lend its portfolio securities
if, as a result, the aggregate of such loans does not exceed 33 1/3%
of the value of a Fund's total assets.
The U.S. Treasury Fund may not purchase securities other than direct
obligations of the United States Treasury or repurchase agreements pertaining
thereto (there being no limit on the amount of the assets of the U.S. Treasury
Fund which may be invested in the securities of any one issuer of such
obligations).
The Government Fund may not purchase securities other than
obligations issued or guaranteed by the United States Government or its agencies
or instrumentalities or repurchase agreements pertaining thereto (there being
no limit on the amount of the assets of the Government Fund which may be
invested in the securities of any one issuer of such obligations).
The Cash Management Fund may not:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the investments of
the Cash Management Fund in that industry would exceed 25% of the
current value of the total assets of the Cash Management Fund,
except that the Fund may invest more than 25% of its total assets in
bank obligations (including bank obligations subject to repurchase
agreements) and except that there is no limitation with respect to
investments in obligations of the United States Government, its
agencies or instrumentalities;
(2) invest more than 5% of the current value of the total assets of the
Cash Management Fund in the securities of any one issuer (including
securities subject to repurchase agreements), other than obligations
of the United States Government or its agencies or
instrumentalities; or
(3) write, purchase or sell puts, calls, warrants or options or any
combination thereof.
The New York Tax-Free Fund may not:
(1) purchase equity securities or other securities convertible into
equity securities;
(2) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the Fund's
investments in that
34
<PAGE>
industry would exceed 25% of the current value of the Fund's total
assets, provided that there is no limitation with respect to
investments in Municipal Obligations (for the purpose of this
restriction, industrial development and pollution control bonds
shall not be deemed Municipal Obligations if the payment of
principal and interest on such bonds is the ultimate responsibility
of nongovernmental users), obligations of the United States
Government, its agencies or instrumentalities, negotiable
certificates of deposit or bankers' acceptances;
(3) purchase or sell real estate (other than municipal obligations or
other money market securities secured by real estate or interests
therein or money market securities issued by companies which invest
in real estate or interests therein), commodities or commodity
contracts;
(4) invest more than 5% of the current value of the Fund's total assets
in the securities of any one issuer, other than obligations of the
United States Government, its agencies or instrumentalities or
securities which are backed by the full faith and credit of the
United States, except that up to 25% of the value of the New York
Tax-Free Fund's total assets may be invested without regard to this
5% limitation; or
(5) write, purchase or sell puts, calls, warrants or options or any
combination thereof, except that the New York Tax-Free Fund may
enter into stand-by commitments.
(6) invest less than 80% of its net assets in New York Municipal
Obligations except when, in the opinion of the Adviser, it is
advisable for the Fund to invest temporarily up to 100% of its total
assets in taxable securities to maintain a "defensive" posture
because of market conditions.
The Funds' diversification tests are measured at the time of initial
purchase, and calculated as specified in Rule 2a-7 of the Investment Company Act
of 1940, which may allow the Funds to exceed the limits specified in the
Prospectus for certain securities subject to guarantees or demand features. The
Funds will be deemed to satisfy the maturity requirements described in this
Prospectus to the extent that the Funds satisfy Rule 2a-7's maturity
requirements. The definition of issuer for purposes of these investment
restrictions is the same as that described under "Investment Policies" in this
SAI for the purpose of diversification under the 1940 Act.
It is the intention of the Funds, unless otherwise indicated, that with
respect to the Funds' policies that are the result of the application of law,
the Funds will take advantage of the flexibility provided by rules or
interpretations of the SEC currently in existence or promulgated in the future
or changes to such laws.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in the net
or total assets of a Fund, in the securities rating of the investment, or any
other later change.
MANAGEMENT
Trustees and Officers
The principal occupations for the past five years of the Trustees and
executive officers of the Trust are listed below. The address of each, unless
otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. No Trustee is
deemed to be an "interested person" of the Trust for purposes of the Investment
Company Act of 1940, as amended.
HARALD PAUMGARTEN, Chairman of the Board of Trustees - age 61, 405
---------------------------------
Lexington Avenue, New York, NY 10017; Managing Director, Adirondack
Capital Group since 1997; President, Paumgarten and
35
<PAGE>
Company 1991 to 1997; Advisory Managing Director, Lepercq de Neuflize & Co.
Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to 1993;
Chairman of the Board of Trustees, HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - age 74, 251 Laurel Road, New Canaan,
-------
Connecticut 06840. Trustee, Henrietta and E. Frederick H. Bugher
Foundation; Trustee, U.S.T. Master Funds, Inc. and U.S.T. Master Tax-
Exempt Funds, Inc. (mutual funds); Trustee, HSBC Funds Trust.
JOHN P. PFANN, Trustee - age 69, 43 Captains Walk, Marina Cove, Palm
-------
Coast, Florida 32137. Chairman and President, JPP Equities, Inc. 1982 to
1995; Trustee, HSBC Funds Trust.
JEFFREY HASS, Trustee - age 37, 155 East 38th Street, New York, NY 10016;
-------
Associate Professor of Law, New York Law School, 1996-Present; Partner,
Hass & Hass 1993-1996.
RICHARD J. LOOS, Trustee,- age 65, 97 Southport Wood Drive, Southport,
-------
CT 06490. Retired; President, Aspen Capital Management 1995-1996; Managing
Director, HSBC Asset Management Americas Inc. 1972-1994.
CLIFTON MALONEY, Trustee, - age 62, 49 East 92nd Street, New York, NY
--------
10028; President, C.H.W. Maloney & Co. Inc., 1981-Present.
JOHN MEDITZ, Trustee, - age 51, 21 Hamilton Avenue, Weehawken, N.J. 07087;
--------
Portfolio Manager/Vice Chairman, Horizon Asset Management
1994-Present.
WALLY GRIMM, President - Executive Vice President, Fund Services Division
------------------------------------
of BISYS Fund Services, Inc., June 1992 to present.
ERIC F. ALMQUIST, Senior Vice President - Senior Marketing Strategist, Fund
---------------------
Services Division, BISYS Fund Services, Inc., August, 1996 to present;
Director of Process Management, Coopers & Lybrand L.L.P. from 1994 to 1996;
Vice President, The Dreyfus Service Corporation from 1988 to 1994.
CHARLES BOOTH, Vice President - Chief Compliance Officer and Vice President
--------------
of Fund Administration, Fund Services Division of BISYS Fund Services,
Inc., 1988 to present.
ANTHONY J. FISCHER, Vice Present - Client Services, Fund Services Division
-------------
of BISYS Fund Services Inc. 1998-Present; SEI 1997-1998.
NADEEM YOUSAF, Treasurer - Director, Fund Services Division of BISYS Fund
----------
Services, Inc. August 1999 - Present. Director of Canadian Operations with
Investors Bank and Trust, 1997-1999.
STEVEN R. HOWARD, Secretary -1285 Avenue of the Americas, New York, New
---------
York 10019. Partner, Paul, Weiss, Rifkind, Wharton & Garrison since April,
1998; Partner, Baker & McKenzie 1991 to 1996; Partner, Gaston & Snow from
1988 to 1991; Secretary, HSBC Funds Trust since 1987.
ALAINA V. METZ, Assistant Secretary - Chief Administrator, Administration
-------------------
and Regulatory Services of BISYS Fund Services, Inc., June 1995 to Present;
Supervisor of Mutual Fund Legal Department, Alliance Capital Management,
May 1989 to June 1995.
36
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation from Benefits Accrued as Part Benefits Upon from the Fund
the Funds of Fund Expenses Retirement Complex*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee** $18,200 0 N/A $26,500
Richard J. Loos,Trustee $16,800 0 N/A $24,500
Harald Paumgarten, Chairman $21,300 0 N/A $31,000
John Meditz, Trustee $12,300 0 N/A $18,000
Clifton H.W. Maloney, Trustee $12,300 0 N/A $18,000
Jeffrey Hass, Trustee $ 9,600 0 N/A $14,000
John P. Pfann, Trustee $18,200 0 N/A $26,500
Robert A. Robinson, Trustee $18,200 0 N/A $26,500
</TABLE>
*Represents the total compensation paid to such persons during the calendar year
ended December 31, 1999.
**Wolfe Frankl resigned as a Trustee effective December 31, 1999.
Trustees of the Funds receive from the Funds an annual fee and a fee for
attending each meeting of the Trustees and each committee meeting and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
As of the date of this SAI, the Trustees and officers of the Trust as a
group owned less than 1% of the outstanding shares of each Fund.
Investment Adviser
The Funds retain HSBC Asset Management (Americas) Inc. (the "Adviser") to
act as the adviser for the Funds. The Adviser is the North American investment
affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking Corporation) and
Marine Midland Bank and is located at 140 Broadway, New York, NY 10005.
The Advisory Contract provides that the Adviser shall provide over-all
investment guidance and policy direction in connection with the management of
the Funds. The Adviser has agreed to provide to the Trust, among other things,
information relating to money market portfolio composition, credit conditions
and average maturity of the portfolio of each Fund. Pursuant to the Advisory
Contract, the Adviser also furnishes to the Trust's Board of Trustees periodic
reports on the investment performance of each Fund.
The Adviser has also agreed in the Advisory Contract to provide
administrative assistance in connection with the operation of the Funds.
Administrative services provided by the Adviser include, among other things (i)
37
<PAGE>
data processing, clerical and bookkeeping services required in connection with
maintaining the financial accounts and records for the Funds, (ii) compiling
statistical and research data required for the preparation of reports and
statements which are periodically distributed to the Funds' officers and
Trustees, (iii) handling general shareholder relations with Fund investors, such
as advice as to the status of their accounts, the current yield and dividends
declared to date and assistance with other questions related to their accounts,
and (iv) compiling information required in connection with the Funds' filings
with the Securities and Exchange Commission ("SEC").
Administrator
Pursuant to the Management and Administration Agreement, BISYS Fund
Services Limited Partnership d/b/a BISYS Fund Services, (i) provides
administrative services reasonably necessary for the operation of the Trust and
the Funds, other than those services which are provided by the Adviser pursuant
to the Advisory Contract, (ii) provides the Trust with office space and office
facilities reasonably necessary for the operation of the Trust and the Funds,
and (iii) employs or associates with itself such persons as it believes
appropriate to assist it in performing its obligations under the Management and
Administration Agreement.
Distributor
Shares of each of the Funds are offered on a continuous basis and without
sales charges through BISYS Fund Services, which serves as the Distributor
pursuant to a Distribution Agreement. The Distributor is not obligated to sell
any specific amount of shares.
Distribution Plan and Expenses
The Funds have adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 of the 1940 Act, as amended, after having concluded that there is a
reasonable likelihood that the Plan will benefit each Fund and its shareholders.
The Plan authorizes payments through BISYS Fund Services to broker-dealers or
financial institutions for their assistance in distributing Fund shares and
otherwise promoting the sale of Fund shares. In addition, the Plan authorizes
payments through BISYS Fund Services for the printing and distribution of
prospectuses sent to prospective investors, the preparation, printing and
distribution of sales literature and expenses associated with media
advertisements and telephone services.
The Plan provides for a monthly payment of 12b-1 fees not to exceed an
annual rate of 0.20% of the average daily net assets of the Class A shares of
all the Funds. Class B and Class C shares pay a 12b-1 fee not to exceed 0.75%
of the average daily net assets of the respective class.
For the year ended December 31, 1999, the Funds incurred the following
amounts in distribution-related fees under the Rule 12b-1 Distribution Plan:
38
<PAGE>
<TABLE>
<CAPTION>
Printing of
Compensation to Prospectuses and Retail Postage and
Broker- Shareholder Marketing Miscellaneous
Fund Dealers Advertising Reports Program Total
- --------------- --------- ----------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Cash
Management $558,302 $0 $0 $0 $588,302
Government $ 24,258 $0 $0 $0 $ 24,258
U.S. Treasury $ 26,041 $0 $0 $0 $ 26,041
New York $121,780 $0 $0 $0 $121,780
</TABLE>
The Plan will continue to be in effect with respect to the Funds from year
to year provided such continuance is approved annually by a vote of the Board of
Trustees of the Trust and of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan ("disinterested" Trustees), cast
in person at a meeting called for the purpose of voting on such Plan. The Board
of Trustees of the Trust and "disinterested" Trustees of the Trust approved the
continuance of the Plan at a meeting of the Board of Trustees on January 25,
2000.
SERVICE ORGANIZATIONS
The Trust also contracts with banks (including HSBC Bank USA), trust
companies, broker-dealers or other financial organizations ("Service
Organizations") on behalf of the Funds to provide certain administrative
services for the Fund at a fee of up to an annual rate of 0.35% for Class A
shares and 0.50% fee Class B and Class C shares. Services provided by Service
Organizations may include among other things; providing necessary personnel and
facilities to establish and maintain certain shareholder accounts and records;
assisting in processing purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving of funds in connection with
shareholder orders to purchase or redeem shares; verifying and guaranteeing
client signatures in connection with redemption orders, transfers among and
changes in shareholders designating accounts; providing periodic statements
showing a shareholder's account balance and, to the extent practicable,
integrating such information with other client transactions; furnishing periodic
and annual statements and confirmations of all purchases and redemptions of
shares in a shareholder's account; transmitting proxy statements, annual
reports, and updating prospectuses and other communications from a Fund to its
shareholders; and providing such other services as each Fund or shareholder
reasonably may request, to the extent permitted by applicable statute, rule or
regulation.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than the minimum
initial or subsequent investments specified by each Fund or charging a direct
fee for servicing. If imposed, these fees would be in addition to any amounts
which might be paid to the Service Organization by a Fund. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult them regarding any
such fees or conditions.
Any customer of a Participating Organization may become the shareholder of
record upon written request to its Participating Organization or the Fund's
Transfer Agent. Each Participating Organization will receive monthly payments
which in some cases may be based upon expenses that the Participating
Organization has incurred in the performance of its services under the Servicing
Agreement. The payments will not exceed, on an annualized basis, an amount equal
to 0.35% (0.50% for Class B and Class C) of the average daily value during the
month of Fund shares in the subaccount of which the Participating Organization
is record owner as nominee for its customers. Such payments will be separately
negotiated with each Participating Organization and will vary depending upon
such factors as the
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services provided and the costs incurred by each Participating Organization. The
payment may be more or less than the fees payable to BISYS Fund Services, Inc.
for the services it provides pursuant to the Transfer Agency Agreement for
similar services.
The payments will be made by the Funds to the Participating Organizations
pursuant to the Servicing Agreements. BISYS Fund Services, Inc. will not receive
any compensation as transfer or dividend disbursing agent with respect to the
subaccounts maintained by Participating Organizations. The Board of Trustees
will review, at least quarterly, the amounts paid and the purposes for which
such expenditures were made pursuant to the Servicing Agreements.
Under separate agreements, the Adviser (not the funds) may make
supplementary payments from its own revenues to a Participating Organization
that agrees to perform services such as advising customers about the status of
their subaccounts, the current yield and dividends declared to date and
providing related services a shareholder may request. Such payments will vary
depending upon such factors as the services provided and the cost incurred by
each Participating Organization.
Advisory and Administrative Fees and Expenses
As compensation for its advisory and administrative services, the Adviser
is paid a monthly fee with respect to each Fund at the following annual rates:
Portion of average daily
value of net assets of
each Fund Advisory
-------------------------- --------
Not exceeding $500 million............ 0.350%
In excess of $500 million but
not exceeding $1 billion.............. 0.315%
In excess of $1 billion but
not exceeding $1.5 billion............ 0.280%
In excess of $1.5 billion............. 0.245%
For the year ended December 31, 1999, HSBC earned $1,287,655 from the Cash
Management Fund, $116,732 from the U.S. Treasury Money Market Fund, $218,297
from the Government Money Fund and $357,951 from the New York Tax-Free Money
Market Fund in advisory fees, net of fee waivers of $473,546, $47,254, $53,833
and $114,961, respectively.
For the year ended December 31, 1998, HSBC earned $850,781, from the Cash
Management Fund, $103,714 from the U.S. Treasury Money Market Fund, $324,264
from the Government Money Fund and $300,720 from the New York Tax-Free Money
Market Fund in advisory fees, net of fee waivers of $610,119, $52,242, $261,302
and $246,732, respectively.
For the year ended December 31, 1997, HBSC earned $647,611, from the Cash
Management Fund, $92,003 from the U.S. Treasury Money Market Fund, $250,442 from
the Government Money Fund and $283,194 from the New York Tax-Free Money Market
Fund in advisory fees, net of fee waivers of $0, $0, and $89,496 respectively.
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For the year ended December 31, 1999, as Administrator, BISYS Fund Services
earned $509,638 from the Cash Management Fund, $50,028 from the U.S. Treasury
Money Market Fund, $93,557 from the Government Money Market Fund and $153,409
from the New York Tax-Free Money Market Fund, net of fee waivers of $183,958,
$16,676, $31,186 and $51,138, respectively in administrative services fees.
For the year ended December 31, 1998, as Administrator, BISYS Fund Services
earned $353,424 from the Cash Management Fund, $44,449 from the U.S. Treasury
Money Market Fund, $138,971 from the Government Money Market Fund and $128,881
from the New York Tax-Free Money Market Fund, net of fee waivers of $121,599,
14,824, 46,346 and 42,984, respectively in administrative services fees.
For the year ended December 31, 1997, as Administrator, BISYS Fund Services
earned $184,849 from the Cash Management Fund, $39,430 from the U.S. Treasury
Money Market Fund, $108,190 from the Government Money Market Fund and $121,370
from the New York Tax-Free Money Market Fund, net of fee waivers of $92,701,
$13,170, $36,135 and $40,537 respectively in administrative services fees.
The Adviser may contractually agree in advance not to impose a portion of
its fees in the future. Except for the expenses paid by the Adviser and BISYS
under their respective contracts, the Trust bears all costs of its operations.
Expenses directly attributable to each Fund are charged to that Fund. Other
expenses of the Trust are allocated among the Funds by the Board of Trustees in
a manner which may, but need not, be proportionate in relation to the net assets
of each Fund.
The Advisory Contract, the Distribution Agreement and the Management and
Administration Agreement (upon expiration of its initial term ending September
1, 1999) will continue in effect with respect to each Fund from year to year
provided such continuance is approved annually (i) by the holders of a majority
of the outstanding voting securities of that Fund or by the Trust's Board of
Trustees and (ii) by a majority of the Trustees of the Trust who are not parties
to such contracts or "interested persons" (as defined in the 1940 Act)
("disinterested" Trustees) of any such party. Each contract may be terminated
with respect to the Trust at any time, without payment of any penalty, by a vote
of a majority of the outstanding voting securities of the Trust (as defined in
the 1940 Act) or by a vote of a majority of the Trust's entire Board of Trustees
on 60 days' written notice, except in the case of the Management and
Administration Agreement, which requires written notice of non-renewal given at
least 90 days prior to expiration of the then current term. The Contracts shall
terminate automatically in the event of their assignment (as defined in the 1940
Act).
The Board of Trustees of the Trust and the "disinterested" Trustees of the
Trust approved the continuance of each Fund's Advisory Contract, and the
Distribution Agreement at a meeting of the Board of Trustees on January 25,
2000.
CALCULATION OF YIELDS
AND PERFORMANCE INFORMATION
From time to time, the Funds quote current yield based on a specific seven
calendar day period. The yield may be used in advertisements and marketing
material. Each of the Money Market Funds calculates a seven day yield by
determining the "net change in value" (exclusive of capital changes) of a
hypothetical account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by 365/7, with the resulting yield figure
carried to the nearest hundredth of one percent.
The Money Market Funds may also advertise an effective yield based on a
specific seven-day period, carried to the nearest hundredth of one percent,
which is calculated by determining the net change, exclusive of capital changes,
in the value of a hypothetical account having a balance of one share at the
beginning of the period, subtracting a
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hypothetical charge reflecting deductions from shareholder accounts, and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then compounding the base period
return by adding one, raising the sum to a power equal to 365 divided by seven,
and subtracting one from the result.
For calculating yield and effective yield, "net change in value" of an
account will consist of the value of additional shares purchased with dividends
from the original share and dividends declared on both the original share and
any such additional shares (not including realized gains or losses and
unrealized appreciation or depreciation), less applicable expenses.
The New York Tax-Free Fund may from time to time advertise tax equivalent
yields. Tax equivalent yield is the net annualized taxable yield needed to
produce a specified tax-exempt yield at a given tax rate based on a specified
seven-day period assuming a reinvestment of all dividends paid during such
period. The equivalent yield is calculated by dividing that portion of the New
York Tax-Free Fund's effective yield (calculated in the manner described above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt.
Thirty-day yields for the Funds may also be advertised from time to time
and are calculated by using a method known as "semi-annual compounding." Yield
is calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Where: yield = 2[(a-b) + 1)/6/ - 1]
cd
a = dividends and interest earned during the period, including the
amortization of market premium or accretion of market discount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the 7-day period ending December 31, 1999 the yield and effective yields
were:
7-Day Yield Effective Yield
Cash Management Fund 5.13% 5.26%
Government Money Market Fund 4.94% 5.06%
U.S. Treasury Money Market Fund 4.21% 4.30%
New York Tax-Free Fund 3.68% 3.74%
From time to time, in marketing pieces and other Fund literature, each
Fund's or the Funds' total performance may be compared to the performance of
broad groups of comparable funds or unmanaged indices of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Funds. Sources for Fund performance information
may include, but are not limited to, the following:
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Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Donoghue's Money Fund Report, a weekly publication of theDonoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average," and "Donoghue's Government
Money Fund Average."
Financial Times, Europe's business newspaper, which from time to time
features articles on international or country-specific funds.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
DETERMINATION OF NET ASSET VALUE
As indicated under "Determination of Net Asset Value" in the Funds'
Prospectus, the Funds use the amortized cost method to determine the value of
their portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which a Fund would receive if the security were sold. During these periods the
yield to a shareholder may differ somewhat from that which could be obtained
from a similar fund which utilizes a method of valuation based upon
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market prices. Thus, during periods of declining interest rates, if the use of
the amortized cost method resulted in lower value of a Fund's portfolio on a
particular day, a prospective investor in that Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized
cost method, each Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase securities having remaining maturities of
thirteen months or less and invest only in securities determined by the Trust's
Board of Trustees to be "eligible securities" as defined by Rule 2a-7 and to
present minimal credit risks. Pursuant to Rule 2a-7, the Board is required to
establish procedures designed to stabilize, to the extent reasonably possible,
the price per share of each Fund, as computed for the purpose of sales and
redemptions, at $1.00. Such procedures include review of the Funds' portfolio
holdings by the Board of Trustees, at such intervals as it may deem appropriate,
to determine whether the net asset value of each Fund calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, the Board will take such corrective action
as it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or establishing a net asset
value per share by using available market quotations.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policy
established by the Trust's Board of Trustees, the Adviser is primarily
responsible for portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Trust to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While the Adviser generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available. The policy of each Fund of
investing in securities with short maturities has resulted in high portfolio
turnover.
Purchases and sales of securities will usually be principal transactions.
Portfolio securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities and Municipal Obligations are traded
on a net basis and do not involve brokerage commissions. The cost of executing
portfolio securities transactions for the Funds primarily consists of dealer
spreads and underwriting commissions and, since June 4, 1982 (commencement of
operations), the Trust has paid no brokerage commissions. Under the 1940 Act,
persons affiliated with the Trust or the Adviser are prohibited from dealing
with the Trust as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Securities and
Exchange Commission. The Funds may purchase Municipal Obligations from
underwriting syndicates of which an affiliate is a member under certain
conditions in accordance with the provisions of a rule adopted under the 1940
Act.
The Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms.
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PURCHASE OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Funds' Prospectus entitled "Purchasing and Adding to
Your Shares." The Prospectus contains a general description of how investors may
buy shares of the Funds and states whether the Funds offer more than one class
of shares.
Class B and C shares may be subject to a contingent deferred sales charge
("CDSC") payable upon redemption within a specified period after purchase. The
prospectus contains a table of applicable CDSCs. After being held for six years,
Class B shares will automatically convert into Class A shares which are not
subject to sales charges or a CDSC. Class B and C shares are offered without an
initial sales charge. The Funds may sell shares without a sales charge or CDSC
pursuant to special purchase plans the Trust signs.
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at
least seven days may exchange those shares for shares of any of the other
portfolios of the Trust and HSBC Mutual Funds Trust which are available for sale
in their state. Shareholders who exchange shares of any Fund for shares of any
HSBC Mutual Fund will be subject to a sales load. For further information about
the sales load, please see a prospectus for any of the HSBC Mutual Funds.
Before effecting an exchange, shareholders should review the Prospectus for
the portfolio in which they intend to invest. Exercise of the exchange privilege
is treated as a redemption for Federal and New York State and City income tax
purposes and, depending on the circumstances, a gain or loss may be recognized
in the case of a Fund that has not maintained a constant net asset value per
share.
The exchange privilege may be modified or terminated upon sixty (60) days'
prior written notice to shareholders. Although initially there will be no limit
on the number of times a shareholder may exercise the exchange privilege, the
Trust reserves the right to impose such a limitation. Call or write the Trust
for further details.
REDEMPTIONS
Payment of redemption proceeds may be made in securities, subject to
regulation by some state securities commissions. The Trust may suspend the right
of redemption during any period when (i) trading on the New York Stock Exchange
is restricted or that Exchange is closed, other than customary weekend and
holiday closings, (ii) the Securities and Exchange Commission has by order
permitted such suspension or (iii) an emergency exists making disposal of
portfolio securities or determination of the value of the net assets of the
Trust not reasonably practicable.
If a Fund does not maintain a constant net asset value per share, the
proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for Federal and New York
State and City income tax purposes.
A shareholder's account with a Fund remains open for at least one year
following complete redemption and all costs during the period will be borne by
the Trust. This permits an investor to resume investments in that Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive stockholder expense burdens, the
Trust reserves the right to adopt a policy pursuant to which it may redeem upon
not less than 30 days' notice shares of a Fund in an account which has a value
below a designated amount. However, any shareholder affected by the exercise of
this right will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
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Although it would not normally do so, the Trust has the right to pay the
redemption price in whole or in part in securities of the Funds' portfolio as
prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the 1940 Act, as amended.
Under that rule, the Trust must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of a Fund's net asset value at the beginning
of such period.
FEDERAL INCOME TAXES
Each Fund has elected and qualified to be treated as a regulated investment
company during 1999 and intends to continue to so qualify by complying with the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to regulated investment companies so that it will not be subject to
Federal income tax on its net investment income and net realized capital gains
that are distributed to shareholders in accordance with the timing requirements
of the Code.
In order to so qualify, each Fund must, among other things, (a) derive at
least 90% of its annual gross income from dividends, interest, payments with
respect to loans of stock and securities and gains from the sale or other
disposition of stock or securities or foreign currency gains related to
investments in stock or securities or other income (including gains from
options, futures or forward contracts) derived with respect to the business of
investing in stock, securities or currency and; (b) diversify its holdings so
that, at the end of each fiscal quarter of its taxable year, (i) at least 50% of
the market value of its assets is represented by cash, cash items, U.S.
Government securities, securities of other regulated investment companies and
other stocks and securities limited, in the case of other stocks or securities
for purposes of this calculation, in respect of any one issuer, to an amount not
greater than 5% of its assets or 10% of the voting stocks or securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government stocks or securities
and securities of other regulated investment companies).
Each portfolio within the Trust will be separate for investment and
accounting purposes and will be treated as a separate taxable entity for Federal
income tax purposes. Provided that each Fund qualifies as a regulated investment
company under the Code, it will not be required to pay Massachusetts income or
excise taxes.
Each Fund will be subject to a 4% non-deductible excise tax to the extent
that it fails to distribute to its shareholders during each calendar year an
amount equal to at least the sum of (a) 98% of its taxable ordinary income
(excluding long and short-term capital gain income) for the calendar year; plus
(b) 98% of its capital gain net income for the one year period ending on October
31 of such calendar year; plus (c) any ordinary income or capital gain net
income from the preceding calendar year which was neither distributed to
shareholders nor taxed to the Fund during such year. Each Fund intends to
distribute to its shareholders each year an amount sufficient to avoid the
imposition of such excise tax.
Dividends are not expected to qualify for the dividends-received deduction
available to corporations. As to the tax treatment of redemptions, see
"Redemptions" above.
Each Fund is required to report to the Internal Revenue Service (the "IRS")
all distributions of taxable dividends and of capital gains. Each Fund may be
required to withhold Federal income tax at a rate of 31% ("backup withholding")
from dividends (including capital gain dividends) paid to non-corporate
shareholders who have not furnished the Fund with a correct taxpayer
identification number and made certain required certifications or who have been
notified by the IRS that they are subject to backup withholding. In addition,
the Trust may be required to withhold Federal income tax at a rate of 31% if it
s notified by the IRS or a broker that the taxpayer identification number is
incorrect or that backup withholding applies because of underreporting of
interest or dividend income.
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Distributions of taxable net investment income and net realized capital
gains will be taxable as described in the Prospectus whether made in shares or
in cash. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from prior years will be applied against capital
gains. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date. Fund distributions will also be included in individual and corporate
shareholders' income on which the alternative minimum tax may be imposed.
Different tax treatment is accorded to accounts maintained as IRAs,
including a penalty on early distributions. Investors should consult their tax
advisers for more information. Under the laws of certain states, distributions
of net investment income are taxable to shareholders as dividend income even
though a substantial portion of such distributions may be derived from interest
on U.S. Government obligations which, if received directly by the resident of
such state, would be exempt from such state's income tax.
The amount of capital gains, if any, realized in any given year will result
from sales of securities made with a view to the maintenance of a portfolio
believed by each Fund's management to be most likely to attain such Fund's
objective. Such sales, and any resulting gains or losses, may therefore vary
considerably from year to year.
A Fund's use of equalization accounting, if such method of tax accounting
is used for any taxable year, may affect the amount, timing and character of its
distributions to shareholders.
Special Tax Considerations for the New York Tax-Free Fund
The New York Tax-Free Fund also intends to qualify to pay "exempt-interest
dividends" within the meaning of the Code by holding at the end of each quarter
of its taxable year at least 50% of the value of its total assets in the form of
Municipal Obligations. Dividends derived from interest on Municipal Obligations
that constitute exempt-interest dividends will not be includable in gross income
for Federal income tax purposes and exempt interest dividends derived from
interest on New York Municipal Obligations will not be includable in gross
income for Federal income tax purposes or subject to New York State or City
personal income tax.
However, as described in the Fund's Prospectus, if the New York Tax-Free
Fund invested in Municipal Obligations and New York Municipal Obligations that
are private activity bonds, some portion of exempt-interest dividends paid by
the New York Tax-Free Fund would be treated as an item of tax preference for
purposes of the Federal alternative minimum tax on individuals and corporations.
In addition, a portion of original issue discount relating to stripped Municipal
Obligations and their coupons may be treated as taxable income under certain
circumstances, as will income from repurchase agreements and securities loans.
Exempt-interest dividends received by corporations which hold shares of the
New York Tax-Free Fund will be part of the "adjusted current earnings" of such
corporations, and will increase the "alternative minimum taxable income" of such
corporations for purposes of the alternative minimum tax on corporations.
Interest on debt incurred to purchase or carry shares in the New York Tax-
Free Fund may not be deductible for federal income tax purposes. Property and
casualty insurance companies will be required to reduce their deductions for
"losses incurred" by a portion of the exempt-interest dividends they receive
from the New York Tax-Free Fund.
The portion of the income from the New York Tax-Free Fund derived from
bonds with respect to which a holder is a "substantial user" will not be tax-
exempt in the hands of such user.
The New York Tax-Free Fund will determine the portion of any distribution
that will qualify as an exempt-interest dividend based on the proportion of its
gross income derived from interest on Municipal Obligations over the course of
the Fund's taxable year. Therefore, the percentage of any particular
distribution designated as an exempt-
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interest dividend may be substantially different from the percentage of the New
York Tax-Free Fund's gross income derived from interest on Municipal Obligations
for the period covered by the distribution.
Opinions relating to the validity of Municipal Obligations (including New
York Municipal Obligations) and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel for each issue at the time of
issuance. Neither the Trust nor its investment adviser will review the
proceedings relating to the issuance of Municipal Obligations or the basis for
such opinions.
The New York Tax-Free Fund may obtain put rights with respect to certain of
their Municipal Obligations. The IRS has issued published and private rulings
concerning the treatment of such put transactions for Federal income tax
purposes. Since these rulings are ambiguous in certain respects, there can be no
assurance that the Fund will be treated as the owner of the Municipal
Obligations subject to the puts or that the interest on such obligations
received by the Fund will be exempt from Federal income tax (and New York State
and City personal income tax in the case of New York Municipal Obligations). If
the Fund is not treated as the owner of the Municipal Obligations subject to the
puts, distributions of income derived from such obligations will be taxed as
ordinary income. The Fund anticipates that, in any event, it will remain
qualified to pay exempt-interest dividends with respect to interest derived from
other obligations in its portfolio.
Shareholders should consult their own tax advisers with respect to the tax
status of distributions from the New York Tax-Free Fund, and redemptions of Fund
shares, in their own states and localities. Shareholders who are not United
States persons should also consult their tax advisers as to the potential
application of foreign and U.S. taxes, including a 30% U.S. withholding tax (or
lower treaty rate) on dividends representing ordinary income to them.
SHARES OF BENEFICIAL INTEREST
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest having a par value of $0.001 per share. The
Trust's Declaration of Trust authorizes the Board of Trustees to classify or
reclassify any unissued shares of beneficial interest. Pursuant to that
authority, the Board of Trustees has authorized the issuance of four series
representing four portfolios of the Trust. Each portfolio is comprised of three
different classes of shares -- Class A shares, Class B shares and Class C
shares.
All shares of the Trust have equal voting rights and will be voted in the
aggregate, and not by class or series, except where voting by class is required
by law or where the matter involved affects only one class. As used in the Money
Market Funds Prospectus and in this SAI, the term "majority," when referring to
the approvals to be obtained from shareholders in connection with general
matters affecting all of the Funds (e.g., election of trustees and ratification
of independent auditors), means the vote of a majority of each Fund's
outstanding shares represented at a meeting. The term "majority," when referring
to the approvals to be obtained from shareholders in connection with matters
affecting a single Fund (e.g., approval of investment advisory contracts or
changing the fundamental policies of a Fund), means the vote of the lesser of
(i) 67% of the shares of a Fund represented at a meeting if the holders of more
than 50% of the outstanding shares of a Fund are present in person or by proxy,
or (ii) more than 50% of the outstanding shares of a Fund. Shareholders are
entitled to one vote for each full share held, and fractional votes for
fractional shares held.
Each share of a Fund represents an equal proportionate interest in that
Fund with each other share of the same Fund and is entitled to such dividends
and distributions out of the income earned on the assets belonging to that Fund
as are declared in the discretion of the Trust's Board of Trustees. In the event
of the liquidation or dissolution of the Trust, shares of a Fund are entitled to
receive the assets belonging to that Fund which are available for distribution,
and a proportionate distribution, based upon the relative net assets of the
Funds, of any general assets not belonging to a Fund which are available for
distribution.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Trust.
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As of April 28, 2000, no person owned of record or, to the knowledge of
management, beneficially owned more than 5% of the outstanding shares of any
Fund, except as set forth below:
SHARES HELD & PERCENT OF CLASS
Name and Address of
Holder of Record Shares Held Percent of
Class
Cash Management Fund
Class A
BISYS Fund Services Pittsburgh
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 239,922,087 59.20%
HSBC Bank USA
PO Box 4203
Buffalo, NY 14240 66,349,095 16.86%
Total Shares Outstanding 393,435,368
Cash Management Fund
Class B
BISYS Fund Services Pittsburgh
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 5,170 100.00%
Total Shares Outstanding 5,170
Cash Management Fund
Class C
BISYS Fund Services Pittsburgh
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 2,678,896 99.81%
Total Shares Outstanding 2,684,056
Government Money Market Fund
Chase Manhattan Bank
Chase Manhattan Plaza
New York, NY 10017 5,798,330 8.06%
BISYS Fund Services Inc.
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 14,791,057 20.57%
HSBC Bank USA
PO Box 4203
Buffalo, NY 14240 38,753,709 53.89%
Total Shares Outstanding 71,913,147
U.S. Treasury Money Market Fund
BISYS Fund Services Inc.
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 31,689,459 45.30%
HSBC Bank USA
PO Box 4203
Buffalo, NY 14240 22,298,844 31.88%
Total Shares Outstanding 69,942,254
NY Tax Free Money Market Fund
BISYS Fund Services Inc.
Marine Midland Sweep Customers
3435 Stelzer Road
Columbus, OH 43219 57,045,657 48.49%
HSBC Bank USA
PO Box 4203
Buffalo, NY 14240 26,772,983 22.76%
Total Shares Outstanding 117,649,628
The aforementioned shares were held on behalf of various customer accounts
of the holders of record. HSBC and BISYS Fund Services have informed the Trust
that they were not the beneficial owners of any of the shares each held of
record. The Trust does not know the extent to which the other holders of record
were beneficial owners of the shares indicated.
CUSTODIAN, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
The Bank of New York has been retained to act as custodian for the Funds
pursuant to a Custodian Agreement. The Bank of New York's address is 90
Washington Street, New York, New York 10286. Under the Custodian Agreement, the
Custodian maintains a custody account or accounts in the name of each Fund;
receives and delivers all assets for each such Fund upon purchase and upon sale
or maturity; collects and receives all income and other payments and
distributions on account of the assets of each such Fund; pays all expenses of
the Funds; receives and pays out cash for purchases and redemptions of shares of
each such Fund and pays out cash if requested for dividends on shares of each
such Fund. Under the Custodian Agreement, the Trust has agreed to pay the
Custodian for furnishing custodian services a fee with respect to each Fund for
certain transaction charges and out-of-pocket expenses.
The Board of Trustees has authorized the Bank of New York in its capacity
as custodian of the Funds to enter into Subcustodian Agreements with banks that
qualify under the 1940 Act to act as subcustodians with respect to certain
variable rate short-term tax-exempt obligations in each Fund's portfolio.
BISYS Fund Services, Inc. (the "Transfer Agent") has been retained by the
Trust to act as transfer agent and dividend disbursing agent for the Funds.
Under the Agency Agreement, BISYS Fund Services, Inc. maintains an account in
the name of each stockholder of record in each Fund reflecting purchases,
redemptions, daily dividend accruals and
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monthly dividend disbursements, processes purchase and redemption requests,
issues and redeems shares of each Fund, addresses and mails all communications
by the Trust to its shareholders, including financial reports, other reports to
shareholders, dividend and distribution notices, tax notices and proxy material
for its shareholder meetings, and maintains records for the foregoing services.
Under the Agency Agreement, each Fund has agreed to pay BISYS Fund Services,
Inc. $15.00 per account and subaccount (whether maintained by BISYS Fund
Services, Inc. or a correspondent bank) per annum. In addition, the Funds have
agreed to pay BISYS Fund Services, Inc. certain transaction charges, wire
charges and out-of-pocket expenses incurred by BISYS Fund Services, Inc.
For the year ended December 31, 1999, BISYS received fees under the Agency
Agreement of $271,819, $52,779, $24,032, and $67,467 from the Cash Management,
Government, U.S. Treasury, and New York Tax-Free Funds, respectively.
For the year ended December 31, 1998, BISYS received fees under the Agency
Agreement of $180,920, $44,186, $43,337 and $52,935 from the Cash Management,
Government, U.S. Treasury and New York Tax-Free Funds, respectively.
For the year ended December 31, 1997, BISYS received fees under the Agency
Agreement of $140,855, $50,378, $37,460 and $60,684 from the Cash Management,
Government, U.S. Treasury and New York Tax-Free Funds, respectively.
In addition, BISYS Fund Services, Inc provides certain fund accounting
services to the Funds pursuant to a Fund Accounting Agreement. Under such
Agreement, BISYS Fund Services, Inc. maintains the accounting books and records
for each Fund, maintains a monthly trial balance of all ledger accounts;
performs certain accounting services for the Fund, including calculation of the
net asset value per share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity.
INDEPENDENT AUDITORS
The Board of Trustees of the Trust approved the continuation of Ernst &
Young LLP as the Trust's independent auditors on January 25, 2000. Ernst & Young
LLP provides audit services, tax return preparation and assistance and
consultation in connection with review of Securities and Exchange Commission
filings. Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York
10019.
FUND COUNSEL
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel to the Funds.
FINANCIAL STATEMENTS
The financial statements appearing in the most current fiscal year Annual
Report to shareholders and the report thereon of the independent auditors
appearing therein, namely Ernst & Young LLP, are incorporated by reference in
this Statement of Additional Information. The Annual Report to shareholders
which contains the referenced statements, are available upon request and without
charge by calling 1-800-634-2536.
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