<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998
FILE NOS. 33-9421
811-5526
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 \x\
PRE-EFFECTIVE AMENDMENT NO. \ \
POST-EFFECTIVE AMENDMENT NO. 22 \x\
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 \x\
AMENDMENT NO. 26 \x\
----------------
MUTUAL FUND INVESTMENT TRUST (formerly AVESTA Trust)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
One Chase Manhattan Plaza, Third Floor
New York, New York 10081
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
--------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 492-1600
--------------------
George Martinez, Esq.
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
GARY S. SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
It is proposed that this filing will become effective:
\x\ immediately upon filing pursuant
to paragraph (b) \ \ on pursuant to paragraph (b)
\ \ 60 days after filing pursuant to
paragraph (a)(1) \ \ on pursuant to paragraph (a)(1)
1
<PAGE>
\ \ 75 days after filing pursuant
to paragraph (a)(2) \ \ on pursuant to paragraph (a)(2)
of Rule 485
If appropriate, check the following box:
\ \ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously elected, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, to register an indefinite number of units of
beneficial interest for sale under the Securities Act of 1933. Registrant's
Rule 24f-2 Notice for the fiscal year 1997 was filed on or about March 26, 1998.
================================================================================
2
<PAGE>
MUTUAL FUND INVESTMENT TRUST
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET
Pursuant to Rule 495(a) Under the Securities Act of 1933
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
---------- ------------------ -----------------------
Captions apply to all
Prospectuses except where
indicated in parenthesis.
Parenthesis indicate captions
for Institutional Shares
Prospectuses
1 Front Cover Page *
2(a) Expense Summary *
(b) Not Applicable *
3(a) Financial Highlights *
(b) Not Applicable *
(c) Performance Information *
4(a)(b) Other Information Concerning *
the Fund; Fund Objective;
Investment Policies
(c) Fund Objective; Investment *
Policies
(d) Not Applicable *
5(a) Management *
(b) Management *
(c)(d) Management; Other Information *
Concerning the Fund
(e) Other Information Concerning *
the Fund; Back Cover Page
(f) Other Information Concerning *
the Fund
(g) Not Applicable *
5A Not Applicable *
6(a) Other Information Concerning *
the Fund
(b) Not Applicable *
(c) Not Applicable *
3
<PAGE>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
---------- ------------------ -----------------------
(d) Not Applicable *
(e)(f) About Your Investment; How to *
Buy, Sell and Exchange Shares (How to Purchase, Redeem and
Exchange Shares); How Distributions Are Made; Tax
Information; Other Information Concerning the Fund.
(f) How Distributions are Made; *
Tax Information
(g) How Distributions are Made; Tax Matters
Tax Information
(h) About Your Investment; How to *
Buy, Sell and Exchange Shares
(How to Purchase, Redeem and
Exchange Shares); Other
Information Concerning the
Fund
7(a) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
(b) How the Fund Values its *
Shares; How to Buy, Sell and
Exchange Shares (How to
Purchase, Redeem and Exchange
Shares)
(c) Not Applicable *
(d) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
(e) Management; Other Information *
Concerning the Fund
(f) Other Information Concerning *
the Fund
8(a) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
(b) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
4
<PAGE>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
---------- ------------------ -----------------------
(c) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
(d) How to Buy, Sell and Exchange *
Shares (How to Purchase,
Redeem and Exchange Shares)
9 Not Applicable *
10 * Front Cover Page
11 * Front Cover Page
12 * Not Applicable
13(a)(b) Fund Objective; Investment Investment Policies and
Policies Restrictions
14(c) * Management of the Trust and
Funds or Portfolios
(b) * Not Applicable
(c) * Management of the Trust and
Funds or Portfolios
15(a) * Not Applicable
(b) * General Information
(c) * General Information
16(a) Management Management of the Trust and
Funds or Portfolios
(b) Management Management of the Trust and
Funds or Portfolios
(c) Other Information Concerning Management of the Trust and
the Fund Funds or Portfolios
(d) Management Management of the Trust and
Funds or Portfolios
(e) * Not Applicable
(f) How to Buy, Sell and Exchange Management of the Trust and
Shares (How to Purchase, Funds or Portfolios
Redeem and Exchange Shares);
Other Information Concerning
the Fund
(g) * Not Applicable
(h) * Management of the Trust and
Funds or Portfolios;
Independent Accountants
(i) * Not Applicable
5
<PAGE>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
---------- ------------------ -----------------------
17 Investment Policies Investment Policies and
Restrictions
18(a) Other Information Concerning General Information
the Fund; How to Buy, Sell
and Exchange Shares (How to
Purchase, Redeem and Exchange
Shares)
(b) * Not Applicable
19(a) How to Buy, Sell and Exchange Purchases, Redemptions and
Shares (How to Purchase, Exchanges
Redeem and Exchange Shares)
(b) How the Fund Values its Determination of Net Asset
Shares; How to Buy, Sell and Value
Exchange Shares (How to
Purchase, Redeem and Exchange
Shares)
(c) * Purchases, Redemptions and
Exchanges
20 How Distributions are Made; Tax Matters
Tax Information
21(a) * Management of the Trust and
Funds or Portfolios
(b) * Management of the Trust and
Funds or Portfolios
(c) * Not Applicable
22 * Performance Information
23 * Not Applicable
6
<PAGE>
PROSPECTUS
CHASE FUNDS
INVESTMENT STRATEGIES:
CHASE MONEY MARKET FUND: CURRENT INCOME
CHASE TAX FREE MONEY MARKET FUND: CURRENT INCOME
CHASE TAX FREE INCOME FUND: INCOME
CHASE NEW YORK TAX FREE INCOME FUND: INCOME
CHASE SHORT-INTERMEDIATE TERM
U.S. GOVERNMENT SECURITIES FUND: INCOME
CHASE U.S. GOVERNMENT SECURITIES FUND: INCOME
CHASE INTERMEDIATE TERM BOND FUND: INCOME
CHASE INCOME FUND: INCOME
CHASE BALANCED FUND: INCOME AND GROWTH
CHASE EQUITY INCOME FUND: GROWTH AND INCOME
CHASE CORE EQUITY FUND: TOTAL RETURN
CHASE EQUITY GROWTH FUND: CAPITAL GROWTH
CHASE MID CAP GROWTH FUND: CAPITAL GROWTH
CHASE SMALL CAPITALIZATION FUND: CAPITAL GROWTH
CHASE INTERNATIONAL EQUITY FUND: CAPITAL GROWTH
PREMIER SHARES
April 1, 1998
This Prospectus explains concisely what you should know before investing. Please
read it carefully and keep it for future reference. You can find more detailed
information about the Funds in their April 30, 1998 Statement of Additional
Information, as amended periodically (the 'SAI'). For a free copy of the SAI,
call the Chase Funds Service Center at 1-800-62-CHASE. The SAI has been filed
with the Securities and Exchange Commission (the 'Commission') and is
incorporated into this Prospectus by reference. In addition, the Commission
maintains a Web site (http://www.sec.gov) that contains the SAI, the Funds'
reports to shareholders and other information regarding the Funds which has been
electronically filed with the Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTMENTS IN THE MONEY MARKET FUND AND TAX FREE MONEY MARKET FUND ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT
SUCH FUNDS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE CHASE MANHATTAN BANK OR ANY OF ITS AFFILIATES AND ARE NOT
INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENTS IN MUTUAL FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
<PAGE>
The Chase Funds are portfolios of Mutual Fund Investment Trust ('MFIT'), an
open-end investment company organized as a Massachusetts business trust in
September 1997. The Chase Funds are managed by The Chase Manhattan Bank
('Chase'), a subsidiary of The Chase Manhattan Corporation ('CMC'). As indicated
below, certain of the Funds are successor investment portfolios to portfolios of
the AVESTA Trust, the predecessor entity of MFIT. The AVESTA Trust was a
collective trust established under the laws of the State of Texas by Chase Bank
of Texas, National Association (herein, 'Chase Texas'). The AVESTA Trust was
registered under the Investment Company Act of 1940 and was available solely for
certain individual retirement accounts and pension and profit-sharing plans. The
AVESTA Trust was converted and redomiciled into MFIT, effective as of January 1,
1998 (the 'Conversion'). Chase Texas acted as the trustee of the AVESTA Trust,
and as trustee was obligated to provide the investment portfolios of the AVESTA
Trust with the investment advisory, administrative, custodial and other services
necessary to manage the portfolios.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
CHASE MONEY MARKET FUND.................................................... 4
CHASE TAX FREE MONEY MARKET FUND........................................... 8
CHASE TAX FREE INCOME FUND................................................. 10
CHASE NEW YORK TAX FREE INCOME FUND........................................ 12
CHASE SHORT-INTERMEDIATE TERM U.S. GOVERNMENT SECURITIES FUND.............. 14
CHASE U.S. GOVERNMENT SECURITIES FUND...................................... 18
CHASE INTERMEDIATE TERM BOND FUND.......................................... 22
CHASE INCOME FUND.......................................................... 25
CHASE BALANCED FUND........................................................ 28
CHASE EQUITY INCOME FUND................................................... 31
CHASE CORE EQUITY FUND..................................................... 34
CHASE EQUITY GROWTH FUND................................................... 37
CHASE MID CAP GROWTH FUND.................................................. 41
CHASE SMALL CAPITALIZATION FUND............................................ 43
CHASE INTERNATIONAL EQUITY FUND............................................ 46
COMMON INVESTMENT POLICIES................................................. 49
MANAGEMENT................................................................. 62
HOW TO BUY, SELL AND EXCHANGE SHARES....................................... 64
HOW THE FUNDS VALUE THEIR SHARES........................................... 65
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION................................ 66
OTHER INFORMATION CONCERNING THE FUNDS..................................... 68
PERFORMANCE INFORMATION.................................................... 70
</TABLE>
3
<PAGE>
CHASE MONEY MARKET FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Money Market Fund's objective is to provide maximum current
income consistent with the preservation of capital and the maintenance of
liquidity.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests in high quality, short-term,
U.S. dollar-denominated money market instruments. The Fund invests principally
in (i) high quality commercial paper and other short-term obligations, including
floating and variable rate master demand notes of U.S. and foreign issuers; (ii)
U.S. dollar-denominated obligations of foreign governments and supranational
agencies (e.g., the International Bank for Reconstruction and Development);
(iii) obligations issued or guaranteed by U.S. banks with total assets exceeding
$1 billion (including obligations of foreign branches of such banks) and by
foreign banks with total assets exceeding $10 billion (or the equivalent in
other currencies) which have branches or agencies in the U.S. (including U.S.
branches of such banks), or such other U.S. or foreign commercial banks which
are judged by the Fund's adviser to meet comparable credit standing criteria;
(iv) securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (v) repurchase agreements.
MATURITY. The dollar weighted average maturity of the Fund will be 90 days or
less. The Fund purchases only instruments which have or are deemed to have
remaining maturities of 397 days or less in accordance with federal regulations.
CREDIT QUALITY. The Fund invests only in U.S. dollar-denominated high quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees. Each investment must be rated in the highest short-term
rating category by at least two nationally recognized statistical rating
organizations ('NRSROs') (or one NRSRO if the instrument was rated only by one
such organization) or, if unrated, must be determined to be of comparable
quality in accordance with the procedures of the Trust. If a security has an
unconditional guarantee or similar enhancement, the issuer of the guarantee or
enhancement may be relied upon in meeting these ratings requirements rather than
the issuer of the security.
MISCELLANEOUS. The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund is classified as a 'diversified' fund under federal securities laws.
4
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Money Market Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.30%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.20%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.50%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming
5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $5 $16 $28 $ 63
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.29% and 0.59%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
5
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Money Market Fund series (the 'Predecessor Fund')
of the AVESTA Trust was converted into the Money Market Fund. The table set
forth below provides selected per share data and ratios for one Unit of the
Predecessor Fund. This information is supplemented by financial statements and
accompanying notes appearing in the Predecessor Fund's Annual Report for the
fiscal year ended December 31, 1997, which is incorporated by reference into
the SAI. Shareholders may obtain a copy of the Annual Report by contacting the
Fund. The Financial Highlights for the periods ended December 31, 1992 through
December 31, 1997 have been audited by Price Waterhouse LLP, whose unqualified
report is included in the Annual Report. Information for periods prior to the
fiscal year ended December 31, 1992 have been examined by other accountants
whose opinion was unqualified.
6
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Chase Money Market Fund
For the Years Ended December 31,
--------------------------------------------------------------------------
03/29/88*
Through
1997 1996 1995 1994 1993 1992 1991 1990 1989 12/31/88
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.051 0.049 0.054 0.039 0.026 0.035 0.057 0.075 0.084 0.056
Net Gains or Losses in Securities
(both realized and unrealized) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
-------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.051 0.049 0.054 0.039 0.026 0.035 0.057 0.075 0.084 0.056
-------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.051 0.049 0.054 0.039 0.026 0.035 0.057 0.075 0.084 0.056
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=====================================================================================
TOTAL RETURN 5.10% 5.10% 5.57% 3.80% 2.60% 3.44% 6.01% 7.80% 8.91% 7.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $134,579 $119,106 $71,310 $55,505 $28,024 $32,861 $32,230 $25,832 $18,891 $5,079
Ratios to Average Net Assets:#
Ratio of Expenses 0.50% 0.50% 0.50% 0.50% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of Net Investment Income 5.09% 4.93% 5.43% 3.90% 2.57% 3.37% 5.69% 7.53% 8.49% 6.11%
Ratio of expenses without waivers
and assumption of expenses 0.74% 0.72% 0.72% 0.83% 0.82% 0.81% 0.80% 0.88% 0.96% 2.16%
Ratio of net investment income without
waivers and assumption of expenses 4.85% 4.71% 5.21% 3.57% 2.40% 3.21% 5.54% 7.30% 8.18% 4.60%
Portfolio Turnover Rate N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Commission rate per share N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
7
<PAGE>
CHASE TAX FREE MONEY MARKET FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Tax Free Money Market Fund's objective is to provide as high a
level of current income which is excluded from gross income for federal income
tax purposes as is consistent with the preservation of capital and maintenance
of liquidity.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests in a non-diversified portfolio
of short-term, fixed rate and variable rate Municipal Obligations. 'Municipal
Obligations' are obligations issued by or on behalf of states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which, in the
opinion of bond counsel, is excluded from gross income for federal income tax
purposes (without regard to whether the interest thereon is also exempt from the
personal income taxes of any state or whether the interest thereon constitutes a
preference item for purposes of the federal alternative minimum tax).
As a fundamental policy, under normal market conditions the Fund will have at
least 80% of its total assets invested in Municipal Obligations the interest on
which, in the opinion of bond counsel, is excluded from gross income for federal
income tax purposes and does not constitute a preference item which would be
subject to the federal alternative minimum tax on individuals (these preference
items are referred to as 'AMT Items'). Although the Fund will seek to invest
100% of its assets in such Municipal Obligations, it reserves the right under
normal market conditions to invest up to 20% of its total assets in AMT Items or
securities the interest on which is subject to federal income tax. For temporary
defensive purposes, the Fund may exceed this limitation.
MATURITY. The dollar weighted average maturity of the Fund will be 90 days or
less. The Fund purchases only instruments which have or are deemed to have
remaining maturities of 397 days or less in accordance with federal regulations.
CREDIT QUALITY. The Fund invests only in U.S. dollar-denominated high quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees. Each investment must be rated in the highest short-term
rating category by at least two NRSROs (or one NRSRO if the instrument was rated
only by one such organization) or, if unrated, must be determined to be of
comparable quality in accordance with the procedures of the Trust. If a security
has an unconditional guarantee or similar enhancement, the issuer of the
guarantee or enhancement may be relied upon in meeting these ratings
requirements rather than the issuer of the security.
MISCELLANEOUS. The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund is classified as a 'diversified' fund under federal securities law.
8
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Tax Free Money Market Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.30%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.20%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.50%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5%
annual return:
1 Year 3 Years
------ -------
<S> <C> <C>
Premier Shares............................................... $5 $16
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.05%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
9
<PAGE>
CHASE TAX FREE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Tax Free Income Fund's objective is to provide monthly dividends
which are excluded from gross income for federal income tax purposes, as well as
to protect the value of its shareholders' investment.
STYLE AND PORTFOLIO COMPOSITION. As a fundamental policy, under normal market
conditions the Fund will have at least 80% of its total assets invested in
Municipal Obligations the interest on which, in the opinion of bond counsel, is
excluded from gross income for federal income tax purposes and does not
constitute an AMT Item. The Fund reserves the right under normal market
conditions to invest up to 20% of its total assets in AMT Items or securities
the interest on which is subject to federal income tax. For temporary defensive
purposes, the Fund may exceed this limitation.
The Fund's investments may include, among other instruments, fixed, variable or
floating rate general obligation and revenue bonds, zero coupon securities,
inverse floaters and bonds with interest rate caps. However, the Fund does not
have any present intention to invest in inverse floaters or bonds with interest
rate caps.
MATURITY. There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security. The Fund's adviser may adjust the average
maturity of the Fund's portfolio based upon its assessments of the relative
yields available on securities of different maturities and their expectations of
future changes in interest rates.
CREDIT QUALITY. The Fund's Municipal Obligations will be rated at the time of
purchase at least in the category Baa, MIG-3 or VMIG-3 by Moody's Investors
Service, Inc. ('Moody's'), or BBB or SP-2 by Standard & Poor's Corporation
('S&P'), or BBB or F-3 by Fitch Investors Service, Inc. ('Fitch') or comparably
rated by another NRSRO, or, if unrated, considered by the Fund's adviser to be
of comparable quality. Bonds rated in the category Baa or BBB are generally
considered to be investment grade obligations which are neither highly protected
nor poorly secured; obligations rated MIG-3, VMIG-3, SP-2 or F-3 are generally
considered to have satisfactory capacity to pay principal and interest. Although
the adviser is not required to dispose of securities which are downgraded below
investment grade subsequent to acquisition, there is no present intention to
retain securities which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'non-diversified' fund under federal
securities law.
10
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Tax Free Income Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Premier Shares............................................... $8 $24
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.25%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
11
<PAGE>
CHASE NEW YORK TAX FREE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The New York Tax Free Income Fund's objective is to provide monthly
dividends which are excluded from gross income for federal income tax purposes
and exempt from New York State and New York City personal income taxes, as well
as to protect the value of its shareholders' investment.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily in New York
Municipal Obligations. 'New York Municipal Obligations' are Municipal
Obligations of the State of New York and its political subdivisions and of
Puerto Rico, other U.S. territories and their political subdivisions, the
interest on which, in the opinion of bond counsel, is exempt from New York State
and New York City personal income taxes.
As a fundamental policy, under normal market conditions the Fund will have at
least 80% of its total assets invested in New York Municipal Obligations the
interest on which, in the opinion of bond counsel, does not constitute an AMT
Item. The Fund reserves the right under normal market conditions to invest up to
20% of its total assets in AMT Items or securities the interest on which is
subject to federal income tax and New York State and New York City personal
income taxes. For temporary defensive purposes, the Fund may exceed this
limitation.
The Fund's investments may include, among other instruments, fixed, variable or
floating rate general obligation and revenue bonds, zero coupon securities,
inverse floaters and bonds with interest rate caps. However, the Fund does not
have any present intention to invest in inverse floaters or bonds with interest
rate caps.
MATURITY. There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security. The Fund's adviser may adjust the average
maturity of the Fund's portfolio based upon its assessments of the relative
yields available on securities of different maturities and their expectations of
future changes in interest rates.
CREDIT QUALITY. The Fund's Municipal Obligations will be rated at the time of
purchase at least in the category Baa, MIG-3 or VMIG-3 by Moody's or BBB or SP-2
by S&P or BBB or F-3 by Fitch or comparably rated by another NRSRO, or, if
unrated, considered by the Fund's adviser to be of comparable quality. Bonds
rated in the category Baa or BBB are generally considered to be investment grade
obligations which are neither highly protected nor poorly secured; obligations
rated MIG-3, VMIG-3, SP-2 or F-3 are generally considered to have satisfactory
capacity to pay principal and interest. Although the adviser is not required to
dispose of securities which are downgraded below investment grade subsequent to
acquisition, there is no present intention to retain securities which are
downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'non-diversified' fund under federal
securities law.
12
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the New York Tax Free Income Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Premier Shares............................................... $8 $24
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.25%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
13
<PAGE>
CHASE SHORT-INTERMEDIATE TERM
U.S. GOVERNMENT SECURITIES FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Short-Intermediate Term Fund's objective is to provide as high a
level of current income as is consistent with the preservation of capital.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily (under normal market
conditions, at least 70% of the value of the Fund's total assets) in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements with respect thereto. The Fund expects that
substantially all of its assets will be so invested. The Fund seeks to preserve
capital by investing in shorter-term securities; it expects the volatility in
the principal value of its shorter-term investments to be more limited than that
associated with investments in comparable securities having longer maturities.
The Fund may invest in mortgage-backed securities issued or guaranteed by
certain agencies of the U.S. Government as described below under 'Common
Investment Policies--Other Investment Practices--Mortgage-Related Securities.'
MATURITY. As a matter of operating policy, under normal market conditions the
dollar-weighted average maturity of the Fund's portfolio, measured at the time
an investment is made, will be between two and five years. There is no
restriction on the maturity of any individual asset which may be acquired by the
Fund. The average maturity of securities in the Fund will be based primarily
upon the adviser's expectations for the future course of interest rates and the
then prevailing price and yield levels in the U.S. Government securities market.
MISCELLANEOUS. Guarantees of principal and interest on obligations that may be
purchased by the Fund are not guarantees of the market value of such
obligations, nor do they extend to the value of the shares of the Fund. The Fund
is classified as a 'diversified' fund under federal securities laws.
14
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Short-Intermediate Term Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee......................................................... 0.50%
12b-1 Fee.............................................................. None
Other Expenses (after estimated waivers and reimbursements)*........... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*...................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................... $8 $24 $42 $ 93
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.62% and 1.12%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
15
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Short-Intermediate Term U.S. Government
Securities Fund series (the 'Predecessor Fund') of the AVESTA Trust was
converted into the Short-Intermediate Term U.S. Government Securities Fund. The
table set forth below provides selected per share data and ratios for one Unit
of the Predecessor Fund. This information is supplemented by financial
statements and accompanying notes appearing in the Predecessor Fund's Annual
Report for the fiscal year ended December 31, 1997, which is incorporated by
reference into the SAI. Shareholders may obtain a copy of the Annual Report
by contacting the Fund. The Financial Highlights for the periods ended December
31, 1993 through December 31, 1997 have been audited by Price Waterhouse LLP,
whose unqualified report is included in the Annual Report.
16
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Chase Short-Intermediate Term
U.S. Government Securities Fund
For the Years Ended December 31,
----------------------------------
04/01/93*
Through
1997 1996 1995 1994 12/31/93
--------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $11.66 $11.35 $10.14 $10.24 $10.00
--------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.670 0.600 0.580 0.450 0.290
Net Gains or Losses in Securities
(both realized and unrealized) 0.060 (0.290) 0.630 (0.550) (0.050)
--------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.730 0.310 1.210 (0.100) 0.240
--------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $12.39 $11.66 $11.35 $10.14 $10.24
============================================
TOTAL RETURN 6.30% 2.68% 12.01% -1.05% 2.43%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $23,948 $28,551 $28,783 $22,992 $17,391
Ratios to Average Net Assets:#
Ratio of Expenses 0.75% 0.75% 0.75% 0.75% 0.60%
Ratio of Net Investment Income 5.40% 5.26% 5.38% 4.41% 3.76%
Ratio of expenses without waivers
and assumption of expenses 1.01% 0.88% 0.91% 0.96% 1.66%
Ratio of net investment income without
waivers and assumption of expenses 5.14% 5.13% 5.22% 4.20% 2.70%
Portfolio Turnover Rate 63% 177% 187% 268% 247%
Commission rate per share N/A N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
17
<PAGE>
CHASE U.S. GOVERNMENT SECURITIES FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The U.S. Government Securities Fund's objective is to provide current
income with emphasis on the preservation of capital.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily (under normal market
conditions, at least 70% of the value of the Fund's total assets) in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements with respect thereto. The Fund expects that
substantially all of its assets will be so invested. The Fund may invest in
mortgage-backed securities issued or guaranteed by certain agencies of the U.S.
Government as described below under 'Common Investment Policies--Other
Investment Practices--Mortgage-Related Securities.'
MATURITY. As a matter of operating policy, under normal market conditions, the
dollar-weighted average maturity of the Fund's portfolio, measured at the time
an investment is made, will be between five and fifteen years. There is no
restriction on the maturity of any individual asset which may be acquired by the
Fund. The average maturity of securities in the Fund will be based primarily
upon the adviser's expectations for the future course of interest rates and the
then prevailing price and yield levels in the U.S. Government securities market.
Fixed income securities with longer maturities generally have less stable market
values.
MISCELLANEOUS. Guarantees of principal and interest on obligations that may be
purchased by the Fund are not guarantees of the market value of such
obligations, nor do they extend to the value of the shares of the Fund. The Fund
is classified as a 'diversified' fund under federal securities laws.
18
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the U.S. Government Securities
Fund based on estimated expenses for the current fiscal year. The example shows
the cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming
5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier.................................... $8 $24 $42 $ 93
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.25%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
19
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the U.S. Government Securities Fund series
(the 'Predecessor Fund') of the AVESTA Trust was converted into the U.S.
Government Securities Fund. The table set forth below provides selected
per share data and ratios for one Unit of the Predecessor Fund. This
information is supplemented by financial statements and accompanying
notes appearing in the Predecessor Fund's Annual Report for the fiscal
year ended December 31, 1997, which is incorporated by reference into
the SAI. Shareholders may obtain a copy of the Annual Report by contacting the
Fund. The Financial Highlights for the periods ended December 31, 1993 through
December 31, 1997 have been audited by Price Waterhouse LLP, whose unqualified
report is included in the Annual Report.
20
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Chase U.S. Government Securities Fund
For the Years Ended
December 31,
------------------------------
04/01/93*
Through
1997 1996 1995 1994 12/31/93
----------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $12.76 $13.01 $10.00 $10.91 $10.00
----------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.750 0.740 0.730 0.620 0.400
Net Gains or Losses in Securities
(both realized and unrealized) 0.470 (0.990) 2.280 (1.530) 0.510
----------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.220 (0.250) 3.010 (0.910) 0.910
----------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $13.98 $12.76 $13.01 $10.00 $10.91
========================================
TOTAL RETURN 9.55% -1.89% 30.11% -8.39% 9.12%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $2,928 $2,747 $2,877 $2,628 $2,916
Ratios to Average Net Assets:#
Ratio of Expenses 0.75% 0.75% 0.75% 0.75% 0.64%
Ratio of Net Investment Income 5.73% 6.01% 6.38% 6.23% 4.91%
Ratio of expenses without waivers
and assumption of expenses 3.15% 2.09% 2.22% 2.38% 4.69%
Ratio of net investment income without
waivers and assumption of expenses 3.33% 4.67% 4.91% 4.60% 0.86%
Portfolio Turnover Rate 87% 48% 17% 174% 232%
Commission rate per share N/A N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
21
<PAGE>
CHASE INTERMEDIATE TERM BOND FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Intermediate Term Bond Fund's objective is to provide current
income, with consideration also given to stability of principal.
STYLE AND PORTFOLIO COMPOSITION. Primary investment emphasis is on intermediate
term debt securities. Under normal market conditions, at least 70% of the Fund's
total assets will be invested in bonds, notes and debentures issued by domestic
or foreign issuers, U.S. Government securities, debt obligations collateralized
by U.S. Government securities or by private mortgages and preferred stock of
domestic issuers. The Fund may also invest in debt securities issued by foreign
issuers. The Fund will not typically invest in common stocks, although the Fund
may acquire common stocks as a result of purchases of unit offerings of fixed
income securities, which include such securities, or in connection with the
conversion or exchange of fixed income securities.
MATURITY. The Fund will maintain a dollar weighted average portfolio maturity
ranging from three to ten years. Fixed income securities purchased by the Fund
will normally have a maturity in excess of one year. The average maturity of
securities in the Fund will be based primarily upon the adviser's expectations
for the future course of interest rates and the then prevailing price and yield
levels in the fixed income market. Fixed income securities with longer
maturities generally have less stable market values.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Investment grade debt securities
are securities rated in the category Baa or higher by Moody's or BBB or higher
by S&P or the equivalent by another NRSRO. Although the adviser is not required
to dispose of securities which are downgraded below investment grade subsequent
to acquisition, there is no present intention to retain securities which are
downgraded below investment grade. The Fund's investments in securities other
than debt of domestic and foreign issuers and debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (e.g.,
preferred stock) will be based on the adviser's judgment of the quality of the
securities. The judgment may be based upon such considerations as the issuer's
financial strength, including its historic and current financial condition, and
its historic and projected earnings; the issuer's market position; and other
factors relevant to an analysis of a particular issuer, as determined by the
adviser.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
22
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Intermediate Term Bond Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $8 $24 $42 $ 93
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.78% and 1.28%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
23
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Intermediate Term Bond Fund series (the
'Predecessor Fund') of the AVESTA Trust was converted into the
Intermediate Term Bond Fund. The table set forth below provides selected
per share data and ratios for one Unit of the Predecessor Fund. This
information is supplemented by financial statements and accompanying
notes appearing in the Predecessor Fund's Annual Report for the fiscal
year ended December 1997, which is incorporated by reference into the
SAI. Shareholders may obtain a copy of the Annual Report by contacting the Fund.
The Financial Highlights for the periods ended December 31, 1994 through
December 31, 1997 have been audited by Price Waterhouse LLP, whose unqualified
report is included in the Annual Report.
Financial Highlights
<TABLE>
<CAPTION>
Chase Intermediate Term Bond Fund
For the Years Ended
December 31,
----------------------
10/03/94*
Through
1997 1996 1995 12/31/94
-----------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $11.89 $11.67 $9.99 $10.00
-----------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.560 0.610 0.640 0.150
Net Gains or Losses in Securities
(both realized and unrealized) 0.300 (0.390) 1.040 (0.160)
-----------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.860 0.220 1.680 (0.010)
-----------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $12.75 $11.89 $11.67 $9.99
===================================
TOTAL RETURN 7.26% 1.86% 16.79% -0.32%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $18,595 $6,949 $5,031 $5,124
Ratios to Average Net Assets:#
Ratio of Expenses 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income 5.61% 5.32% 5.89% 6.12%
Ratio of expenses without waivers and
assumption of expenses 1.25% 1.42% 1.43% 1.38%
Ratio of net investment income without
waivers and assumption of expenses 5.11% 4.65% 5.21% 5.49%
Portfolio Turnover Rate 138% 134% 198% 7%
Commission rate per share N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
24
<PAGE>
CHASE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Income Fund's objective is to invest in securities that earn a
high level of current income with consideration also given to safety of
principal.
STYLE AND PORTFOLIO COMPOSITION. Investment emphasis is on fixed income
securities, primarily domestic debt securities, such as bonds, notes and
debentures issued by domestic issuers, U.S. Government securities, debt
obligations collateralized by U.S. Government securities or by private mortgages
and preferred stock of domestic issuers. Under normal market conditions, at
least 70% of the Income Fund's total assets will be invested in such securities.
The Fund may also invest in debt securities issued by foreign issuers. The Fund
will not typically invest in common stock, although the Fund may acquire common
stock as a result of purchases of unit offerings of fixed income securities,
which include such securities, or in connection with the conversion or exchange
of fixed income securities.
MATURITY. Under normal market conditions it is expected that the dollar weighted
average maturity of the Fund will range between five to fifteen years. Fixed
income securities purchased by the Fund will normally have a maturity in excess
of one year. The average maturity of securities in the Fund will be based
primarily upon the adviser's expectations for the future course of interest
rates and the then prevailing price and yield levels in the fixed income market.
Fixed income securities with longer maturities generally have less stable market
values.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade. The Fund's investments in
securities other than debt of domestic and foreign issuers and debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(e.g., preferred stock) will be based on the adviser's judgment of the quality
of the securities. The judgment may be based upon such considerations as the
issuer's financial strength, including its historic and current financial
condition, and its historic and projected earnings; the issuer's market
position; and other factors relevant to an analysis of a particular issuer, as
determined by the adviser.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
25
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Income Fund based on estimated
expenses for the current fiscal year. The example shows the cumulative expenses
attributable to a hypothetical $1,000 investment over specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $8 $24 $42 $ 93
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.42% and 0.92%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
26
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Income Fund series (the 'Predecessor
Fund') of the AVESTA Trust was converted into the Income Fund. The table
set forth below provides selected per share data and ratios for one Unit
of the Predecessor Fund. This information is supplemented by financial
statements and accompanying notes appearing in the Predecessor Fund's
Annual Report for the fiscal year ended December 31, 1997, which is
incorporated by reference into the SAI. Shareholders may obtain a copy
of the Annual Report by contacting the Fund. The Financial Highlights for the
periods ended December 31, 1992 through December 31, 1997 have been audited by
Price Waterhouse LLP, whose unqualified report is included in the Annual Report.
Information for periods prior to the fiscal year ended December 31, 1992 have
been examined by other accountants whose opinion was unqualified.
Financial Highlights
<TABLE>
<CAPTION>
Chase Income Fund
For the Years Ended December 31,
------------------------------------------------------------------------------------
03/29/88*
Through
1997 1996 1995 1994 1993+ 1992+ 1991+ 1990+ 1989+ 12/31/88+
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period $18.56 $18.21 $15.39 $16.11 $14.62 $13.90 $12.22 $11.47 $10.39 $10.00
----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 1.140 1.000 0.970 0.840 0.820 0.880 0.840 0.910 0.850 0.610
Net Gains or Losses in Securities
(both realized and unrealized) 0.480 (0.650) 1.850 (1.560) 0.670 (0.160) 0.840 (0.160) 0.230 (0.220)
----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.620 0.350 2.820 (0.720) 1.490 0.720 1.680 0.750 1.080 0.390
----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $20.18 $18.56 $18.21 $15.39 $16.11 $14.62 $13.90 $12.22 $11.47 $10.39
==============================================================================================
TOTAL RETURN 8.73% 1.91% 18.38% -4.47% 10.18% 5.13% 13.73% 6.60% 10.37% 5.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) $51,329 $53,614 $57,452 $52,235 $76,085 $64,509 $41,872 $19,353 $13,548 $6,095
Ratios to Average Net Assets:#
Ratio of Expenses 0.75% 0.75% 0.75% 0.75% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income 5.82% 5.58% 5.77% 5.43% 5.20% 6.21% 6.57% 7.91% 7.65% 7.97%
Ratio of expenses without
waivers and assumption of
expenses 1.14% 1.07% 1.08% 1.07% 1.09% 1.17% 1.18% 1.24% 1.32% 2.15%
Ratio of net investment income
without waivers and
assumption of expenses 5.43% 5.26% 5.44% 5.11% 5.11% 6.04% 6.39% 7.67% 7.33% 6.82%
Portfolio Turnover Rate 97% 72% 93% 239% 156% 285% 304% 241% 361% 110%
Commission rate per share NA NA NA NA NA NA NA NA NA NA
</TABLE>
* Commencement of operations.
# Short periods have been annualized
+ Amounts have been adjusted to reflect 10:1 reverse split of the Fund's
units on May 7, 1993.
See notes to financial statements.
27
<PAGE>
CHASE BALANCED FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Balanced Fund's objective is to provide a balance of current
income and growth of capital.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ a combination of (1) an
active equity management style focused primarily on strong earnings momentum
and profitability within a growth-oriented stock universe, and (2) an active
fixed income management style using primarily domestic debt securities. Under
normal market conditions, 30% to 70% of the Fund's total assets will be invested
in equity-based securities, which include common stocks and those debt
securities and preferred stock that are convertible into common stock. Under
normal market conditions, at least 25% of the value of the total assets of the
Fund will be invested in U.S. Government securities and fixed income senior
securities other than convertible securities. The Fund's adviser may alter the
relative portion of the Fund's assets invested in equity-based and fixed income
securities depending on its judgment as to general market and economic
conditions and trends, yields and interest rates and changes in monetary
policies.
EQUITY-BASED INVESTMENTS.
The Fund's equity investments are typically made in companies displaying one or
more of the following characteristics: projected earnings growth at a rate equal
to or greater than the equity markets in general, return on assets and equity
equal to or greater than the equity markets, above market average price/earnings
ratios, below average dividend yield, above average market volatility, and a
market capitalization in excess of $500 million. The Fund will focus on
companies with strong earnings growth and high levels of profitability as well
as positive industry and company specific characteristics, and attractive
valuations given growth potential.
MATURITY. The average maturity of fixed income securities in the Fund will be
based primarily upon the adviser's expectations for the future course of
interest rates and the then prevailing price and yield levels in the fixed
income market.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
28
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Balanced Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.61% and 1.36%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
29
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Balanced Fund series (the 'Predecessor
Fund') of the AVESTA Trust was converted into the Balanced Fund. The
table set forth below provides selected per share data and ratios for
one Unit of the Predecessor Fund. This information is supplemented by
financial statements and accompanying notes appearing in the Predecessor
Fund's Annual Report for the fiscal year ended December 31, 1997, which
is incorporated by reference into the SAI. Shareholders may obtain a
copy of the Annual Report by contacting the Fund. The Financial Highlights for
the periods ended December 31, 1992 through December 31, 1997 have been audited
by Price Waterhouse LLP, whose unqualified report is included in the Annual
Report. Information for periods prior to the fiscal year ended December 31, 1992
have been examined by other accountants whose opinion was unqualified.
Financial Highlights
<TABLE>
<CAPTION>
Chase Balanced Fund
For the Years Ended December 31,
------------------------------------------------------------------------------------
03/29/88*
Through
1997 1996 1995 1994 1993+ 1992+ 1991+ 1990+ 1989+ 12/31/88+
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period $23.66 $21.25 $17.16 $17.56 $16.57 $15.73 $12.67 $12.50 $10.57 $10.00
----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.740 0.630 0.570 0.460 0.470 0.520 0.540 0.640 0.650 0.370
Net Gains or Losses in Securities
(both realized and unrealized) 4.860 1.780 3.520 (0.860) 0.520 0.320 2.520 (0.470) 1.280 0.200
----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.600 2.410 4.090 (0.400) 0.990 0.840 3.060 0.170 1.930 0.570
----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $29.26 $23.66 $21.25 $17.16 $17.56 $16.57 $15.73 $12.67 $12.50 $10.57
==============================================================================================
TOTAL RETURN 23.67% 11.31% 23.83% -2.27% 6.01% 5.32% 24.16% 1.34% 18.26% 7.68%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) $36,359 $22,631 $21,471 $22,802 $37,276 $51,092 $30,542 $17,373 $10,965 $2,890
Ratios to Average Net Assets:#
Ratio of Expenses 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income 2.73% 2.82% 2.94% 2.94% 2.78% 3.33% 3.77% 5.27% 5.35% 4.92%
Ratio of expenses without
waivers and assumption of
expenses 1.28% 1.17% 1.17% 1.17% 1.10% 1.17% 1.20% 1.26% 1.49% 3.83%
Ratio of net investment income
without waivers and
assumption of expenses 2.45% 2.65% 2.77% 2.77% 2.68% 3.16% 3.57% 5.01% 4.86% 2.09%
Portfolio Turnover Rate 64% 70% 98% 157% 148% 187% 213% 141% 217% 90%
Commission rate per share $0.12000 $0.14000 NA NA NA NA NA NA NA NA
</TABLE>
* Commencement of operations.
# Short periods have been annualized
+ Amounts have been adjusted to reflect 10:1 reverse split of the Fund's
units on May 7, 1993.
See notes to financial statements.
30
<PAGE>
CHASE EQUITY INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Equity Income Fund's objective is to invest in securities that
provide both capital appreciation as well as current income.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on both earnings momentum and value within an
income-oriented stock universe. Investment emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks convertible into common stocks. Under normal market conditions, it is
expected that at least 70% of the value of the total assets of the Fund will be
invested in equity-based securities. The Fund may invest any portion of its
assets not invested as described above in other types of securities, including
fixed income securities, money market instruments and non-income producing
equity securities.
EQUITY-BASED INVESTMENTS. The Fund will emphasize companies displaying one or
more of the following characteristics: above average dividend yield, a
consistent dividend record, below average market volatility, attractive earnings
momentum, below market price/earnings ratios, and a market capitalization in
excess of $500 million.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
31
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Equity Income Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.37% and 1.12%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
32
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Equity Income Fund series (the
'Predecessor Fund') of the AVESTA Trust was converted into the Equity
Income Fund. The table set forth below provides selected per share data
and ratios for one Unit of the Predecessor Fund. This information is
supplemented by financial statements and accompanying notes appearing in
the Predecessor Fund's Annual Report for the fiscal year ended December
31, 1997, which is incorporated by reference into the SAI. Shareholders may
obtain a copy of the Annual Report by contacting the Fund. The Financial
Highlights for the periods ended December 31, 1992 through December 31, 1997
have been audited by Price Waterhouse LLP, whose unqualified report is included
in the Annual Report. Information for periods prior to the fiscal year ended
December 31, 1992 have been examined by other accountants whose opinion was
unqualified.
Financial Highlights
<TABLE>
<CAPTION>
Chase Equity Income Fund
For the Years Ended December 31,
------------------------------------------------------------------------------------
03/29/88*
Through
1997 1996 1995 1994 1993+ 1992+ 1991+ 1990+ 1989+ 12/31/88+
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period $28.21 $23.93 $17.90 $18.52 $16.49 $15.60 $12.79 $13.38 $10.93 $10.00
----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.400 0.430 0.440 0.390 0.350 0.390 0.460 0.540 0.460 0.340
Net Gains or Losses in Securities
(both realized and unrealized) 8.360 3.850 5.590 (1.010) 1.680 0.500 2.350 (1.130) 1.990 0.590
----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 8.760 4.280 6.030 (0.620) 2.030 0.890 2.810 (0.590) 2.450 0.930
----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $36.97 $28.21 $23.93 $17.90 $18.52 $16.49 $15.60 $12.79 $13.38 $10.93
==============================================================================================
TOTAL RETURN 31.50% 17.87% 33.72% -3.37% 12.34% 5.61% 22.10% -4.40% 22.50% 12.44%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) $75,243 $63,390 $54,985 $39,296 $41,605 $22,908 $14,092 $6,180 $4,948 $3,782
Ratios to Average Net Assets:#
Ratio of Expenses 1.00% 1.00% 1.00% 1.00% 0.95% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income 1.16% 1.67% 2.10% 2.13% 1.98% 2.52% 3.25% 4.26% 3.73% 4.37%
Ratio of expenses without
waivers and assumption of
expenses 1.11% 1.07% 1.09% 1.12% 1.21% 1.24% 1.34% 1.46% 1.59% 2.80%
Ratio of net investment income
without waivers and
assumption of expenses 1.05% 1.60% 2.01% 2.01% 1.72% 2.28% 2.91% 3.80% 3.14% 2.57%
Portfolio Turnover Rate 14% 24% 11% 42% 40% 25% 39% 42% 124% 15%
Commission rate per share $0.13000 $0.14000 NA NA NA NA NA NA NA NA
</TABLE>
* Commencement of operations.
# Short periods have been annualized
+ Amounts have been adjusted to reflect 10:1 reverse split of the Fund's
units on May 7, 1993.
See notes to financial statements.
33
<PAGE>
CHASE CORE EQUITY FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Core Equity Fund's objective is to maximize total investment
return through emphasis on long-term capital appreciation and current income
consistent with reasonable risk.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on strong earnings momentum and profitability
within the S&P 500 stock universe. Portfolio emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks convertible into common stocks. Under normal conditions, it is expected
that at least 70% of the value of the total assets of the fund will be invested
in equity-based securities. The Fund may invest any portion of its assets not
invested as described above in other types of securities, including fixed income
securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund will typically emphasize companies displaying
one or more of the following characteristics: superior and stable record of
earnings growth relative to the equity markets in general, return on assets and
equity equal to or greater than the equity markets averages, and projected
earnings growth at a rate equal to or greater than the equity markets, and a
market capitalization in excess of $500 million. The Fund's assets will be
allocated among both the growth and cyclical sectors of the economy.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
34
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Core Equity Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.49% and 1.24%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
35
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Core Equity Fund series (the 'Predecessor
Fund') of the AVESTA Trust was converted into the Core Equity Fund. The
table set forth below provides selected per share data and ratios for
one Unit of the Predecessor Fund. This information is supplemented by
financial statements and accompanying notes appearing in the Predecessor
Fund's Annual Report for the fiscal year ended December 31, 1997, which
is incorporated by reference into the SAI. Shareholders may obtain a
copy of the Annual Report by contacting the Fund. The Financial Highlights for
the periods ended December 31, 1993 through December 31, 1997 have been audited
by Price Waterhouse LLP, whose unqualified report is included in the Annual
Report.
Financial Highlights
<TABLE>
<CAPTION>
Chase Core Equity Fund
For the Years Ended December 31,
--------------------------------------
04/01/93*
Through
1997 1996 1995 1994 12/31/93
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $15.94 $13.01 $10.36 $10.80 $10.00
------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.140 0.160 0.170 0.180 0.140
Net Gains or Losses in Securities
(both realized and unrealized) 5.170 2.770 2.480 (0.620) 0.660
-------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.310 2.930 2.650 (0.440) 0.800
-------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $21.25 $15.94 $13.01 $10.36 $10.80
=================================================
TOTAL RETURN 33.33% 22.54% 25.53% -4.03% 7.95%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $51,398 $28,584 $24,367 $21,035 $11,718
Ratios to Average Net Assets:#
Ratio of Expenses 1.00% 1.00% 1.00% 1.00% 0.79%
Ratio of Net Investment Income 0.74% 1.10% 1.44% 1.68% 1.84%
Ratio of expenses without waivers and
assumption of expenses 1.20% 1.14% 1.17% 1.27% 2.74%
Ratio of net investment income without
waivers and assumption of expenses 0.54% 0.96% 1.27% 1.41% -0.11%
Portfolio Turnover Rate 24% 29% 133% 129% 83%
Commission rate per share $0.14000 $0.15000 NA NA NA
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
36
<PAGE>
CHASE EQUITY GROWTH FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Equity Growth Fund's objective is to provide capital
appreciation. Current income is a secondary objective.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on strong earnings momentum and profitability
within a growth-oriented stock universe. Portfolio emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks that are convertible into common stocks. Under normal market conditions,
it is expected that at least 70% of the value of the total assets of the Fund
will be invested in equity-based securities. The Fund may invest any portion of
its assets not invested as described above in other types of securities,
including fixed income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund's investments are typically made in companies
displaying one or more of the following characteristics: projected earnings
growth at a rate equal to or greater than the equity markets in general, return
on assets and equity equal to or greater than the equity markets, above market
average price-earnings ratios, below average dividend yield, above average
market volatility, and a market capitalization in excess of $500 million. The
Fund will focus on companies with strong earnings and high levels of
profitability as well as positive industry and company specific characteristics,
and attractive valuation given growth potential.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
37
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Equity Growth Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.37% and 1.12%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
38
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Equity Growth Fund series (the
'Predecessor Fund') of the AVESTA Trust was converted into the Equity
Growth Fund. The table set forth below provides selected per share data
and ratios for one Unit of the Predecessor Fund. This information is
supplemented by financial statements and accompanying notes appearing in
the Predecessor Fund's Annual Report for the fiscal year ended December
31, 1997, which is incorporated by reference into the SAI. Shareholders
may obtain a copy of the Annual Report by contacting the Fund. The Financial
Highlights for the periods ended December 31, 1992 through December 31, 1997
have been audited by Price Waterhouse LLP, whose unqualified report is included
in the Annual Report. Information for periods prior to the fiscal year ended
December 31, 1992 have been examined by other accountants whose opinion was
unqualified.
39
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Chase Equity Growth Fund
For the Years Ended December 31,
------------------------------------------------------------------------------------
03/29/88*
Through
1997 1996 1995 1994 1993+ 1992+ 1991+ 1990+ 1989+ 12/31/88+
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period $27.95 $23.20 $18.44 $18.61 $18.16 $17.06 $12.96 $13.15 $10.48 $10.00
----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.070 0.100 0.170 0.200 0.200 0.190 0.260 0.260 0.360 0.140
Net Gains or Losses in Securities
(both realized and unrealized) 10.340 4.650 4.590 (0.370) 0.250 0.910 3.840 (0.450) 2.310 0.340
----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 10.410 4.750 4.760 (0.170) 0.450 1.100 4.100 (0.190) 2.670 0.480
----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $38.36 $27.95 $23.20 $18.44 $18.61 $18.16 $17.06 $12.96 $13.15 $10.48
==============================================================================================
TOTAL RETURN 37.20% 20.52% 25.78% -0.90% 2.48% 6.43% 31.69% -1.45% 25.73% 6.15%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) $76,730 $57,328 $45,578 $36,683 $30,648 $25,514 $16,716 $5,357 $2,839 $2,576
Ratios to Average Net Assets:#
Ratio of Expenses 1.00% 1.00% 1.00% 1.00% 0.96% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income 0.20% 0.41% 0.78% 1.07% 1.12% 1.16% 1.73% 2.03% 2.95% 1.84%
Ratio of expenses without
waivers and assumption of
expenses 1.11% 1.08% 1.10% 1.17% 1.21% 1.23% 1.32% 1.56% 1.91% 2.92%
Ratio of net investment income
without waivers and
assumption of expenses 0.09% 0.33% 0.68% 0.90% 0.87% 0.93% 1.41% 1.47% 2.04% -0.08%
Portfolio Turnover Rate 35% 62% 99% 116% 97% 99% 135% 156% 235% 80%
Commission rate per share $0.13000 $0.15000 NA NA NA NA NA NA NA NA
</TABLE>
* Commencement of operations.
# Short periods have been annualized
+ Amounts have been adjusted to reflect 10:1 reverse split of the Fund's
units on May 7, 1993.
See notes to financial statements.
40
<PAGE>
CHASE MID CAP GROWTH FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Mid Cap Growth Fund's objective is to provide long-term capital
growth. Current income, if any, is a consideration incidental to the Fund's
objective of long-term capital growth.
STYLE AND PORTFOLIO COMPOSITION. The Fund will invest primarily in a broad
portfolio of common stocks. Under normal market conditions, the Fund will invest
at least 70% of its total assets in common stocks of mid cap companies. The Fund
may invest any portion of its assets not invested as described above in other
types of securities, including equity securities of small and large cap
companies, fixed income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund will seek to invest primarily in stocks of
companies with market capitalizations of $750 million to $4 billion. The Fund
will target companies which have one or more of the following characteristics: a
sound balance sheet, strong earnings momentum and high levels of profitability.
In selecting equity-based securities, the Fund's adviser adopts an active
management style, stressing first fundamental security selection, with secondary
consideration given to factors such as sector weighting and market timing.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in mid cap companies may be more volatile than
investments in companies with greater capitalization, as described under 'Risk
Factors' below. The Fund is classified as a 'diversified' fund under federal
securities law.
41
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Mid Cap Growth Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.50%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
42
<PAGE>
CHASE SMALL CAPITALIZATION FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Small Cap Fund's objective is to provide capital appreciation.
Although the Fund, in seeking its objective, may receive current income from
dividends and interest, income is only an incidental consideration of the Fund.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on delivering risk and return characteristics
representative of a small capitalization asset class. Portfolio emphasis is on
equity-based securities, which include common stocks and those debt securities
and preferred stocks convertible into common stocks. Under normal conditions, it
is expected that at least 70% of the value of the total assets of the Fund will
be invested in equity-based securities of small cap issuers. The Fund may invest
any portion of its assets not invested as described above in other types of
securities, including equity securities of mid and large cap companies, fixed
income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund investments are typically made in companies
displaying one or more of the following characteristics: above market average
price/earnings ratios and price/book ratios, below average dividend yield and
above average market volatility. In addition, small capitalization companies
will be emphasized that possess one or more of the following: high quality
management, a leading or dominant position in a major product line, new or
innovative products, services or processes, a sound financial position and a
relatively high rate of return of invested capital so that future growth can be
financed from internal sources. The Fund primarily targets companies with market
capitalizations of $100 million to $1 billion at time of purchase. Purchases are
a direct result of a disciplined stock selection process focusing on identifying
attractively valued stock of companies with positive business fundamentals.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in smaller companies may be more volatile than
investments in companies with greater capitalization, as described under 'Risk
Factors' below. The Fund is classified as a 'diversified' fund under federal
securities laws.
43
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Small Cap Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements*........... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements*..................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Premier Shares........................... $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.54% and 1.29%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
44
<PAGE>
FINANCIAL HIGHLIGHTS
Effective January 1, 1998, the Small Capitalization Fund series (the
'Predecessor Fund') of the AVESTA Trust was converted into the Small
Capitalization Fund. The table set forth below provides selected per share data
and ratios for one Unit of the Predecessor Fund. This information is
supplemented by financial statements and accompanying notes appearing in the
Predecessor Fund's Annual Report for the fiscal year ended December 31, 1997,
which is incorporated by reference into the SAI. Shareholders may obtain a copy
of the Annual Report by contacting the Fund. The Financial Highlights for the
periods ended December 31, 1993 through December 31, 1997 have been audited by
Price Waterhouse LLP, whose unqualified report is included in the Annual Report.
Financial Highlights
<TABLE>
<CAPTION>
Chase Small Capitalization Fund
For the Years Ended December 31,
--------------------------------
04/01/93*
Through
1997 1996 1995 1994 12/31/93
------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $17.55 $13.41 $10.23 $10.89 $10.00
------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.020 0.010 0.050 0.060 0.020
Net Gains or Losses in Securities
(both realized and unrealized) 4.210 4.130 3.130 (0.720) 0.870
------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.230 4.140 3.180 (0.660) 0.890
------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.000 0.000 0.000 0.000 0.000
NET ASSET VALUE, END OF PERIOD $21.78 $17.55 $13.41 $10.23 $10.89
==========================================
TOTAL RETURN 24.08% 30.88% 31.14% -6.12% 8.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $40,028 $20,750 $12,848 $9,267 $9,838
Ratios to Average Net Assets:#
Ratio of Expenses 1.00% 1.00% 1.00% 1.00% 0.82%
Ratio of Net Investment Income 0.13% 0.04% 0.46% 0.55% 0.28%
Ratio of expenses without waivers and
assumption of expenses 1.40% 1.37% 1.50% 1.60% 2.46%
Ratio of net investment income without
waivers and assumption of expenses -0.27% -0.33% -0.04% -0.05% -1.36%
Portfolio Turnover Rate 43% 68% 89% 120% 161%
Commission rate per share $0.26000 $0.26000 N/A N/A N/A
</TABLE>
* Commencement of operations.
# Short periods have been annualized
See notes to financial statements.
45
<PAGE>
CHASE INTERNATIONAL EQUITY FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The International Equity Fund's objective is to provide total return
from long-term capital growth and income.
STYLE AND PORTFOLIO COMPOSITION. The Fund will invest principally (under normal
market conditions, at least 65% of its total assets) in a broad portfolio of
marketable equity securities of established foreign companies organized in
countries other than the U.S. and foreign subsidiaries of U.S. companies
participating in foreign economies. These will include common stocks, preferred
stocks, securities convertible into common stocks, and warrants to purchase
common stocks.
The Fund's adviser seeks to identify those countries and industries where
economic and political factors, including currency movements, are likely to
produce above-average growth rates. The Fund's adviser attempts to identify
those companies in such countries and industries that are best positioned and
managed to take advantage of these economic and political factors. The Fund will
seek to diversify investments broadly among issuers in various countries and,
normally, the Fund's portfolio will include securities of issuers located in at
least three different countries other than the U.S. The Fund may invest a
substantial portion of its assets in one or more of such countries.
The Fund intends to invest in companies based in (or governments located in) the
Far East (including Japan, Hong Kong, Singapore and Malaysia), Western Europe
(including the United Kingdom, Germany, Netherlands, France, Switzerland, Italy
and Spain), Scandinavia, Australia, Canada and such other areas and countries as
the Fund's adviser may determine from time to time. Because the Fund invests a
large portion of its assets in countries comprising the Morgan Stanley Capital
International Europe, Australia and Far East Index, which is heavily weighted
towards companies based in Japan and the United Kingdom, a substantial portion
of the Fund's assets may be invested in companies based in Japan, the United
Kingdom and/or other countries represented in the Index. However, investments
may be made from time to time in companies in, or governments of, developing
countries.
The Fund's adviser will allocate investments among securities denominated in the
U.S. dollar and currencies of foreign countries. The adviser may adjust the
Fund's exposure to each currency based on its perception of the most favorable
markets and issuers. The percentage of the Fund's assets invested in securities
of a particular country or denominated in a particular currency will vary in
accordance with the adviser's assessment of the relative yield and appreciation
potential of such securities and the current and anticipated relationship of a
country's currency to the U.S. dollar. Fundamental economic strength, earnings
growth, quality
46
<PAGE>
of management, industry growth, credit quality and interest rate trends are some
of the principal factors which may be considered by the Fund's adviser in
determining whether to increase or decrease the emphasis placed upon a
particular type of security, industry sector, country or currency. Securities
purchased by the Fund may be denominated in a currency other than that of the
country in which the issuer is domiciled.
Primary emphasis will be placed on equity securities and securities with equity
features. However, the Fund may invest in any type of debt security including,
but not limited to, other convertible securities, bonds, notes and other debt
securities of foreign governmental and private issuers, and various derivative
securities.
The Fund will not invest more than 25% of its net assets in debt securities
denominated in a single currency other than the U.S. dollar, nor will it invest
more than 25% of its net assets in debt securities issued by a single foreign
government or supranational organization.
EQUITY-BASED INVESTMENTS. The Fund may invest in securities of companies of
various sizes, including smaller companies whose securities may be more volatile
and less liquid than securities of larger companies. With respect to certain
countries in which capital markets are either less developed or not easily
accessed, investments by the Fund may be made through investments in closed-end
investment companies that in turn are authorized to invest in the securities of
such countries.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in foreign securities involve a higher degree of risk
than investments in U.S. securities, as described under 'Common Investment
Policies-- Other Investment Practices-- Foreign Securities' and 'Risk Factors'
below. The Fund is classified as a 'diversified' fund under federal securities
law.
47
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the International Equity Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 1.00%
12b-1 Fee............................................................. None
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming
5% annual return:
1 Year 3 Years
------ -------
<S> <C> <C>
Premier Shares............................................... $ 13 $40
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.75%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
48
<PAGE>
COMMON INVESTMENT
POLICIES
Although the Money Market Fund and Tax Free Money Market Fund each seek to be
fully invested, at times they may hold uninvested cash reserves, which would
adversely affect their yield.
Each Fund may invest any portion of its assets not invested as described above
in high quality money market instruments and repurchase agreements. For
temporary defensive purposes, a Fund may invest without limitation in these
instruments. At times when the advisers of the Balanced Fund, Equity Income
Fund, Core Equity Fund, Equity Growth Fund, Mid Cap Growth Fund, Small Cap Fund,
or International Equity Fund (the 'Equity Funds') deem it advisable to limit the
Fund's exposure to the equity markets, each Equity Fund may invest without
limitation in investment grade fixed income securities (exclusive of any
investments in money market instruments). To the extent a Fund departs from its
investment policies during temporary defensive periods, its investment objective
may not be achieved.
Fixed income securities in each Fund's portfolio may include, to the extent
permitted by the Fund's investment policies, bonds, notes, mortgage-related
securities, asset-backed securities, government and government agency and
instrumentality obligations, zero coupon securities, convertible securities and
money market instruments, as discussed below.
In determining the credit quality of a fixed income security, each Fund's
adviser will consider the issuer's financial strength, including its historic
and current financial condition, its historic and projected earnings; the
issuer's market position; and other factors relevant to an analysis of a
particular issuer, as determined by the adviser.
In making investment decisions for the Tax Free Income Fund, the New York Tax
Free Income Fund, the Short-Intermediate Term Fund, the U.S. Government
Securities Fund, the Intermediate Term Bond Fund and the Income Fund (the 'Fixed
Income Funds'), each such Fund's adviser considers many factors in addition to
current yield, including preservation of capital, maturity and yield to
maturity. Each Fixed Income Fund's adviser will adjust such Fund's investments
in particular securities or types of securities based upon its appraisal of
changing economic conditions and trends. Each Fixed Income Fund's adviser may
sell one security and purchase another security of comparable quality and
maturity in order to take advantage of what it believes to be short-term
differentials in market values or yield disparities.
The maturity of securities with put features will be measured based on the next
put date, and the maturity of mortgage-backed and asset-backed securities will
be based on their weighted average lives.
In lieu of investing directly, each Fund is authorized to seek to achieve its
objective by investing all of its investable assets in an investment company
having
49
<PAGE>
substantially the same investment objective and policies as the applicable Fund.
See 'Unique Characteristics of Master/Feeder Structure.'
The Tax Free Income Fund and New York Tax Free Income Fund are classified as
'non-diversified' funds under federal securities laws. These Funds' assets may
be more concentrated in the securities of any single issuer or group of issuers
than if the Funds were diversified. The other Funds are classified as
'diversified' funds under federal securities laws.
No Fund is intended to be a complete investment program, and there is no
assurance that any Fund will achieve its investment objective.
OTHER INVESTMENT PRACTICES
The Funds may also engage in the following investment practices when consistent
with their overall objective and policies. These practices, and certain
associated risks, are more fully described in the SAI.
FOREIGN SECURITIES. The Tax Free Money Market Fund, Tax Free Income Fund and New
York Tax Free Income Fund (the 'Tax Free Funds') will invest in Municipal
Obligations, which may be backed by foreign institutions as discussed below
under 'Additional Investment Policies of the Tax Free Funds.' The International
Equity Fund may invest without limitation in foreign securities, including
Depositary Receipts, which are described below. The Money Market Fund may invest
up to 30% of its total assets in securities of foreign governments and
supranational agencies. The Money Market Fund will limit its investments in
foreign government obligations to commercial paper and other short-term notes
issued or guaranteed by the governments of Western Europe, Australia, New
Zealand, Japan and Canada. Each other Fund may invest up to 30% of its total
assets in foreign securities, including Depositary Receipts.
Since foreign securities are normally denominated and traded in foreign
currencies, the values of a Fund's foreign investments may be influenced by
currency exchange rates and exchange control regulations. There may be less
information publicly available about foreign issuers than U.S. issuers, and they
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the U.S. Foreign securities may
be less liquid and more volatile than comparable U.S. securities. Foreign
settlement procedures and trade regulations may involve certain expenses and
risks. One risk would be the delay in payment or delivery of securities or in
the recovery of a Fund's assets held abroad. It is possible that nationalization
or expropriation of assets, imposition of currency exchange controls, taxation
by withholding Fund assets, political or financial instability and diplomatic
developments could affect the value of a Fund's investments in certain foreign
countries. Foreign laws may restrict the ability to invest in certain countries
or issuers and special tax considerations will apply to foreign securities. The
risks can
50
<PAGE>
increase if a Fund invests in emerging market securities.
DEPOSITARY RECEIPTS. Each of the Equity Funds, the Intermediate Term Bond Fund
and the Income Fund may invest its assets in securities of foreign issuers in
the form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other similar securities representing securities of
foreign issuers (collectively, 'Depositary Receipts'). Each Fund treats
Depositary Receipts as interests in the underlying securities for purposes of
its investment policies. Each Fund will limit its investment in Depositary
Receipts not sponsored by the issuer of the underlying securities to no more
than 5% of the value of its net assets (at the time of investment).
SUPRANATIONAL AND ECU OBLIGATIONS. Each Fund other than the Tax Free Funds may
invest in debt securities issued by supranational organizations, which include
organizations such as The World Bank, the European Community, the European Coal
and Steel Community and the Asian Development Bank. Obligations of supranational
agencies are supported by subscribed, but unpaid, commitments of member
countries. There is no assurance that these commitments will be undertaken or
complied with in the future, and foreign and supranational securities are
subject to certain risks associated with foreign investing. Each such Fund may
also invest in securities denominated in the ECU, which is a 'basket' consisting
of specified amounts of the currencies of certain member states of the European
Community. These securities are typically issued by European governments and
supranational organizations.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Treasury obligations,
which are bills, notes and bonds backed by the full faith and credit of the U.S.
Government as to payment of principal and interest which generally differ only
in their interest rates and maturities. Each Fund also may invest in securities
issued or guaranteed by U.S. Government agencies and instrumentalities including
obligations that are supported by the full faith and credit of the U.S.
Treasury, the limited authority of the issuer or guarantor to borrow from the
U.S. Treasury, or only the credit of the issuer or guarantor. In the case of
obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
MONEY MARKET INSTRUMENTS. Each Fund may invest in cash or high-quality,
short-term money market instruments. These may include U.S. Government
securities, commercial paper of domestic and foreign issuers and obligations of
domestic and foreign banks. Investments in foreign money market instruments may
involve certain risks associated with foreign investment.
REPURCHASE AGREEMENTS, SECURITIES LOANS AND FORWARD AND STAND-BY
COMMITMENTS. Each Fund may enter into agreements to purchase and resell
securities at an agreed-
51
<PAGE>
upon price and time. Each Fund also has the ability to lend portfolio securities
in an amount equal to not more than 30% of its total assets to generate
additional income. These transactions must be fully collateralized at all times.
Each Fund may purchase securities for delivery at a future date, which may
increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. Each Fund may
enter into put transactions, including those sometimes referred to as stand-by
commitments, with respect to securities in its portfolio. In these transactions,
a Fund would acquire the right to sell a security at an agreed upon price within
a specified period prior to its maturity date. A put transaction will increase
the cost of the underlying security and consequently reduce the available yield.
Each of these transactions involves some risk to a Fund if the other party
should default on its obligation and the Fund is delayed or prevented from
recovering the collateral or completing the transaction.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow money from
banks for temporary or short-term purposes, but will not borrow money to buy
additional securities, known as 'leveraging.' Each Fund may also sell and
simultaneously commit to repurchase a portfolio security at an agreed-upon price
and time. Each Fund may use this practice to generate cash for shareholder
redemptions without selling securities during unfavorable market conditions.
Whenever a Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets on a daily basis in
an amount at least equal to the repurchase price (including accrued interest).
The Funds would be required to pay interest on amounts obtained through reverse
repurchase agreements, which are considered borrowings under federal securities
laws.
CONVERTIBLE SECURITIES. Each Fund other than the Money Market Fund and the Tax
Free Funds may invest in convertible securities, which are securities generally
offering fixed interest or dividend yields which may be converted either at a
stated price or stated rate for common or preferred stock. Although to a lesser
extent than with fixed income securities generally, the market value of
convertible securities tends to decline as interest rates increase, and increase
as interest rates decline. Because of the conversion feature, the market value
of convertible securities also tends to vary with fluctuations in the market
value of the underlying common or preferred stock.
OTHER INVESTMENT COMPANIES. Apart from being able to invest all of its
investable assets in another investment company having substantially the same
investment objectives and policies, each Fund may invest up to 10% of its total
assets in shares of other registered investment companies when consistent with
its investment objective and policies, subject to applicable regulatory
limitations. Additional fees will be charged by such other investment companies.
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<PAGE>
ZERO COUPON SECURITIES, PAYMENT-IN-KIND OBLIGATIONS AND STRIPPED
OBLIGATIONS. The Short-Intermediate Term Fund and U.S. Government Securities
Fund may invest without limitation in zero coupon securities issued by
governmental issuers and each other Fund other than the Money Market Fund and
the Tax Free Money Market Fund may invest up to 25% of its total assets in zero
coupon securities issued by governmental and private issuers. Zero coupon
securities are debt securities that do not pay regular interest payments, and
instead are sold at substantial discounts from their value at maturity. Each
Fund other than the Money Market Fund and Tax Free Money Market Fund may invest
in payment-in-kind obligations. Payment-in-kind obligations are obligations on
which the interest is payable in additional securities rather than cash. The
Short-Intermediate Term Fund and the U.S. Government Securities Fund may invest
without limitation and each other Fund other than the Money Market Fund may
invest up to 25% of its total assets in stripped obligations (i.e., separately
traded principal and interest components of securities) where the underlying
obligations are backed by the full faith and credit of the U.S. Government,
including instruments known as 'STRIPS.' The value of these instruments tends to
fluctuate more in response to changes in interest rates than the value of
ordinary interest-paying debt securities with similar maturities. The risk is
greater when the period to maturity is longer.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES. Each Fund may
invest in floating rate securities, whose interest rates adjust automatically
whenever a specified interest rate changes, and variable rate securities, whose
interest rates are periodically adjusted. Certain of these instruments permit
the holder to demand payment of principal and accrued interest upon a specified
number of days' notice from either the issuer or a third party. The securities
in which a Fund may invest include participation certificates and certificates
of indebtedness or safekeeping. Participation certificates are pro rata
interests in securities held by others; certificates of indebtedness or
safekeeping are documentary receipts for such original securities held in
custody by others. As a result of the floating or variable rate nature of these
investments, a Fund's yield may decline and it may forego the opportunity for
capital appreciation during periods when interest rates decline; however, during
periods when interest rates increase, the Fund's yield may increase and it may
have reduced risk of capital depreciation. Demand features on certain floating
or variable rate securities may obligate the Fund to pay a 'tender fee' to a
third party. Demand features provided by foreign banks involve certain risks
associated with foreign investments.
INDEXED INVESTMENTS. The International Equity Fund may invest in instruments
which are indexed to certain specific foreign currency exchange rates. The terms
of such instruments may provide that their principal amounts or just
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<PAGE>
their coupon interest rates are adjusted upwards or downwards (but not below
zero) at maturity or on established coupon payment dates to reflect changes in
the exchange rate between two or more currencies while the obligation is
outstanding. Such indexed investments entail the risk of loss of principal
and/or interest payments from currency movements in addition to principal risk,
but offer the potential for realizing gains as a result of changes in foreign
currency exchange rates.
REAL ESTATE INVESTMENT TRUSTS. Equity investments may include shares of real
estate investment trusts ('REITs'). REITs are pooled investment vehicles which
invest primarily in income-producing real estate ('equity trust') or real estate
related loans or interests ('mortgage trusts'). The value of equity trusts will
depend upon the value of the underlying properties, and the value of the
mortgage trusts will be sensitive to the value of the underlying loans or
interests. The value of REITs may decline when interest rates rise.
INVERSE FLOATERS AND INTEREST RATE CAPS. Each of the Fixed Income Funds may
invest in inverse floaters and in securities with interest rate caps. Inverse
floaters are instruments whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. The market value
of an inverse floater will vary inversely with changes in market interest rates,
and will be more volatile in response to interest rates changes than that of a
fixed rate obligation. Interest rate caps are financial instruments under which
payments occur if an interest rate index exceeds a certain predetermined
interest rate level, known as the cap rate, which is tied to a specific index.
These financial products will be more volatile in price than securities which do
not include such a structure. No Fund has any present intention to invest in
inverse floaters or securities with interest rate caps.
MORTGAGE-RELATED SECURITIES. Each Equity Fund may invest in investment grade
mortgage-related securities. The Intermediate Term Bond Fund and Income Fund
each may invest up to two-thirds of its total assets in investment grade
mortgage-related securities. The Short-Intermediate Term Fund and U.S.
Government Securities Fund may invest without limitation in mortgage-related
U.S. Government Securities. Mortgage pass-through securities are securities
representing interests in 'pools' of mortgages in which payments of both
interest and principal on the securities are made monthly, in effect 'passing
through' monthly payments made by the individual borrowers on the residential
mortgage loans which underlie the securities. Early repayment of principal on
mortgage pass-through securities held by a Fund (due to prepayments of principal
on the underlying mortgage loans) may result in a lower rate of return when the
Fund reinvests such principal. In addition, as with callable fixed income
securities generally, if a Fund purchased the securities at a premium, sustained
early repayment would limit the value of the premium. Like other fixed income
securities, when interest rates rise
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<PAGE>
the value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed income, fixed maturity
securities which have no prepayment or call features.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the U.S.
Government, or by agencies or instrumentalities of the U.S. Government (which
guarantees are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Certain mortgage pass-through
securities created by nongovernmental issuers may be supported by various forms
of insurance or guarantees, while other such securities may be backed only by
the underlying mortgage collateral.
Each Fund other than the Money Market Fund and the Tax Free Funds may also
invest in investment grade Collateralized Mortgage Obligations ('CMOs'), which
are hybrid instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Similar to a bond, interest and prepaid
principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized
by whole residential or commercial mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
the U.S. Government or its agencies or instrumentalities. CMOs are structured
into multiple classes, with each class having a different expected average life
and/or stated maturity. Monthly payments of principal, including prepayments,
are allocated to different classes in accordance with the terms of the
instruments, and changes in prepayment rates or assumptions may significantly
affect the expected average life and value of a particular class.
Each Fund other than the Money Market Fund and the Tax Free Funds may invest in
principal-only or interest-only stripped mortgage-backed securities.
Stripped mortgage-backed securities have greater volatility than other types of
mortgage-related securities. Stripped mortgage-backed securities which are
purchased at a substantial premium or discount generally are extremely sensitive
not only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such securities' yield to maturity. In addition, stripped mortgage
securities may be illiquid.
The Funds expect that governmental, government-related or private entities may
create other mortgage-related securities in addition to those described above.
As new types of mortgage-related securities are developed and offered to
investors, a Fund may consider making investments in such securities.
DOLLAR ROLLS. Each Fund other than the Money Market Fund and
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<PAGE>
the Tax Free Funds may enter into mortgage 'dollar rolls' in which a Fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. These transactions involve some risk to a
Fund if the other party should default on its obligation and the Fund is delayed
or prevented from completing the transaction.
ASSET-BACKED SECURITIES. Each Fund may invest in investment grade asset-backed
securities, which represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool of
assets similar to one another, such as motor vehicle receivables or credit card
receivables.
DERIVATIVES AND RELATED INSTRUMENTS. Each Fund other than the Money Market Fund
and the Tax Free Money Market Fund may invest its assets in derivative and
related instruments to hedge various market risks or to increase the Fund's
income or gain. Some of these instruments will be subject to asset segregation
requirements to cover a Fund's obligations. Each such Fund may (i) purchase,
write and exercise call and put options on securities and securities indexes
(including using options in combination with securities, other options or
derivative instruments); (ii) enter into swaps, futures contracts and options on
futures contracts; (iii) employ forward currency and interest rate contracts;
and (iv) purchase and sell structured products, which are instruments designed
to restructure or reflect the characteristics of certain other investments.
There are a number of risks associated with the use of derivatives and related
instruments and no assurance can be given that any strategy will succeed. The
value of certain derivatives or related instruments in which a Fund invests may
be particularly sensitive to changes in prevailing economic conditions and
market value. The ability of a Fund to successfully utilize these instruments
may depend in part upon the ability of its adviser to forecast these factors
correctly. Inaccurate forecasts could expose a Fund to a risk of loss. There can
be no guarantee that there will be a correlation between price movements in a
hedging instrument and in the portfolio assets being hedged. No Fund is required
to use any hedging strategies. Hedging strategies, while reducing risk of loss,
can also reduce the opportunity for gain. Derivatives transactions not involving
hedging may have speculative characteristics, involve leverage and result in
losses that may exceed the original investment of a Fund. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out a derivatives position. Activities of large traders in the futures and
securities markets involving arbitrage, 'program trading,' and other investment
strategies may cause price distortions in derivatives markets. In certain
instances, particularly those involving over-the-counter transactions or forward
contracts, there is a greater potential that a counterparty or broker may
default. In the event of a default, a Fund
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<PAGE>
may experience a loss. For additional information concerning derivatives,
related instruments and the associated risks, see the SAI.
PORTFOLIO TURNOVER. It is intended that the Money Market Fund and the Tax Free
Money Market Fund will be fully managed by buying and selling securities, as
well as holding securities to maturity. The frequency of each Fund's buy and
sell transactions will vary from year to year. A Fund's investment policies may
lead to frequent changes in investments, particularly in periods of rapidly
changing market conditions. High portfolio turnover rates would generally result
in higher transaction costs, including brokerage commissions or dealer mark-ups.
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND
BANK OBLIGATIONS. Bank obligations include certificates of deposit, time
deposits and bankers' acceptances issued or guaranteed by U.S. banks (including
their foreign branches) and foreign banks (including their U.S. branches). These
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation. Foreign bank obligations involve certain risks associated with
foreign investing.
MUNICIPAL OBLIGATIONS. The Fund may invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which they may invest. Dividends paid by this Fund
that are derived from interest on municipal obligations will be taxable to
shareholders for federal income tax purposes.
CUSTODIAL RECEIPTS. The Fund may acquire securities in the form of custodial
receipts that evidence ownership of future interest payments, principal payments
or both on certain U.S. Treasury notes or bonds in connection with programs
sponsored by banks and brokerage firms. These are not deemed U.S. Government
securities. These notes and bonds are held in custody by a bank on behalf of the
owners of the receipts.
ADDITIONAL INVESTMENT POLICIES OF THE TAX FREE FUNDS
The following provides additional information regarding the permitted
investments of the Tax Free Money Market Fund, the Tax Free Income Fund and the
New York Tax Free Income Fund. These investments, and certain associated risks
are more fully described in the SAI.
MUNICIPAL OBLIGATIONS. Municipal Obligations are issued to obtain funds for
various public purposes, such as the construction of public facilities, the
payment of general operating expenses or the refunding of outstanding debts.
They may also be issued to finance various private activities, including the
lending of funds to public or private institutions for the construction of
housing, educational or medical facilities, and may include certain types of
industrial development bonds, private activity bonds or notes issued by public
authorities to finance privately owned or operated
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<PAGE>
facilities, or to fund short-term cash requirements. Short-term Municipal
Obligations may be issued as interim financing in anticipation of tax
collections, revenue receipts or bond sales to finance various public purposes.
The Municipal Obligations in which the Tax Free Money Market Fund invests may
consist of municipal notes, municipal commercial paper and municipal bonds
maturing or deemed to mature in 397 days or less.
The two principal classifications of Municipal Obligations are general
obligation and revenue obligation securities. General obligation securities
involve a pledge of the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The characteristics
and methods of enforcement of general obligation securities vary according to
the law applicable to the particular issuer. Revenue obligation securities are
payable only from revenues derived from a particular facility or class of
facilities, or a specific revenue source, and generally are not payable from the
unrestricted revenues of the issuer. Industrial development bonds and private
activity bonds are in most cases revenue obligation securities, the credit
quality of which is directly related to the private user of the facilities.
From time to time, each Fund may invest more than 25% of the value of its total
assets in industrial development bonds which, although issued by industrial
development authorities, may be backed only by the assets and revenues of non-
governmental issuers such as hospitals or airports, provided, however, that a
Fund may not invest more than 25% of the value of its total assets in such bonds
if the issuers are in the same industry.
MUNICIPAL LEASE OBLIGATIONS. Each Tax Free Fund may invest in municipal lease
obligations. These are participations in a lease obligation or installment
purchase contract obligation and typically provide a premium interest rate.
Municipal lease obligations do not constitute general obligations of the
municipality. Certain municipal lease obligations in which the Funds may invest
contain 'non-appropriation' clauses which provide that the municipality has no
obligation to make lease or installment payments in future years unless money is
later appropriated for such purposes. Although 'non-appropriation' lease
obligations are secured by the leased property, disposition of the property in
the event of foreclosure might prove difficult. Certain investments in municipal
lease obligations may be illiquid. Each Fund's adviser will evaluate the
liquidity of municipal lease obligations in accordance with procedures
established by the Funds.
LIMITING INVESTMENT RISKS
Specific investment restrictions help the Funds limit investment risks for their
shareholders. These restrictions prohibit each Fund from (a) investing more than
15% of its net assets (10% in the case of the Money Market Fund and the Tax
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Free Money Market Fund) in illiquid securities (which include securities
restricted as to resale unless they are determined to be readily marketable in
accordance with procedures established by the Board of Trustees) or (b)
investing more than 25% of its total assets in any one industry (excluding (i)
U.S. Government obligations, (ii) with respect to the Money Market Fund and Tax
Free Money Market Fund, bank obligations, and (iii) with respect to the Tax Free
Funds, obligations of states, cities, municipalities or other public
authorities, as well as municipal obligations secured by bank letters of credit
or guarantees). Each 'diversified' Fund may not, with respect to 75% of its
total assets, invest more than 5% of its total assets in the securities of any
one issuer (other than U.S. Government obligations) or hold more than 10% of the
voting securities of any issuer. In addition, in order to comply with federal
securities regulations relating to money market funds, the Money Market Fund and
Tax Free Money Market Fund will not, with respect to 100% of its total assets,
invest more than 5% of its total assets in the securities of any one issuer
(other than U.S. Government obligations). A complete description of these and
other investment policies is included in the SAI. Except for restriction (b)
above and investment policies designated as fundamental in the SAI, the Funds'
investment policies (including their investment objectives) are not fundamental.
The Trustees may change any non-fundamental investment policy without
shareholder approval. However, in the event of a change in any such Fund's
investment objective, shareholders will be given at least 30 days' prior written
notice.
RISK FACTORS
There can be no assurance that the Money Market Fund or Tax Free Money Market
Fund will be able to maintain a stable net asset value. Changes in interest
rates may affect the value of the obligations held by such Funds. The value of
fixed income securities varies inversely with changes in prevailing interest
rates, although money market instruments are generally less sensitive to changes
in interest rates than are longer-term securities.
The Money Market Fund is permitted to invest any portion of its assets in
obligations of domestic banks (including their foreign branches), and in
obligations of foreign issuers. The ability to concentrate in the banking
industry may involve certain credit risks, such as defaults or downgrades, if at
some future date adverse economic conditions prevail in such industry. U.S.
banks are subject to extensive governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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Securities issued by foreign banks, foreign branches of U.S. banks and foreign
governmental and private issuers involve investment risks in addition to those
of obligations of domestic issuers, including risks relating to future political
and economic developments, more limited liquidity of foreign obligations than
comparable domestic obligations, the possible imposition of withholding taxes on
interest income, the possible seizure or nationalization of foreign assets, and
the possible establishment of exchange controls or other restrictions. There may
be less publicly available information concerning foreign issuers, there may be
difficulties in obtaining or enforcing a judgment against a foreign issuer
(including branches), and accounting, auditing and financial reporting standards
and practices may differ from those applicable to U.S. issuers. In addition,
foreign banks are not subject to regulations comparable to U.S. banking
regulations.
The Tax Free Money Market Fund may invest without limitation and each of the Tax
Free Income Fund and New York Tax Free Income Fund may invest up to 25% of its
total assets in Municipal Obligations secured by letters of credit or guarantees
from U.S. banks (including their foreign branches), and may also invest in
Municipal Obligations backed by foreign institutions. These investments are
subject to the considerations discussed in the preceding paragraphs relating to
the Money Market Fund. Changes in the credit quality of banks or other financial
institutions backing the Fund's Municipal Obligations could cause losses to the
Fund and affect its share price. Credit enhancements which are supplied by
foreign or domestic banks are not subject to federal deposit insurance.
Each of the Tax Free Income Fund and the New York Tax Free Income Fund is
'non-diversified,' which may make the value of its shares more susceptible to
developments affecting issuers in which such Funds invest. In addition, more
than 25% of the assets of the Tax Free Funds may be invested in securities to be
paid from revenue of similar projects, which may cause such Funds to be more
susceptible to similar economic, political or regulatory developments. The New
York Tax Free Income Fund will be particularly susceptible to such economic,
political or regulatory developments since the issuers in which it will invest
will generally be located in the State of New York.
Because the Tax Free Funds will invest primarily in obligations issued by
states, cities, public authorities and other municipal issuers, such Funds are
susceptible to factors affecting such states and their municipal issuers. A
number of municipal issuers, including New York issuers, have a recent history
of significant financial and fiscal difficulties. If a municipal issuer is
unable to meet its financial obligations, the income derived by a Tax Free Fund
and a Tax Free Fund's ability to preserve capital and liquidity could be
adversely affected. See the SAI for further information regarding New York
municipal issuers.
Interest on certain Municipal Obligations (including certain industrial
development bonds),
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while exempt from federal income tax, is a preference item for the purpose of
the alternative minimum tax. Where a mutual fund receives such interest, a
proportionate share of any exempt-interest dividend paid by the mutual fund may
be treated as such a preference item to shareholders. Federal tax legislation
enacted over the past few years has limited the types and volume of bonds which
are not AMT Items and the interest on which is not subject to federal income
tax. This legislation may affect the availability of Municipal Obligations for
investments by the Tax Free Funds.
The net asset value of the shares of each Fund (other than the Money Market Fund
and Tax Free Money Market Fund) will fluctuate based on the value of the
securities in the Fund's portfolio. The Fixed Income Funds are subject to the
general risks and considerations associated with fixed income investing, as well
as the risks discussed herein. The Equity Funds are subject to the general risks
and considerations associated with equity and, to the extent they invest in
fixed income securities, fixed income investing, as well as the risks discussed
herein.
The performance of each Fixed Income Fund and, to the extent it invests in fixed
income securities, each Equity Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by a Fund
tends to decrease. This effect will be more pronounced with respect to
investments by a Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. Except as indicated in its investment
policies, there is no restriction on the maturity of a Fund's portfolio or any
individual portfolio security, and to the extent a Fund invests in securities
with longer maturities, the volatility of the Fund in response to changes in
interest rates can be expected to be greater than if the Fund had invested in
comparable securities with shorter maturities. The performance of a Fund will
also depend on the quality of its investments. While U.S. Government securities
generally are of high quality, government securities that are not backed by the
full faith and credit of the U.S. Treasury may be affected by changes in the
creditworthiness of the agency that issued them. Guarantees of principal and
interest on obligations that may be purchased by a Fund are not guarantees of
the market value of such obligations, nor do they extend to the value of shares
of the Fund. Other fixed income securities in which a Fund may invest, while of
investment-grade quality, may be of lesser credit quality than U.S. Government
Securities. Securities rated in the category Baa by Moody's or BBB by S&P or the
equivalent by another NRSRO lack certain investment characteristics and may have
speculative characteristics.
To the extent permitted by its investment objective and policies, each Fund may
invest in the securities of small or mid cap companies. The securities of small
to mid cap companies often trade less frequently and in more limited volume, and
may be subject to more abrupt or erratic price movements, than securities of
larger, more established companies.
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Such companies may have limited product lines, markets or financial resources,
or may depend on a limited management group.
As the International Equity Fund invests primarily in equity securities of
companies outside the U.S., an investment in the Fund's shares involves a higher
degree of risk than an investment in a U.S. equity fund. See 'Common Investment
Policies--Other Investment Practices--Foreign Securities.' Investments in
securities of issuers based in developing countries entail certain additional
risks, including greater risks of expropriation, taxation by withholding Fund
assets, nationalization, and less social, political and economic stability. The
small size of markets for securities of issuers based in such countries and the
low or nonexistent volume of trading may result in a lack of liquidity and in
price volatility. Certain national policies may restrict the investment
opportunities, including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests. There may be an absence of
developed legal structures governing private or foreign investment and private
property.
For a discussion of certain other risks associated with each Fund's additional
investment activities, see 'Other Investment Practices' above.
MANAGEMENT
THE FUNDS' ADVISERS
Chase acts as investment adviser to the Funds pursuant to an Investment Advisory
Agreement and has overall responsibility for investment decisions of each of the
Funds, subject to the oversight of the Board of Trustees. Chase is a
wholly-owned subsidiary of The Chase Manhattan Corporation, a bank holding
company. Chase and its predecessors have over 100 years of money management
experience.
For its investment advisory services to the Funds, Chase is entitled to receive
an annual fee equal to the percentage of the average daily net assets of each
Fund set forth below:
<TABLE>
<CAPTION>
Fee
Fund Rate
- ----------------------------- -----
<S> <C>
Money Market Fund............ 0.30%
Tax Free Money
Market Fund................ 0.30%
Tax Free Income Fund......... 0.50%
New York Tax Free Income
Fund........................ 0.50%
Short-Intermediate Term U.S.
Government Securities
Fund .................... 0.50%
U.S. Government Securities
Fund........................ 0.50%
Intermediate Term Bond
Fund........................ 0.50%
Income Fund.................. 0.50%
Balanced Fund................ 0.75%
Equity Income Fund........... 0.75%
Core Equity Fund............. 0.75%
Equity Growth Fund........... 0.75%
Mid Cap Growth Fund.......... 0.75%
Small Cap Fund............... 0.75%
International Equity Fund 1.00%
</TABLE>
Chase Texas serves as sub-investment adviser to certain of the Funds under a
Sub-Investment Advisory Agreement between Chase and Chase Texas. Chase Texas is
a wholly-owned subsidiary of The Chase Manhattan Corporation. Chase Texas makes
investment decisions for these Funds on a day-to-day basis. For these services,
Chase Texas is entitled to receive a fee, payable by Chase, at the percentage of
the average daily net assets of each Fund set forth below:
<TABLE>
<CAPTION>
Fee
Fund Rate
- ----------------------------- ------
<S> <C>
Money Market Fund............ 0.15%
Short-Intermediate Term U.S.
Government Securities
Fund .................... 0.25%
</TABLE>
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<TABLE>
<CAPTION>
Fee
Fund Rate
- ----------------------------- ------
<S> <C>
U.S. Government Securities
Fund ....................... 0.25%
Intermediate Term Bond
Fund........................ 0.25%
Income Fund.................. 0.25%
Balanced Fund................ 0.375%
Equity Income Fund........... 0.375%
Core Equity Fund............. 0.375%
Equity Growth Fund........... 0.375%
Small Cap Fund............... 0.375%
</TABLE>
Chase Texas is located at 712 Main Street, Houston, Texas 77002. Prior to
January 1, 1998, Chase Texas acted as trustee of the AVESTA Trust and, as
trustee, was obligated to provide the investment portfolios of the AVESTA Trust
with the investment advisory, administrative, custodial and other services
necessary to manage the portfolios.
Chase may enter into one or more additional Sub-Investment Advisory Agreements
with respect to the Tax Free Money Market Fund, Tax Free Income Fund, New York
Tax Free Income Fund, Mid Cap Growth Fund and International Equity Fund.
PORTFOLIO MANAGERS. Guy Barba, a Senior Investment Officer at Chase Texas, has
served as the portfolio manager of the Money Market Fund since April 1993 and
the Short-Intermediate Term Fund since its inception. Mr. Barba has been
employed by Chase Texas since 1988.
A team composed of Chase investment professionals is responsible for the
management of the Tax Free Money Market Fund's portfolio.
A team composed of Chase investment professionals is responsible for the
management of the Tax Free Income Fund's portfolio.
A team composed of Chase investment professionals is responsible for the
management of the New York Tax Free Income Fund's portfolio.
H. Mitchell Harper, a Senior Investment Officer at Chase Texas, has served as
the portfolio manager of the Intermediate Term Bond Fund since its inception.
Mr. Harper has been employed by Chase Texas since 1987.
John Miller, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager for each of the Income Fund and the fixed income portion of
the Balanced Fund since July 1994 and for the U.S. Government Securities Fund
since June 1995. Mr. Miller has been employed with Chase Texas since 1986.
Henry Lartigue, the Chief Investment Officer at Chase Texas, has served as the
portfolio manager for the Equity Growth Fund since July 1994, the equity portion
of the Balanced Fund since July 1994 and the Core Equity Fund since January
1996. Between July 1992 and July 1994, Mr. Lartigue was self-employed as a
registered investment adviser.
Robert Heintz, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager of the Equity Income Fund since its inception. Mr. Heintz has
been employed by Chase Texas since 1983.
A team composed of Chase investment professionals is responsible for the
management of the Mid Cap Growth Fund's portfolio.
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Juliet Ellis, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager of the Small Cap Fund since September 1993. Ms. Ellis has been
employed by Chase Texas since 1987. Prior to becoming portfolio manager for the
Small Cap Fund, Ms. Ellis was the director of research and an equity analyst at
Chase Texas.
A team composed of Chase investment professionals is responsible for the
management of the International Equity Fund's portfolio.
HOW TO BUY, SELL AND
EXCHANGE_ SHARES
HOW TO BUY SHARES
Premier Shares may be purchased through selected financial service firms, such
as broker-dealer firms and banks ('Financial Intermediaries') who have entered
into an agreement with the Funds' distributor on each business day during which
the Federal Reserve Bank of New York and the New York Stock Exchange are open
for business ('Fund Business Day'). The Funds reserve the right to reject any
purchase order or cease offering shares for purchase at any time.
Premier Shares are purchased at their public offering price, which is their next
determined net asset value. Orders received by Financial Intermediaries in
proper form prior to the New York Stock Exchange closing time are confirmed at
that day's net asset value, provided that the order is received by the Chase
Funds Service Center prior to its close of business. Orders are in proper form
only after funds are converted to federal funds. Financial Intermediaries are
responsible for forwarding orders for the purchase of shares on a timely basis.
Premier Shares will be maintained in book entry form and share certificates will
not be issued.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening an account.
Financial Intermediaries may offer additional services to their customers,
including customized procedures for the purchase and redemption of Premier
Shares, such as pre-authorized or systematic purchase and withdrawal programs,
'sweep' checking programs, cash advances, automated access and direct demand
deposit debit.
MINIMUM INVESTMENTS. Each Fund has established a minimum initial investment
amount of $100,000 for the purchase of Premier Shares. Financial Intermediaries
must maintain an average account balance of $100,000 in the Premier Shares of a
Fund at all times. There is no minimum for subsequent investments. Financial
Intermediaries may impose their own initial and subsequent investment minimums
on customers who purchase shares through them.
HOW TO SELL SHARES
Shares may be redeemed at any time at the net asset value next determined after
a redemption request in proper form is furnished to your Financial Intermediary
and
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transmitted to and received by the Chase Funds Service Center.
The price you receive is the next net asset value calculated after the Fund
receives your request in proper form. In order to receive that day's net asset
value, the Chase Funds Service Center must receive your request before the close
of regular trading on the New York Stock Exchange. Your Financial Intermediary
will be responsible for furnishing all necessary documentation to the Chase
Funds Service Center, and may charge you for its services.
The Funds generally send your Financial Intermediary payment for your shares in
federal funds on the business day after your request is received in proper form.
Under unusual circumstances, the Funds may suspend redemptions, or postpone
payment for more than seven business days, as permitted by federal securities
laws.
If a Financial Intermediary is authorized to act upon redemption and transfer
instructions received by telephone from an investor and the Financial
Intermediary fails to employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, it may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that to
the extent permitted by applicable law, neither a Fund nor the investor's
Financial Intermediary nor any of their agents will be liable for any loss,
liability, cost or expense arising out of any redemption request, including any
fraudulent or unauthorized request. For information, consult the Chase Funds
Service Center.
HOW TO EXCHANGE SHARES
You can exchange your shares for Premier Shares of other Chase Funds if
permitted by your Financial Intermediary. Any exchange requests should be made
through your Financial Intermediary. The description of the other Fund into
which shares are being exchanged, which appears in this Prospectus, should be
read carefully and this Prospectus should be retained for future reference.
For federal income tax purposes, an exchange between Funds is treated as a sale
of shares and generally results in capital gain or loss.
HOW THE FUNDS
VALUE_ THEIR_ SHARES
MONEY MARKET FUNDS. The net asset value of each class of shares of the Money
Market Fund and the Tax Free Money Market Fund is currently determined as of
4:00 p.m., Eastern time on each Fund Business Day by dividing the net assets of
a Fund attributable to such class by the number of shares of such class
outstanding at the time the determination is made. The portfolio securities of
the Money Market Fund and the Tax Free Money Market Fund are valued at their
amortized cost in accordance with federal securities laws, certain requirements
of which are summarized under 'Common Investment Policies.' This method
increases stability in valuation, but may result in periods during which the
stated value of a portfolio security is higher or lower than the
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price a Fund would receive if the instrument were sold. It is anticipated that
the net asset value of each share of each Fund will remain constant at $1.00 and
the Funds will employ specific investment policies and procedures to accomplish
this result, although no assurance can be given that they will be able to do so
on a continuing basis. The Board of Trustees will review the holdings of each
Fund at intervals it deems appropriate to determine whether that Fund's net
asset value calculated by using available market quotations (or an appropriate
substitute which reflects current market conditions) deviates from $1.00 per
share based upon amortized costs. In the event the Trustees determine that a
deviation exists that may result in material dilution or other unfair results to
investors or existing shareholders, the Trustees will take such corrective
action as they regard as necessary and appropriate.
NON-MONEY MARKET FUNDS. The net asset value of each class of each other Fund's
shares is determined once daily based upon prices determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., Eastern
time, however, options are priced at 4:15 p.m., Eastern time), on each Fund
Business Day, by dividing the net assets of the Fund attributable to that class
by the total number of outstanding shares of that class. Values of assets held
by the Funds are determined on the basis of their market or other fair value, as
described in the SAI.
HOW DISTRIBUTIONS ARE
MADE;_ TAX_ INFORMATION
MONEY MARKET FUNDS. The net investment income (i.e., a Fund's investment company
taxable income as that term is defined in the Internal Revenue Code of 1986, as
amended (the 'Code') without regard to the deduction for dividends paid) of each
class of shares of each of the Money Market Fund and the Tax Free Money Market
Fund is declared as a dividend to the shareholders each Fund Business Day.
Dividends are declared as of the time of day which corresponds to the latest
time on that day that a Fund's net asset value is determined. Shares begin
accruing dividends on the day that the order is received in proper form by the
Fund. Dividends are distributed monthly. The Money Market Fund and Tax Free
Money Market Fund do not expect to realize net capital gain (i.e., the excess of
a Fund's net long-term capital gains over short-term capital losses).
NON-MONEY MARKET FUNDS. Each Fixed Income Fund declares dividends daily and
distributes any net investment income at least monthly. Each Equity Fund other
than the International Equity Fund distributes any net investment income at
least quarterly. The International Equity Fund distributes any net investment
income at least annually. Each Fund other than the Money Market Fund and the Tax
Free Money Market Fund (which do not expect to earn net capital gain)
distributes any net capital gain at least annually.
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GENERAL. You can choose from three distribution options if made available by
your Financial Intermediary: (1) reinvest all distributions in additional Fund
shares; (2) receive distributions from net investment income in cash while
reinvesting net capital gain distributions in additional shares; or (3) receive
all distributions in cash. You can change your distribution option by notifying
your Financial Intermediary in writing. If you do not select an option when you
open your account, all distributions will be reinvested.
Each Fund intends to qualify as a 'regulated investment company' for federal
income tax purposes under Subchapter M of the Code and to meet all other
requirements that are necessary for it to be relieved of federal taxes on income
and gain it distributes to shareholders. If a Fund does not qualify as a
regulated investment company for any taxable year or does not meet certain other
requirements, such Fund will be subject to tax on all of its taxable income and
gains.
All Fund distributions of net investment income (which term shall include
short-term capital gains) will be taxable as ordinary income. Any distributions
of net capital gain which are designated as 'capital gain dividends' will be
taxable as long-term capital gain at the currently applicable 28% or 20% rate,
regardless of how long you have held the shares. Distributions by the Tax Free
Funds of their tax-exempt interest income will not be subject to federal income
tax. Such distributions will generally be subject to state and local taxes, but
may be exempt if paid out of interest on municipal obligations of the state or
locality in which you reside. To the extent distributions are attributable to
interest from obligations of the U.S. Government and certain of its agencies and
instrumentalities, such distributions may be exempt from certain types of state
and local taxes. Distributions will be taxable as described above whether
received in cash or in shares through the reinvestment of distributions.
A portion of the ordinary income dividends paid by certain Funds may qualify for
the 70% dividends-received deduction for corporate shareholders.
Investment income received by the International Equity Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. Since
more than 50% of the value of the total assets of the Fund at the close of the
Fund's taxable year is anticipated to be stock or securities of foreign
corporations, the Fund may elect to 'pass through' to its shareholders the
amount of foreign taxes paid by the Fund.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the next distribution date. Those investors purchasing
shares just prior to a distribution will be taxed on the entire amount of the
distribution received, even though the net asset value per share on the date of
such purchase reflected the amount of such distribution.
Early in each calendar year the Funds will notify your Financial
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Intermediary of the amount and tax status of distributions paid for the
preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in the Funds. You should consult your tax adviser to determine the
precise effect of an investment in the Funds on your particular tax situation
(including possible liability for state and local taxes and, for foreign
shareholders, U.S. withholding taxes).
OTHER INFORMATION
CONCERNING_ THE_ FUNDS
For shareholders that bank with Chase or Chase Texas, Chase or Chase Texas may
aggregate investments in the Chase Funds with balances held in Chase or Chase
Texas bank accounts for purposes of determining eligibility for certain bank
privileges that are based on specified minimum balance requirements, such as
reduced or no fees for certain banking services or preferred rates on loans and
deposits. Chase, Chase Texas and certain other financial institutions may, at
their own expense, provide gifts, such as computer software packages, guides and
books related to investment or additional Fund shares valued up to $250 to their
customers that invest in the Chase Funds.
ADMINISTRATOR
Chase acts as the Funds' administrator and is entitled to receive a fee computed
daily and paid monthly at an annual rate equal to 0.10% of each Fund's average
daily net assets.
SUB-ADMINISTRATOR AND DISTRIBUTOR
CFD Fund Distributors, Inc. ('CFD') acts as the Funds' sub-administrator and
distributor. CFD is a subsidiary of The BISYS Group, Inc. and is unaffiliated
with Chase. For the sub-administrative services it performs, CFD is entitled to
receive a fee from each Fund at an annual rate equal to 0.05% of the Fund's
average daily net assets. CFD has agreed to use a portion of this fee to pay for
certain expenses incurred in connection with organizing new series of the Trust
and certain other ongoing expenses of the Trust. CFD is located at One Chase
Manhattan Plaza, Third Floor, New York, New York 10081.
CUSTODIAN
Chase acts as custodian for the Funds and receives compensation under an
agreement with the Trust. Chase may sub-contract for the provision of certain
services to be provided under the custody agreement. Fund securities and cash
may be held by sub-custodian banks if such arrangements are reviewed and
approved by the Trustees.
EXPENSES
Each Fund pays the expenses incurred in its operations, including its pro rata
share of expenses of the Trust. These expenses include investment advisory and
administrative fees; the compensation of the Trustees; registration fees;
interest charges; taxes; expenses connected with the execution, recording and
settlement of security transactions; fees and
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expenses of the Funds' custodian for all services to the Funds, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of preparing and mailing reports to investors and to government offices
and commissions; expenses of meetings of investors; fees and expenses of
independent accountants, of legal counsel and of any transfer agent, registrar
or dividend disbursing agent of the Trust; insurance premiums; and expenses of
calculating the net asset value of, and the net income on, shares of the Funds.
Shareholder servicing and distribution fees are allocated to specific classes of
a Fund. In addition, each Fund may allocate transfer agency and certain other
expenses by class. Service providers to a Fund may, from time to time,
voluntarily waive all or a portion of any fees to which they are entitled.
ORGANIZATION AND DESCRIPTION OF SHARES
The Funds are portfolios of Mutual Fund Investment Trust, an open-end management
investment company organized as a Massachusetts business trust on September 23,
1997 (the 'Trust'). The Trust has reserved the right to create and issue
additional series and classes. Each share of a series or class represents an
equal proportionate interest in that series or class with each other share of
that series or class. The shares of each series or class participate equally in
the earnings, dividends and assets of the particular series or class. Shares
have no preemptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one vote
for each whole share held, and each fractional share shall be entitled to a
proportionate fractional vote, except that Trust shares held in the treasury of
the Trust shall not be voted. Shares of each class of a Fund generally vote
together except when required under federal securities laws to vote separately
on matters that only affect a particular class, such as the approval of
distribution plans for a particular class.
Premier Shares may be purchased only by shareholders who are able to meet the
minimum investment requirement. The categories of investors that are eligible to
purchase shares may differ for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in sales charge
arrangements, ongoing distribution and service fee levels, and levels of certain
other expenses, which will affect the relative performance of the different
classes. Any person entitled to receive compensation for selling or servicing
shares of a Fund may receive different levels of compensation with respect to
one class of shares over another.
The business and affairs of the Trust are managed under the general direction
and supervision of the Trust's Board of Trustees. The Trust is not required to
hold annual meetings of shareholders but will hold special meetings of
shareholders of all series or classes when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. The Trustees
will promptly
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call a meeting of shareholders to remove a trustee(s) when requested to do so in
writing by record holders of not less than 10% of all outstanding shares of the
Trust.
Under Massachusetts law, shareholders of such a business trust may, under
certain circumstances be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust was formed to receive the assets of the AVESTA Trust, a Texas trust
('AVESTA'). Pursuant to a conversion and redomiciling which was effective as of
January 1, 1998, the Money Market Fund, Short-Term Intermediate Term Fund, U.S.
Government Securities Fund, Intermediate Term Bond Fund, Income Fund, Balanced
Fund, Equity Income Fund, Core Equity Fund, Equity Growth Fund and Small Cap
Fund each acquired the assets of a corresponding series of AVESTA in exchange
for Premier Shares of such Fund.
UNIQUE CHARACTERISTICS OF MASTER/FEEDER FUND STRUCTURE
Unlike other mutual funds which directly acquire and manage their own portfolio
securities, each Fund is permitted to invest all of its investable assets in a
separate registered investment company (a 'Portfolio'). In that event, a
shareholder's interest in a Fund's underlying investment securities would be
indirect. In addition to selling a beneficial interest to a Fund, a Portfolio
could also sell beneficial interests to other mutual funds or institutional
investors. In the event that a Fund adopts a master/feeder structure and invests
all its investable assets in a Portfolio, shareholders of the Fund will be given
at least 30 days' prior written notice. For additional information regarding the
master/feeder structure, see the SAI.
PERFORMANCE_ INFORMATION
MONEY MARKET FUNDS. The Money Market Fund and the Tax Free Money Market Fund may
each advertise its annualized 'yield' and its 'effective yield.' Annualized
'yield' is determined by assuming that income generated by an investment in a
Fund over a stated seven-day period (the 'yield') will continue to be generated
each week over a 52-week period. It is shown as a percentage of such investment.
'Effective yield' is the annualized 'yield' calculated assuming the reinvestment
of the income earned during each week of the 52-week period. The 'effective
yield' will be slightly higher than the 'yield' due to the compounding effect of
this assumed reinvestment.
The Tax Free Money Market Fund may also quote a 'tax equivalent yield,' the
yield that a taxable money market fund would have to generate in order to
produce an after-tax yield equivalent to the tax free fund's yield. The tax
equivalent yield of the Tax Free Money Market Fund can then be compared to the
yield of a taxable money market fund. Tax equivalent yields can be quoted on
either a 'yield' or 'effective yield' basis.
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NON-MONEY MARKET FUNDS. The investment performance of each Fund other than the
Money Market Fund and the Tax Free Money Market Fund may from to time be
included in advertisements about the Fund. 'Yield' is calculated by dividing the
annualized net investment income per share during a recent 30-day period by the
maximum public offering price per share on the last day of that period.
'Total return' for the one-, five-and ten-year periods (or for the life of a
class, if shorter) through the most recent calendar quarter represents the
average annual compounded rate of return on an investment of $1,000 in a Fund
invested at the public offering price. Total return may also be presented for
other periods.
GENERAL. All performance data is based on each Fund's past investment results
and does not predict future performance. Investment performance, which will
vary, is based on many factors, including market conditions, the composition of
a Fund's portfolio and a Fund's operating expenses. Investment performance also
often reflects the risks associated with a Fund's investment objectives and
policies. These factors should be considered when comparing a Fund's investment
results to those of other mutual funds and other investment vehicles. Quotation
of investment performance for any period when a fee waiver or expense limitation
was in effect will be greater than if the waiver or limitation had not been in
effect. Each Fund's performance may be compared to other mutual funds, relevant
indices and rankings prepared by independent services. See the SAI.
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TRANSFER AGENT AND DIVIDEND PAYING AGENT
DST Systems, Inc.
210 West 10th Street
Kansas City, MO 64105
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, Texas 77002
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CHASE FUNDS
INVESTMENT STRATEGIES:
CHASE MONEY MARKET FUND: CURRENT INCOME
CHASE TAX FREE MONEY MARKET FUND: CURRENT INCOME
CHASE TAX FREE INCOME FUND: INCOME
CHASE NEW YORK TAX FREE INCOME FUND: INCOME
CHASE SHORT-INTERMEDIATE TERM U.S.
GOVERNMENT SECURITIES FUND: INCOME
CHASE U.S. GOVERNMENT SECURITIES FUND: INCOME
CHASE INTERMEDIATE TERM BOND FUND: INCOME
CHASE INCOME FUND: INCOME
CHASE BALANCED FUND: INCOME AND GROWTH
CHASE EQUITY INCOME FUND: GROWTH AND INCOME
CHASE CORE EQUITY FUND: TOTAL RETURN
CHASE EQUITY GROWTH FUND: CAPITAL GROWTH
CHASE MID CAP GROWTH FUND: CAPITAL GROWTH
CHASE SMALL CAPITALIZATION FUND: CAPITAL GROWTH
CHASE INTERNATIONAL EQUITY FUND: CAPITAL GROWTH
RETAIL SHARES
April 30, 1998
This Prospectus explains concisely what you should know before investing. Please
read it carefully and keep it for future reference. You can find more detailed
information about the Funds in their April 30, 1998 Statement of Additional
Information, as amended periodically (the 'SAI'). For a free copy of the SAI,
call the Chase Funds Service Center at 1-800-62-CHASE. The SAI has been filed
with the Securities and Exchange Commission (the 'Commission') and is
incorporated into this Prospectus by reference. In addition, the Commission
maintains a Web site (http://www.sec.gov) that contains the SAI, the Funds'
reports to shareholders and other information regarding the Funds which has been
electronically filed with the Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTMENTS IN THE MONEY MARKET FUND AND TAX FREE MONEY MARKET FUND ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT
SUCH FUNDS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, THE CHASE MANHATTAN BANK OR ANY OF ITS AFFILIATES AND ARE NOT
INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENTS IN MUTUAL FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
<PAGE>
The Chase Funds are portfolios of Mutual Fund Investment Trust ('MFIT'), an
open-end investment company organized as a Massachusetts business trust in
September 1997. The Chase Funds are managed by The Chase Manhattan Bank
('Chase'), a subsidiary of The Chase Manhattan Corporation ('CMC'). As indicated
below, certain of the Funds are successor investment portfolios to portfolios of
the AVESTA Trust, the predecessor entity of MFIT. The AVESTA Trust was a
collective trust established under the laws of the State of Texas by Chase Bank
of Texas, National Association (herein, 'Chase Texas'). The AVESTA Trust was
registered under the Investment Company Act of 1940 and was available solely for
certain individual retirement accounts and pension and profit-sharing plans. The
AVESTA Trust was converted and redomiciled into MFIT, effective as of January 1,
1998 (the 'Conversion'). Chase Texas acted as the trustee of the AVESTA Trust,
and as trustee was obligated to provide the investment portfolios of the AVESTA
Trust with the investment advisory, administrative, custodial and other services
necessary to manage the portfolios.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
CHASE MONEY MARKET FUND.................................................... 4
CHASE TAX FREE MONEY MARKET FUND........................................... 6
CHASE TAX FREE INCOME FUND................................................. 8
CHASE NEW YORK TAX FREE INCOME FUND........................................ 10
CHASE SHORT-INTERMEDIATE TERM U.S. GOVERNMENT SECURITIES FUND.............. 12
CHASE U.S. GOVERNMENT SECURITIES FUND...................................... 14
CHASE INTERMEDIATE TERM BOND FUND.......................................... 16
CHASE INCOME FUND.......................................................... 18
CHASE BALANCED FUND........................................................ 20
CHASE EQUITY INCOME FUND................................................... 22
CHASE CORE EQUITY FUND..................................................... 24
CHASE EQUITY GROWTH FUND................................................... 26
CHASE MID CAP GROWTH FUND.................................................. 28
CHASE SMALL CAPITALIZATION FUND............................................ 30
CHASE INTERNATIONAL EQUITY FUND............................................ 32
COMMON INVESTMENT POLICIES................................................. 35
MANAGEMENT................................................................. 48
HOW TO BUY, SELL AND EXCHANGE SHARES....................................... 50
HOW THE FUNDS VALUE THEIR SHARES........................................... 53
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION................................ 53
OTHER INFORMATION CONCERNING THE FUNDS..................................... 55
PERFORMANCE INFORMATION.................................................... 58
</TABLE>
3
<PAGE>
CHASE MONEY MARKET FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Money Market Fund's objective is to provide maximum current
income consistent with the preservation of capital and the maintenance of
liquidity.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests in high quality, short-term,
U.S. dollar-denominated money market instruments. The Fund invests principally
in (i) high quality commercial paper and other short-term obligations, including
floating and variable rate master demand notes of U.S. and foreign issuers; (ii)
U.S. dollar-denominated obligations of foreign governments and supranational
agencies (e.g., the International Bank for Reconstruction and Development);
(iii) obligations issued or guaranteed by U.S. banks with total assets exceeding
$1 billion (including obligations of foreign branches of such banks) and by
foreign banks with total assets exceeding $10 billion (or the equivalent in
other currencies) which have branches or agencies in the U.S. (including U.S.
branches of such banks), or such other U.S. or foreign commercial banks which
are judged by the Fund's adviser to meet comparable credit standing criteria;
(iv) securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (v) repurchase agreements.
MATURITY. The dollar weighted average maturity of the Fund will be 90 days or
less. The Fund purchases only instruments which have or are deemed to have
remaining maturities of 397 days or less in accordance with federal regulations.
CREDIT QUALITY. The Fund invests only in U.S. dollar-denominated high quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees. Each investment must be rated in the highest short-term
rating category by at least two nationally recognized statistical rating
organizations ('NRSROs') (or one NRSRO if the instrument was rated only by one
such organization) or, if unrated, must be determined to be of comparable
quality in accordance with the procedures of the Trust. If a security has an
unconditional guarantee or similar enhancement, the issuer of the guarantee or
enhancement may be relied upon in meeting these ratings requirements rather than
the issuer of the security.
MISCELLANEOUS. The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund is classified as a 'diversified' fund under federal securities laws.
4
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Money Market Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.30%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.20%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $8 $24 $42 $ 93
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.29% and 0.84%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
5
<PAGE>
CHASE TAX FREE MONEY MARKET FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Tax Free Money Market Fund's objective is to provide as high a
level of current income which is excluded from gross income for federal income
tax purposes as is consistent with the preservation of capital and maintenance
of liquidity.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests in a non-diversified portfolio
of short-term, fixed rate and variable rate Municipal Obligations. 'Municipal
Obligations' are obligations issued by or on behalf of states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which, in the
opinion of bond counsel, is excluded from gross income for federal income tax
purposes (without regard to whether the interest thereon is also exempt from the
personal income taxes of any state or whether the interest thereon constitutes a
preference item for purposes of the federal alternative minimum tax).
As a fundamental policy, under normal market conditions the Fund will have at
least 80% of its total assets invested in Municipal Obligations the interest on
which, in the opinion of bond counsel, is excluded from gross income for federal
income tax purposes and does not constitute a preference item which would be
subject to the federal alternative minimum tax on individuals (these preference
items are referred to as 'AMT Items'). Although the Fund will seek to invest
100% of its assets in such Municipal Obligations, it reserves the right under
normal market conditions to invest up to 20% of its total assets in AMT Items or
securities the interest on which is subject to federal income tax. For temporary
defensive purposes, the Fund may exceed this limitation.
MATURITY. The dollar weighted average maturity of the Fund will be 90 days or
less. The Fund purchases only instruments which have or are deemed to have
remaining maturities of 397 days or less in accordance with federal regulations.
CREDIT QUALITY. The Fund invests only in U.S. dollar-denominated high quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees. Each investment must be rated in the highest short-term
rating category by at least two NRSROs (or one NRSRO if the instrument was rated
only by one such organization) or, if unrated, must be determined to be of
comparable quality in accordance with the procedures of the Trust. If a security
has an unconditional guarantee or similar enhancement, the issuer of the
guarantee or enhancement may be relied upon in meeting these ratings
requirements rather than the issuer of the security.
MISCELLANEOUS. The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund is classified as a 'diversified' fund under federal securities law.
6
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Tax Free Money Market Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.30%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.20%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 0.75%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Retail Shares............................................... $8 $24
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.30%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
7
<PAGE>
CHASE TAX FREE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Tax Free Income Fund's objective is to provide monthly dividends
which are excluded from gross income for federal income tax purposes, as well as
to protect the value of its shareholders' investment.
STYLE AND PORTFOLIO COMPOSITION. As a fundamental policy, under normal market
conditions the Fund will have at least 80% of its total assets invested in
Municipal Obligations the interest on which, in the opinion of bond counsel, is
excluded from gross income for federal income tax purposes and does not
constitute an AMT Item. The Fund reserves the right under normal market
conditions to invest up to 20% of its total assets in AMT Items or securities
the interest on which is subject to federal income tax. For temporary defensive
purposes, the Fund may exceed this limitation.
The Fund's investments may include, among other instruments, fixed, variable or
floating rate general obligation and revenue bonds, zero coupon securities,
inverse floaters and bonds with interest rate caps. However, the Fund does not
have any present intention to invest in inverse floaters or bonds with interest
rate caps.
MATURITY. There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security. The Fund's adviser may adjust the average
maturity of the Fund's portfolio based upon its assessments of the relative
yields available on securities of different maturities and their expectations of
future changes in interest rates.
CREDIT QUALITY. The Fund's Municipal Obligations will be rated at the time of
purchase at least in the category Baa, MIG-3 or VMIG-3 by Moody's Investors
Service, Inc. ('Moody's'), or BBB or SP-2 by Standard & Poor's Corporation
('S&P'), or BBB or F-3 by Fitch Investors Service, Inc. ('Fitch') or comparably
rated by another NRSRO, or, if unrated, considered by the Fund's adviser to be
of comparable quality. Bonds rated in the category Baa or BBB are generally
considered to be investment grade obligations which are neither highly protected
nor poorly secured; obligations rated MIG-3, VMIG-3, SP-2 or F-3 are generally
considered to have satisfactory capacity to pay principal and interest. Although
the adviser is not required to dispose of securities which are downgraded below
investment grade subsequent to acquisition, there is no present intention to
retain securities which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'non-diversified' fund under federal
securities law.
8
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Tax Free Income Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Advisory Fee............................................... 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Retail Shares................................................ $ 10 $32
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.50%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
9
<PAGE>
CHASE NEW YORK TAX FREE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The New York Tax Free Income Fund's objective is to provide monthly
dividends which are excluded from gross income for federal income tax purposes
and exempt from New York State and New York City personal income taxes, as well
as to protect the value of its shareholders' investment.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily in New York
Municipal Obligations. 'New York Municipal Obligations' are Municipal
Obligations of the State of New York and its political subdivisions and of
Puerto Rico, other U.S. territories and their political subdivisions, the
interest on which, in the opinion of bond counsel, is exempt from New York State
and New York City personal income taxes.
As a fundamental policy, under normal market conditions the Fund will have at
least 80% of its total assets invested in New York Municipal Obligations the
interest on which, in the opinion of bond counsel, does not constitute an AMT
Item. The Fund reserves the right under normal market conditions to invest up to
20% of its total assets in AMT Items or securities the interest on which is
subject to federal income tax and New York State and New York City personal
income taxes. For temporary defensive purposes, the Fund may exceed this
limitation.
The Fund's investments may include, among other instruments, fixed, variable or
floating rate general obligation and revenue bonds, zero coupon securities,
inverse floaters and bonds with interest rate caps. However, the Fund does not
have any present intention to invest in inverse floaters or bonds with interest
rate caps.
MATURITY. There is no restriction on the maturity of the Fund's portfolio or any
individual portfolio security. The Fund's adviser may adjust the average
maturity of the Fund's portfolio based upon its assessments of the relative
yields available on securities of different maturities and their expectations of
future changes in interest rates.
CREDIT QUALITY. The Fund's Municipal Obligations will be rated at the time of
purchase at least in the category Baa, MIG-3 or VMIG-3 by Moody's or BBB or SP-2
by S&P or BBB or F-3 by Fitch or comparably rated by another NRSRO, or, if
unrated, considered by the Fund's adviser to be of comparable quality. Bonds
rated in the category Baa or BBB are generally considered to be investment grade
obligations which are neither highly protected nor poorly secured; obligations
rated MIG-3, VMIG-3, SP-2 or F-3 are generally considered to have satisfactory
capacity to pay principal and interest. Although the adviser is not required to
dispose of securities which are downgraded below investment grade subsequent to
acquisition, there is no present intention to retain securities which are
downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'non-diversified' fund under federal
securities law.
10
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the New York Tax Free Income Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Retail Shares................................................ $ 10 $32
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.50%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
11
<PAGE>
CHASE SHORT-INTERMEDIATE TERM
U.S. GOVERNMENT SECURITIES FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Short-Intermediate Term Fund's objective is to provide as high a
level of current income as is consistent with the preservation of capital.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily (under normal market
conditions, at least 70% of the value of the Fund's total assets) in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements with respect thereto. The Fund expects that
substantially all of its assets will be so invested. The Fund seeks to preserve
capital by investing in shorter-term securities; it expects the volatility in
the principal value of its shorter-term investments to be more limited than that
associated with investments in comparable securities having longer maturities.
The Fund may invest in mortgage-backed securities issued or guaranteed by
certain agencies of the U.S. Government as described below under 'Common
Investment Policies--Other Investment Practices--Mortgage-Related Securities.'
MATURITY. As a matter of operating policy, under normal market conditions the
dollar-weighted average maturity of the Fund's portfolio, measured at the time
an investment is made, will be between two and five years. There is no
restriction on the maturity of any individual asset which may be acquired by the
Fund. The average maturity of securities in the Fund will be based primarily
upon the adviser's expectations for the future course of interest rates and the
then prevailing price and yield levels in the U.S. Government securities market.
MISCELLANEOUS. Guarantees of principal and interest on obligations that may be
purchased by the Fund are not guarantees of the market value of such
obligations, nor do they extend to the value of the shares of the Fund. The Fund
is classified as a 'diversified' fund under federal securities laws.
12
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Short-Intermediate Term Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares........................... $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.62% and 1.37%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
13
<PAGE>
CHASE U.S. GOVERNMENT SECURITIES FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The U.S. Government Securities Fund's objective is to provide current
income with emphasis on the preservation of capital.
STYLE AND PORTFOLIO COMPOSITION. The Fund invests primarily (under normal market
conditions, at least 70% of the value of the Fund's total assets) in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements with respect thereto. The Fund expects that
substantially all of its assets will be so invested. The Fund may invest in
mortgage-backed securities issued or guaranteed by certain agencies of the U.S.
Government as described below under 'Common Investment Policies--Other
Investment Practices--Mortgage-Related Securities.'
MATURITY. As a matter of operating policy, under normal market conditions, the
dollar-weighted average maturity of the Fund's portfolio, measured at the time
an investment is made, will be between five and fifteen years. There is no
restriction on the maturity of any individual asset which may be acquired by the
Fund. The average maturity of securities in the Fund will be based primarily
upon the adviser's expectations for the future course of interest rates and the
then prevailing price and yield levels in the U.S. Government securities market.
Fixed income securities with longer maturities generally have less stable market
values.
MISCELLANEOUS. Guarantees of principal and interest on obligations that may be
purchased by the Fund are not guarantees of the market value of such
obligations, nor do they extend to the value of the shares of the Fund. The Fund
is classified as a 'diversified' fund under federal securities laws.
14
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the U.S. Government Securities
Fund based on estimated expenses for the current fiscal year. The example shows
the cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.50%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
15
<PAGE>
CHASE INTERMEDIATE TERM BOND FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Intermediate Term Bond Fund's objective is to provide current
income, with consideration also given to stability of principal.
STYLE AND PORTFOLIO COMPOSITION. Primary investment emphasis is on intermediate
term debt securities. Under normal market conditions, at least 70% of the Fund's
total assets will be invested in bonds, notes and debentures issued by domestic
or foreign issuers, U.S. Government securities, debt obligations collateralized
by U.S. Government securities or by private mortgages and preferred stock of
domestic issuers. The Fund may also invest in debt securities issued by foreign
issuers. The Fund will not typically invest in common stocks, although the Fund
may acquire common stocks as a result of purchases of unit offerings of fixed
income securities, which include such securities, or in connection with the
conversion or exchange of fixed income securities.
MATURITY. The Fund will maintain a dollar weighted average portfolio maturity
ranging from three to ten years. Fixed income securities purchased by the Fund
will normally have a maturity in excess of one year. The average maturity of
securities in the Fund will be based primarily upon the adviser's expectations
for the future course of interest rates and the then prevailing price and yield
levels in the fixed income market. Fixed income securities with longer
maturities generally have less stable market values.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Investment grade debt securities
are securities rated in the category Baa or higher by Moody's or BBB or higher
by S&P or the equivalent by another NRSRO. Although the adviser is not required
to dispose of securities which are downgraded below investment grade subsequent
to acquisition, there is no present intention to retain securities which are
downgraded below investment grade. The Fund's investments in securities other
than debt of domestic and foreign issuers and debt obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (e.g.,
preferred stock) will be based on the adviser's judgment of the quality of the
securities. The judgment may be based upon such considerations as the issuer's
financial strength, including its historic and current financial condition and
its historic and projected earnings; the issuer's market position; and other
factors relevant to an analysis of a particular issuer, as determined by the
adviser.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
16
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Intermediate Term Bond Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.78% and 1.53%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
17
<PAGE>
CHASE INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Income Fund's objective is to invest in securities that earn a
high level of current income with consideration also given to safety of
principal.
STYLE AND PORTFOLIO COMPOSITION. Investment emphasis is on fixed income
securities, primarily domestic debt securities, such as bonds, notes and
debentures issued by domestic issuers, U.S. Government securities, debt
obligations collateralized by U.S. Government securities or by private mortgages
and preferred stock of domestic issuers. Under normal market conditions, at
least 70% of the Income Fund's total assets will be invested in such securities.
The Fund may also invest in debt securities issued by foreign issuers. The Fund
will not typically invest in common stock, although the Fund may acquire common
stock as a result of purchases of unit offerings of fixed income securities,
which include such securities, or in connection with the conversion or exchange
of fixed income securities.
MATURITY. Under normal market conditions it is expected that the dollar weighted
average maturity of the Fund will range between five to fifteen years. Fixed
income securities purchased by the Fund will normally have a maturity in excess
of one year. The average maturity of securities in the Fund will be based
primarily upon the adviser's expectations for the future course of interest
rates and the then prevailing price and yield levels in the fixed income market.
Fixed income securities with longer maturities generally have less stable market
values.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade. The Fund's investments in
securities other than debt of domestic and foreign issuers and debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(e.g., preferred stock) will be based on the adviser's judgment of the quality
of the securities. The judgment may be based upon such considerations as the
issuer's financial strength, including its historic and current financial
condition and its historic and projected earnings; the issuer's market position;
and other factors relevant to an analysis of a particular issuer, as determined
by the adviser.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
18
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Income Fund based on estimated
expenses for the current fiscal year. The example shows the cumulative expenses
attributable to a hypothetical $1,000 investment over specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.50%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 10 $32 $55 $122
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.42% and 1.17%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
19
<PAGE>
CHASE BALANCED FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Balanced Fund's objective is to provide a balance of current
income and growth of capital.
STYLE AND PORTFOLIO
COMPOSITION. The Fund will employ a combination of (1) an active equity
management style focused primarily on strong earnings momentum and profitability
within a growth-oriented stock universe, and (2) an active fixed income
management style using primarily domestic debt securities. Under normal market
conditions, 30% to 70% of the Fund's total assets will be invested in
equity-based securities, which include common stocks and those debt securities
and preferred stocks that are convertible into common stock. Under normal market
conditions, at least 25% of the value of the total assets of the Fund will be
invested in U.S. Government securities and fixed income senior securities other
than convertible securities. The Fund's adviser may alter the relative portion
of the Fund's assets invested in equity-based and fixed income securities
depending on its judgment as to general market and economic conditions and
trends, yields and interest rates and changes in monetary policies.
EQUITY-BASED INVESTMENTS. The Fund's equity investments are typically made in
companies displaying one or more of the following characteristics: projected
earnings growth at a rate equal to or greater than the equity markets in
general, return on assets and equity equal to or greater than the equity
markets, above market average price/earnings ratios, below average dividend
yield, above average market volatility, and a market capitalization in excess of
$500 million. The Fund will focus on companies with strong earnings growth and
high levels of profitability as well as positive industry and company specific
characteristics, and attractive valuations given growth potential. The equity
portion of the Fund will emphasize the growth sectors of the economy.
MATURITY. The average maturity of fixed income securities in the Fund will be
based primarily upon the adviser's expectations for the future course of
interest rates and the then prevailing price and yield levels in the fixed
income market.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
20
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Balanced Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 13 $40 $69 $151
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.61% and 1.61%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
21
<PAGE>
CHASE EQUITY INCOME FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Equity Income Fund's objective is to invest in securities that
provide both capital appreciation as well as current income.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on both earnings momentum and value within an
income-oriented stock universe. Investment emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks convertible into common stocks. Under normal market conditions, it is
expected that at least 70% of the value of the total assets of the Fund will be
invested in equity-based securities. The Fund may invest any portion of its
assets not invested as described above in other types of securities, including
fixed income securities, money market instruments and non-income producing
equity securities.
EQUITY-BASED INVESTMENTS. The Fund will emphasize companies displaying one or
more of the following characteristics: above average dividend yield, a
consistent dividend record, below average market volatility, attractive earnings
momentum, below market price/earnings ratios, and a market capitalization in
excess of $500 million.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
22
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Equity Income Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 13 $40 $69 $151
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.37% and 1.37%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
23
<PAGE>
CHASE CORE EQUITY FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Core Equity Fund's objective is to maximize total investment
return through emphasis on long-term capital appreciation and current income
consistent with reasonable risk.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on strong earnings momentum and profitability
within the S&P 500 stock universe. Portfolio emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks convertible into common stocks. Under normal conditions, it is expected
that at least 70% of the value of the total assets of the fund will be invested
in equity-based securities. The Fund may invest any portion of its assets not
invested as described above in other types of securities, including fixed income
securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund will typically emphasize companies displaying
one or more of the following characteristics: superior and stable record of
earnings growth relative to the equity markets in general, return on assets and
equity equal to or greater than the equity markets averages, and projected
earnings growth at a rate equal to or greater than the equity markets, and a
market capitalization in excess of $500 million. The Fund will be well
diversified among both the growth and cyclical sectors of the economy.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
24
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Core Equity Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 13 $40 $69 $151
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.49% and 1.49%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
25
<PAGE>
CHASE EQUITY GROWTH FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Equity Growth Fund's objective is to provide capital
appreciation. Current income is a secondary objective.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on strong earnings momentum and profitability
within a growth-oriented stock universe. Portfolio emphasis is on equity-based
securities, which include common stocks and those debt securities and preferred
stocks that are convertible into common stocks. Under normal market conditions,
it is expected that at least 70% of the value of the total assets of the Fund
will be invested in equity-based securities. The Fund may invest any portion of
its assets not invested as described above in other types of securities,
including fixed income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund investments are typically made in companies
displaying one or more of the following characteristics: projected earnings
growth at a rate equal to or greater than the equity markets in general, return
on assets and equity equal to or greater than the equity markets, above market
average price-earnings ratios, below average dividend yield, above average
market volatility, and a market capitalization in excess of $500 million. The
Fund will focus on companies with strong earnings and high levels of
profitability as well as positive industry and company specific characteristics,
and attractive valuation given growth potential. The Fund will emphasize the
growth sectors of the economy.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. The Fund is classified as a 'diversified' fund under federal
securities laws.
26
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Equity Growth Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 13 $40 $69 $151
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.37% and 1.37%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
27
<PAGE>
CHASE MID CAP GROWTH FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Mid Cap Growth Fund's objective is to provide long-term capital
growth. Current income, if any, is a consideration incidental to the Fund's
objective of long-term capital growth.
STYLE AND PORTFOLIO COMPOSITION. The Fund will invest primarily in a broad
portfolio of common stocks. Under normal market conditions, the Fund will invest
at least 70% of its total assets in common stocks of mid cap companies. The Fund
may invest any portion of its assets not invested as described above in other
types of securities, including equity securities of small and large cap
companies, fixed income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund will seek to invest primarily in stocks of
companies with market capitalizations of $750 million to $4 billion. The Fund
will target companies which have one or more of the following characteristics: a
sound balance sheet, strong earnings momentum and high levels of profitability.
In selecting equity-based securities, the Fund's adviser adopts an active
management style, stressing first fundamental security selection, with secondary
consideration given to factors such as sector weighting and market timing.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in mid cap companies may be more volatile than
investments in companies with greater capitalization, as described under 'Risk
Factors' below. The Fund is classified as a 'diversified' fund under federal
securities law.
28
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Mid Cap Growth Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Retail Shares................................................ $ 13 $40
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 4.25%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
29
<PAGE>
CHASE SMALL CAPITALIZATION FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The Small Cap Fund's objective is to provide capital appreciation.
Although the Fund, in seeking its objective, may receive current income from
dividends and interest, income is only an incidental consideration of the Fund.
STYLE AND PORTFOLIO COMPOSITION. The Fund will employ an active equity
management style focused primarily on delivering risk and return characteristics
representative of a small capitalization asset class. Portfolio emphasis is on
equity-based securities, which include common stocks and those debt securities
and preferred stocks convertible into common stocks. Under normal conditions, it
is expected that at least 70% of the value of the total assets of the Fund will
be invested in equity-based securities of small cap issuers. The Fund may invest
any portion of its assets not invested as described above in other types of
securities, including equity securities of mid and large cap companies, fixed
income securities and money market instruments.
EQUITY-BASED INVESTMENTS. The Fund investments are typically made in companies
displaying one or more of the following characteristics: above market average
price/earnings ratios and price/book ratios, below average dividend yield, and
above average market volatility. In addition, small capitalization companies
will be emphasized that possess one or more of the following: high quality
management, a leading or dominant position in a major product line, new or
innovative products, services, or processes, a sound financial position, and a
relatively high rate of return of invested capital so that future growth can be
financed from internal sources. The Fund primarily targets companies with market
capitalizations of $100 million to $1 billion at time of purchase. Purchases are
a direct result of a disciplined stock selection process focusing on identifying
attractively valued stock of companies with positive business fundamentals.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in smaller companies may be more volatile than
investments in companies with greater capitalization, as described under 'Risk
Factors' below. The Fund is classified as a 'diversified' fund under federal
securities laws.
30
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Small Cap Fund based on
estimated expenses for the current fiscal year. The example shows the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 0.75%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.25%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5%
annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Retail Shares.............................. $ 13 $40 $69 $151
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
0.54% and 1.54%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
31
<PAGE>
CHASE INTERNATIONAL EQUITY FUND
FUND_ OBJECTIVE_ AND_ INVESTMENT_ APPROACH
OBJECTIVE. The International Equity Fund's objective is to provide total return
from long-term capital growth and income.
STYLE AND PORTFOLIO COMPOSITION. The Fund will invest principally (under normal
market conditions, at least 65% of its total assets) in a broad portfolio of
marketable equity securities of established foreign companies organized in
countries other than the U.S. and foreign subsidiaries of U.S. companies
participating in foreign economies. These will include common stocks, preferred
stocks, securities convertible into common stocks, and warrants to purchase
common stocks.
The Fund's adviser seeks to identify those countries and industries where
economic and political factors, including currency movements, are likely to
produce above-average growth rates. The Fund's adviser attempts to identify
those companies in such countries and industries that are best positioned and
managed to take advantage of these economic and political factors. The Fund will
seek to diversify investments broadly among issuers in various countries and,
normally, the Fund's portfolio will include securities of issuers located in at
least three different countries other than the U.S. The Fund may invest a
substantial portion of its assets in one or more of such countries.
The Fund intends to invest in companies based in (or governments located in) the
Far East (including Japan, Hong Kong, Singapore and Malaysia), Western Europe
(including the United Kingdom, Germany, Netherlands, France, Switzerland, Italy
and Spain), Scandinavia, Australia, Canada and such other areas and countries as
the Fund's adviser may determine from time to time. Because the Fund invests a
large portion of its assets in countries comprising the Morgan Stanley Capital
International Europe, Australia and Far East Index, which is heavily weighted
towards companies based in Japan and the United Kingdom, a substantial portion
of the Fund's assets may be invested in companies based in Japan, the United
Kingdom and/or other countries represented in the Index. However, investments
may be made from time to time in companies in, or governments of, developing
countries.
The Fund's adviser will allocate investments among securities denominated in the
U.S. dollar and currencies of foreign countries. The adviser may adjust the
Fund's exposure to each currency based on its perception of the most favorable
markets and issuers. The percentage of the Fund's assets invested in securities
of a particular country or denominated in a particular currency will vary in
accordance with the adviser's assessment of the relative yield and appreciation
potential of such securities and the current and anticipated relationship of a
country's currency to the U.S. dollar. Fundamental economic strength, earnings
growth, quality
32
<PAGE>
of management, industry growth, credit quality and interest rate trends are some
of the principal factors which may be considered by the Fund's adviser in
determining whether to increase or decrease the emphasis placed upon a
particular type of security, industry sector, country or currency. Securities
purchased by the Fund may be denominated in a currency other than that of the
country in which the issuer is domiciled.
Primary emphasis will be placed on equity securities and securities with equity
features. However, the Fund may invest in any type of debt security including,
but not limited to, other convertible securities, bonds, notes and other debt
securities of foreign governmental and private issuers, and various derivative
securities.
The Fund will not invest more than 25% of its net assets in debt securities
denominated in a single currency other than the U.S. dollar, nor will it invest
more than 25% of its net assets in debt securities issued by a single foreign
government or supranational organization.
EQUITY-BASED INVESTMENTS. The Fund may invest in securities of companies of
various sizes, including smaller companies whose securities may be more volatile
and less liquid than securities of larger companies. With respect to certain
countries in which capital markets are either less developed or not easily
accessed, investments by the Fund may be made through investments in closed-end
investment companies that in turn are authorized to invest in the securities of
such countries.
CREDIT QUALITY. The Fund will invest in debt securities of domestic and foreign
issuers only if they are rated investment grade or, if unrated, determined by
the Fund's adviser to be of comparable quality. Although the adviser is not
required to dispose of securities which are downgraded below investment grade
subsequent to acquisition, there is no present intention to retain securities
which are downgraded below investment grade.
MISCELLANEOUS. Investments in foreign securities involve a higher degree of risk
than investments in U.S. securities, as described under 'Common Investment
Policies-- Other Investment Practices-- Foreign Securities' and 'Risk Factors'
below. The Fund is classified as a 'diversified' fund under federal securities
law.
33
<PAGE>
EXPENSE_ SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the International Equity Fund
based on estimated expenses for the current fiscal year. The example shows the
cumulative expenses attributable to a hypothetical $1,000 investment over
specified periods.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee........................................................ 1.00%
12b-1 Fee............................................................. 0.25%
Other Expenses (after estimated waivers and reimbursements)*.......... 0.25%
Total Fund Operating Expenses (after estimated waivers and
reimbursements)*.................................................... 1.50%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Your investment of $1,000 would incur the following expenses, assuming 5% annual
return:
1 Year 3 Years
------ -------
<S> <C> <C>
Retail Shares.............................................. $ 15 $47
</TABLE>
* Reflects current waivers and reimbursements to maintain Total Fund Operating
Expenses at the level indicated in the table above. Absent such waivers and
reimbursements, Other Expenses and Total Fund Operating Expenses would be
3.75% and 5.00%, respectively. Chase has agreed voluntarily to waive fees
payable to it and/or reimburse expenses for a period of at least one year
commencing January 1, 1998 to the extent necessary to prevent Total Fund
Operating Expenses for such period from exceeding the amount in the table.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS;
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN SHOWN.
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an investment
in the Fund.
34
<PAGE>
COMMON INVESTMENT
POLICIES
Although the Money Market Fund and Tax Free Money Market Fund each seek to be
fully invested, at times they may hold uninvested cash reserves, which would
adversely affect their yield.
Each Fund may invest any portion of its assets not invested as described above
in high quality money market instruments and repurchase agreements. For
temporary defensive purposes, a Fund may invest without limitation in these
instruments. At times when the advisers of the Balanced Fund, Equity Income
Fund, Core Equity Fund, Equity Growth Fund, Mid Cap Growth Fund, Small Cap Fund,
or International Equity Fund (the 'Equity Funds') deem it advisable to limit the
Fund's exposure to the equity markets, each Equity Fund may invest without
limitation in investment grade fixed income securities (exclusive of any
investments in money market instruments). To the extent a Fund departs from its
investment policies during temporary defensive periods, its investment objective
may not be achieved.
Fixed income securities in each Fund's portfolio may include, to the extent
permitted by the Fund's investment policies, bonds, notes, mortgage-related
securities, asset-backed securities, government and government agency and
instrumentality obligations, zero coupon securities, convertible securities and
money market instruments, as discussed below.
In determining the credit quality of a fixed income security, each Fund's
adviser will consider the issuer's financial strength, including its historic
and current financial condition, its historic and projected earnings; the
issuer's market position; and other factors relevant to an analysis of a
particular issuer, as determined by the adviser.
In making investment decisions for the Tax Free Income Fund, the New York Tax
Free Income Fund, the Short-Intermediate Term Fund, the U.S. Government
Securities Fund, the Intermediate Term Bond Fund and the Income Fund (the 'Fixed
Income Funds'), each such Fund's adviser considers many factors in addition to
current yield, including preservation of capital, maturity and yield to
maturity. Each Fixed Income Fund's adviser will adjust such Fund's investments
in particular securities or types of securities based upon its appraisal of
changing economic conditions and trends. Each Fixed Income Fund's adviser may
sell one security and purchase another security of comparable quality and
maturity in order to take advantage of what it believes to be short-term
differentials in market values or yield disparities.
The maturity of securities with put features will be measured based on the next
put date, and the maturity of mortgage-backed and asset-backed securities will
be based on their weighted average lives.
In lieu of investing directly, each Fund is authorized to seek to achieve its
objective by investing all of its investable assets in an investment company
having
35
<PAGE>
substantially the same investment objective and policies as the applicable Fund.
See 'Unique Characteristics of Master/Feeder Structure.'
The Tax Free Income Fund and New York Tax Free Income Fund are classified as
'non-diversified' funds under federal securities laws. These Funds' assets may
be more concentrated in the securities of any single issuer or group of issuers
than if the Funds were diversified. The other Funds are classified as
'diversified' funds under federal securities laws.
No Fund is intended to be a complete investment program, and there is no
assurance that any Fund will achieve its investment objective.
OTHER INVESTMENT PRACTICES
The Funds may also engage in the following investment practices when consistent
with their overall objective and policies. These practices, and certain
associated risks, are more fully described in the SAI.
FOREIGN SECURITIES. The Tax Free Money Market Fund, Tax Free Income Fund and New
York Tax Free Income Fund (the 'Tax Free Funds') will invest in Municipal
Obligations, which may be backed by foreign institutions as described below
under 'Additional Investment Policies of the Tax Free Funds.' The International
Equity Fund may invest without limitation in foreign securities, including
Depositary Receipts, which are described below. The Money Market Fund may invest
up to 30% of its total assets in securities of foreign governments and
supranational agencies. The Money Market Fund will limit its investments in
foreign government obligations to commercial paper and other short-term notes
issued or guaranteed by the governments of Western Europe, Australia, New
Zealand, Japan and Canada. Each other Fund may invest up to 30% of its total
assets in foreign securities, including Depositary Receipts.
Since foreign securities are normally denominated and traded in foreign
currencies, the values of a Fund's foreign investments may be influenced by
currency exchange rates and exchange control regulations. There may be less
information publicly available about foreign issuers than U.S. issuers, and they
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the U.S. Foreign securities may
be less liquid and more volatile than comparable U.S. securities. Foreign
settlement procedures and trade regulations may involve certain expenses and
risks. One risk would be the delay in payment or delivery of securities or in
the recovery of a Fund's assets held abroad. It is possible that nationalization
or expropriation of assets, imposition of currency exchange controls, taxation
by withholding Fund assets, political or financial instability and diplomatic
developments could affect the value of a Fund's investments in certain foreign
countries. Foreign laws may restrict the ability to invest in certain countries
or issuers and special tax considerations will apply to foreign securities. The
risks can increase if a Fund invests in emerging market securities.
DEPOSITARY RECEIPTS. Each of the Equity Funds, the Intermediate Term Bond Fund
and the Income
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Fund may invest its assets in securities of foreign issuers in the form of
American Depositary Receipts, European Depositary Receipts, Global Depositary
Receipts or other similar securities representing securities of foreign issuers
(collectively, 'Depositary Receipts'). Each Fund treats Depositary Receipts as
interests in the underlying securities for purposes of its investment policies.
Each Fund will limit its investment in Depositary Receipts not sponsored by the
issuer of the underlying securities to no more than 5% of the value of its net
assets (at the time of investment).
SUPRANATIONAL AND ECU OBLIGATIONS. Each Fund other than the Tax Free Funds may
invest in debt securities issued by supranational organizations, which include
organizations such as The World Bank, the European Community, the European Coal
and Steel Community and the Asian Development Bank. Obligations of supranational
agencies are supported by subscribed, but unpaid, commitments of member
countries. There is no assurance that these commitments will be undertaken or
complied with in the future, and foreign and supranational securities are
subject to certain risks associated with foreign investing. Each such Fund may
also invest in securities denominated in the ECU, which is a 'basket' consisting
of specified amounts of the currencies of certain member states of the European
Community. These securities are typically issued by European governments and
supranational organizations.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Treasury obligations,
which are bills, notes and bonds backed by the full faith and credit of the U.S.
Government as to payment of principal and interest which generally differ only
in their interest rates and maturities. Each Fund also may invest in securities
issued or guaranteed by U.S. Government agencies and instrumentalities including
obligations that are supported by the full faith and credit of the U.S.
Treasury, the limited authority of the issuer or guarantor to borrow from the
U.S. Treasury, or only the credit of the issuer or guarantor. In the case of
obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
MONEY MARKET INSTRUMENTS. Each Fund may invest in cash or high-quality,
short-term money market instruments. These may include U.S. Government
securities, commercial paper of domestic and foreign issuers and obligations of
domestic and foreign banks. Investments in foreign money market instruments may
involve certain risks associated with foreign investment.
REPURCHASE AGREEMENTS, SECURITIES LOANS AND FORWARD AND STAND-BY
COMMITMENTS. Each Fund may enter into agreements to purchase and resell
securities at an agreed-upon price and time. Each Fund also has the ability to
lend portfolio securities in an amount equal to not more than 30% of its total
assets to generate additional income. These transactions must be fully
collateralized at all times. Each Fund may purchase securities for delivery at a
future date, which
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may increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. Each Fund may
enter into put transactions, including those sometimes referred to as stand-by
commitments, with respect to securities in its portfolio. In these transactions,
a Fund would acquire the right to sell a security at an agreed upon price within
a specified period prior to its maturity date. A put transaction will increase
the cost of the underlying security and consequently reduce the available yield.
Each of these transactions involves some risk to a Fund if the other party
should default on its obligation and the Fund is delayed or prevented from
recovering the collateral or completing the transaction.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow money from
banks for temporary or short-term purposes, but will not borrow money to buy
additional securities, known as 'leveraging.' Each Fund may also sell and
simultaneously commit to repurchase a portfolio security at an agreed-upon price
and time. Each Fund may use this practice to generate cash for shareholder
redemptions without selling securities during unfavorable market conditions.
Whenever a Fund enters into a reverse repurchase agreement, it will establish a
segregated account in which it will maintain liquid assets on a daily basis in
an amount at least equal to the repurchase price (including accrued interest).
The Funds would be required to pay interest on amounts obtained through reverse
repurchase agreements, which are considered borrowings under federal securities
laws.
CONVERTIBLE SECURITIES. Each Fund other than the Money Market Fund and the Tax
Free Funds may invest in convertible securities, which are securities generally
offering fixed interest or dividend yields which may be converted either at a
stated price or stated rate for common or preferred stock. Although to a lesser
extent than with fixed income securities generally, the market value of
convertible securities tends to decline as interest rates increase, and increase
as interest rates decline. Because of the conversion feature, the market value
of convertible securities also tends to vary with fluctuations in the market
value of the underlying common or preferred stock.
OTHER INVESTMENT COMPANIES. Apart from being able to invest all of its
investable assets in another investment company having substantially the same
investment objectives and policies, each Fund may invest up to 10% of its total
assets in shares of other registered investment companies when consistent with
its investment objective and policies, subject to applicable regulatory
limitations. Additional fees will be charged by such other investment companies.
ZERO COUPON SECURITIES, PAYMENT-IN-KIND OBLIGATIONS AND STRIPPED
OBLIGATIONS. The Short-Intermediate Term Fund and U.S. Government Securities
Fund may invest without limitation in zero coupon securities issued by
governmental issuers and each other Fund other than the Money Market Fund and
the Tax Free Money Market Fund may invest up to 25% of its total assets in zero
coupon securities issued by
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governmental and private issuers. Zero coupon securities are debt securities
that do not pay regular interest payments, and instead are sold at substantial
discounts from their value at maturity. Each Fund other than the Money Market
Fund and Tax Free Money Market Fund may invest in payment-in-kind obligations.
Payment-in-kind obligations are obligations on which the interest is payable in
additional securities rather than cash. The Short-Intermediate Term Fund and the
U.S. Government Securities Fund may invest without limitation and each other
Fund other than the Money Market Fund may invest up to 25% of its total assets
in stripped obligations (i.e., separately traded principal and interest
components of securities) where the underlying obligations are backed by the
full faith and credit of the U.S. Government, including instruments known as
'STRIPS.' The value of these instruments tends to fluctuate more in response to
changes in interest rates than the value of ordinary interest-paying debt
securities with similar maturities. The risk is greater when the period to
maturity is longer.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES. Each Fund may
invest in floating rate securities, whose interest rates adjust automatically
whenever a specified interest rate changes, and variable rate securities, whose
interest rates are periodically adjusted. Certain of these instruments permit
the holder to demand payment of principal and accrued interest upon a specified
number of days' notice from either the issuer or a third party. The securities
in which a Fund may invest include participation certificates and certificates
of indebtedness or safekeeping. Participation certificates are pro rata
interests in securities held by others; certificates of indebtedness or
safekeeping are documentary receipts for such original securities held in
custody by others. As a result of the floating or variable rate nature of these
investments, a Fund's yield may decline and it may forego the opportunity for
capital appreciation during periods when interest rates decline; however, during
periods when interest rates increase, the Fund's yield may increase and it may
have reduced risk of capital depreciation. Demand features on certain floating
or variable rate securities may obligate the Fund to pay a 'tender fee' to a
third party. Demand features provided by foreign banks involve certain risks
associated with foreign investments.
INDEXED INVESTMENTS. The International Equity Fund may invest in instruments
which are indexed to certain specific foreign currency exchange rates. The terms
of such instruments may provide that their principal amounts or just their
coupon interest rates are adjusted upwards or downwards (but not below zero) at
maturity or on established coupon payment dates to reflect changes in the
exchange rate between two or more currencies while the obligation is
outstanding. Such indexed investments entail the risk of loss of principal
and/or interest payments from currency movements in addition to principal risk,
but offer the potential for realizing gains as a result of changes in foreign
currency exchange rates.
REAL ESTATE INVESTMENT TRUSTS. Equity investments may include shares of real
estate investment
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trusts ('REITs'). REITs are pooled investment vehicles which invest primarily in
income-producing real estate ('equity trust') or real estate related loans or
interests ('mortgage trusts'). The value of equity trusts will depend upon the
value of the underlying properties, and the value of the mortgage trusts will be
sensitive to the value of the underlying loans or interests. The value of REITs
may decline when interest rates rise.
INVERSE FLOATERS AND INTEREST RATE CAPS. Each of the Fixed Income Funds may
invest in inverse floaters and in securities with interest rate caps. Inverse
floaters are instruments whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. The market value
of an inverse floater will vary inversely with changes in market interest rates,
and will be more volatile in response to interest rates changes than that of a
fixed rate obligation. Interest rate caps are financial instruments under which
payments occur if an interest rate index exceeds a certain predetermined
interest rate level, known as the cap rate, which is tied to a specific index.
These financial products will be more volatile in price than securities which do
not include such a structure. No Fund has any present intention to invest in
inverse floaters or securities with interest rate caps.
MORTGAGE-RELATED SECURITIES. Each Equity Fund may invest in investment grade
mortgage-related securities. The Intermediate Term Bond Fund and Income Fund
each may invest up to two-thirds of its total assets in investment grade
mortgage-related securities. The Short-Intermediate Term Fund and U.S.
Government Securities Fund may invest without limitation in mortgage-related
U.S. Government Securities. Mortgage pass-through securities are securities
representing interests in 'pools' of mortgages in which payments of both
interest and principal on the securities are made monthly, in effect 'passing
through' monthly payments made by the individual borrowers on the residential
mortgage loans which underlie the securities. Early repayment of principal on
mortgage pass-through securities held by a Fund (due to prepayments of principal
on the underlying mortgage loans) may result in a lower rate of return when the
Fund reinvests such principal. In addition, as with callable fixed income
securities generally, if a Fund purchased the securities at a premium, sustained
early repayment would limit the value of the premium. Like other fixed income
securities, when interest rates rise the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income, fixed maturity securities which have no prepayment or call
features.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the U.S.
Government, or by agencies or instrumentalities of the U.S. Government (which
guarantees are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Certain mortgage pass-through
securities created by
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nongovernmental issuers may be supported by various forms of insurance or
guarantees, while other such securities may be backed only by the underlying
mortgage collateral.
Each Fund other than the Money Market Fund and the Tax Free Funds may also
invest in investment grade Collateralized Mortgage Obligations ('CMOs'), which
are hybrid instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Similar to a bond, interest and prepaid
principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized
by whole residential or commercial mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
the U.S. Government or its agencies or instrumentalities. CMOs are structured
into multiple classes, with each class having a different expected average life
and/or stated maturity. Monthly payments of principal, including prepayments,
are allocated to different classes in accordance with the terms of the
instruments, and changes in prepayment rates or assumptions may significantly
affect the expected average life and value of a particular class.
Each Fund other than the Money Market Fund and the Tax Free Funds may invest in
principal-only or interest-only stripped mortgage-backed securities. Stripped
mortgage-backed securities have greater volatility than other types of
mortgage-related securities. Stripped mortgage-backed securities which are
purchased at a substantial premium or discount generally are extremely sensitive
not only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such securities' yield to maturity. In addition, stripped mortgage
securities may be illiquid.
The Funds expect that governmental, government-related or private entities may
create other mortgage-related securities in addition to those described above.
As new types of mortgage-related securities are developed and offered to
investors, a Fund may consider making investments in such securities.
DOLLAR ROLLS. Each Fund other than the Money Market Fund and the Tax Free Funds
may enter into mortgage 'dollar rolls' in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. These transactions involve some risk to a Fund if the
other party should default on its obligation and the Fund is delayed or
prevented from completing the transaction.
ASSET-BACKED SECURITIES. Each Fund may invest in investment grade asset-backed
securities, which represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool of
assets similar to one another, such as motor vehicle receivables or credit card
receivables.
DERIVATIVES AND RELATED INSTRUMENTS. Each Fund other than the Money Market Fund
and
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the Tax Free Money Market Fund may invest its assets in derivative and related
instruments to hedge various market risks or to increase the Fund's income or
gain. Some of these instruments will be subject to asset segregation
requirements to cover a Fund's obligations. Each such Fund may (i) purchase,
write and exercise call and put options on securities and securities indexes
(including using options in combination with securities, other options or
derivative instruments); (ii) enter into swaps, futures contracts and options on
futures contracts; (iii) employ forward currency and interest rate contracts;
and (iv) purchase and sell structured products, which are instruments designed
to restructure or reflect the characteristics of certain other investments.
There are a number of risks associated with the use of derivatives and related
instruments and no assurance can be given that any strategy will succeed. The
value of certain derivatives or related instruments in which a Fund invests may
be particularly sensitive to changes in prevailing economic conditions and
market value. The ability of a Fund to successfully utilize these instruments
may depend in part upon the ability of its adviser to forecast these factors
correctly. Inaccurate forecasts could expose a Fund to a risk of loss. There can
be no guarantee that there will be a correlation between price movements in a
hedging instrument and in the portfolio assets being hedged. No Fund is required
to use any hedging strategies. Hedging strategies, while reducing risk of loss,
can also reduce the opportunity for gain. Derivatives transactions not involving
hedging may have speculative characteristics, involve leverage and result in
losses that may exceed the original investment of a Fund. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out a derivatives position. Activities of large traders in the futures and
securities markets involving arbitrage, 'program trading,' and other investment
strategies may cause price distortions in derivatives markets. In certain
instances, particularly those involving over-the-counter transactions or forward
contracts, there is a greater potential that a counterparty or broker may
default. In the event of a default, a Fund may experience a loss. For additional
information concerning derivatives, related instruments and the associated
risks, see the SAI.
PORTFOLIO TURNOVER. It is intended that the Money Market Fund and the Tax Free
Money Market Fund will be fully managed by buying and selling securities, as
well as holding securities to maturity. The frequency of each Fund's buy and
sell transactions will vary from year to year. A Fund's investment policies may
lead to frequent changes in investments, particularly in periods of rapidly
changing market conditions. High portfolio turnover rates would generally result
in higher transaction costs, including brokerage commissions or dealer mark-ups.
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND
BANK OBLIGATIONS. Bank obligations include certificates of deposit, time
deposits and bankers' acceptances issued or guaranteed by U.S. banks (including
their foreign branches) and foreign banks (including their U.S. branches).
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These obligations may be general obligations of the parent bank or may be
limited to the issuing branch by the terms of the specific obligation or by
government regulation. Foreign bank obligations involve certain risks associated
with foreign investing.
MUNICIPAL OBLIGATIONS. The Fund may invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which they may invest. Dividends paid by this Fund
that are derived from interest on municipal obligations will be taxable to
shareholders for federal income tax purposes.
CUSTODIAL RECEIPTS. The Fund may acquire securities in the form of custodial
receipts that evidence ownership of future interest payments, principal payments
or both on certain U.S. Treasury notes or bonds in connection with programs
sponsored by banks and brokerage firms. These are not deemed U.S. Government
securities. These notes and bonds are held in custody by a bank on behalf of the
owners of the receipts.
ADDITIONAL INVESTMENT POLICIES OF THE TAX FREE FUNDS
The following provides additional information regarding the permitted
investments of the Tax Free Money Market Fund, the Tax Free Income Fund and the
New York Tax Free Income Fund. These investments, and certain associated risks
are more fully described in the SAI.
MUNICIPAL OBLIGATIONS. Municipal Obligations are issued to obtain funds for
various public purposes, such as the construction of public facilities, the
payment of general operating expenses or the refunding of outstanding debts.
They may also be issued to finance various private activities, including the
lending of funds to public or private institutions for the construction of
housing, educational or medical facilities, and may include certain types of
industrial development bonds, private activity bonds or notes issued by public
authorities to finance privately owned or operated facilities, or to fund
short-term cash requirements. Short-term Municipal Obligations may be issued as
interim financing in anticipation of tax collections, revenue receipts or bond
sales to finance various public purposes. The Municipal Obligations in which the
Tax Free Money Market Fund invests may consist of municipal notes, municipal
commercial paper and municipal bonds maturing or deemed to mature in 397 days or
less.
The two principal classifications of Municipal Obligations are general
obligation and revenue obligation securities. General obligation securities
involve a pledge of the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The characteristics
and methods of enforcement of general obligation securities vary according to
the law applicable to the particular issuer. Revenue obligation securities are
payable only from revenues derived from a particular facility or class of
facilities, or a specific revenue source, and generally are not payable from the
unrestricted revenues of the issuer. Industrial development bonds and private
activity bonds are in most cases
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revenue obligation securities, the credit quality of which is directly related
to the private user of the facilities.
From time to time, each Fund may invest more than 25% of the value of its total
assets in industrial development bonds which, although issued by industrial
development authorities, may be backed only by the assets and revenues of non-
governmental issuers such as hospitals or airports, provided, however, that a
Fund may not invest more than 25% of the value of its total assets in such bonds
if the issuers are in the same industry.
MUNICIPAL LEASE OBLIGATIONS. Each Tax Free Fund may invest in municipal lease
obligations. These are participations in a lease obligation or installment
purchase contract obligation and typically provide a premium interest rate.
Municipal lease obligations do not constitute general obligations of the
municipality. Certain municipal lease obligations in which the Funds may invest
contain 'non-appropriation' clauses which provide that the municipality has no
obligation to make lease or installment payments in future years unless money is
later appropriated for such purposes. Although 'non-appropriation' lease
obligations are secured by the leased property, disposition of the property in
the event of foreclosure might prove difficult. Certain investments in municipal
lease obligations may be illiquid. Each Fund's adviser will evaluate the
liquidity of municipal lease obligations in accordance with procedures
established by the Funds.
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LIMITING INVESTMENT RISKS
Specific investment restrictions help the Funds limit investment risks for their
shareholders. These restrictions prohibit each Fund from (a) investing more than
15% of its net assets (10% in the case of the Money Market Fund and the Tax Free
Money Market Fund) in illiquid securities (which include securities restricted
as to resale unless they are determined to be readily marketable in accordance
with procedures established by the Board of Trustees) or (b) investing more than
25% of its total assets in any one industry (excluding (i) U.S. Government
obligations, (ii) with respect to the Money Market Fund and Tax Free Money
Market Fund, bank obligations, and (iii) with respect to the Tax Free Funds,
obligations of states, cities, municipalities or other public authorities, as
well as municipal obligations secured by bank letters of credit or guarantees).
Each 'diversified' Fund may not, with respect to 75% of its total assets, invest
more than 5% of its total assets in the securities of any one issuer (other than
U.S. Government obligations) or hold more than 10% of the voting securities of
any issuer. In addition, in order to comply with federal securities regulations
relating to money market funds, the Money Market Fund and Tax Free Money Market
Fund will not, with respect to 100% of its total assets, invest more than 5% of
its total assets in the securities of any one issuer (other than U.S. Government
obligations). A complete description of these and other investment policies is
included in the SAI. Except for restriction (b) above and investment policies
designated as fundamental in the SAI, the Funds' investment policies (including
their investment objectives) are not fundamental. The Trustees may change any
non-fundamental investment policy without shareholder approval. However, in the
event of a change in any such Fund's investment objective, shareholders will be
given at least 30 days' prior written notice.
RISK FACTORS
There can be no assurance that the Money Market Fund or Tax Free Money Market
Fund will be able to maintain a stable net asset value. Changes in interest
rates may affect the value of the obligations held by such Funds. The value of
fixed income securities varies inversely with changes in prevailing interest
rates, although money market instruments are generally less sensitive to changes
in interest rates than are longer-term securities.
The Money Market Fund is permitted to invest any portion of its assets in
obligations of domestic banks (including their foreign branches), and in
obligations of foreign issuers. The ability to concentrate in the banking
industry may involve certain credit risks, such as defaults or downgrades, if at
some future date adverse economic conditions prevail in such industry. U.S.
banks are subject to extensive governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising
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from possible financial difficulties of borrowers play an important part in the
operations of this industry.
Securities issued by foreign banks, foreign branches of U.S. banks and foreign
governmental and private issuers involve investment risks in addition to those
of obligations of domestic issuers, including risks relating to future political
and economic developments, more limited liquidity of foreign obligations than
comparable domestic obligations, the possible imposition of withholding taxes on
interest income, the possible seizure or nationalization of foreign assets, and
the possible establishment of exchange controls or other restrictions. There may
be less publicly available information concerning foreign issuers, there may be
difficulties in obtaining or enforcing a judgment against a foreign issuer
(including branches), and accounting, auditing and financial reporting standards
and practices may differ from those applicable to U.S. issuers. In addition,
foreign banks are not subject to regulations comparable to U.S. banking
regulations.
The Tax Free Money Market Fund may invest without limitation and each of the Tax
Free Income Fund and New York Tax Free Income Fund may invest up to 25% of its
total assets in Municipal Obligations secured by letters of credit or guarantees
from U.S. banks (including their foreign branches), and may also invest in
Municipal Obligations backed by foreign institutions. These investments are
subject to the considerations discussed in the preceding paragraphs relating to
the Money Market Fund. Changes in the credit quality of banks or other financial
institutions backing the Fund's Municipal Obligations could cause losses to the
Fund and affect its share price. Credit enhancements which are supplied by
foreign or domestic banks are not subject to federal deposit insurance.
Each of the Tax Free Income Fund and the New York Tax Free Income Fund is
'non-diversified,' which may make the value of its shares more susceptible to
developments affecting issuers in which such Funds invest. In addition, more
than 25% of the assets of the Tax Free Funds may be invested in securities to be
paid from revenue of similar projects, which may cause such Funds to be more
susceptible to similar economic, political or regulatory developments. The New
York Tax Free Income Fund will be particularly susceptible to such economic,
political or regulatory developments since the issuers in which it will invest
will generally be located in the State of New York.
Because the Tax Free Funds will invest primarily in obligations issued by
states, cities, public authorities and other municipal issuers, such Funds are
susceptible to factors affecting such states and their municipal issuers. A
number of municipal issuers, including New York issuers, have a recent history
of significant financial and fiscal difficulties. If a municipal issuer is
unable to meet its financial obligations, the income derived by a Tax Free Fund
and a Tax Free Fund's ability to preserve capital and liquidity could be
adversely affected. See the SAI for further information regarding New York
municipal issuers.
Interest on certain Municipal Obligations (including certain industrial
development bonds),
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while exempt from federal income tax, is a preference item for the purpose of
the alternative minimum tax. Where a mutual fund receives such interest, a
proportionate share of any exempt-interest dividend paid by the mutual fund may
be treated as such a preference item to shareholders. Federal tax legislation
enacted over the past few years has limited the types and volume of bonds which
are not AMT Items and the interest on which is not subject to federal income
tax. This legislation may affect the availability of Municipal Obligations for
investments by the Tax Free Funds.
The net asset value of the shares of each Fund (other than the Money Market Fund
and Tax Free Money Market Fund) will fluctuate based on the value of the
securities in the Fund's portfolio. The Fixed Income Funds are subject to the
general risks and considerations associated with fixed income investing, as well
as the risks discussed herein. The Equity Funds are subject to the general risks
and considerations associated with equity and, to the extent they invest in
fixed income securities, fixed income investing, as well as the risks discussed
herein.
The performance of each Fixed Income Fund and, to the extent it invests in fixed
income securities, each Equity Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by a Fund
tends to decrease. This effect will be more pronounced with respect to
investments by a Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. Except as indicated in its investment
policies, there is no restriction on the maturity of a Fund's portfolio or any
individual portfolio security, and to the extent a Fund invests in securities
with longer maturities, the volatility of the Fund in response to changes in
interest rates can be expected to be greater than if the Fund had invested in
comparable securities with shorter maturities. The performance of a Fund will
also depend on the quality of its investments. While U.S. Government securities
generally are of high quality, government securities that are not backed by the
full faith and credit of the U.S. Treasury may be affected by changes in the
creditworthiness of the agency that issued them. Guarantees of principal and
interest on obligations that may be purchased by a Fund are not guarantees of
the market value of such obligations, nor do they extend to the value of shares
of the Fund. Other fixed income securities in which a Fund may invest, while of
investment-grade quality, may be of lesser credit quality than U.S. Government
Securities. Securities rated in the category Baa by Moody's or BBB by S&P or the
equivalent by another NRSRO lack certain investment characteristics and may have
speculative characteristics.
To the extent permitted by its investment objective and policies, each Fund may
invest in the securities of small or mid cap companies. The securities of small
to mid cap companies often trade less frequently and in more limited volume, and
may be subject to more abrupt or erratic price movements, than securities of
larger, more established companies. Such companies may have limited product
lines, markets or financial resources, or may depend on a limited management
group.
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As the International Equity Fund invests primarily in equity securities of
companies outside the U.S., an investment in the Fund's shares involves a higher
degree of risk than an investment in a U.S. equity fund. See 'Common Investment
Policies-Other Investment Practices-Foreign Securities.' Investments in
securities of issuers based in developing countries entail certain additional
risks, including greater risks of expropriation, taxation by withholding Fund
assets, nationalization, and less social, political and economic stability. The
small size of markets for securities of issuers based in such countries and the
low or nonexistent volume of trading may result in a lack of liquidity and in
price volatility. Certain national policies may restrict the investment
opportunities, including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests. There may be an absence of
developed legal structures governing private or foreign investment and private
property.
For a discussion of certain other risks associated with each Fund's additional
investment activities, see 'Other Investment Practices' above.
MANAGEMENT
THE FUNDS' ADVISERS
Chase acts as investment adviser to the Funds pursuant to an Investment Advisory
Agreement and has overall responsibility for investment decisions of each of the
Funds, subject to the oversight of the Board of Trustees. Chase is a
wholly-owned subsidiary of The Chase Manhattan Corporation, a bank holding
company. Chase and its predecessors have over 100 years of money management
experience.
For its investment advisory services to the Funds, Chase is entitled to receive
an annual fee equal to the percentage of the average daily net assets of each
Fund set forth below:
<TABLE>
<CAPTION>
Fee
Fund Rate
- ----------------------------- -----
<S> <C>
Money Market Fund............ 0.30%
Tax Free Money
Market Fund................ 0.30%
Tax Free Income Fund......... 0.50%
New York Tax Free Income
Fund........................ 0.50%
Short-Intermediate Term U.S.
Government Securities
Fund ....................... 0.50%
U.S. Government Securities
Fund........................ 0.50%
Intermediate Term Bond
Fund........................ 0.50%
Income Fund.................. 0.50%
Balanced Fund................ 0.75%
Equity Income Fund........... 0.75%
Core Equity Fund............. 0.75%
Equity Growth Fund........... 0.75%
Mid Cap Growth Fund.......... 0.75%
Small Cap Fund............... 0.75%
International Equity Fund 1.00%
</TABLE>
Chase Texas serves as sub-investment adviser to certain of the Funds under a
Sub-Investment Advisory Agreement between Chase and Chase Texas. Chase Texas is
a wholly-owned subsidiary of The Chase Manhattan Corporation. Chase Texas makes
investment decisions for these Funds on a day-to-day basis. For these services,
Chase Texas is entitled to receive a fee, payable by Chase, at an annual rate
equal to the percentage of the average daily net assets of each Fund set forth
below:
<TABLE>
<CAPTION>
Fee
Fund Rate
- ----------------------------- ------
<S> <C>
Money Market Fund............ 0.15%
Short-Intermediate Term U.S.
Government Securities
Fund ....................... 0.25%
U.S. Government Securities
Fund ....................... 0.25%
Intermediate Term Bond
Fund........................ 0.25%
Income Fund.................. 0.25%
Balanced Fund................ 0.375%
Equity Income Fund........... 0.375%
Core Equity Fund............. 0.375%
Equity Growth Fund........... 0.375%
Small Cap Fund............... 0.375%
</TABLE>
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<PAGE>
Chase Texas is located at 712 Main Street, Houston, Texas 77002. Prior to
January 1, 1998, Chase Texas acted as trustee of the AVESTA Trust and, as
trustee, was obligated to provide the investment portfolios of the AVESTA Trust
with the investment advisory, administrative, custodial and other services
necessary to manage the portfolios.
Chase may enter into one or more additional Sub-Investment Advisory Agreements
with respect to the Tax Free Money Market Fund, Tax Free Income Fund, New York
Tax Free Income Fund, Mid Cap Growth Fund and International Equity Fund.
PORTFOLIO MANAGERS. Guy Barba, a Senior Investment Officer at Chase Texas, has
served as the portfolio manager of the Money Market Fund since April 1993 and
the Short-Intermediate Term Fund since its inception. Mr. Barba has been
employed by Chase Texas since 1988.
A team composed of Chase investment professionals is responsible for the
management of the Tax Free Money Market Fund's portfolio.
A team composed of Chase investment professionals is responsible for the
management of the Tax Free Income Fund's portfolio.
A team composed of Chase investment professionals is responsible for the
management of the New York Tax Free Income Fund's portfolio.
H. Mitchell Harper, a Senior Investment Officer at Chase Texas, has served as
the portfolio manager of the Intermediate Term Bond Fund since its inception.
Mr. Harper has been employed by Chase Texas since 1987.
John Miller, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager for each of the Income Fund and the fixed income portion of
the Balanced Fund since July 1994 and for the U.S. Government Securities Fund
since June 1995. Mr. Miller has been employed with Chase Texas since 1986.
Henry Lartigue, the Chief Investment Officer at Chase Texas, has served as the
portfolio manager for the Equity Growth Fund since July 1994, the equity portion
of the Balanced Fund since July 1994 and the Core Equity Fund since January
1996. Between July 1992 and July 1994, Mr. Lartigue was self-employed as a
registered investment adviser.
Robert Heintz, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager of the Equity Income Fund since its inception. Mr. Heintz has
been employed by Chase Texas since 1983.
A team composed of Chase investment professionals is responsible for the
management of the Mid Cap Growth Fund's portfolio.
Juliet Ellis, a Senior Investment Officer at Chase Texas, has served as the
portfolio manager of the Small Cap Fund since September 1993. Ms. Ellis has been
employed by Chase Texas since 1987. Prior to becoming portfolio manager for the
Small Cap Fund, Ms. Ellis was the director of research and an equity analyst at
Chase Texas.
A team composed of Chase investment professionals is
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<PAGE>
responsible for the management of the International Equity Fund's portfolio.
HOW TO BUY, SELL AND
EXCHANGE_ SHARES
HOW TO BUY SHARES
You can open a Fund account with as little as $2,500 for regular accounts or
$1,000 for IRAs, SEP-IRAs and the Systematic Investment Plan. Additional
investments can be made at any time with as little as $100. You can buy Fund
shares three ways-- through an investment representative, directly through the
Fund's distributor by calling the Chase Funds Service Center, or through the
Systematic Investment Plan.
All purchases made by check should be in U.S. dollars and made payable to the
Chase Funds. Third Party checks, credit cards and cash will not be accepted. The
Funds reserve the right to reject any purchase order or cease offering shares
for purchase at any time. When purchases are made by check, redemptions will not
be allowed until the check clears, which may take 15 calendar days or longer. In
addition, the redemption of shares purchased through Automated Clearing House
(ACH) will not be allowed until your payment clears, which may take 7 business
days or longer.
BUYING SHARES THROUGH THE FUNDS' DISTRIBUTOR. Complete and return the enclosed
application and your check in the amount you wish to invest to the Chase Funds
Service Center.
BUYING SHARES THROUGH SYSTEMATIC INVESTING. You can make regular investments of
$100 or more per transaction through automatic periodic deduction from your bank
checking or savings account. Shareholders electing to start this Systematic
Investment Plan when opening an account should complete Section 8 of the account
application. Current shareholders may begin such a plan at any time by sending a
signed letter and a deposit slip or voided check to the Chase Funds Service
Center. Call the Chase Funds Service Center at 1-800-62-CHASE for complete
instructions.
Shares are purchased at the public offering price, which is based on the net
asset value next determined after the Chase Funds Service Center receives your
order in proper form. In most cases, in order to receive that day's public
offering price, the Chase Funds Service Center must receive your order in proper
form before the close of regular trading on the New York Stock Exchange. If you
buy shares through your investment representative, the representative must
receive your order generally before the close of regular trading on the New York
Stock Exchange to receive that day's public offering price; however your
investment representative may impose an earlier deadline. Orders are in proper
form only after funds are converted to federal funds. Orders paid by check and
received by 2:00 p.m., Eastern Time will generally be available for the purchase
of shares the following business day.
If you are considering redeeming or exchanging shares or transferring shares to
another person shortly after purchase, you should pay for those shares with a
certified check to avoid any delay in redemption,
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<PAGE>
exchange or transfer. Otherwise the Funds may delay payment until the purchase
price of those shares has been collected or, if you redeem by telephone, until
15 calendar days after the purchase date. To eliminate the need for safekeeping,
the Funds will not issue certificates for your shares and all shares will be
held in book entry form.
HOW TO SELL SHARES
You can sell your Fund shares any day the New York Stock Exchange and Federal
Reserve Bank of New York are open, either directly to the Funds or through your
investment representative. Each Fund will only forward redemption payments on
shares for which it has collected payment of the purchase price.
SELLING SHARES DIRECTLY TO THE FUNDS. Send a signed letter of instruction to the
Chase Funds Service Center. The price you will receive is the next net asset
value calculated after the Fund receives your request in proper form. In order
to receive that day's net asset value, the Chase Funds Service Center must
receive your request before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more, the signatures
of registered owners or their legal representatives must be guaranteed by a
bank, broker-dealer or certain other financial institutions. See the SAI for
more information about where to obtain a signature guarantee.
If you want your redemption proceeds sent to an address other than your address
as it appears on the Funds' records, a signature guarantee is required. The
Funds may require additional documentation for the sale of shares by a
corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Chase Funds Service Center for details.
DELIVERY OF PROCEEDS. Each Fund generally sends you payment for your shares the
business day after your request is received in proper form, assuming the Fund
has collected payment of the purchase price of your shares. Under unusual
circumstances, the Funds may suspend redemptions, or postpone payment for more
than seven days, as permitted by federal securities law.
TELEPHONE REDEMPTIONS. You may use the Funds' Telephone Redemption Privilege to
redeem shares from your account unless you have notified the Chase Funds Service
Center of an address change within the preceding 30 days. Telephone redemption
requests in excess of $25,000 will only be made by wire or ACH to a bank account
on record with the Funds. Unless an investor indicates otherwise on the account
application, each Fund will be authorized to act upon redemption and transfer
instructions received by telephone from a shareholder, or any person claiming to
act as his or her representative, who can provide the Fund with his or her
account registration and address as it appears on the Fund's records.
The Chase Funds Service Center will employ these and other reasonable procedures
to confirm that instructions communicated by telephone are genuine; if it fails
to employ reasonable procedures, the Funds may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that to
the extent
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<PAGE>
permitted by applicable law, neither the Funds nor their agents will be liable
for any loss, liability, cost or expense arising out of any redemption request,
including any fraudulent or unauthorized request. For information, consult the
Chase Funds Service Center.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Chase Funds Service Center by telephone. In
this event, you may wish to submit a written redemption request, as described
above, or contact your investment representative. The Telephone Redemption
Privilege is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
SYSTEMATIC WITHDRAWAL. You can make regular withdrawals of $50 or more monthly,
quarterly or semiannually. A minimum account balance of __________ is required
to establish a systematic withdrawal plan. Call the Chase Funds Service Center
at 1-800-62-CHASE for complete instructions.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE. Your investment
representative must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Chase Funds Service Center, and may charge you for its
services.
INVOLUNTARY REDEMPTION OF ACCOUNTS. Each Fund may involuntarily redeem your
shares if at such time the aggregate net asset value of the shares in your
account is less than $500 due to redemptions or if you purchase through the
Systematic Investment Plan and fail to meet the Fund's investment minimum within
a twelve month period. In the event of any such redemption, you will receive at
least 60 days notice prior to the redemption.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares for shares of the same class of certain other Chase
Funds at net asset value beginning 15 days after purchase. Not all Chase Funds
offer all classes of shares. The description of the other Chase Fund into which
shares are being exchanged which appears in this prospectus should be read
carefully and retained for future reference.
For federal income tax purposes, an exchange is treated as a sale of shares and
generally results in a capital gain or loss.
EXCHANGING BY PHONE. A Telephone Exchange Privilege is currently available. Call
the Chase Funds Service Center for procedures for telephone transactions. The
Telephone Exchange Privilege is not available if you were issued certificates
for shares that remain outstanding.
EXCHANGE PARAMETERS. The exchange privilege is not intended as a vehicle for
short-term trading. Excessive exchange activity may interfere with portfolio
management and have an adverse effect on all shareholders. In order to limit
excessive exchange activity and in other circumstances where Fund management or
the Trustees believe doing so would be in the best interests of the Funds, each
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<PAGE>
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. In addition, any
shareholder who makes more than ten exchanges of shares involving a Fund in a
year or three in a calendar quarter will be charged a $5.00 administration fee
for each such exchange. Shareholders would be notified of any such action to the
extent required by law. Consult the Chase Funds Service Center before requesting
an exchange. See the SAI to find out more about the exchange privilege.
HOW THE FUNDS
VALUE_ THEIR_ SHARES
MONEY MARKET FUNDS. The net asset value of each class of shares of the Money
Market Fund and the Tax Free Money Market Fund is currently determined as of
4:00 p.m., Eastern time on each Fund Business Day by dividing the net assets of
a Fund attributable to such class by the number of shares of such class
outstanding at the time the determination is made.
The portfolio securities of the Money Market Fund and the Tax Free Money Market
Fund are valued at their amortized cost in accordance with federal securities
laws, certain requirements of which are summarized under 'Common Investment
Policies.' This method increases stability in valuation, but may result in
periods during which the stated value of a portfolio security is higher or lower
than the price a Fund would receive if the instrument were sold. It is
anticipated that the net asset value of each share of each Fund will remain
constant at $1.00 and the Funds will employ specific investment policies and
procedures to accomplish this result, although no assurance can be given that
they will be able to do so on a continuing basis. The Board of Trustees will
review the holdings of each Fund at intervals it deems appropriate to determine
whether that Fund's net asset value calculated by using available market
quotations (or an appropriate substitute which reflects current market
conditions) deviates from $1.00 per share based upon amortized costs. In the
event the Trustees determine that a deviation exists that may result in material
dilution or other unfair results to investors or existing shareholders, the
Trustees will take such corrective action as they regard as necessary and
appropriate.
NON-MONEY MARKET FUNDS. The net asset value of each class of each other Fund's
shares is determined once daily based upon prices determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., Eastern
time, however, options are priced at 4:15 p.m., Eastern time), on each Fund
Business Day, by dividing the net assets of the Fund attributable to that class
by the total number of outstanding shares of that class. Values of assets held
by the Funds are determined on the basis of their market or other fair value, as
described in the SAI.
HOW DISTRIBUTIONS ARE
MADE;_ TAX_ INFORMATION
MONEY MARKET FUNDS. The net investment income (i.e., a Fund's investment company
taxable income as that term is defined in the Internal Revenue Code of 1986, as
amended (the 'Code') without
53
<PAGE>
regard to the deduction for dividends paid) of each class of shares of each of
the Money Market Fund and the Tax Free Money Market Fund is declared as a
dividend to the shareholders each Fund Business Day. Dividends are declared as
of the time of day which corresponds to the latest time on that day that a
Fund's net asset value is determined. Shares begin accruing dividends on the day
that the order is received in proper form by the Fund. Dividends are distributed
monthly. Unless a shareholder arranges to receive dividends in cash or by
Automated Clearing House (ACH) to a pre-established bank account, dividends are
distributed in the form of additional shares. The Money Market Fund and Tax Free
Money Market Fund do not expect to realize net capital gain (i.e., the excess of
a Fund's net long-term capital gains over short-term capital losses).
NON-MONEY MARKET FUNDS. Each Fixed Income Fund declares dividends daily and
distributes any net investment income at least monthly. Each Equity Fund other
than the International Equity Fund distributes any net investment income at
least quarterly. The International Equity Fund distributes any net investment
income at least annually. Each Fund other than the Money Market Fund and the Tax
Free Money Market Fund (which do not expect to earn net capital gain)
distributes any net capital gain at least annually.
GENERAL. You can choose from three distribution options: (1) reinvest all
distributions in additional Fund shares; (2) receive distributions from net
investment income in cash while reinvesting net capital gain distributions in
additional shares; or (3) receive all distributions in cash. You can change your
distribution option by notifying your account administrator in writing. If you
do not select an option when you open your account, all distributions will be
reinvested.
Each Fund intends to qualify as a 'regulated investment company' for federal
income tax purposes under Subchapter M of the Code and to meet all other
requirements that are necessary for it to be relieved of federal taxes on income
and gain it distributes to shareholders. If a Fund does not qualify as a
regulated investment company for any taxable year or does not meet certain other
requirements, such Fund will be subject to tax on all of its taxable income and
gains.
All Fund distributions of net investment income (which term shall include net
short-term capital gain) will be taxable as ordinary income. Any distributions
of net capital gain which are designated as 'capital gain dividends' will be
taxable as long-term capital gain at the currently applicable 28% or 20% rate,
regardless of how long you have held the shares. Distributions by the Tax Free
Funds of their tax-exempt interest income will not be subject to federal income
tax. Such distributions will generally be subject to state and local taxes, but
may be exempt if paid out of interest on municipal obligations of the state or
locality in which you reside. To the extent distributions are attributable to
interest from obligations of the U.S. Government and certain of its agencies and
54
<PAGE>
instrumentalities, such distributions may be exempt from certain types of state
and local taxes. Distributions will be taxable as described above whether
received in cash or in shares through the reinvestment of distributions.
A portion of the ordinary income dividends paid by certain Funds may qualify for
the 70% dividends-received deduction for corporate shareholders.
Investment income received by the International Equity Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. Since
more than 50% of the value of the total assets of the Fund at the close of the
Fund's taxable year is anticipated to be stock or securities of foreign
corporations, the Fund may elect to 'pass through' to its shareholders the
amount of foreign taxes paid by the Fund.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the next distribution date. Those investors purchasing
shares just prior to a distribution will be taxed on the entire amount of the
distribution received, even though the net asset value per share on the date of
such purchase reflected the amount of such distribution.
Early in each calendar year the Funds will notify you of the amount and tax
status of distributions paid for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in the Funds. You should consult your tax adviser to determine the
precise effect of an investment in the Funds on your particular tax situation
(including possible liability for state and local taxes and, for foreign
shareholders, U.S. withholding taxes).
OTHER INFORMATION
CONCERNING_ THE_ FUNDS
For shareholders that bank with Chase or Chase Texas, Chase or Chase Texas may
aggregate investments in the Chase Funds with balances held in Chase or Chase
Texas bank accounts for purposes of determining eligibility for certain bank
privileges that are based on specified minimum balance requirements, such as
reduced or no fees for certain banking services or preferred rates on loans and
deposits. Chase, Chase Texas and certain other financial institutions may, at
their own expense, provide gifts, such as computer software packages, guides and
books related to investment or additional Fund shares valued up to $250 to their
customers that invest in the Avesta Funds.
DISTRIBUTION PLANS
The Funds' distributor is CFD Fund Distributors, Inc. ('CFD'). CFD is a
subsidiary of The BISYS Group, Inc. and is unaffiliated with Chase. The Trust
has adopted a Rule 12b-1 distribution plan for Retail Class shares, which
provides for the payment of distribution fees at an annual rate of up to 0.25%
of the average daily net assets attributable to Retail Class shares of each
Fund. Payments under the distribution plan shall be used to compensate the
Funds' distributor and broker-dealers for services provided and expenses
incurred in connection with the sale of Retail Class shares, and are not tied to
the actual expenses incurred. Payments may be used to compensate broker-
55
<PAGE>
dealers with trail or maintenance commissions at an annual rate of up to 0.25%
of the average daily net assets value of Retail Class shares invested in each
Fund by customers of those broker-dealers. Trail or maintenance commissions are
paid to broker-dealers beginning the 13th month following the purchase of shares
by their customers. Promotional activities for the sale of Retail Class shares
will be conducted generally by the Chase Funds, and activities intended to
promote one Fund's Retail Class shares may also benefit such Fund's other shares
and other Chase Funds.
CFD may provide promotional incentives to broker-dealers that meet specified
sales targets for one or more Chase Funds. These incentives may include gifts of
up to $100 per person annually; an occasional meal, ticket to a sporting event
or theater for entertainment for broker-dealers and their guests; and payment or
reimbursement for travel expenses, including lodging and meals, in connection
with attendance at training and educational meetings within and outside the U.S.
ADMINISTRATOR
Chase acts as the Funds' administrator and is entitled to receive a fee computed
daily and paid monthly at an annual rate equal to 0.10% of each Fund's average
daily net assets.
SUB-ADMINISTRATOR AND DISTRIBUTOR
CFD acts as the Funds' sub-administrator and distributor. CFD is a subsidiary of
The BISYS Group, Inc. and is unaffiliated with Chase. For the sub-administrative
services it performs, CFD is entitled to receive a fee from each Fund at an
annual rate equal to 0.05% of the Fund's average daily net assets. CFD has
agreed to use a portion of this fee to pay for certain expenses incurred in
connection with organizing new series of the Trust and certain other ongoing
expenses of the Trust. CFD is located at One Chase Manhattan Plaza, Third Floor,
New York, NY 10081.
CUSTODIAN
Chase acts as custodian for the Funds and receives compensation under an
agreement with the Trust. Chase may sub-contract for the provision of certain
services to be provided under the custody agreement. Fund securities and cash
may be held by sub-custodian banks if such arrangements are reviewed and
approved by the Trustees.
EXPENSES
Each Fund pays the expenses incurred in its operations, including its pro rata
share of expenses of the Trust. These expenses include investment advisory and
administrative fees; the compensation of the Trustees; registration fees;
interest charges; taxes; expenses connected with the execution, recording and
settlement of security transactions; fees and expenses of the Funds' custodian
for all services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to government offices and commissions; expenses of
meetings of investors; fees and
56
<PAGE>
expenses of independent accountants, of legal counsel and of any transfer agent,
registrar or dividend disbursing agent of the Trust; insurance premiums; and
expenses of calculating the net asset value of, and the net income on, shares of
the Funds. Shareholder servicing and distribution fees are allocated to specific
classes of a Fund. In addition, each Fund may allocate transfer agency and
certain other expenses by class. Service providers to a Fund may, from time to
time, voluntarily waive all or a portion of any fees to which they are entitled.
ORGANIZATION AND DESCRIPTION OF SHARES
The Funds are portfolios of Mutual Fund Investment Trust, an open-end management
investment company organized as a Massachusetts business trust on September 23,
1997 (the 'Trust'). The Trust has reserved the right to create and issue
additional series and classes. Each share of a series or class represents an
equal proportionate interest in that series or class with each other share of
that series or class. The shares of each series or class participate equally in
the earnings, dividends and assets of the particular series or class. Shares
have no preemptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one vote
for each whole share held, and each fractional share shall be entitled to a
proportionate fractional vote, except that Trust shares held in the treasury of
the Trust shall not be voted. Shares of each class of a Fund generally vote
together except when required under federal securities laws to vote separately
on matters that only affect a particular class, such as the approval of
distribution plans for a particular class.
Each Fund issues multiple classes of shares. This Prospectus relates only to
Retail Shares of the Funds. The Funds offer other classes of shares in addition
to this class. The categories of investors that are eligible to purchase shares
may differ for each class of Fund shares. In addition, other classes of Fund
shares may be subject to differences in sales charge arrangements, ongoing
distribution and service fee levels, and levels of certain other expenses, which
will affect the relative performance of the different classes. Investors may
call 1-800-_______ to obtain additional information about other classes of
shares of the Funds that are offered. Any person entitled to receive
compensation for selling or servicing shares of a Fund may receive different
levels of compensation with respect to one class of shares over another.
The business and affairs of the Trust are managed under the general direction
and supervision of the Trust's Board of Trustees. The Trust is not required to
hold annual meetings of shareholders but will hold special meetings of
shareholders of all series or classes when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. The Trustees
will promptly call a meeting of shareholders to remove a trustee(s) when
requested to do so in writing by record holders of not less than 10% of all
outstanding shares of the Trust.
Under Massachusetts law, shareholders of such a business trust may, under
certain circumstances
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<PAGE>
be held personally liable as partners for its obligations. However, the risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Trust was formed to receive the assets of the AVESTA Trust, a Texas business
trust ('AVESTA'). Pursuant to a reorganization which took place on December 31,
1997, the Money Market Fund, Short-Term Intermediate Term Fund, U.S. Government
Securities Fund, Intermediate Term Bond Fund, Income Fund, Balanced Fund, Equity
Income Fund, Core Equity Fund, Equity Growth Fund and Small Cap Fund each
acquired the assets of a corresponding series of AVESTA in exchange for
Institutional Shares of such Fund.
UNIQUE CHARACTERISTICS OF MASTER/FEEDER FUND STRUCTURE
Unlike other mutual funds which directly acquire and manage their own portfolio
securities, each Fund is permitted to invest all of its investable assets in a
separate registered investment company (a 'Portfolio'). In that event, a
shareholder's interest in a Fund's underlying investment securities would be
indirect. In addition to selling a beneficial interest to a Fund, a Portfolio
could also sell beneficial interests to other mutual funds or institutional
investors. In the event that a Fund adopts a master/feeder structure and invests
all its investable assets in a Portfolio, shareholders of the Fund will be given
at least 30 days' prior written notice. For additional information regarding the
master/feeder structure, see the SAI.
PERFORMANCE_ INFORMATION
MONEY MARKET FUNDS. The Money Market Fund and the Tax Free Money Market Fund may
each advertise its annualized 'yield' and its 'effective yield.' 'Annualized
'yield' is determined by assuming that income generated by an investment in a
Fund over a stated seven-day period (the 'yield') will continue to be generated
each week over a 52-week period. It is shown as a percentage of such investment.
'Effective yield' is the annualized 'yield' calculated assuming the reinvestment
of the income earned during each week of the 52-week period. The 'effective
yield' will be slightly higher than the 'yield' due to the compounding effect of
this assumed reinvestment.
The Tax Free Money Market Fund may also quote a 'tax equivalent yield,' the
yield that a taxable money market fund would have to generate in order to
produce an after-tax yield equivalent to the tax free fund's yield. The tax
equivalent yield of the Tax Free Money Market Fund can then be compared to the
yield of a taxable money market fund. Tax equivalent yields can be quoted on
either a 'yield' or 'effective yield' basis.
NON-MONEY MARKET FUNDS. The investment performance of each Fund other than the
Money Market Fund and the Tax Free Money Market Fund may from to time be
included in advertisements about the Fund. 'Yield' is calculated by dividing the
annualized net investment income per share during a recent 30-day period by the
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maximum public offering price per share on the last day of that period.
'Total return' for the one-, five-and ten-year periods (or for the life of a
class, if shorter) through the most recent calendar quarter represents the
average annual compounded rate of return on an investment of $1,000 in a Fund
invested at the public offering price. Total return may also be presented for
other periods.
GENERAL. All performance data is based on each Fund's past investment results
and does not predict future performance. Investment performance, which will
vary, is based on many factors, including market conditions, the composition of
a Fund's portfolio and a Fund's operating expenses. Investment performance also
often reflects the risks associated with a Fund's investment objectives and
policies. These factors should be considered when comparing a Fund's investment
results to those of other mutual funds and other investment vehicles. Quotation
of investment performance for any period when a fee waiver or expense limitation
was in effect will be greater than if the waiver or limitation had not been in
effect. Each Fund's performance may be compared to other mutual funds, relevant
indices and rankings prepared by independent services. See the SAI.
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STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
CHASE BALANCED FUND
CHASE CORE EQUITY FUND
CHASE EQUITY GROWTH FUND
CHASE EQUITY INCOME FUND
CHASE INCOME FUND
CHASE INTERMEDIATE TERM BOND FUND
CHASE INTERNATIONAL EQUITY FUND
CHASE MID CAP GROWTH FUND
CHASE MONEY MARKET FUND
CHASE NEW YORK TAX FREE INCOME FUND
CHASE SHORT-INTERMEDIATE TERM U.S. GOVERNMENT SECURITIES FUND
CHASE SMALL CAPITALIZATION FUND
CHASE TAX FREE INCOME FUND
CHASE TAX FREE MONEY MARKET FUND
CHASE U.S. GOVERNMENT SECURITIES FUND
101 PARK AVENUE, NEW YORK, NEW YORK 10178
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses offering Premier
and Retail shares of Chase Money Market Fund and Chase Tax Free Money Market
Fund (collectively the 'Money Market Funds'), Chase Income Fund, Chase
Intermediate Term Bond Fund, Chase New York Tax Free Income Fund, Chase Short-
Intermediate Term U.S. Government Securities Fund, Chase Tax Free Income Fund
and Chase U.S. Government Securities Fund (collectively the 'Income Funds'), and
Chase Balanced Fund, Chase Core Equity Fund, Chase Equity Income Fund, Chase
Equity Growth Fund, Chase International Equity Fund, Chase Mid Cap Growth Fund
and Chase Small Capitalization Fund (collectively the 'Equity Funds'). The Chase
Tax Free Money Market Fund, Chase Tax Free Income Fund and Chase New York Tax
Free Income Fund are collectively known as the 'Tax Free Funds.' Any references
to a 'Prospectus' in this Statement of Additional Information is a reference to
one or more of the foregoing Prospectuses, as the context requires. Copies of
each Prospectus may be obtained by an investor without charge by contacting CFD
Fund Distributors, Inc. ('CFD'), the Funds' distributor (the 'Distributor'), at
the above-listed address.
The Chase Mid Cap Growth Fund, the Chase International Equity Fund and the
Tax Free Funds are not currently available for investment.
This Statement of Additional Information is NOT a prospectus and is
authorized for distribution to prospective investors only if preceded or
accompanied by an effective prospectus.
For more information about your account, simply call or write the Chase
Funds Service Center at:
1-800-62-CHASE
Chase Funds Service Center
P.O. Box 419392
Kansas City, MO 64141
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Funds.................................................................................................. 3
Investment Policies and Restrictions....................................................................... 3
Performance Information.................................................................................... 21
Determination of Net Asset Value........................................................................... 25
Purchases, Redemptions and Exchanges....................................................................... 26
Tax Matters................................................................................................ 27
Management of the Trust and the Funds...................................................................... 32
Independent Accountants.................................................................................... 39
Certain Regulatory Matters................................................................................. 39
General Information........................................................................................ 40
APPENDIX A
Description of certain obligations issued or guaranteed by U.S. Government
Agencies or Instrumentalities............................................................................ 42
APPENDIX B
Description of Ratings..................................................................................... 44
APPENDIX C
Special investment considerations relating to New York Municipal Obligations............................... 47
</TABLE>
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THE FUNDS
Mutual Fund Investment Trust (the 'Trust') is an open-end management
investment company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on September 23, 1997. The Trust presently
consists of 15 separate series (the 'Funds'). Certain of the Funds are
diversified and other Funds are non-diversified, as such term is defined in the
Investment Company Act of 1940, as amended (the '1940 Act'). The shares of the
Funds are collectively referred to in this Statement of Additional Information
as the 'Shares.'
Effective January 1, 1998, the Money Market, Short-Intermediate Term U.S.
Government Securities, U.S. Government Securities, Intermediate Term Bond,
Income, Balanced, Equity Income, Core Equity, Equity Growth and Small
Capitalization Funds of the AVESTA Trust, a collective investment trust, were
converted and redomiciled into the corresponding portfolios of the Trust (the
'Avesta Conversion').
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ('Chase') is
the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the 'Administrator') and supervises the overall administration of
the Trust, including the Funds. A majority of the Trustees of the Trust are not
affiliated with the investment adviser or sub-advisers.
INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES
The Prospectuses set forth the various investment policies of each Fund.
The following information supplements and should be read in conjunction with the
related sections of the Prospectuses. As used in this Statement of Additional
Information, with respect to those Funds and policies for which it applies, the
term 'Municipal Obligations' has the meaning given to it in the Prospectuses.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
('Moody's'), Standard & Poor's Corporation ('S&P') and Fitch Investors Service,
Inc. ('Fitch'), see Appendix B.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality. Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States. Other U.S.
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States. These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of the
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields
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than are available from the more common types of government-backed instruments.
However, such specialized instruments may only be available from a few sources,
in limited amounts, or only in very large denominations; they may also require
specialized capability in portfolio servicing and in legal matters related to
government guarantees. While they may frequently offer attractive yields, the
limited-activity markets of many of these securities means that, if a Fund were
required to liquidate any of them, it might not be able to do so advantageously;
accordingly, each Fund investing in such securities normally to hold such
securities to maturity or pursuant to repurchase agreements, and would treat
such securities (including repurchase agreements maturing in more than seven
days) as illiquid for purposes of its limitation on investment in illiquid
securities.
Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which a Fund cannot realize the proceeds thereon within seven days
are deemed 'illiquid' for the purposes of its restriction on investments in
illiquid securities. Deposit notes are notes issued by commercial banks which
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation. Investors should also be aware that securities of
foreign banks and foreign branches of United States banks may involve foreign
investment risks in addition to those relating to domestic bank obligations.
Depositary Receipts. A Fund will limit its investment in Depositary
Receipts not sponsored by the issuer of the underlying security to no more than
5% of the value of its net assets (at the time of investment). A purchaser of an
unsponsored Depositary Receipt may not have unlimited voting rights and may not
receive as much information about the issuer of the underlying securities as
with a sponsored Depositary Receipt.
ECU Obligations. The specific amounts of currencies comprising the ECU may
be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Trustees do not
believe that such adjustments will adversely affect holders of ECU-denominated
securities or the marketability of such securities.
Supranational Obligations. Supranational organizations, include
organizations such as The World Bank, which was chartered to finance development
projects in developing member countries; the European Community, which is a
twelve-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations of the Asian and
Pacific regions.
4
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Corporate Reorganizations. In general, securities that are the subject of
a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or proposal. The
increased market price of these securities may also discount what the stated or
appraised value of the security would be if the contemplated action were
approved or consummated. These investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of these contingencies requires unusually broad knowledge and experience on the
part of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offeror as well as the dynamics of the business
climate when the offer or proposal is in progress. Investments in reorganization
securities may tend to increase the turnover ratio of a Fund and increase its
brokerage and other transaction expenses.
Warrants and Rights. Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are similar to warrants but normally have a shorter duration and are distributed
directly by the issuer to shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
Commercial Paper. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts. The commercial paper and other
short-term obligations of U.S. and foreign corporations which may be purchased
by the Money Market Fund, other than those of bank holding companies, include
obligations which are (i) rated Prime-1 by Moody's, A-1 by S&P, or F-1 by Fitch,
or comparably rated by another NRO; or (ii) determined by the advisers to be of
comparable quality to those rated obligations which may be purchased by the
Money Market Fund at the date of purchase or which at the date of purchase have
an outstanding debt issue rated in the highest rating category by Moody's, S&P,
Fitch or another NRO. The commercial paper and other short-term obligations of
U.S. banks holding companies which may be purchased by Money Market Fund include
obligations issued or guaranteed by bank holding companies with total assets
exceeding $1 billion. For purposes of the size standards with respect to banks
and bank holding companies, 'total deposits' and 'total assets' are determined
on an annual basis by reference to an institution's then most recent annual
financial statements.
Repurchase Agreements. A Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers believed
creditworthy, and only if fully collateralized by securities in which such Fund
is permitted to invest. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying instrument for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument and the Fund to resell the instrument at a fixed price
and time, thereby determining the yield during the Fund's holding period. This
procedure results in a fixed rate of return insulated from market fluctuations
during such period. A repurchase agreement is subject to the risk that the
seller may fail to repurchase the security. Repurchase agreements are considered
under the 1940 Act to be loans collateralized by the underlying securities. All
repurchase agreements entered into by a Fund will be fully collateralized at all
times during the period of the agreement in that the value of the underlying
security will be at least equal to 100% of the amount of the loan, including the
accrued interest thereon, and the Fund or its custodian or sub-custodian will
have possession of the collateral, which the Board of Trustees believes will
give it a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been conclusively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities would not be owned by the Fund,
but would only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, a Fund may suffer time delays and incur costs in
connection with the disposition of the collateral. The Board of Trustees
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<PAGE>
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by a Fund. Repurchase agreements maturing in more than seven
days are treated as illiquid for purposes of the Funds' restrictions on
purchases of illiquid securities. Repurchase agreements are also subject to the
risks described below with respect to stand-by commitments.
Forward Commitments. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will normally
be purchased. Although, with respect to any Tax Free Fund, short-term
investments will normally be in tax-exempt securities or Municipal Obligations,
short-term taxable securities or obligations may be purchased if suitable
short-term tax-exempt securities or Municipal Obligations are not available.
When a commitment to purchase a security on a forward commitment basis is made,
procedures are established consistent with the General Statement of Policy of
the Securities and Exchange Commission concerning such purchases. Since that
policy currently recommends that an amount of the respective Fund's assets equal
to the amount of the purchase be held aside or segregated to be used to pay for
the commitment, a separate account of such Fund consisting of cash or liquid
securities equal to the amount of such Fund's commitments securities will be
established at such Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed in
the account daily so that the value of the account will equal the amount of such
commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the issuer and changes, real or anticipated, in the level of interest rates.
Purchasing securities on a forward commitment basis can involve the risk that
the yields available in the market when the delivery takes place may actually be
higher or lower than those obtained in the transaction itself. On the settlement
date of the forward commitment transaction, the respective Fund will meet its
obligations from then available cash flow, sale of securities held in the
separate account, sale of other securities or, although it would not normally
expect to do so, from sale of the forward commitment securities themselves
(which may have a value greater or lesser than such Fund's payment obligations).
The sale of securities to meet such obligations may result in the realization of
capital gains or losses which, for consideration by investors in the Tax Free
Funds, are not exempt from federal, state or local taxation.
To the extent a Fund engages in forward commitment transactions, it will do
so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
Floating and Variable Rate Securities; Participation Certificates.
Floating and variable rate demand instruments permit the holder to demand
payment upon a specified number of days' notice of the unpaid principal balance
plus accrued interest either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument.
Investments by the Income Funds in floating or variable rate
securities normally will involve industrial development or revenue bonds that
provide for a periodic adjustment in the interest rate paid on the obligation
and may, but need not, permit the holder to demand payment as described above.
While there is usually no established secondary market for issues of these types
of securities, the dealer that sells an issue of such security frequently will
also offer to repurchase the securities at any time at a repurchase price which
varies and may be more or less than the amount the holder paid for them. The
floating or variable rate demand instruments in which the Money Market Funds may
invest are payable on demand on not more than seven calendar days' notice.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board of
Trustees of the Trust in order to minimize credit risks.
In the case of a Money Market Fund, the Board of Trustees may determine
that an unrated floating or variable rate security meets the Fund's high quality
criteria if it is backed by a letter of credit or guarantee or is
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insured by an insurer that meets such quality criteria, or on the basis of a
credit evaluation of the underlying obligor. If the credit of the obligor is of
'high quality', no credit support from a bank or other financial institution
will be necessary. The Board of Trustees will re-evaluate each unrated floating
or variable rate security on a quarterly basis to determine that it continues to
meet a Money Market Fund's high quality criteria. If an instrument is ever
deemed to fall below a Money Market Fund's high quality standards, either it
will be sold in the market or the demand feature will be exercised.
The securities in which certain Funds may be invested include participation
certificates issued by a bank, insurance company or other financial institution
in securities owned by such institutions or affiliated organizations
('Participation Certificates'). A Participation Certificate gives a Fund an
undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security and
generally provides the demand feature described below. Each Participation
Certificate is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the Participation Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
Participation Certificate) or insurance policy of an insurance company that the
Board of Trustees of the Trust has determined meets the prescribed quality
standards for a particular Fund.
A Fund may have the right to sell the Participation Certificate back to the
institution and draw on the letter of credit or insurance on demand after the
prescribed notice period, for all or any part of the full principal amount of
the Fund's participation interest in the security, plus accrued interest. The
institutions issuing the Participation Certificates would retain a service and
letter of credit fee and a fee for providing the demand feature, in an amount
equal to the excess of the interest paid on the instruments over the negotiated
yield at which the Participation Certificates were purchased by a Fund. The
total fees would generally range from 5% to 15% of the applicable prime rate or
other short-term rate index. With respect to insurance, a Fund will attempt to
have the issuer of the participation certificate bear the cost of any such
insurance, although the Funds retain the option to purchase insurance if deemed
appropriate. Obligations that have a demand feature permitting a Fund to tender
the obligation to a foreign bank may involve certain risks associated with
foreign investment. A Fund's ability to receive payment in such circumstances
under the demand feature from such foreign banks may involve certain risks such
as future political and economic developments, the possible establishments of
laws or restrictions that might adversely affect the payment of the bank's
obligations under the demand feature and the difficulty of obtaining or
enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on an
ongoing basis the pricing, quality and liquidity of the floating and variable
rate securities held by the Funds, including Participation Certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Funds may subscribe. Although these
instruments may be sold by a Fund, it is intended that they be held until
maturity.
Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly 'prime rates' charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed rate securities. A Fund's portfolio may
contain floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the floating or
variable rate securities is made in relation to movements of the applicable
banks' 'prime rates' or other short-term rate adjustment indices, the floating
or variable rate securities are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of (i)
the notice period required before a Fund is entitled to receive payment of the
principal amount of the security upon demand or (ii) the period
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remaining until the security's next interest rate adjustment. With respect to a
Money Market Fund, the maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. With respect to Income Funds, if
variable rate securities are not redeemed through the demand feature, they
mature on a specified date which may range up to thirty years from the date of
issuance.
Tender Option Floating or Variable Rate Certificates. The Money Market
Funds may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts are
then issued to investors, such as the Funds, evidencing ownership interests in
the trust. The trust sets a floating or variable rate on a daily or weekly basis
which is established through a remarketing agent. These types of derivatives, to
be money market eligible under Rule 2a-7, must have a liquidity facility in
place which provides additional comfort to the investors in case the remarketing
fails. The sponsor of the trust keeps the difference between the rate on the
long term bond and the rate on the short term floating or variable rate
security.
Reverse Repurchase Agreements. Reverse repurchase agreements involve the
sale of securities held by a Fund with an agreement to repurchase the securities
at an agreed upon price and date. The repurchase price is generally equal to the
original sales price plus interest. Reverse repurchase agreements are usually
for seven days or less and cannot be repaid prior to their expiration dates.
Reverse repurchase agreements involve the risk that the market value of the
portfolio securities transferred may decline below the price at which the Fund
is obliged to purchase the securities.
High Quality Municipal Obligations. Investments by the Tax Free Money
Market Fund will be made in unrated Municipal Obligations only if they are
determined to be of comparable quality to permissible rated investments on the
basis of the advisers' credit evaluation of the obligor or of the bank issuing a
participation certificate, letter of credit or guaranty, or insurance issued in
support of the obligation. High Quality instruments may produce a lower yield
than would be available from less highly rated instruments. The Board of
Trustees has determined that Municipal Obligations which are backed by the
credit of U.S. Government will be considered to have a rating equivalent to
Moody's Aaa.
If, subsequent to purchase by the Tax Free Money Market Fund, (a) an issue
of rated Municipal Obligations ceases to be rated in the highest short-term
rating category by at least two rating organizations (or one rating organization
if the instrument was rated by only one such organization) or the Board of
Trustees determines that it is no longer of comparable quality or (b) the Tax
Free Money Market Fund's advisers become aware that any portfolio security not
so highly rated or any unrated security has been given a rating by any rating
organization below the rating organization's second highest rating category, the
Board of Trustees will reassess promptly whether such security presents minimal
credit risk and will cause such Tax Free Money Market Fund to take such action
as it determines is in its best interest and that of its shareholders; provided
that the reassessment required by clause (b) is not required if the portfolio
security is disposed of or matures within five business days of the advisers
becoming aware of the new rating and the Fund's Board is subsequently notified
of the adviser's actions.
To the extent that a rating given by Moody's, S&P or Fitch for Municipal
Obligations 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
its investments in accordance with the investment policies contained in the
Prospectus and this Statement of Additional Information. The ratings of Moody's,
S&P and Fitch represent their opinions as to the quality of the Municipal
Obligations which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings may be an initial criterion for selection of portfolio
investments, the advisers also will evaluate these securities and the
creditworthiness of the issuers of such securities.
Zero Coupon, Payment-in-Kind and Stripped Obligations. The principal and
interest components of United States Treasury bonds with remaining maturities of
longer than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ('STRIPS') program.
Under the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The interest
component of STRIPS may be more volatile than that of United States Treasury
bills with comparable maturities.
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Zero coupon obligations are sold at a substantial discount from their value
at maturity and, when held to maturity, their entire return, which consists of
the amortization of discount, comes from the difference between their purchase
price and maturity value. Because interest on a zero coupon obligation is not
distributed on a current basis, the obligation tends to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying securities with similar maturities. The value of zero coupon
obligations appreciates more than such ordinary interest-paying securities
during periods of declining interest rates and depreciates more than such
ordinary interest-paying securities during periods of rising interest rates.
Under the stripped bond rules of the Internal Revenue Code of 1986, as amended
(the 'Code'), investments by a Fund in zero coupon obligations will result in
the accrual of interest income on such investments in advance of the receipt of
the cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their component
parts through such custodial arrangements.
Payment-in-kind ('PIK') bonds are debt obligations which provide that the
issuer thereof may, at its option, pay interest on such bonds in cash or in the
form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments experience greater volatility in market value due to
changes in interest rates than debt obligations which provide for regular
payments of interest. A Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the 'Securities Act') and commercial obligations issued in
reliance on the so-called 'private placement' exemption from registration
afforded by Section 4(2) of the Securities Act ('Section 4(2) paper'). Rule 144A
provides an exemption from the registration requirements of the Securities Act
for the resale of certain restricted securities to qualified institutional
buyers. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as a Fund
who agree that they are purchasing the paper for investment and not with a view
to public distribution. Any resale of Section 4(2) paper by the purchaser must
be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities. Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security. The Trustees will
periodically review the Funds' purchases and sales of Rule 144A securities and
Section 4(2) paper.
Stand-By Commitments. In a put transaction, a Fund acquires the right to
sell a security at an agreed upon price within a specified period prior to its
maturity date, and a stand-by commitment entitles a Fund to same-day settlement
and to receive an exercise price equal to the amortized cost of the underlying
security plus accrued interest, if any, at the time of exercise.
The amount payable to the Tax Free Money Market Fund upon its exercise of a
stand-by commitment with respect to a Municipal Obligation normally would be (i)
the acquisition cost of the Municipal Obligation (excluding any accrued interest
paid by the Fund on the acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund owned
the security, plus (ii) all
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interest accrued on the security since the last interest payment date during the
period the security was owned by the Fund. Absent unusual circumstances relating
to a change in market value, the Tax Free Money Market Fund would value the
underlying Municipal Obligation at amortized cost. Accordingly, the amount
payable by a bank or dealer during the time a stand-by commitment is exercisable
would be substantially the same as the market value of the underlying Municipal
Obligation. The Tax Free Money Market Fund values stand-by commitments at zero
for purposes of computing their net asset value per share.
Stand-by commitments are subject to certain risks, which include the
inability of the issuer of the commitment to pay for the securities at the time
the commitment is exercised, the fact that the commitment is not marketable by
the Fund, and that the maturity of the underlying security will generally be
different from that of the commitment. Nor more than 10% of the total assets of
the Tax Free Money Market Fund will be invested in Municipal Obligations that
are subject to stand-by commitments from the same bank or broker-dealer.
Securities Loans. To the extent specified in the Prospectuses, each Fund
is permitted to lend its securities to broker-dealers and other institutional
investors in order to generate additional income. Such loans of portfolio
securities may not exceed 30% of the value of a Fund's total assets. In
connection with such loans, a Fund will receive collateral consisting of cash,
cash equivalents, U.S. Government securities or irrevocable letters of credit
issued by financial institutions. Such collateral will be maintained at all
times in an amount equal to at least 102% of the current market value plus
accrued interest of the securities loaned. A Fund can increase its income
through the investment of such collateral. A Fund continues to be entitled to
the interest payable or any dividend-equivalent payments received on a loaned
security and, in addition, to receive interest on the amount of the loan.
However, the receipt of any dividend-equivalent payments by a Fund on a loaned
security from the borrower will not qualify for the dividends-received
deduction. Such loans will be terminable at any time upon specified notice. A
Fund might experience risk of loss if the institutions with which it has engaged
in portfolio loan transactions breach their agreements with such Fund. The risks
in lending portfolio securities, as with other extensions of secured credit,
consist of possible delays in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower experience financial difficulty. Loans will be made only to firms
deemed by the advisers to be of good standing and will not be made unless, in
the judgment of the advisers, the consideration to be earned from such loans
justifies the risk.
Real Estate Investment Trusts. Certain Funds may invest in shares of real
estate investment trusts ('REITs'), which are pooled investment vehicles which
invest primarily in income-producing real estate or real estate related loans or
interests. REITs are generally classified as equity REITs or mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. The value of equity
trusts will depend upon the value of the underlying properties, and the value of
mortgage trusts will be sensitive to the value of the underlying loans or
interests.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
Introduction. As explained more fully below, the non-Money Market Funds
may employ derivative and related instruments as tools in the management of
portfolio assets. Put briefly, a 'derivative' instrument may be considered a
security or other instrument which derives its value from the value or
performance of other instruments or assets, interest or currency exchange rates,
or indexes. For instance, derivatives include futures, options, forward
contracts, structured notes and various over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways: first,
to reduce risk by hedging (offsetting) an investment position; second, to
substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives; and lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund.
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Each Fund may invest its assets in derivative and related instruments
subject only to the Fund's investment objective and policies and the requirement
that the Fund maintain segregated accounts consisting of cash or other liquid
assets (or, as permitted by applicable regulation, enter into certain offsetting
positions) to cover its obligations under such instruments with respect to
positions where there is no underlying portfolio asset so as to avoid leveraging
the Fund.
The value of some derivative or similar instruments in which the Funds may
invest may be particularly sensitive to changes in prevailing interest rates or
other economic factors, and--like other investments of the Funds--ability of a
Fund to successfully utilize these instruments may depend in part upon the
ability of the advisers to forecast interest rates and other economic factors
correctly. If the advisers inaccurately forecast such factors and have taken
positions in derivative or similar instruments contrary to prevailing market
trends, a Fund could be exposed to the risk of a loss. The Funds might not
employ any or all of the strategies described herein, and no assurance can be
given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies and
related instruments the Funds may employ along with risks or special attributes
associated with them. This discussion is intended to supplement the Funds'
current prospectuses as well as provide useful information to prospective
investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
This risk is particularly acute in the case of 'cross-hedges' between
currencies. The advisers may inaccurately forecast interest rates, market values
or other economic factors in utilizing a derivatives strategy. In such a case, a
Fund may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the opportunity
for gain. In other words, hedging usually limits both potential losses as well
as potential gains. Strategies not involving hedging may increase the risk to a
Fund. Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to a Fund than hedging strategies
using the same instruments. There can be no assurance that a liquid market will
exist at a time when a Fund seeks to close out an option, futures contract or
other derivative or related position. Many exchanges and boards of trade limit
the amount of fluctuation permitted in option or futures contract prices during
a single day; once the daily limit has been reached on particular contract, no
trades may be made that day at a price beyond that limit. In addition, certain
instruments are relatively new and without a significant trading history. As a
result, there is no assurance that an active secondary market will develop or
continue to exist. Finally, over-the-counter instruments typically do not have a
liquid market. Lack of a liquid market for any reason may prevent a Fund from
liquidating an unfavorable position. Activities of large traders in the futures
and securities markets involving arbitrage, 'program trading,' and other
investment strategies may cause price distortions in these markets. In certain
instances, particularly those involving over-the-counter transactions, forward
contracts there is a greater potential that a counterparty or broker may default
or be unable to perform on its commitments. In the event of such a default, a
Fund may experience a loss. In transactions involving currencies, the value of
the currency underlying an instrument may fluctuate due to many factors,
including economic conditions, interest rates, governmental policies and market
forces.
Specific Uses and Strategies. Set forth below are explanations of various
strategies involving derivatives and related instruments which may be used by a
Fund.
Options on Securities, Securities Indexes and Debt Instruments. A Fund may
purchase, sell or exercise call and put options on (i) securities, (ii)
securities indexes, and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Funds may
also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such,
over-the-counter options generally have much less market liquidity and carry the
risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund may also use
combinations of options to minimize costs, gain exposure to markets or
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take advantage of price disparities or market movements. For example, a Fund may
sell put or call options it has previously purchased or purchase put or call
options it has previously sold. These transactions may result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A Fund may write a call or put option in order to earn the related premium
from such transactions. Prior to exercise or expiration, an option may be closed
out by an offsetting purchase or sale of a similar option. The Funds will not
write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
Fund writing a covered call (i.e., where the underlying securities are held by
the Fund) has, in return for the premium on the option, given up the opportunity
to profit from a price increase in the underlying securities above the exercise
price, but has retained the risk of loss should the price of the underlying
securities decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The Funds will not
write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, such Fund will lose
its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when a Fund seeks to close out an option position. Furthermore, if
trading restrictions or suspensions are imposed on the options markets, a Fund
may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. A Fund may purchase or
sell (i) interest-rate futures contracts, (ii) futures contracts on specified
instruments or indices, and (iii) options on these futures contracts ('futures
options').
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign currencies,
certificates of deposit, Eurodollar time deposits, securities indices, economic
indices (such as the Consumer Price Indices compiled by the U.S. Department of
Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund may sell a futures contract--or buy a futures option--to protect against
a decline in value, or reduce the duration, of portfolio holdings. Likewise,
these instruments may be used where a Fund intends to acquire an instrument or
enter into a position. For example, a Fund may purchase a futures contract--or
buy a futures option--to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired in
the future. Futures options may also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter into
other transactions involving futures contracts or futures options in order to
minimize costs, gain exposure to markets, or take advantage of price disparities
or market movements. Such strategies may entail additional risks in certain
instances. The Funds may engage in cross-hedging by purchasing or selling
futures or options on a security or currency different from the security or
currency position being hedged to take advantage of relationships between the
two securities or currencies.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
Forward Contracts. A Fund may use foreign currency and interest-rate
forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. A Fund that may
invest in securities denominated in foreign currencies may, in
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addition to buying and selling foreign currency futures contracts and options on
foreign currencies and foreign currency futures, enter into forward foreign
currency exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, a Fund 'locks in' the
exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, a Fund reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of a Fund is similar to selling securities denominated in
one currency and purchasing securities denominated in another. Transactions that
use two foreign currencies are sometimes referred to as 'cross-hedges.'
A Fund may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Fund's investments or anticipated
investments in securities denominated in foreign currencies. A Fund may also
enter into these contracts for purposes of increasing exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another.
A Fund may also use forward contracts to hedge against changes in interest
rates, increase exposure to a market or otherwise take advantage of such
changes. An interest-rate forward contract involves the obligation to purchase
or sell a specific debt instrument at a fixed price at a future date.
Interest Rate and Currency Transactions. A Fund may employ currency and
interest rate management techniques, including transactions in options
(including yield curve options), futures, options on futures, forward foreign
currency exchange contracts, currency options and futures and currency and
interest rate swaps. The aggregate amount of a Fund's net currency exposure will
not exceed the total net asset value of its portfolio. However, to the extent
that a Fund is fully invested while also maintaining currency positions, it may
be exposed to greater combined risk.
The Funds will only enter into interest rate and currency swaps on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate and currency swaps do not involve the delivery of securities, the
underlying currency, other underlying assets or principal. Accordingly, the risk
of loss with respect to interest rate and currency swaps is limited to the net
amount of interest or currency payments that a Fund is contractually obligated
to make. If the other party to an interest rate or currency swap defaults, a
Fund's risk of loss consists of the net amount of interest or currency payments
that the Fund is contractually entitled to receive. Since interest rate and
currency swaps are individually negotiated, the Funds expect to achieve an
acceptable degree of correlation between their portfolio investments and their
interest rate or currency swap positions.
A Fund may hold foreign currency received in connection with investments in
foreign securities when it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate.
A Fund may purchase or sell without limitation as to a percentage of its
assets forward foreign currency exchange contracts when the advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
denominated in that currency do not present attractive investment opportunities
and are not held by such Fund. In addition, a Fund may enter into forward
foreign currency exchange contracts in order to protect against adverse changes
in future foreign currency exchange rates. A Fund may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated in a different currency if its advisers believe
that there is a pattern of correlation between the two currencies. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a Fund
than if it had not entered into such contracts. The use of foreign currency
forward contracts will not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Fund's foreign
currency denominated portfolio securities and the use of such techniques will
subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Fund may not always be able to enter into foreign currency forward contracts at
attractive prices, and this will limit a Fund's ability to use such contract to
hedge or cross-hedge its assets. Also, with regard to a
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Fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a Fund's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which the Fund's assets that are the subject of such cross-hedges are
denominated.
A Fund may enter into interest rate and currency swaps to the maximum
allowed limits under applicable law. A Fund will typically use interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
Mortgage-Related Securities. A Fund may purchase mortgage-backed
securities--i.e., securities representing an ownership interest in a pool of
mortgage loans issued by lenders such as mortgage bankers, commercial banks and
savings and loan associations. Mortgage loans included in the pool--but not the
security itself--may be insured by the Government National Mortgage Association
or the Federal Housing Administration or guaranteed by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the Veterans
Administration. Mortgage-backed securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. Although providing the potential for enhanced
returns, mortgage-backed securities can also be volatile and result in
unanticipated losses.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of the principal invested
far in advance of the maturity of the mortgages in the pool. The actual rate of
return of a mortgage-backed security may be adversely affected by the prepayment
of mortgages included in the mortgage pool underlying the security.
A Fund may also invest in securities representing interests in
collateralized mortgage obligations ('CMOs'), real estate mortgage investment
conduits ('REMICs') and in pools of certain other asset-backed bonds and
mortgage pass-through securities. Like a bond, interest and prepaid principal
are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by the U.S. Government, or U.S.
Government-related entities, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, are allocated to different
classes in accordance with the terms of the instruments, and changes in
prepayment rates or assumptions may significantly affect the expected average
life and value of a particular class.
REMICs include governmental and/or private entities that issue a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities. REMICs issued by private
entities are not U.S. Government securities and are not directly guaranteed by
any government agency. They are secured by the underlying collateral of the
private issuer.
The advisers expect that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed-rate mortgages. A Fund may also invest in
debentures and other securities of real estate investment trusts. As new types
of mortgage-related securities are developed and offered to investors, the Funds
may consider making investments in such new types of mortgage-related
securities.
Dollar Rolls. Under a mortgage 'dollar roll,' a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund forgoes principal and
interest paid on the mortgage-backed securities. A Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the 'drop') as well as by the interest
earned on
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the cash proceeds of the initial sale. A Fund may only enter into covered rolls.
A 'covered roll' is a specific type of dollar roll for which there is an
offsetting cash position which matures on or before the forward settlement date
of the dollar roll transaction. At the time a Fund enters into a mortgage
'dollar roll,' it will establish a segregated account with its custodian bank in
which it will maintain cash or liquid securities equal in value to its
obligations in respect of dollar rolls, and accordingly, such dollar rolls will
not be considered senior securities. Mortgage dollar rolls involve the risk that
the market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Asset-Backed Securities. A Fund may invest in asset-backed securities,
including conditional sales contracts, equipment lease certificates and
equipment trust certificates. The advisers expect that other asset-backed
securities (unrelated to mortgage loans) will be offered to investors in the
future. Several types of asset-backed securities already exist, including, for
example, 'Certificates for Automobile Receivables(Service Mark)' or 'CARSSM'
('CARS'). CARS represent undivided fractional interests in a trust whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS are passed-through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the CARS trust. An investor's return on CARS may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the CARS trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, the failure of servicers to take appropriate steps to perfect
the CARS trust's rights in the underlying loans and the servicer's sale of such
loans to bona fide purchasers, giving rise to interests in such loans superior
to those of the CARS trust, or other factors. As a result, certificate holders
may experience delays in payments or losses if the letter of credit is
exhausted. A Fund also may invest in other types of asset-backed securities. In
the selection of other asset-backed securities, the advisers will attempt to
assess the liquidity of the security giving consideration to the nature of the
security, the frequency of trading in the security, the number of dealers making
a market in the security and the overall nature of the marketplace for the
security.
Structured Products. A Fund may invest in interests in entities organized
and operated solely for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities ('structured products')
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. A Fund may invest in structured products which represent derived
investment positions based on relationships among different markets or asset
classes.
A Fund may also invest in other types of structured products, including,
among others, inverse floaters, spread trades and notes linked by a formula to
the price of an underlying instrument. Inverse floaters have coupon rates that
vary inversely at a multiple of a designated floating rate (which typically is
determined by reference to an index rate, but may also be determined through a
dutch auction or a remarketing agent or by reference to another security) (the
'reference rate'). As an example, inverse floaters may constitute a class of
CMOs with a coupon rate that moves inversely to a designated index, such as
LIBOR (London Interbank Offered Rate) or the Cost of Funds Index. Any rise in
the reference rate of an inverse floater (as a consequence of an increase in
interest rates) causes a drop in the coupon rate while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate. A spread trade
is an investment position relating to a difference in the prices or interest
rates of two securities where the value of the investment position is determined
by movements in the difference between the prices or interest rates, as the case
may be, of the respective securities. When a Fund invests in notes linked to the
price of an underlying instrument, the price of the underlying security is
determined by a multiple (based on a formula) of the price of such underlying
security. A structured product may be
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considered to be leveraged to the extent its interest rate varies by a magnitude
that exceeds the magnitude of the change in the index rate of interest. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument. Because certain structured products of the type in
which a Fund may invest may involve no credit enhancement, the credit risk of
those structured products generally would be equivalent to that of the
underlying instruments. A Fund may invest in a class of structured products that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured products typically have higher yields and present
greater risks than unsubordinated structured products. Although a Fund's
purchase of subordinated structured products would have similar economic effect
to that of borrowing against the underlying securities, the purchase will not be
deemed to be leverage for purposes of a Fund's fundamental investment limitation
related to borrowing and leverage.
Certain issuers of structured products may be deemed to be 'investment
companies' as defined in the 1940 Act. As a result, a Fund's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which an Income Fund
invests may be deemed illiquid and subject to its limitation on illiquid
investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a 'commodity pool' (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options will
be purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a segregated
account with such Fund's custodian or sub-custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the account of
its broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures contracts held
by a Fund not exceed 50% of the market value of its total assets. Neither this
restriction nor any policy with respect to the above-referenced restrictions,
would be changed by the Board of Trustees without considering the policies and
concerns of the various federal and state regulatory agencies.
MASTER-FEEDER STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, each Fund is permitted to invest all of its investable
assets in a separate registered investment company (a 'Portfolio'). In that
event, a shareholder's interest in a Fund's underlying investment securities
would be indirect. In addition to selling a beneficial interest to a Fund, a
Portfolio could also sell beneficial interests to other mutual funds or
institutional investors. Such investors would invest in such Portfolio on the
same terms and conditions and would pay a proportionate share of such
Portfolio's expenses. However, other investors in a Portfolio would not be
required to sell their shares at the same public offering price as a Fund, and
might bear different levels of ongoing expenses than a Fund. Shareholders of the
Funds should be aware that these differences may result in differences in
returns experienced in the different funds that invest in a Portfolio. Such
differences in return are also present in other mutual fund structures.
Smaller funds investing in a Portfolio could be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
were to withdraw from a Portfolio, the remaining funds might experience higher
pro rata operating expenses, thereby producing lower returns. Additionally, the
Portfolio could
16
<PAGE>
become less diverse, resulting in increased portfolio risk. However, this
possibility also exists for traditionally structured funds which have large or
institutional investors. Funds with a greater pro rata ownership in a Portfolio
could have effective voting control of such Portfolio. Under this master/feeder
investment approach, whenever the Trust was requested to vote on matters
pertaining to a Portfolio, the Trust would hold a meeting of shareholders of the
relevant Fund and would cast all of its votes in the same proportion as did such
Fund's shareholders. Shares of a Fund for which no voting instructions had been
received would be voted in the same proportion as those shares for which voting
instructions had been received. Certain changes in a Portfolio's objective,
policies or restrictions might require the Trust to withdraw the relevant Fund's
interest in such Portfolio. Any such withdrawal could result in a distribution
in kind of portfolio securities (as opposed to a cash distribution from such
Portfolio). A Fund could incur brokerage fees or other transaction costs in
converting such securities to cash. In addition, a distribution in kind could
result in a less diversified portfolio of investments or adversely affect the
liquidity of the relevant Fund.
A Fund will not adopt a master/feeder structure under which the
disinterested Trustees of the Trust are Trustees of the Portfolio unless the
Trustees of the Trust, including a majority of the disinterested Trustees, adopt
procedures they believe to be reasonably appropriate to deal with any conflict
of interest up to and including creating a separate Board of Trustees.
If a Fund invests all of its investable assets in a Portfolio, investors in
the Fund will be able to obtain information about whether investment in the
Portfolio might be available through other funds by contacting the Chase Funds
Service Center. In the event a Fund adopts a master/feeder structure and invests
all of its investable assets in a Portfolio, shareholders of the Fund will be
given at least 30 days' prior written notice.
INVESTMENT RESTRICTIONS
The Funds have adopted the following investment restrictions which may not
be changed without approval by a 'majority of the outstanding shares' of a Fund
which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of a Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of a Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of a Fund.
Each Fund may not:
(1) borrow money, except that each Fund may borrow money for temporary
or emergency purposes, or by engaging in reverse repurchase transactions,
in an amount not exceeding 33 1/3% of the value of its total assets at the
time when the loan is made and may pledge, mortgage or hypothecate no more
than 1/3 of its net assets to secure such borrowings. Any borrowings
representing more than 5% of a Fund's total assets must be repaid before
the Fund may make additional investments;
(2) make loans, except that each Fund may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the same
industry. Notwithstanding the foregoing, (i) with respect to a Fund's
permissible futures and options transactions in U.S. Government securities,
positions in such options and futures shall not be subject to this
restriction; (ii) the Money Market Funds may invest more than 25% of their
total assets in obligations issued by banks, including U.S. banks; and
(iii) the Tax Free Money Market Fund may invest more than 25% of its assets
in municipal obligations secured by bank letters of credit or guarantees,
including participation certificates.
(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not prevent
a Fund from (i) purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities
or (ii) engaging in forward purchases or sales of foreign currencies or
securities;
17
<PAGE>
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund in securities backed by mortgages on real estate or
in marketable securities of companies engaged in such activities are not
hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except
that (a) a Fund may engage in transactions that may result in the issuance
of senior securities to the extent permitted under applicable regulations
and interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, a Fund may borrow money as authorized by the
1940 Act. For purposes of this restriction, collateral arrangements with
respect to permissible options and futures transactions, including deposits
of initial and variation margin, are not considered to be the issuance of a
senior security; or
(7) underwrite securities issued by other persons except insofar as a
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security.
In addition, as a matter of fundamental policy, notwithstanding any other
investment policy or restriction, each Fund may seek to achieve its investment
objective by investing all of its investable assets in another investment
company having substantially the same investment objective and policies as the
Fund.
For purposes of investment restriction (2) above, loan participations are
considered to be debt instruments.
For purposes of investment restriction (5) above, real estate includes Real
Estate Limited Partnerships.
For purposes of investment restriction (3) above, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
'industry.' Investment restriction (3) above, however, is not applicable to
investments by a Fund in municipal obligations where the issuer is regarded as a
state, city, municipality or other public authority since such entities are not
members of an 'industry.' Supranational organizations are collectively
considered to be members of a single 'industry' for purposes of restriction (3)
above.
For purposes of investment restriction (3) above, the Money Market Funds
may invest more than 25% of their respective total assets in obligations issued
by banks, including foreign branches of U.S. banks where the investment risk of
investing in the foreign branch is the same as that of investing in the U.S.
parent, in that the U.S. parent would be unconditionally liable in the event the
foreign branch failed to pay on its instruments for any reason.
In addition, each Fund is subject to the following nonfundamental
restrictions which may be changed without shareholder approval:
(1) Each Fund other than the Tax Free Income Fund and New York Tax
Free Income Fund may not, with respect to 75% of its assets, hold more than
10% of the outstanding voting securities of any issuer or invest more than
5% of its assets in the securities of any one issuer (other than
obligations of the U.S. Government, its agencies and instrumentalities);
each of the Tax Free Income Fund and New York Tax Free Income Fund may not,
with respect to 50% of its assets, hold more than 10% of the outstanding
voting securities of any issuer.
(2) Each Fund may not make short sales of securities, other than short
sales 'against the box,' or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund.
(3) Each Fund may not purchase or sell interests in oil, gas or
mineral leases.
(4) Each Fund other than the Money Market Funds may not invest more
than 15% of its net assets in illiquid securities; each Money Market Fund
may not invest more than 10% of its net assets in illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
writing, purchasing or selling of puts, calls or combinations thereof with
respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
18
<PAGE>
(6) Except as specified above, each Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not
own more than 3% of the securities of any one investment company or invest
more than 10% of its total assets in the securities of other investment
companies.
For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by a Fund will not be considered a violation. If the value of a Fund's
holdings of illiquid securities at any time exceeds the percentage limitation
applicable at the time of acquisition due to subsequent fluctuations in value or
other reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such Fund
and who is appointed and supervised by senior officers of such adviser or
sub-adviser. Changes in a Fund's investments are reviewed by the Board of
Trustees of the Trust. The portfolio managers may serve other clients of the
advisers in a similar capacity.
The frequency of a Fund's portfolio transactions--the portfolio turnover
rate--will vary from year to year depending upon market conditions. Because a
high turnover rate may increase transaction costs and the possibility of taxable
short-term gains, the advisers will weigh the added costs of short-term
investment against anticipated gains. Each Fund will engage in portfolio trading
if its advisers believe a transaction, net of costs (including custodian
charges), will help it achieve its investment objective. Funds investing in both
equity and debt securities apply this policy with respect to both the equity and
debt portions of their portfolios.
For the fiscal years ended December 31, 1995, 1996 and 1997, the annual
rates of portfolio turnover for the predecessors of the following Funds were as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Balanced Fund................................................................ 98 % 70 % 64 %
Core Equity Fund............................................................. 133 % 29 % 24 %
Equity Growth Fund........................................................... 99 % 62 % 35 %
Equity Income Fund........................................................... 11 % 24 % 14 %
Income Fund.................................................................. 93 % 72 % 97 %
Intermediate Term Bond Fund.................................................. 198 % 134 % 138 %
Short- Intermediate Term U.S. Government Securities Fund..................... 187 % 177 % 63 %
Small Capitalization Fund.................................................... 89 % 68 % 43 %
U.S. Government Securities Fund.............................................. 17 % 48 % 87 %
</TABLE>
For the fiscal year ended December 31, 1998, the annual rates of portfolio
turnover for the International Equity Fund, Mid Cap Growth Fund, New York Tax
Free Income Fund and Tax Free Income Fund are each expected not to exceed 200%.
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs or
proceeds being the most favorable to the Funds. In assessing the best overall
terms available for any transaction, the adviser and sub-advisers consider all
factors they deem relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, research services provided to the adviser and
sub-advisers, and the reasonableness of the commissions, if any, both for the
specific transaction and on a continuing basis. The adviser and sub-advisers are
not required to obtain the lowest commission or the best net price for any Fund
on any particular transaction, and are not required to execute any order in a
fashion either preferential to any Fund relative to other accounts they manage
or otherwise materially adverse to such other accounts.
19
<PAGE>
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund normally seeks to deal directly with the primary market
makers unless, in its opinion, best execution is available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Fund's portfolio securities in so-called tender or exchange offers.
Such soliciting dealer fees are in effect recaptured for a Fund by the adviser
and sub-adviser. At present, no other recapture arrangements are in effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for a Fund in excess of the amount other broker-dealers
would have charged for the transaction if they determine in good faith that the
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or their overall responsibilities to accounts
over which they exercise investment discretion. Not all of such services are
useful or of value in advising the Funds. The adviser and sub-advisers report to
the Board of Trustees regarding overall commissions paid by the Funds and their
reasonableness in relation to the benefits to the Funds. The term 'brokerage and
research services' includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or of purchasers or sellers of securities, furnishing
analyses and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy and the performance of accounts, and effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Funds will exceed
those that might otherwise be paid by an amount which cannot be presently
determined. Such services generally would be useful and of value to the adviser
or sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
generally would be useful to the adviser or sub-advisers in carrying out their
obligations to the Funds. While such services are not expected to reduce the
expenses of the adviser or sub-advisers, the advisers would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staffs.
In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers' other
clients. Investment decisions for the Funds and for other clients are made with
a view to achieving their respective investment objectives. It may develop that
the same investment decision is made for more than one client or that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more Funds or other clients are simultaneously
engaged in the purchase or sale of the same security, the securities are
allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as the Funds are concerned. However, it
is believed that the ability of the Funds to participate in volume transactions
will generally produce better executions for the Funds.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
predecessor to the Balanced Fund paid aggregate brokerage commissions of
$31,889, $17,647, and $15,780 respectively.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
predecessor to the Core Equity Fund paid aggregate brokerage commissions of
$78,529, $14,201 and $35,767 respectively.
20
<PAGE>
For the fiscal years ended December 31, 1995, 1996 and 1997, the
predecessor to the Equity Growth Fund paid aggregate brokerage commissions of
$94,430, $60,946 and $55,780 respectively.
For the fiscal years ended December 31, 1995 and 1996 and 1997, the
predecessor to the Equity Income Fund paid aggregate brokerage commissions of
$17,134, $43,787 and $27,089 respectively.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
predecessor to the Income Fund paid aggregate brokerage commissions of $45,
$0 and $0 respectively.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
predecessor to the Small Capitalization Fund paid aggregate brokerage
commissions of $21,765, $34,255 and $48,136 respectively.
No portfolio transactions are executed with the advisers or with any
affiliate of the advisers, acting either as principal or as broker.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based on
past investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future. From
time to time, the performance and yield of classes of a Fund may be quoted and
compared to those of other mutual funds with similar investment objectives,
unmanaged investment accounts, including savings accounts, or other similar
products and to stock or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund or its
classes may be compared to data prepared by Lipper Analytical Services, Inc. or
Morningstar Mutual Funds on Disc, widely recognized independent services which
monitor the performance of mutual funds. Performance and yield data as reported
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in local or regional publications, may also be used in comparing the performance
and yield of a Fund or its classes. A Fund's performance may be compared with
indices such as the Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Government Bond Index, the Lehman Government Bond 1-3 Year Index and
the Lehman Aggregate Bond Index; the S&P 500 Index, the S&P 400 Mid Cap Index,
the S&P 600 Small Cap Index, the Dow Jones Industrial Average or any other
commonly quoted index of common stock prices; and the Russell 2000 Index and the
NASDAQ Composite Index. Additionally, a Fund may, with proper authorization,
reprint articles written about such Fund and provide them to prospective
shareholders.
A Fund may provide period and average annual 'total rates of return.' The
'total rate of return' refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. One-,
five-, and ten-year periods will be shown, unless the class has been in
existence for a shorter period.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values (in the case of the
non-Money Market Funds) of the classes of shares of a Fund will vary based on
market conditions, the current market value of the securities held by the Fund
and changes in the Fund's expenses. The advisers, the Administrator, the
Distributor and other service providers may voluntarily waive a portion of their
fees on a month-to-month basis. In addition, the Distributor may assume a
portion of a Fund's operating expenses on a month-to-month basis. These actions
would have the effect of increasing the net income (and therefore the yield and
total rate of return) of the classes of shares of the Fund during the period
such waivers are in effect. These factors and possible differences in the
methods used to calculate the yields and total rates of return should be
considered when comparing the yields or total rates of return of the classes of
shares of a Fund to yields and total rates of return published for other
investment companies and other investment vehicles (including different classes
of shares).
21
<PAGE>
Each Fund presents performance information for each class thereof since the
commencement of operations of that Fund (or the related predecessor fund, as
described below), rather than the date such class was introduced. Performance
information for each class introduced after the commencement of operations of
the related Fund (or predecessor fund) is therefore based on the performance
history of a predecessor class. Historical expenses reflected in performance
information are based upon the distribution and other expenses actually incurred
during the periods presented and have not been restated, for periods during
which the performance information for a particular class is based upon the
performance history of a predecessor class, to reflect the ongoing expenses
currently borne by the particular class.
In connection with the Avesta Conversion, each of the Balanced, Core
Equity, Equity Growth, Equity Income, Income, Intermediate Term Bond, Money
Market, Short-Intermediate Term U.S. Government Securities, Small Capitalization
and U.S. Government Securities Funds of the Trust was established to receive the
assets of the corresponding investment portfolio of the AVESTA Trust, a
collective investment trust organized under Texas law. Performance results
presented for each class of the Chase Funds include the performance of the
corresponding investment portfolio of the AVESTA Trust for periods prior to the
consummation of the Avesta Conversion. Accordingly, for periods prior to January
1, 1998, the performance results for each class of a Fund will be identical.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as well
as legislative, regulatory and monetary developments, and may include investment
strategies and related matters believed to be of relevance to a Fund.
Advertisements for the Chase Funds may include references to the asset size
of other financial products made available by Chase or its affiliates, such as
the offshore assets of other funds.
TOTAL RATE OF RETURN
A Fund's or class's total rate of return for any period will be calculated
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such period
with respect to a share held at the beginning of such period and with respect to
shares purchased with such dividends and capital gains distributions, by (ii)
the public offering price per share on the first day of such period, and (b)
subtracting 1 from the result. The average annual rate of return quotation will
be calculated by (x) adding 1 to the period total rate of return quotation as
calculated above, (y) raising such sum to a power which is equal to 365 divided
by the number of days in such period, and (z) subtracting 1 from the result.
AVERAGE ANNUAL TOTAL RETURNS(1)
The average annual total rate of return figures for the predecessors to the
following Funds, reflecting the initial investment and assuming the reinvestment
of all distributions for the one and five year periods ended December 31, 1997
and for the period from commencement of business operations of each such Fund to
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SINCE FUND DATE OF FUND DATE OF CLASS
FUND ONE YEAR FIVE YEARS INCEPTION INCEPTION INTRODUCTION
- ------------------------------------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balanced Fund 3/29/88
Premier Shares................................. 23.67% 12.05% 11.64% 3/29/88
Retail Shares(2)............................... 23.67% 12.05% 11.64% *
Core Equity Fund 4/1/93
Premier Shares................................. 33.33% -- 17.20% 4/1/93
Retail Shares(2)............................... 33.33% -- 17.20% *
Equity Growth Fund 3/29/88
Premier Shares................................. 37.20% 16.13% 14.78% 3/29/88
Retail Shares(2)............................... 37.20% 16.13% 14.78% *
Equity Income Fund 3/29/88
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SINCE FUND DATE OF FUND DATE OF CLASS
FUND ONE YEAR FIVE YEARS INCEPTION INCEPTION INTRODUCTION
- ------------------------------------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Premier Shares................................. 31.05% 17.52% 14.35% 3/29/88
Retail Shares(2)............................... 31.05% 17.52% 14.35% *
Income Fund 3/29/88
Premier Shares................................. 8.73% 6.66% 7.47% 3/29/88
Retail Shares(2)............................... 8.73% 6.66% 7.47% *
Intermediate Term Bond Fund
10/3/94
Premier Shares................................. 7.26% -- 7.76% 10/3/94 10/3/94
Retail Shares(2)............................... 7.26% -- 7.76% *
Short-Intermediate Term
U.S. Government Securities Fund 4/1/93
Premier Shares................................. 6.30% -- 4.61% 4/1/93
Retail Shares(2)............................... 6.30% -- 4.61% *
Small Capitalization Fund 4/1/93
Premier Shares................................. 24.08% -- 17.81% 4/1/93
Retail Shares(2)............................... 24.08% -- 17.81% *
U.S. Government Securities Fund 4/1/93
Premier Shares................................. 9.55% -- 7.31% 4/1/93
Retail Shares(2)............................... 9.55% -- 7.31% *
</TABLE>
- ------------------
(1) The ongoing fees and expenses borne by Retail Shares are greater than those
borne by Premier Shares. As indicated above, the performance information for
each class introduced after the commencement of operations of the related
Fund (or predecessor fund) is based on the performance history of a
predecessor class and historical expenses have not been restated, for
periods during which the performance information for a particular class is
based upon the performance history of a predecessor class, to reflect the
ongoing expenses currently borne by the particular class. Accordingly, the
performance information presented in the table above and in each table that
follows may be used in assessing each Fund's performance history but does
not reflect how the distinct classes would have performed on a relative
basis prior to the introduction of those classes, which would require an
adjustment to the ongoing expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on
these Funds (or classes) would have been lower if there were not such
waivers. With respect to certain Funds, Chase and/or other service providers
are obligated to waive certain fees and/or reimburse certain expenses for a
stated period of time. In other instances, there is no obligation to waive
fees or to reimburse expenses. The Prospectuses disclose the extent of any
agreements to waive fees and/or reimburse expenses.
Performance presented in the table above and in each table that follows for
each class of these Funds includes the performance of their respective
predecessor funds for periods prior to the consummation of the Avesta
Conversion. Performance presented for each class of each of these Funds is
based on the historical expenses and performance of a single class of shares
of its predecessor fund and does not reflect the current distribution,
service and/or other expenses that an investor would incur as a holder of
such class of such Fund. Date of Fund inception shown for these Funds is the
date of inception of their respective predecessor funds. These Funds
commenced operations as part of the Trust on January 1, 1998. The
predecessor funds (unlike the Chase Funds and other investment companies)
were not required to comply with the diversification, distribution and other
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the 'Code'). Had the predecessor funds been subject to such
requirements, their investment performance might have been adversely
affected.
(Footnotes continued on next page)
23
<PAGE>
(Footnotes continued from previous page)
(2) Performance information presented in the table above and in each table that
follows for this class of this Fund prior to the date the class was
introduced does not reflect distribution fees and certain other expenses
borne by this class which, if reflected, would reduce the performance
quoted.
* Retail Shares are not currently avaiable for investment.
YIELD QUOTATIONS
Any current 'yield' quotation for a class of shares shall consist of an
annualized hypothetical yield, carried at least to the nearest hundredth of one
percent, based on a thirty calendar day period and shall be calculated by (a)
raising to the sixth power the sum of 1 plus the quotient obtained by dividing
the Fund's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the maximum offering price per share on the last day of
the period, (b) subtracting 1 from the result, and (c) multiplying the result by
2.
Any current 'yield' for a class of shares of a Money Market Fund which is
used in such a manner as to be subject to the provisions of Rule 482(d) under
the Securities Act of 1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven calendar day period and shall be calculated by
dividing the net change in the value of an account having a balance of one Share
at the beginning of the period by the value of the account at the beginning of
the period and multiplying the quotient by 365/7. For this purpose, the net
change in account value would reflect the value of additional Shares purchased
with dividends declared on the original Share and dividends declared on both the
original Share and any such additional Shares, but would not reflect any
realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any effective
yield quotation for a class of shares of a Money Market Fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the sum to
a power equal to 365/7, and subtracting 1 from the result. A portion of the Tax
Free Money Market Fund's income used in calculating such yields may be taxable.
Any taxable equivalent yield quotation of a class of shares of a Tax Free
Fund, whether or not it is a Money Market Fund, shall be calculated as follows.
If the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield will be the current yield quotation (as determined in
accordance with the appropriate calculation described above) divided by 1 minus
a stated income tax rate or rates. If a portion of the current yield quotation
is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion
of the yield which is tax-exempt divided by 1 minus a stated income tax rate or
rates and (b) the portion of the yield which is not tax-exempt.
The yields of the shares of the non-Money Market Funds for the thirty day
period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PREMIER
-------
<S> <C>
Balanced Fund................................................................................. 2.82%
Core Equity Fund.............................................................................. 0.69%
Equity Growth Fund............................................................................ 0.15%
Equity Income Fund............................................................................ 1.19%
Income Fund................................................................................... 5.61%
Intermediate Term Bond Fund................................................................... 5.60%
Short-Intermediate Term U.S. Government Securities Fund....................................... 5.08%
Small Capitalization
Fund.......................................................................................... 0.09%
U.S. Government Securities Fund............................................................... 5.14%
</TABLE>
24
<PAGE>
The yields and effective yields of the shares of the Money Market Fund for
the seven day period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
EFFECTIVE
CURRENT COMPOUND
ANNUALIZED YIELD ANNUALIZED YIELD
------------------ ----------------
<S> <C> <C>
Money Market Fund
Premier Shares.................................................. 5.24% 5.37%
</TABLE>
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Since the
International Equity Fund invests in securities primarily listed on foreign
exchanges which may trade on Saturdays or other customary United States national
business holidays on which the Fund does not price, the Fund's portfolio will
trade and the net asset value of the Fund's shares may be significantly affected
on days on which the investor has no access to the Fund.
Equity securities in a Fund's portfolio are valued at the last sale price
on the exchange on which they are primarily traded or on the NASDAQ National
Market System, or at the last quoted bid price for securities in which there
were no sales during the day or for other unlisted (over-the-counter) securities
not reported on the NASDAQ National Market System. Bonds and other fixed income
securities (other than short-term obligations, but including listed issues) in a
Fund's portfolio are valued on the basis of valuations furnished by a pricing
service, the use of which has been approved by the Board of Trustees. In making
such valuations, the pricing service utilizes both dealer-supplied valuations
and electronic data processing techniques that take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or exchange
or over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. Futures and option contracts that
are traded on commodities or securities exchanges are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
The Money Market Funds' portfolio securities are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter accrediting discounts and amortizing premiums at a constant rate to
maturity. Pursuant to the rules of the Securities and Exchange Commission, the
Board of Trustees has established procedures to stabilize the net asset value of
each Money Market Fund at $1.00 per share. These procedures include a review of
the extent of any deviation of net asset value per share, based on available
market rates, from the $1.00 amortized cost price per share. If fluctuating
interest rates cause the market value of a Money Market Fund's portfolio to
approach a deviation of more than 1/2 of 1% from the value determined on the
basis of amortized cost, the Board of Trustees will considered what action, if
any, should be initiated. Such action may include redemption of shares in kind
(as described in greater detail below), selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value per
share as determined by using available market quotations.
The Money Market Funds have established procedures designed to ensure that
their portfolio securities meet their high quality criteria.
Bonds and other fixed income securities, (other than short-term
obligations) in a Funds Portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, compound rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations which
25
<PAGE>
mature in 60 days or less are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. Futures and option contracts that
are traded on commodities or securities exchanges are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Interest income on long-term obligations in a Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of discount
(the difference between acquisition price and stated redemption price at
maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service options
chosen by the shareholder or joint shareholders in his or their latest account
application or other written request for services, including purchasing,
exchanging, or redeeming shares of such Fund and depositing and withdrawing
monies from the bank account specified in the Bank Account Registration section
of the shareholder's latest account application or as otherwise properly
specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
Under the Exchange Privilege, shares may be exchanged for shares of another
fund only if shares of the fund exchanged into are registered in the state where
the exchange is to be made. Shares of a Fund may only be exchanged into another
fund if the account registrations are identical. Any such exchange may create a
gain or loss to be recognized for federal income tax purposes. Normally, shares
of the fund to be acquired are purchased on the redemption rate, but such
purchase may be delayed by either fund for up to five business days if a fund
determines that it would be disadvantaged by an immediate transfer of the
proceeds.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described in
the Prospectuses. A Fund may also refuse to accept or carry out any transaction
that does not satisfy any restrictions then in effect. A signature guarantee may
be obtained from a bank, trust company, broker-dealer or other member of a
national securities exchange. Please note that a notary public cannot provide a
signature guarantee.
26
<PAGE>
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussions here and in
the Prospectuses are not intended as substitutes for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends to qualify and elect to be taxed as a regulated
investment company (a 'RIC') under Subchapter M of the Code. If a Fund qualifies
as a RIC, such Fund will not be subject to federal income tax on the portion of
its net investment income (i.e., its investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and net capital gain (i.e., the excess of its net long-term capital gain over
net short-term capital loss) that it distributes to shareholders, provided that
it distributes (i) at least 90% of its net investment income for the taxable
year, and (ii) in the case of each Tax Free Fund, at least 90% of its net
tax-exempt interest income for the taxable year (the 'Distribution
Requirement').
In addition to satisfying the Distribution Requirement for each taxable
year, a RIC must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the RIC's principal business of
investing in stock or securities) and other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the 'Income
Requirement').
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a RIC. Under this
test, at the close of each quarter of a Fund's taxable year, at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S. Government
securities, securities of other RICs, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of such issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses.
Each non-Money Market Fund may engage in hedging or derivatives
transactions involving foreign currencies, forward contracts, options and
futures contracts (including options, futures and forward contracts on foreign
currencies) and short sales. See 'Additional Policies Regarding Derivative and
Related Transactions.' Such transactions will be subject to special provisions
of the Code that, among other things, may affect the character of gains and
losses realized by the Fund (that is, may affect whether gains or losses are
ordinary or capital), accelerate recognition of income of the Fund and defer
recognition of certain of the Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to 'mark-to-market' certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
Distribution Requirement and avoid the 4% excise tax (described below). Each
Fund intends to monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when it
acquires any option, futures contract, forward contract or hedged investment in
order to mitigate the effect of these rules.
If a Fund purchases shares in a 'passive foreign investment company' (a
'PFIC'), the Fund may be subject to U.S. federal income tax on a portion of any
'excess distribution' or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If a Fund
were to invest in a PFIC and elected to treat the PFIC as a 'qualified electing
fund' under the Code (a 'QEF'), in lieu of the foregoing requirements, the Fund
would be required to include in income each year a portion of the ordinary
earnings and net capital gain of the qualified electing fund, even if not
distributed to the Fund. Alternatively, under recently enacted legislation, a
Fund can elect to mark-to-market at the end of each taxable year its shares in a
PFIC; in this case, the Fund would recognize as ordinary income any increase in
27
<PAGE>
the value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, a Fund might be required to recognize in a year income in excess of
its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year, and such income would nevertheless be subject to the
Distribution Requirement and would be taken into account for purposes of the 4%
excise tax.
If for any taxable year a Fund does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the Fund's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to 98% of ordinary taxable income for the
calendar year and 98% of capital gain net income for the one-year period ended
on October 31 of such calendar year (or, at the election of a RIC having a
taxable year ending November 30 or December 31, for its taxable year (a 'taxable
year election')). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a RIC is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net investment
income for each taxable year. Such distributions will be taxable to shareholders
as ordinary income and treated as dividends for federal income tax purposes, but
they will qualify for the 70% dividends-received deduction for corporations only
to the extent discussed below. Dividends paid on Premier and Retail shares are
calculated at the same time. In general, dividends on Retail shares are expected
to be lower than those on Premier shares due to the higher distribution expenses
borne by the Retail shares. Dividends may also differ between classes as a
result of differences in other class specific expenses.
A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a 'capital gain
dividend,' it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Under recently enacted legislation, the maximum rate of tax on long-term
capital gains of individuals will generally be reduced from 28% to 20% (10% for
gains otherwise taxed at 15%) for long-term capital gains realized after July
28, 1997 with respect to capital assets held for more than 18 months.
Additionally, beginning after December 31, 2000, the maximum tax rate for
capital assets with a holding period beginning after that date and held for more
than five years will be 18%. Under a literal reading of the legislation, capital
gain dividends paid by a RIC would not appear eligible for the reduced capital
gain rates. However, the legislation authorizes the Treasury Department to
promulgate regulations that would apply the new rates to capital gain dividends
paid by a RIC.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If a Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders of record on
the last day of its taxable year treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a
28
<PAGE>
refundable tax credit for his pro rata share of tax paid by the Fund on the
gain, and will increase the tax basis for his shares by an amount equal to the
deemed distribution less the tax credit.
Each Tax Free Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax Free
Fund's taxable year at least 50% of the its total assets consist of tax-exempt
municipal obligations. Distributions from a Tax Free Fund will constitute
exempt-interest dividends to the extent of its tax-exempt interest income (net
of expenses and amortized bond premium). Exempt-interest dividends distributed
to shareholders of a Tax Free Fund are excluded from gross income for federal
income tax purposes. However, shareholders required to file a federal income tax
return will be required to report the receipt of exempt-interest dividends on
their returns. Investors should be aware that gain from the sale or redemption
of shares of a Tax Free Fund will be taxable to the shareholders as capital gain
even though the increase in value of such shares is attributable to tax-exempt
interest income. Moreover, while exempt-interest dividends are excluded from
gross income for federal income tax purposes, they may be subject to alternative
minimum tax ('AMT') in certain circumstances and may have other collateral tax
consequences as discussed below. Distributions by a Tax Free Fund of any net
investment income or of any net capital gain will be taxable to shareholders as
discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular income tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ('AMTI') over an exemption amount.
Exempt-interest dividends derived from certain 'private activity' municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax Free Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Tax Free Fund. Moreover, a shareholder who is (or is related to) a
'substantial user' of a facility financed by industrial development bonds held
by a Tax Free Fund will likely be subject to tax on dividends paid by the Tax
Free Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
tax advisers as to such consequences.
Ordinary income dividends paid by a Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations to the extent of the amount of qualifying dividends received by a
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (1) if it has been received
with respect to any share of stock that the Fund has held for less than 46 days
(91 days in the case of certain preferred stock) during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock) under
the Rules of Code Section 246(c)(3) and (4); (2) to the extent that a Fund is
under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property;
or (3) to the extent the stock on which the dividend is paid is treated as
debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced if the corporate shareholder fails to satisfy the foregoing requirements
with respect to its shares of a Fund.
For purposes of the Corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMT.
However, corporate shareholders will generally be required to take the full
amount of any dividend
29
<PAGE>
received from a Fund into account (without a dividends-received deduction) in
determining its adjusted current earnings.
Investment income that may be received by certain of the Funds from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle any such Fund to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of any such Fund's assets to be invested in various
countries is not known. If more than 50% of the value of the International
Equity Fund's total assets at the close of its taxable year consists of the
stock or securities of foreign corporations, the Fund may elect to 'pass
through' to the Fund's shareholders the amount of foreign taxes paid by such
Fund. If the International Equity Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
International Equity Fund representing income derived from foreign sources. No
deduction for foreign taxes could be claimed by an individual shareholder who
does not itemize deductions. In certain circumstances, a shareholder that (i)
has held shares of the International Equity Fund for less than a specified
minimum period during which it is not protected from risk of loss or (ii) is
obligated to make payments related to the dividends, will not be allowed a
foreign tax credit for foreign taxes deemed imposed on dividends paid on such
shares. Additionally, the International Equity Fund must also meet this holding
period requirement with respect to its foreign stocks and securities in order
for 'creditable' taxes to flow-through. Each shareholder should consult his own
tax adviser regarding the potential application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income dividends,
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other 'exempt recipient.'
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<PAGE>
SALE OR REDEMPTION OF SHARES
Each Money Market Fund seeks to maintain a net asset value of $1.00 per
share; however, there can be no assurance that a Money Market Fund will be able
to do this. In such a case and in any case involving the non-Money Market Funds,
a shareholder will recognize gain or loss on the sale or redemption of shares of
a Fund in an amount equal to the difference between the proceeds of the sale or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or redemption.
In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of shares of a Fund will be considered capital gain or loss and
will be long- term capital gain or loss if the shares were held for longer than
one year. However, any capital loss arising from the sale or redemption of
shares held for six months or less will be disallowed to the extent of the
amount of exempt-interest dividends received on such shares and (to the extent
not disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ('foreign shareholder'), depends on whether the income from a Fund
is 'effectively connected' with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, dividends paid to a foreign
shareholder will be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the International Equity Fund's
election to treat any foreign taxes paid by it as paid by the shareholders, but
may not be allowed a deduction against this gross income or a credit against
this U.S. withholding tax for the foreign shareholder's pro rata share of such
foreign taxes which it is treated as having paid. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund and capital gain dividends and exempt-interest
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax on a net basis at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
STATE AND LOCAL TAX MATTERS
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a RIC may pass through (without restriction) to its
shareholders state and local income tax exemptions available to direct owners of
certain types of U.S. government securities (such as U.S. Treasury obligations).
Thus, for residents of these states, distributions derived from a Fund's
investment in certain types of U.S. government securities should be free from
state and local income taxes to the extent that the interest income from such
investments would have been exempt from state and local income taxes if such
securities had been held directly by the respective shareholders themselves.
Certain states, however, do not allow a RIC to pass through to its shareholders
the state and local income tax exemptions available to direct owners of certain
types of U.S. government securities unless the RIC holds at least a required
amount of U.S. government securities. Accordingly, for residents of these
states, distributions derived
31
<PAGE>
from a Fund's investment in certain types of U.S. government securities may not
be entitled to the exemptions from state and local income taxes that would be
available if the shareholders had purchased U.S. government securities directly.
Shareholders' dividends attributable to a Fund's income from repurchase
agreements generally are subject to state and local income taxes, although
states and regulations vary in their treatment of such income. The exemption
from state and local income taxes does not preclude states from asserting other
taxes on the ownership of U.S. government securities. To the extent that a Fund
invests to a substantial degree in U.S. government securities which are subject
to favorable state and local tax treatment, shareholders of such Fund will be
notified as to the extent to which distributions from the Fund are attributable
to interest on such securities. Rules of state and local taxation of ordinary
income dividends and capital gain dividends from RICs may differ from the rules
for U.S. federal income taxation in other respects. Shareholders are urged to
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting investment in a Fund.
EFFECT OF FUTURE LEGISLATION
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
MANAGEMENT OF THE TRUST AND THE FUNDS
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period.
*Sarah E. Jones--Chair and Trustee. President and Chief Operating Officer
of Chase Mutual Funds Corp.; formerly Managing Director for the Global Asset
Management and Private Banking Division of The Chase Manhattan Bank. Trustee,
Chase Vista Funds. Age: 46. Address: Chase Mutual Funds Corp., One Chase
Manhattan Plaza, Third Floor, New York, NY 10081.
Frank A. Liddell, Jr.--Trustee. Retired; Of Counsel, Liddell, Sapp,
Zivley, Hill & LaBoon. Member of AVESTA Trust Supervisory Committee from
inception to 1997. Age: 68. Address: P.O. Box 2558, Houston, TX 77252.
George E. McDavid--Trustee. President, Houston Chronicle Publishing
Company. Member of AVESTA Trust Supervisory Committee from inception to 1997.
Age: 66. Address: P.O. Box 2558, Houston, TX 77252.
Kenneth L. Otto--Trustee. Retired; formerly Senior Vice President, Tenneco
Inc. Member of AVESTA Trust Supervisory Committee from inception to 1997. Age:
66. Address: P.O. Box 2558, Houston, TX 77252.
Fergus Reid, III--Trustee. Chairman and Chief Executive Officer, Lumelite
Corporation since September 1985. Chairman and Trustee, the Chase Vista Funds.
Trustee, Morgan Stanley Funds. Age: 65. Address: 202 June Road, Stamford, CT
06903.
H. Michael Tyson--Trustee. Retired; formerly Executive Vice President,
Texas Commerce Bank from 1990 to 1995. Member of AVESTA Trust Supervisory
Committee from 1988 to 1997. Age: 58. Address: P.O. Box 2558, Houston, TX 77252.
- ------------------
* Asterisks indicate those Trustees that are 'interested persons' (as defined in
the 1940 Act). The Board of Trustees of the Trust presently has an Audit
Committee. The members of the Audit Committee are Messrs. Liddell, McDavid,
Otto, Reid and Tyson. The function of the Audit Committee is to recommend
independent auditors and monitor accounting and financial matters.
32
<PAGE>
Martin R. Dean--Treasurer. Associate Director, Accounting Services, BISYS
Fund Services; formerly Senior Manager, KPMG Peat Marwick (1987-1994). Age: 33.
Address: 3435 Stelzer Road, Columbus, OH 43219.
Richard Baxt-Secretary, Senior Vice President, Client Services, BISYS Fund
Services; formerly General Manager of Investment and Insurance, First Fidelity
Bank, President of First Fidelity Brokers, and President of Citicorp Investment
Services. Age: 44. Address: 125 W. 55th Street, New York, NY 10019.
Vicky M. Hayes-Assistant Secretary. Vice President and Global Marketing
Manager, Vista Fund Distributor, Inc.; formerly Assistant Vice President,
Alliance Capital Management and held various positions with J. & W. Seligman &
Co. Age: 36. Address: One Chase Manhattan Plaza, Third Floor, New York, NY
10081.
Alaina Metz-Assistant Secretary. Chief Administrative Officer, BISYS Fund
Services; formerly Supervisor, Blue Sky Department, Alliance Capital Management
L.P. Age: 30. Address: 3435 Stelzer Road, Columbus, OH 43219.
Lee Schultheis--Assistant Treasurer and Assistant Secretary. President,
BISYS Fund Distributors; formerly Senior Managing Director, Forum Financial
Group. Age: 41. Address: One Chase Manhattan Plaza, Third Floor, New York, NY
10081.
Ms. Jones is also a Trustee of Mutual Fund Group, Mutual Fund Trust, Mutual
Fund Select Group, Mutual Fund Select Trust, Mutual Fund Variable Annuity Trust,
Capital Growth Portfolio, Growth and Income Portfolio and International Equity
Portfolio (these entities are referred to as the 'Chase Vista Funds'). Mr. Reid
is Chairman and a Trustee of the Chase Vista Funds. Messrs. Dean, Baxt and
Schultheis and Ms. Hayes and Metz also serve in the same capacities of the
Chase Vista Funds.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services. Each such
Trustee receives a fee, which consists of an annual retainer component and a
meeting fee component.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended December 31, 1997 for each member of the
Supervisory Committee of the AVESTA Trust:
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM
AVESTA TRUST
------------------
<S> <C>
Frank A. Liddell, Jr., Trustee........................................ $7,000
George E. McDavid, Trustee............................................ 7,000
Kenneth L. Otto, Trustee.............................................. 7,000
H. Michael Tyson, Trustee............................................. 7,000
</TABLE>
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or with
respect to any matter unless it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
As of March 31, 1998, Mr. Liddell owned 1.06% of the outstanding units
of the Short-Intermediate U.S. Government Securities Fund. The Trustees and
officers as a group owned less than 1% of each other Fund's shares, all of which
were acquired for investment purposes.
ADVISER AND SUB-ADVISERS
Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement, dated as of January 1, 1998 (the 'Advisory Agreement').
Subject to such policies as the Board of Trustees may determine, Chase is
responsible for investment decisions for the Funds. Pursuant to the terms of the
Advisory Agreement, Chase provides the Funds with such investment advice and
supervision as it deems necessary for the proper supervision of the Funds'
investments. The advisers (including the sub-advisers) continuously provide
investment programs and determine from time to time what securities shall be
purchased, sold or exchanged and what
33
<PAGE>
portion of the Funds' assets shall be held uninvested. The advisers to the Funds
furnish, at their own expense, all services, facilities and personnel necessary
in connection with managing the investments and effecting portfolio transactions
for the Funds. The Advisory Agreement for the Funds will continue in effect from
year to year only if such continuance is specifically approved at least annually
by the Board of Trustees or by vote of a majority of a Fund's outstanding voting
securities and by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on such Advisory Agreement.
Under the Advisory Agreement and the sub-advisers' agreements with the
adviser, the adviser and sub-advisers may utilize the specialized portfolio
skills of all their various affiliates, thereby providing the Funds with greater
opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the advisory agreements, the advisers are
permitted to render services to others. Each advisory agreement is terminable
without penalty by the Trust on behalf of the Funds on not more than 60 days',
nor less than 30 days', written notice when authorized either by a majority vote
of a Fund's shareholders or by a vote of a majority of the Board of Trustees of
the Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its 'assignment' (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio transactions
for the respective Fund, except for wilful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations thereunder
of any state in which the shares of the Funds are qualified for sale, as such
limitations may be raised or lowered from time to time, the adviser shall reduce
its advisory fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by the
adviser shall be deducted from the monthly advisory fee otherwise payable with
respect to the Funds during such fiscal year; and if such amounts should exceed
the monthly fee, the adviser shall pay to a Fund its share of such excess
expenses no later than the last day of the first month of the next succeeding
fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of one
or more affiliated companies that are qualified to act as an investment adviser
of the Fund and are under the common control of Chase, as long as all such
persons are functioning as part of an organized group of persons, managed by
authorized officers of Chase.
Chase, on behalf of the Money Market Fund, Short-Intermediate Term U.S.
Government Securities Fund, U.S. Government Securities Fund, Intermediate Term
Bond Fund, Income Fund, Balanced Fund, Equity Income Fund, Core Equity Fund,
Equity Growth Fund and Small Capitalization Fund, has entered into an investment
sub-advisory agreement dated as of January 1, 1998 with Texas Commerce Bank
National Association, which subsequently changed its name to Chase Bank of
Texas, National Association (herein 'Chase Texas'). Chase may enter into one or
more additional sub-advisory agreements with respect to the Tax Free Money
Market Fund, Tax Free Income Fund, New York Tax Free Income Fund, Mid Cap Growth
Fund and International Equity Fund. With respect to the day-to-day management of
the Funds, under the sub-advisory agreements, the sub-advisers make decisions
concerning, and place all orders for, purchases and sales of securities and help
maintain the records relating to such purchases and sales. The sub-advisers may,
in their discretion, provide such services through their own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser to the Company under applicable laws and are under the common
control of Chase; provided that (i) all persons, when providing services under
the sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the sub-adviser. This arrangement will not result in the
payment of additional fees by the Funds.
34
<PAGE>
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among Chase's accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.
Chase Texas, a wholly-owned subsidiary of The Chase Manhattan Corporation,
is a commercial bank offering a wide range of banking and investment services to
customers throughout the United States and around the world. Also included among
Chase Texas's accounts are commingled trust funds and a broad spectrum of
individual trust and investment management portfolios. These accounts have
varying investment objectives.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from the appropriate
Fund(s) an investment advisory fee computed daily and paid monthly based on a
rate equal to a percentage of such Fund's average daily net assets specified in
the Prospectuses. However, the adviser may voluntarily agree to waive a portion
of the fees payable to it on a month-to-month basis. For its services under its
sub-advisory agreement, Chase Texas will be entitled to receive, with respect to
each such Fund, such compensation, payable by the advisor out of its advisory
fee, as described in the Prospectuses.
Prior to January 1, 1998, the Funds were series of the AVESTA Trust. Chase
Texas acted as Trustee for the Avesta Funds pursuant to three separate, but
substantially similar, management agreements (the 'Avesta Management
Agreements'). As with certain of the Funds, Chase Texas provided investment
advisory services to the Avesta Funds. However, Chase Texas was also obligated
to perform certain administrative and account servicing functions under the
Avesta Management Agreements, including preparation and distribution of
communications to shareholders, accounting and recordkeeping. As Trustee, Chase
Texas also paid certain expenses, including (i) all costs and expenses arising
in connection with the organization of the AVESTA Trust, including the initial
registration statement and qualification of the AVESTA Trust and its units under
federal and state law; (ii) all marketing and advertising expenses of the AVESTA
Trust and (iii) expenses of all employees, office space and facilities necessary
to carry out its duties under the Avesta Management Agreements. Accordingly, the
compensation received by the Trustee under the Avesta Management Agreements are
not necessarily indicative of the fees to be earned by Chase under the Advisory
Agreement.
For its services under the Avesta Management Agreements, the Trustee was
entitled to receive compensation as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS
---------------------------------------------
IN EXCESS OF
$250 MILLION
UP TO BUT LESS THAN IN EXCESS OF
FUND $250 MILLION $500 MILLION $500 MILLION
- -------------------------------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Money Market.................................................. 0.65% 0.65% 0.65%
Income........................................................ 1.00% 0.90% 0.80%
Equity Growth................................................. 1.00% 0.90% 0.80%
Equity Income................................................. 1.00% 0.90% 0.80%
Balanced...................................................... 1.00% 0.90% 0.80%
Short-Intermediate Term U.S. Government Securities............ 0.75% 0.65% 0.55%
U.S. Government Securities.................................... 0.85% 0.75% 0.65%
Small Capitalization.......................................... 1.15% 1.05% 0.95%
Core Equity................................................... 1.00% 0.90% 0.80%
Intermediate Term Bond........................................ 0.75% 0.65% 0.55%
</TABLE>
35
<PAGE>
The Funds in operation paid management fees to the Trustee, net of
voluntary waivers(1), for the years ended, respectively, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
FUND 1995 1996 1997
- ------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Money Market Fund.................................................. $435,936 $449,833 $806,004
Income Fund........................................................ 546,375 405,352 512,611
Intermediate Term Bond Fund........................................ 44,818 47,537 112,462
Balanced Fund...................................................... 218,177 219,535 256,363
Equity Growth Fund................................................. 407,599 509,223 700,938
Equity Income Fund................................................. 446,506 594,351 709,821
Short-Intermediate Term U.S. Government Securities Fund............ 182,714 212,672 194,675
U.S. Government Securities Fund.................................... 21,549 20,595 23,662
Small Capitalization Fund.......................................... 119,346 164,194 352,263
Core Equity Fund................................................... 223,368 265,417 377,800
</TABLE>
- ------------------
(1) For the fiscal year ended December 31, 1997, the Trustee waived management
fees for the Money Market, Income, U.S. Government Securities and Small
Capitalization Funds of $185,719, $128,407, $2,783 and $45,611,
respectively. For the year ended December 31, 1996, the Trustee waived
management fees for the Money Market, Income, U.S. Government Securities and
Small Capitalization Funds of $134,952, $135,137, $2,757, and $24,219,
respectively. For the year ended December 31, 1995, the Trustee waived
management fees for the Money Market, Income, U.S. Government Securities and
Small Capitalization Funds of $100,525, $136,616, $2,527 and $15,584,
respectively.
The Trustee had agreed to reimburse each Fund for the amount by which the
expenses of that Fund (including the management fee, but excluding interest,
taxes, brokerage commissions and extraordinary expenses) during any year exceed
the management fee payable by the Fund, provided that the average daily value of
the Fund's net assets during such year provided that the assets of the Fund did
not exceed $250 million. As such, the total reimbursements paid to the Funds
below by the Trustee for the years ended December 31, 1995, December 31, 1996
and December 31, 1997, respectively, were:
$40,517, $41,514, and $76,840 for the Equity Growth Fund; $41,135,
$38,806, and $78,924 for the Equity Income Fund; $37,986, $37,603, and
$72,408 for the Balanced Fund; $42,439, $38,446, and $70,483 for the Income
Fund; $45,354, $67,069, and $107,304 for the Money Market Fund; $37,619,
$36,085, and $75,253 for the Core Equity Fund; $35,928, $36,160, and
$75,786 for the Small Capitalization Fund; $38,430, $37,184, and $67,908
for the Short-Intermediate Term U.S. Government Securities Fund; $34,649,
$34,175, and $63,928 for the U.S. Government Securities Fund; $40,849,
$42,442, and $75,545 for the Intermediate Term Bond Fund.
ADMINISTRATOR
Pursuant to an Administration Agreement (the 'Administration Agreement'),
Chase is the administrator of the Funds. Chase provides certain administrative
services to the Funds, including, among other responsibilities, coordinating the
negotiation of contracts and fees with, and the monitoring of performance and
billing of, the Funds' independent contractors and agents; preparation for
signature by an officer of the Trust of all documents required to be filed for
compliance by the Trust with applicable laws and regulations excluding those of
the securities laws of various states; arranging for the computation of
performance data, including net asset value and yield; responding to shareholder
inquiries; and arranging for the maintenance of books and records of the Funds
and providing, at its own expense, office facilities, equipment and personnel
necessary to carry out its duties. Chase in its capacity as administrator does
not have any responsibility or authority for the management of the Funds, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
36
<PAGE>
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue in
effect from year to year with respect to each Fund only if such continuance is
specifically approved at least annually by the Board of Trustees of the Trust or
by vote of a majority of such Fund's outstanding voting securities and, in
either case, by a majority of the Trustees who are not parties to the
Administration Agreement or 'interested persons' (as defined in the 1940 Act) of
any such party. The Administration Agreement is terminable without penalty by
the Trust on behalf of each Fund on 60 days' written notice when authorized
either by a majority vote of such Fund's shareholders or by vote of a majority
of the Board of Trustees, including a majority of the Trustees who are not
'interested persons' (as defined in the 1940 Act) of the Trust, or by Chase on
60 days' written notice, and will automatically terminate in the event of their
'assignment' (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase or its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to that
Fund imposed by the securities laws or regulations thereunder of any state in
which the shares of such Fund are qualified for sale, as such limitations may be
raised or lowered from time to time, Chase shall reduce its administration fee
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by Chase shall be
deducted from the monthly administration fee otherwise payable to Chase during
such fiscal year, and if such amounts should exceed the monthly fee, Chase shall
pay to such Fund its share of such excess expenses no later than the last day of
the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily and
paid monthly at an annual rate equal to 0.10% of each of the Fund's average
daily net assets, on an annualized basis for the Fund's then-current fiscal
year. Chase may voluntarily waive a portion of the fees payable to it with
respect to each Fund on a month-to-month basis.
DISTRIBUTION PLAN
The Trust has adopted a plan of distribution pursuant to Rule 12b-1 under
the 1940 Act (a 'Distribution Plan') on behalf of the Retail Class shares of its
Funds as described in the Prospectus, which provides such class of the Funds
shall pay for distribution services a distribution fee (the 'Distribution Fee'),
including payments to the Distributor, at annual rates not to exceed the amounts
set forth in the Prospectus for Retail Class shares. The Distributor may use all
or any portion of such Distribution Fee to pay for Fund expenses of printing
prospectuses and reports used for sales purposes, expenses of the preparation
and printing of sales literature and other such distribution-related expenses.
Retail Class shares pay a Distribution Fee of up to 0.25% of average daily
net assets. Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset values of Retail Class shares
maintained in a Fund by such broker-dealers' customers. Since the distribution
fees are not directly tied to expenses, the amount of distribution fees paid by
a Fund during any year may be more or less than actual expenses incurred
pursuant to the Distribution Plans. For this reason, this type of distribution
fee arrangement is characterized by the staff of the Securities and Exchange
Commission as being of the 'compensation variety' (in contrast to
'reimbursement' arrangements by which a distributor's payments are directly
linked to its expenses). With respect to Retail Class shares, because of the
0.25% annual limitation on the compensation paid to the Distributor during a
fiscal year, compensation relating to a large portion of the commissions
attributable to sales of Retail Class shares in any one year will be accrued and
paid by a Fund to the Distributor in fiscal years subsequent thereto. In
determining whether to purchase Retail Class shares, investors should consider
that compensation payments could continue until the Distributor has been fully
reimbursed for the commissions paid on sales of Retail Class shares. However,
the shares are not liable for any distribution expenses incurred in excess of
the Distribution Fee paid.
37
<PAGE>
The Retail Class shares are entitled to exclusive voting rights with
respect to matters concerning its Distribution Plan.
The Distribution Plan provides that it will continue in effect indefinitely
if such continuance is specifically approved at least annually by a vote of both
a majority of the Trustees and a majority of the Trustees who are not
'interested persons' (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any agreement related to such Plan ('Qualified Trustees'). The
Distribution Plan requires that the Trust shall provide to the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended (and the purposes therefor) under the
Distribution Plan. The Distribution Plan further provides that the selection and
nomination of Qualified Trustees shall be committed to the discretion of the
disinterested Trustees (as defined in the 1940 Act) then in office. The
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Retail Class shares of such Fund (as defined in the
1940 Act). The Distribution Plan may not be amended to increase materially the
amount of permitted expenses thereunder without the approval of shareholders and
may not be materially amended in any case without a vote of the majority of both
the Trustees and the Qualified Trustees. Each of the Funds will preserve copies
of any plan, agreement or report made pursuant to the Distribution Plan for a
period of not less than six years from the date of the Distribution Plan, and
for the first two years such copies will be preserved in an easily accessible
place.
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Distribution and Sub-Administration Agreement
dated January 1, 1998 (the 'Distribution Agreement') with the Distributor,
pursuant to which the Distributor acts as the Funds' exclusive underwriter,
provides certain administration services and promotes and arranges for the sale
of each class of Shares. The Distributor is a wholly-owned subsidiary of BISYS
Fund Services, Inc. The Distribution Agreement provides that the Distributor
will bear the expenses of printing, distributing and filing prospectuses and
statements of additional information and reports used for sales purposes, and of
preparing and printing sales literature and advertisements not paid for by the
Distribution Plan. The Trust pays for all of the expenses for qualification of
the shares of each Fund for sale in connection with the public offering of such
shares, and all legal expenses in connection therewith. In addition, pursuant to
the Distribution Agreement, the Distributor provides certain sub-administration
services to the Trust, including providing officers, clerical staff and office
space.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or 'interested
persons' (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such Fund's
shareholders or by vote of a majority of the Board of Trustees of the Trust,
including a majority of the Trustees who are not 'interested persons' (as
defined in the 1940 Act) of the Trust, or by the Distributor on 60 days' written
notice, and will automatically terminate in the event of its 'assignment' (as
defined in the 1940 Act). The Distribution Agreement also provides that neither
the Distributor nor its personnel shall be liable for any act or omission in the
course of, or connected with, rendering services under the Distribution
Agreement, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of such Fund are qualified for sale, as such
limitations may be raised or lowered from time to time, the Distributor shall
reduce its sub-administration fee with respect to such Fund (which fee is
described below) to the extent of its share of such excess expenses. The amount
of any such reduction to be borne by the Distributor shall be deducted from the
monthly sub-administration fee otherwise payable with respect to such Fund
during such fiscal year; and if such
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amounts should exceed the monthly fee, the Distributor shall pay to such Fund
its share of such excess expenses no later than the last day of the first month
of the next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. However,
the Distributor has voluntarily agreed to waive a portion of the fees payable to
it under the Distribution Agreement with respect to each Fund on a
month-to-month basis.
TRANSFER AGENT AND CUSTODIAN
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ('DST') pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund and receives such compensation as is from time to time
agreed upon by the Trust and Chase. As custodian, Chase provides oversight and
record keeping for the assets held in the portfolios of each Fund. Chase also
provides fund accounting services for the income, expenses and shares
outstanding for such Funds. Chase is located at 3 Metrotech Center, Brooklyn, NY
11245.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the AVESTA
Trust's Annual Report to Shareholders for the fiscal year ended December 31,
1997 and the related financial highlights which appear in the Prospectuses,
have been incorporated herein and included in the Prospectuses in reliance on
the report of Price Waterhouse LLP, 1201 Louisiana, Suite 2900, Houston, Texas
77002, independent accountants of the Funds, given on the authority of said firm
as experts in accounting and auditing. Price Waterhouse LLP provides the Funds
with audit services, tax return preparation and assistance and consultation with
respect to the preparation of filings with the Securities and Exchange
Commission.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser, administrator or custodian to mutual funds or from purchasing mutual
fund shares as agent for a customer. Chase and the Trust believe that Chase
(including its affiliates) may perform the services to be performed by it as
described in the Prospectus and this Statement of Additional Information without
violating such laws. If future changes in these laws or interpretations required
Chase to alter or discontinue any of these services, it is expected that the
Board of Trustees would recommend alternative arrangements and that investors
would not suffer adverse financial consequences. State securities laws may
differ from the interpretations of banking law described above and banks may be
required to register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase will
not invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate, although
under certain circumstances such securities may be purchased from other members
of an underwriting syndicate in which Chase or an affiliate is a non-principal
member. This restriction may limit the amount or type of U.S. Government
obligations, municipal obligations or commercial paper available to be purchased
by any Fund. Chase has informed the Funds that in making its investment
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decision, it does not obtain or use material inside information in the
possession of any other division or department of Chase, including the division
that performs services for the Trust as custodian, or in the possession of any
affiliate of Chase. Shareholders of the Funds should be aware that, subject to
applicable legal or regulatory restrictions, Chase and its affiliates may
exchange among themselves certain information about the shareholder and his
account. Transactions with affiliated broker-dealers will only be executed on an
agency basis in accordance with applicable federal regulations.
GENERAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Investment Trust is an open-end, non-diversified management
investment company organized as Massachusetts business trust under the laws of
the Commonwealth of Massachusetts in 1997. The Trust currently consists of 15
series of shares of beneficial interest, par value $.001 per share. With respect
to all of its Funds, the Trust may offer more than one class of shares. The
Trust has reserved the right to create and issue additional series or classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. The shares
of each series or class participate equally in the earnings, dividends and
assets of the particular series or class. Expenses of the Trust which are not
attributable to a specific series or class are allocated amount all the series
in a manner believed by management of the Trust to be fair and equitable. Shares
have no preemptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one vote
for each share held. Shares of each series or class generally vote together,
except when required under federal securities laws to vote separately on matters
that only affect a particular class, such as the approval of distribution plans
for a particular class.
The classes of shares have several different attributes relating to
expenses, as described herein and in the Prospectuses. In addition to such
differences, expenses borne by each class of a Fund may differ slightly because
of the allocation of other class-specific expenses. For example, a higher
transfer agency fee may be imposed on Retail Class shares than on Premier class
shares. The relative impact of ongoing annual expenses will depend on the length
of time a share is held.
Selected dealers and financial consultants may receive different levels of
compensation for selling one particular class of shares rather than another.
The Trust is not required to hold annual meetings of shareholders but will
hold special meetings of shareholders of a series or class when, in the judgment
of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders also
have, in certain circumstances, the right to remove one or more Trustees without
a meeting. No material amendment may be made to the Trust's Declaration of Trust
without the affirmative vote of the holders of a majority of the outstanding
shares of each portfolio affected by the amendment. Shares have no preemptive or
conversion rights. Shares, when issued, are fully paid and non-assessable,
except as set forth below. Any series or class may be terminated (i) upon the
merger or consolidation with, or the sale or disposition of all or substantially
all of its assets to, another entity, if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Board of Trustees
recommends such merger, consolidation or sale or disposition of assets, the
approval by vote of the holders of a majority of the series' or class'
outstanding shares will be sufficient, or (ii) by the vote of the holders of a
majority of its outstanding shares, or (iii) by the Board of Trustees by written
notice to the series' or class' shareholders. Unless each series and class is so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk
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of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions, pre-clearance
requirements and blackout periods.
PRINCIPAL HOLDERS
As of March 31, 1998, no persons beneficially owned of record 5% or more
of the outstanding shares of any Fund.
FINANCIAL STATEMENTS
The Annual Report to Shareholders for the fiscal year ended December 31,
1997 for the AVESTA Trust, including the report of independent accounts,
financial highlights and financial statements for the fiscal year ended
December 31, 1997 contained therein, are incorporated herein by reference.
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APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government are guaranteed by the U.S.
Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing Administration
of the U.S. Government and are guaranteed by the U.S. Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although possibly
at a lower rate. In addition, prepayment of mortgages included in the mortgage
pool underlying a GNMA Certificate purchased at a premium could result in a loss
to a Fund. Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate. If agency
securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.
GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed by
the U.S. Government.
New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
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Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured by
the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ('Sallie Mae') Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the 'full faith and credit' of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
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APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with respect
to bonds and commercial paper appears below.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated 'Aaa' are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated 'A' possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated 'B' generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated 'Ca' represent obligations which are speculative in
high degree.
Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated 'C' are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers '1', '2', and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated 'AA' also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from 'AAA' issues only in
small degree.
A--Bonds rated 'A' have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB--Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI--Bonds rated 'CI' are income bonds on which no interest is being paid.
D--Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of senior short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated 'Not Prime' do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Ratings
are graded in several categories, ranging from 'A-1' for the highest quality
obligations to 'D' for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3--Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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D--Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
FITCH BOND RATINGS
AAA--Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings. Plus and minus signs are used by Fitch to indicate the
relative position of a credit within a rating category. Plus and minus signs,
however, are not used in the AAA category.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposits, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ --Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, a Fund's investment manager
will consider such event in its determination of whether such Fund should
continue to hold the security. To the extent the ratings given by Moody's, S&P
or Fitch may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Statement of Additional Information.
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2
APPENDIX C
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Tax Free Income Fund and New York Tax Free Money
Market Fund in New York municipal securities are summarized below. The following
information constitutes only a brief summary, does not purport to be a complete
description and is largely based on information drawn from official statements
relating to securities offerings of New York municipal obligations available as
of the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in such offering statements has not
been independently verified.
New York State
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State Constitution,
the State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
New York State Legislature (the "Legislature") and approved by the voters. There
is no limitation on the amount of long-term general obligation debt that may be
so authorized and subsequently incurred by the State. With the exception of
general obligation housing bonds (which must be paid in equal annual
installments or installments that result in substantially level or declining
debt service payments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes ("BANs"). TRANs must mature within one year from their dates
of issuance and may not be refunded or refinanced beyond such period. BANS may
only be issued for the purposes and within the amounts for which bonds may be
issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
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3
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. The
State-guaranteed bonds of the Port Authority of New York and New Jersey were
fully retired on December 31, 1996. State-guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
Payments of debt service on State general obligation and
State-guaranteed bonds and notes are legally enforceable obligations of the
State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual- obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.
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4
The State also participates in the issuance of certificates of
participation ("COPs") in a pool of leases entered into by the State's Office of
General Services on behalf of several State departments and agencies interested
in acquiring operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees although there can be no assurance that such
a default or call will not occur in the future.
The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. There has never been a default on any
moral obligation debt of any public authority although there can be no assurance
that such a default will not occur in the future.
The State anticipated that its capital programs would be financed, in
part, through borrowings by the State and public authorities in the 1997-98
fiscal year. The State expected to issue $605 million in general obligation
bonds (including $140 million for purposes of redeeming outstanding BANs) and
$140 million in general obligation commercial paper. The Legislature also
authorized the issuance of up to $311 million in COPs during the State's 1997-98
fiscal year for equipment purchases.
The proposed 1997-98 through 2002-2003 Capital Program and Financing
Plan was released with the 1998-99 Executive Budget on January 20, 1998. As part
of the Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: delay of the issuance of Certificates of Participation ("COPs") to
finance welfare information systems through 1998-99 to permit a thorough
assessment of needs; and the elimination of issuances for the CEFAP to reflect
the proposed conversion of that bond-financed program to pay-as-you-go
financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
the purposes of redeeming outstanding BANs) and $140 million in general
obligation paper; the issuance
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5
of $83 million in COPs for equipment purchases; and approximately $1.8 billion
in borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State, including
costs of issuance, reserve funds, and other coasts, net of anticipated
refundings and other adjustments for 1997-98 capital projects. The projection of
State borrowings for the 1997-98 fiscal year is subject to change as market
conditions, interest rates and other factors vary through the end of the fiscal
year.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $1.9 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1997-98
capital projects. Included therein are borrowings by (i) DASNY for the State
University of New York ("SUNY"), The City University of New York ("CUNY"),
health facilities, and mental health facilities; (ii) the Thruway Authority for
the Dedicated Highway and Bridge Trust Fund and Consolidated Highway Improvement
Program; (iii) UDC (doing business as the Empire State Development Corporation)
for prison and youth facilities; (iv) the Housing Finance Agency ("HFA") for
housing programs; and (v) borrowings by the Environmental Facilities Corporation
("EFC") and other authorities. In addition, in the 1997 legislative session, the
Legislature also approved two new authorizations for lease-purchase and
contractual obligation financings. An aggregate $425 million was authorized for
four public authorities (Thruway Authority, DASNY, UDC and HFA) for the
Community Enhancement Facility Program for economic development purposes,
including sports facilities, cultural institutions, transportation,
infrastructure and other community facility projects. DASNY was also authorized
to issue up to $40 million to finance the expansion and improvement of
facilities at the Albany County airport.
In addition to the arrangements described above, State law provides for
the creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ("MAC") was created to provide
financing assistance to New York City (the "City"). To enable MAC to pay debt
service on its obligations, MAC receives, subject to annual appropriation by the
Legislature, receipts from the 4% New York State Sales Tax for the benefit of
New York City, the State-imposed stock transfer tax and, subject to certain
prior liens, certain local assistance payments otherwise payable to the City.
The legislation creating MAC also includes a moral obligation provision. Under
its enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. In 1995, the State
created the Municipal Assistance Corporation for the City of Troy ("Troy MAC").
The bonds issued by Troy MAC, however, do not include moral obligation
provisions.
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6
The 1997-1998 State Financial Plan. The State's budget for the State's
1997-98 fiscal year, commencing on April 1, 1997 and ending on March 31, 1998,
was enacted by the Legislature on August 4, 1997. The State Financial Plan for
the 1997-98 fiscal year (the "State Financial Plan") was formulated on August
11, 1997 and was based on the State's budget as enacted by the Legislature and
signed into law by the Governor, as well as actual results for the first quarter
of the current fiscal year. The State Financial Plan is updated in October and
January. The State Financial Plan was projected to be balanced on a cash basis;
however there can be no assurance that the State Financial Plan will continue to
be in balance. Total General Fund receipts and transfers from other funds were
projected to be $35.09 billion, while total General Fund disbursements and
transfers to other funds were projected to be $34.60 billion. After adjustments
for comparability, the adopted 1997-98 budget projected a year-over-year
increase in General Fund disbursements of 5.2 percent. As compared to the
Governor's proposed budget as revised in February 1997, the State's adopted
budget for 1997-98 increased General Fund spending by $1.70 billion, primarily
from increases for local assistance ($1.3 billion). Resources used to fund these
additional expenditures included $540 million in increased revenues projected
for 1997-98, increased resources produced in the 1996-1997 fiscal year that were
to be utilized in 1997-1998, reestimates of social service, fringe benefit and
other spending, and certain non-recurring resources.
The State Financial Plan included actions that would have an effect on
the budget outlook for State fiscal year 1997-98 and beyond. The State Division
of the Budget ("DOB") estimated that the 1997-98 State Financial Plan contained
actions that provide non-recurring resources or savings totaling approximately
$270 million. These included the use of $200 million in federal reimbursement
funds available from retroactive social service claims approved by the federal
government in April 1997. The balance is composed of various other actions,
primarily the transfer of unused special revenue fund balances to the General
Fund.
The State closed projected budget gaps of $5.0 billion, $3.9 billion
and $2.3 billion for its 1995-96 through 1997-98 fiscal years, respectively. The
1998-99 gap was projected at $1.68 billion, in the outyear projections submitted
to the legislature in February 1997. As a result of changes made in the enacted
budget, that gap is now expected to be about the same or smaller than the amount
previously projected, after application of the $530 million reserve for future
needs. The expected gap is smaller than the three previous budget gaps closed by
the State.
The outyear projection will be impacted by a variety of factors.
Certain actions taken in the State's 1997-98 fiscal year, such as medicaid and
welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide recurring
<PAGE>
7
savings. The availability of $530 million in reserves created as a part of the
1997-98 adopted budget and included in the State Financial Plan is expected to
benefit the 1998-99 fiscal year. Sustained growth in the State's economy and
continued declines in welfare case load and health care costs would also produce
additional savings in the State Financial Plan. Finally, various federal
actions, including the potential benefit effect on State tax receipts from
changes to the federal tax treatment of capital gains, would potentially provide
significant benefits to the State over the next several years.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse effects
on the State's projections of receipts and disbursements. For example, changes
to current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1997-98 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by the
City of State aid, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
The following discussion summarizes the State Financial Plan and recent
fiscal years with particular emphasis on the State's General Fund. Pursuant to
statute, the State updates the financial plan at least on a quarterly basis. Due
to changing economic conditions and information, public statements or reports
may be released by the Governor, members of the Legislature, and their
respective staffs, as well as others involved in the budget
<PAGE>
8
process from time to time. Those statements or reports may contain predictions,
projections or other items of information relating to the State's financial
condition, including potential operating results for the current fiscal year and
projected baseline gaps for future fiscal years, that may vary materially and
adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1997-98 fiscal year, the General Fund was expected by the State
to account for approximately 48 percent of total governmental-funds
disbursements and 71 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
The General Fund was projected to be balanced on a cash basis for the
1997-98 fiscal year; however there can be no assurance that the General Fund
will remain balanced for the entire fiscal year. Total receipts are projected to
be $35.09 billion, an increase of $2 billion over total receipts in the prior
fiscal year. Total General Fund disbursements are projected to be $34.60
billion, an increase of $2.05 billion over the total amount disbursed and
transferred in the prior fiscal year.
In addition to the General Fund, the State Financial Plan
includes Special Revenue Funds, Capital Projects Funds and Debt
Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type was expected to comprise more than 42
percent of total governmental funds receipts and disbursements in the 1997-98
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type totaled $28.22 billion, an
increase of $2.51 billion over the prior year. Projected disbursements in this
fund type totaled $28.45 billion, an increase of $2.43 billion over 1996-97
levels. Disbursements from Federal funds, primarily the Federal share of
Medicaid and other social services programs, were projected to total $21.19
billion in the 1997-98 fiscal year. Remaining projected spending of $7.26
billion primarily reflects aid to SUNY supported by tuition and dormitory fees,
education aid funded from lottery receipts, operating aid payments to the
Metropolitan Transportation Authority (the "MTA") funded from the proceeds of
dedicated transportation taxes, and costs of a variety of self-supporting
programs which deliver services financed by user fees.
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9
Capital Projects Funds account for the financial resources used for the
acquisition, construction, or rehabilitation of major State capital facilities
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax dollars transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1997-98 fiscal year, activity in these funds
was expected to comprise 5 percent of total governmental receipts and
disbursements.
Total receipts in this fund type were projected at $3.30 billion. Bond
and note proceeds were expected to provide $605 million in other financing
sources. Disbursements from this fund type were projected to be $3.70 billion, a
decrease of $154 million (4.3 percent) over prior-year levels. The Dedicated
Highway and Bridge Trust Fund is the single largest dedicated fund, comprising
an estimated $982 million (27 percent) of the activity in this fund type. Total
spending for capital projects would be financed through a combination of
sources: federal grants (29 percent), public authority bond proceeds (31
percent), general obligation bond proceeds (15 percent), and pay-as-you-go
revenues (25 percent).
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund was expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1997-98 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and other funds established to accumulate moneys for the payment of debt
service. In the 1997-98 fiscal year, total disbursements in this fund type were
projected at $3.17 billion, an increase of $64 million or 25 percent, most of
which is explained by increases in the General Fund transfer. The projected
transfer from the General Fund of $2.07 billion was expected to finance 65
percent of these payments.
Prior Fiscal years. A narrative description of cash-basis results in
the General Fund is presented below for the prior three fiscal years.
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of TRANs. A national recession, followed by the lingering economic slowdown in
the New York and regional economy, resulted in repeated shortfalls in
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10
receipts and three budget deficits during those years. During its last five
fiscal years, however, the State has recorded balanced budgets on a cash basis,
with positive fund balances as described below. There can be no assurance,
however, that such trends will continue.
Fiscal year 1996-97. 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 $1.4 billion. The cash surplus was derived
primarily from higher-than-expected revenues and lower-than-expected spending
for social services programs. The Governor in his Executive Budget applied $1.05
billion of the cash surplus amount to finance the 1997-98 Financial Plan, and
the additional $373 million is available for use in financing the 1997-98
Financial Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution and
State Finance Law. In addition, $41 million remains on deposit in the CRF. This
fund assists the State in financing any extraordinary litigation costs during
the fiscal year. The remaining $75 million reflects amounts on deposit in the
Community Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not include $1.86
billion in the tax refund reserve account, 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, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the previous
fiscal year (excluding deposits into the tax refund reserve account). General
Fund disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
Fiscal Year 1995-96. The State ended its 1995-96 fiscal year on March
31, 1996 with a General Fund cash surplus. The DOB reported that revenues
exceeded projections by $270 million, while spending for social service programs
was lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million
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11
change in fund balance is attributable to the $65 million voluntary deposit to
the TSRF, a $15 million required deposit to the TSRF, a $40 million deposit to
the CRF, and a $9 million deposit to the Revenue Accumulation Fund. The closing
fund balance includes $237 million on deposit in the TSRF, to be used in the
event of any future General Fund deficit as provided under the State
Constitution and State Finance Law. In addition, $41 million is on deposit in
the CRF. The CRF was established in State fiscal year 1993-94 to assist the
State in financing the costs of extraordinary litigation. The remaining $9
million reflects amounts on deposit in the Revenue Accumulation Fund. This fund
was created to hold certain tax receipts temporarily before their deposit to
other accounts. In addition, $678 million was on deposit in the tax refund
reserve account, of which $521 million was necessary to complete the
restructuring of the State's cash flow under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies.
Fiscal Year 1994-95. The State ended its 1994-95 fiscal year with the
General Fund in balance. The $241 million decline in the fund balance reflects
the planned use of $264 million from the CRF, partially offset by the required
deposit of $23 million to the TSRF. In addition, $278 million was on deposit in
the tax refund reserve account, $250 million of which was deposited to continue
the process of restructuring the State's cash flow as part of the LGAC program.
The closing fund balance of $158 million reflects $157 million in the TSRF and
$1 million in the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9
percent from 1993-94 levels. General Fund disbursements totaled $33.40 billion
for the 1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal
year. The increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF, offset by $188
million in spending reductions initiated in January 1995 to avert a potential
gap in the 1994-95 State Financial Plan. These actions included savings from a
hiring freeze, halting the development of certain services, and the suspension
of non-essential capital projects.
Other Funds. Activity in the three other governmental funds
has remained relatively stable over the last three fiscal years,
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12
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 new dedicated funds in the Special Revenue and Capital Projects fund
types. These revenues are used to support the capital programs of the Department
of Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $24.38
billion to $26.02 billion over the last three years, primarily as a result of
increased costs for the federal share of Medicaid. Other activity reflected
dedication of taxes to a new fund for mass transportation, new lottery games,
and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds declined from $3.62 billion
to $3.54 billion over the last three years, as spending for miscellaneous
capital programs decreased, partially offset by increases for mental hygiene,
health and environmental programs. The composition of this fund type's receipts
also changed as the dedicated transportation taxes began to be deposited,
general obligation bond proceeds declined substantially, federal grants remained
stable, and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds
during the three-year period for improvements to the State's capital facilities
and the continued implementation of the LGAC fiscal reform program. The
increases were moderated by the refunding savings achieved by the State over the
last several years using strict present value savings criteria. The growth in
LGAC debt service was offset by reduced short-term borrowing costs reflected in
the General Fund.
State Financial Plan Considerations. The economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. These factors can be very complex, may vary from fiscal
year to fiscal year, and are frequently the result of actions taken not only by
the State and its agencies and instrumentalities, but also by entities, such as
the federal government, that are not under the control of the State. For
example, various proposals relating to federal tax and spending policies that
are currently being publicly discussed and debated could, if enacted, have a
significant impact on the State's financial condition in the current and future
fiscal years. Because of the uncertainty and unpredictability of the changes,
their impact cannot, as a practical matter, be included in the assumptions
underlying the State's projections at this time.
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13
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. In preparing projections of State receipts,
economic forecasts relating to personal income, wages, consumption, profits and
employment have been particularly important. The projection of receipts from
most tax or revenue sources is generally made by estimating the change in yield
of such tax or revenue source caused by economic and other factors, rather than
by estimating the total yield of such tax or revenue source from its estimated
tax base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations. Factors
that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the federal government, and changes in the demand for and use of State
services.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth in this Annual Information Statement.
In the past, the State has taken management actions and made use of internal
sources to address potential State Financial Plan shortfalls, and DOB believes
it could take similar actions should variances occur in its projections for the
current fiscal year.
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14
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
The State Financial Plan was based upon a July 1997 projection by DOB
of national and State economic activity. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1997-98 Financial Plan.
On August 22, 1996 the President signed the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 (the "1996 Welfare Act"). This new
law made significant changes to welfare and other benefit programs. Major
changes included conversion of AFDC into the TANF block grant to states, new
work requirements and durational limits on recipients of TANF, and limits on
assistance provided to immigrants. City expenditures as a result of welfare
reform are estimated in the Financial Plan at $49 million in fiscal year 1998,
$45 million in fiscal year 1999, $38 million in fiscal year 2000 and $44 million
in fiscal year 2001. In addition, the City's naturalization initiative,
CITIZENSHIP NYC, will assist immigrants made ineligible under Federal law to
regain eligibility for benefits, by helping them through the application process
for citizenship. The Financial Plan assumes that 75% of those immigrants who
otherwise would have lost benefits will become citizens, resulting in projected
savings to the City in public assistance expenditures of $6 million in fiscal
year 1999, $24 million in fiscal year 2000 and $25 million in fiscal year 2001.
Federal legislation enacted August 5, 1997, reinstated eligibility for even more
immigrants currently on the rolls than projected. The outyear estimates made by
OMB are preliminary and depend on a variety of factors, which are impossible to
predict, including the implementation of workfare and child care programs
modified by newly enacted State law, the impact of possible litigation
challenging the law, and the impact of adverse economic developments on welfare
and other benefit programs. In accordance with the Federal welfare reform law,
the Governor submitted a State plan to the Federal government and such plan was
deemed complete as of December 2, 1996. New York State's welfare reform,
bringing the State into compliance with the 1996 Welfare Act and making changes
to the
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Home Relief program, was signed into law on August 20, 1997. The Governor
submitted an amended State plan to the Federal government, reflecting these
changes, on September 20, 1997. Implementation of the changes at the State level
will in part determine the possible costs or savings to the City. it is expected
that OMB's preliminary estimates of potential costs will change, based on new
policies to be developed by the State and City with respect to benefits no
longer funded as Federal entitlements.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in the
State Financial Plan primarily through General Fund expenditure reductions and
without increases in taxes or deferrals of scheduled tax reductions. It is
expected by the State DOB that the State Financial Plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State work force, and efficiency and
productivity initiatives. The division of the Budget intends to update the State
Financial Plan and provide an update to the Annual Information Statement upon
release of the 1997-98 Executive Budget.
U.S. Economy. The national economy has resumed a more robust rate of
growth after a "soft landing" in 1995, with approximately 14 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has added
approximately 300,000 jobs since late 1992, employment growth in the State has
bee hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense, and banking industries. Government
downsizing has also moderated these job gains.
DOB forecasts that national economic growth will continue in 1998 and
1999, it is expected to be substantially slower than is was in 1997. Real Gross
Domestic Product ("GDP") is projected to increase 2.6 percent in 1998, which is
a full percentage point lower than the estimated 1997 growth rate. In 1999, the
GDP is expected to fall to 2.0 percent. The growth of nominal GDP is projected
to decline from 5.8 percent in 1997 to 4.8 percent in 1998 and to 4.3 percent in
1999. The inflation rate is expected to drop to 2.2 percent in 1998, before
rising to 2.5 percent in 1999. The annual rate of job growth is expected to be
2.3 percent in 1998, equaling the strong growth rate experienced in 1997. In
1999, however, employment growth is forecast to slow markedly to 1.3 percent.
Growth in personal income and wages is expected to slow in 1998 and 1999.
New York Economy. The DOB forecast of the State's economy projects
continued moderate growth in 1998 and 1999 for employment, wages, and personal
income. The growth is projected to lesson, however, during the course of the two
years. Personal income is estimated to by 5.4 percent in 1997, 4.8 percent in
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16
1998, and 4.3 percent in 1999. Increases in 1998 year end bonus payments are
projected to be modest, a substantial change from the rate of increase of recent
years. Overall employment is expected to continue at a modest rate, reflecting
the slowing growth in the national economy, continued spending restraint in
government, and restructuring in the health, social service, and banking
sectors.
Current forecasts for continued growth, and any resultant impact on the
State's financial plans, contain some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumer
spending. Investments could also remain robust. Conversely, hints of
accelerating inflation or fears of excessively rapid economic growth could
create upward pressures on interest rates. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments or
inflation growth, resulting in forecasted average wage growth that could differ
significantly form actual growth. Similarly, the State forecast could fail to
correctly account for declines in banking employment and the direction of
employment change that is likely to accompany telecommunications and energy
deregulation.
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
work force engaged in manufacturing, and an increasing proportion engaged in
service industries. The following paragraphs summarize the state of major
sectors of the New York economy:
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 ten 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
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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 over one-sixth of all
non-farm 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.
Relative to the nation, the State has a smaller share of manufacturing
and construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
In the calendar years 1987 through 1996, 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
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published by the US Bureau of Economic Analysis, total personal income in the
State has risen more slowly than the national average since 1988.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because the City is a regional employment center for a multi-state region, State
personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
Financial Plan Updates. The State is required to issue Financial Plan
updates to the cash-basis State Financial Plan in July, October, and January,
respectively. These quarterly updates reflect analysis of actual receipts and
disbursements for each respective period and revised estimates of receipts and
disbursements for the then current fiscal year. The First Quarter Update was
incorporated into the cash-basis State Financial Plan of August 15, 1997 (the
"August Financial Plan").
The Mid-Year Update. The State issued its first update to the
cash-basis 1997-98 State Financial Plan (the "Mid-Year Update") on October 30,
1997. No revisions were made to the estimates of receipts and disbursements
based on the current economic forecasts for both the nation and the State. The
Mid-Year Update continues to reflect a balanced 1997-98 State Financial Plan,
with a projected General Fund reserve for future needs of $530 million. This
projected surplus is now considered to be at the low end of the range of
possible outcomes for the 1997-98 fiscal year.
The forecast of the State economy also remains unchanged from the one
formulated with the August Financial Plan. Steady growth was projected to
continue through the second half of 1997. Personal income was projected to
increase by 6.1 percent in 1997 and 4.5 percent in 1998, reflecting projected
wage growth fueled in part by financial sector bonus payments. The forecast
projected employment increases of 1.4 percent in 1997 and 1.0 percent in 1998.
The projected 1997-98 closing fund balance in the General Fund of $927
million reflects a reserve for future needs of $530 million, a balance of $332
million in the Tax Stabilization Reserve Fund (following a payment of $15
million during the current fiscal year) and a balance of $65 million in the
Contingency Reserve Fund (following a deposit of $24 million during the current
fiscal year). These two reserves remain available to help offset potential risks
to the Financial Plan. Based upon experience to date, it is likely that the
closing fund balance will be larger, providing additional resources for the
1998-99 fiscal year.
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All governmental funds receipts and disbursements are also unchanged.
The projected closing fund balance for all governmental funds remains $1.43
billion. The annual increase in spending for all governmental funds remains
approximately 7 percent. Total projected receipts in all governmental funds
(excluding transfers) are approximately $67.31 billion. All funds disbursements
(excluding transfers) are $67.37 billion. Total net other financing sources
across all governmental funds are projected at $505 million.
On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget: Fiscal Review and Analysis" in which he identified several
risks to the State Financial Plan and estimated that the State faces a potential
imbalance in receipts and disbursements of approximately $1.5 billion for the
State's 1998-99 fiscal year and approximately $3.4 billion for the State's
1999-00 fiscal year. The 1998-99 fiscal year estimate by the State Comptroller
is within the range discussed by the Division of the Budget in the section
entitled "Outyear Projections of Receipts and Disbursements" in the Annual
Information Statement of August 15, 1997. Any increase in the 1997-98 reserve
for future needs would reduce this imbalance further and, based upon results to
date, such an outcome is considered possible. In addition, the Comptroller
identified risks in future years from an economic slowdown and from spending and
revenue actions enacted as a part of the 1997-98 budget that will add pressure
to future budget balance. The Governor is required to submit a balanced budget
each year to the State Legislature.
On August 11, 1997 President Clinton exercised his line item veto
powers to cancel a provision in the Federal Balanced Budget Act of 1997 that
would have deemed New York State's health care provider taxes to be approved by
the federal government. New York and several other states have used hospital
rate assessments and other provider tax mechanisms to finance various Medicaid
and health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was
intended to rectify the uncertainty created by continued inaction on the State's
waiver requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate any
provider tax disallowance.
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On October 9, 1997 the President offered a corrective amendment to the
HCFA regulations governing such taxes. The Governor has stated that this
proposal does not appear to address all of the State's concerns, and
negotiations are ongoing between the State and HCFA. In addition, the City of
New York and other affected parties in the health care industry have filed a
lawsuit challenging the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis.
The January Update. The State revised its 1997-98 Financial Plan on
January 20, 1998 (the "January Update"), in conjunction with the release of its
Executive Budget Forecast for the 1998-99 fiscal year. The State predicted that
the 1997-98 General Fund Financial Plan would continue to be balanced, with a
projected cash surplus of $1.83 billion, an increase of $1.32 billion form the
State's Mid-Year Update. The General Fund closing balance is projected to be
$465 million at the end of the 1997-98 fiscal year, a decline of $462 million
from the Mid-Year Update. This decline reflects the application of $530 million
in undesignated reserve and additional surplus money projected in the January
Update to pay for certain one-time accelerated payments.
Personal income tax collections for 1997-98 are projected at $18.5
billion, a $363 million decrease from the Mid-Year Update. Business tax receipts
are projected to increase by $158 million, for a total of $4.98 billion. User
tax estimates increased $52 million to $7.06 billion. Other tax receipts are
projected to increase by $103 million over the Mid-Year Update to total $1.09
billion for the fiscal year.
The State projected that disbursements would increase by $565 million
over the Mid-Year Update. The State attributed the majority of the increase to a
one-time dispersement of a $561 million pre-payment of expenditures previously
scheduled for 1998-99. Outside of this accelerated payment the projected General
Fund spending for the 1997-98 year remained essentially unchanged from the
Mid-Year Update.
The 1998-99 Executive Budget. The Governor presented the 1998-99
Executive Budget (the "Executive Budget") to the Legislature on January 20,
1998. The Executive Budget contains financial projections for the State's
1997-98 through 2000-01 fiscal years, detailed estimates of receipts, and a
proposed Capital Program and Financing Plan. The State expects that the Governor
will prepare amendments to the Executive Budget as permitted under applicable
law and that these amendments will be
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21
reflected in a revised financial plan. There can be no assurance that the
Legislature will enact into law the Executive Budget as proposed by the Governor
or that the State's budget projections will not differ materially or adversely
from projections set forth in any of its updates.
Under the Executive Budget, the 1998-99 Financial Plan is projected to
be balanced on a cash basis in the General Fund. Total General Fund receipts
(including transfers from other funds) are projected to be $36.22 billion, an
increase of $1.02 billion over the estimated 1997-98 level. The State General
Fund tax base is projected to increase approximately six percent during 1998-99,
after adjusting for tax law and administrative changes. Personal income tax
collections in the General Fund are projected to increase to $19.82 billion, a
$1.32 billion increase over 1997-98. User tax collections and fee receipts are
projected to reach $7.2 billion, an increase of $144 million over the previous
year. Business tax receipts are projected to decline in 1998-99 from $4.98 to
$4.96 billion largely due to scheduled tax reductions. Receipts from other taxes
are also projected to decline form $1.79 billion to $1.01 billion in 1998-99.
Miscellaneous receipts are projected to decline from $1.57 billion in 1997-98 to
$1.4 billion in the 1998-99 fiscal year.
General Fund distributions, including transfers to other funds, are
projected to be $36.18 billion in 1998-99, an increase of $1.02 billion over
projected expenditures (including prepayments) for the 1997-98 fiscal year. The
Executive Budget proposes a year-to-year growth in General Fund spending of 2.89
percent, a growth in State Funds spending of 8.5 percent, and an increase in All
Government Funds spending of 7.6 percent. Dispersements from the category of
Grants to Local Governments (which constitute 67.9 percent of all General Fund
spending) are projected to increase by $931 million to $24.55 billion in 1998-
99, or 3.9 percent above 1997-98. Support of State operations is projected to
increase by $524 million to $6.73 billion, or 8.4 percent higher than 1997-98.
Total spending in General State charges is projected to decline slightly in
1998-99 to $2.23 billion. Transfers in support of debt services are projected to
grow 5.8 percent in 1998-99, from $2.03 billion to $2.15 billion.
The Division of Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic, and political
factors. These factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. For example, there can be no assurance that the Legislature
will enact the Governor's
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proposals or the State's actions will be sufficient to preserve budgetary
balance or align recurring receipts and disbursements in either 1998-99 or
future fiscal years.
Uncertainties with regard to the economy present the largest potential
risk to future budget balance in New York State. The risk includes whether the
financial market changes or broader economic "correction" occurs during the
period and is heightened by the relatively lengthy expansions in the market that
are currently underway. The securities industry is more important to the New
York economy than the national economy and a significant deterioration in stock
market performance could ultimately produce adverse changes in wage and
employment levels. Additionally, a normal "forecast error" of one percentage
point in the expected growth rate could cumulatively raise or lower receipts by
over $1 billion by the last year of the 1998-2001 projection period. On the
other hand, the national or State economy may continue to perform better than
projected, which could produce beneficial results in State receipts.
Ratings Agencies. On August 28, 1997, Standard & Poor's ("S&P") revised
its ratings on the State's general obligation bonds to A from A-, and, in
addition, revised its ratings on the State's moral obligation, lease purchase,
guaranteed and contractual obligation debt. S&P rated the State's general
obligation bonds AA- from August 1987 to March 1990 and A+ from November 1982 to
August 1987. In March 1990, S&P lowered its rating of all of the State's general
obligation bonds from AA- to A. On January 13, 1992, S&P lowered its rating on
the State's general obligation bonds from A to A-, and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. On April 26, 1993 S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P revised its outlook on the
State's general obligation bonds to positive and, on August 5, 1996, confirmed
its A- rating.
On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness. On June 6, 1990, Moody's changed its
ratings on all of the State's outstanding general obligation bonds from A1 to A,
the rating having been A1 since May 27, 1986. On November 12, 1990, Moody's
confirmed the A rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1.
Authorities. The fiscal stability of the State is related in part to
the fiscal stability of its public authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself, and may issue bonds and notes within the amounts of, and as otherwise
restricted by, their legislative authorization. The State's
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23
access to the public credit markets could be impaired, and the market price of
its outstanding debt may be materially adversely affected, if any of its public
authorities were to default on their respective obligations. As of September 30,
1996 there were 17 public authorities that had outstanding debt of $100 million
or more each, and the aggregate outstanding debt, including refunding bonds, of
all state public authorities was $75.4 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques
for public authorities. Also, there are statutory arrangements providing for
State local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, if local
assistance payments are so diverted, the affected localities could seek
additional State assistance.
Some authorities also receive monies from State appropriations to pay
for the operating costs of certain of their programs. As described below, the
MTA receives the bulk of this money in order to carry out mass transit and
commuter services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
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24
Metropolitan Transportation Authority. The MTA oversees the operation
of the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and
tunnels. Because fare revenues are not sufficient to finance the mass transit
portion of these operations, the MTA has depended, and will continue to depend
for operating support upon a system of State, local government and TBTA support,
and, to the extent available, Federal operating assistance, including loans,
grants and operating subsidies. If current revenue projections are not realized
and/or operating expenses exceed current projections, the TA or commuter
railroads may be required to seek additional State assistance, raise fares or
take other actions.
Since 1980, the State has enacted several taxes--including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax--that provide revenues for mass transit purposes, including assistance to
the MTA. In addition, since 1987, State law has required that the proceeds of a
one quarter of 1% mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993 the State dedicated a portion of
the State petroleum business tax to fund operating or capital assistance to the
MTA. For the 1997-98 fiscal year, total State assistance to the MTA is projected
to total approximately $1.2 billion, an increase of $76 million over the 1996-97
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 a new $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 approved the 1995-99 Capital Program. This plan
supersedes the overlapping portion of the MTA's 1992-96 Capital Program. This is
the fourth capital plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is designed to
upgrade the performance of the MTA's transportation systems by investing in new
rolling stock, maintaining replacement schedules for existing assets and
bringing the MTA system into a state of good repair. The 1995-99 Capital Program
assumes the issuance of an estimated $5.1 billion in bonds under this $6.5
billion aggregate bonding
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authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions
for future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
Localities. Certain localities outside the City have experienced
financial problems and have requested and received additional State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the projections of the State's receipts and disbursements for the State's
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipal Indebtedness. Municipalities and school districts have
engaged in substantial short-term and long-term borrowings. In 1995, the total
indebtedness of all localities in the State other than the City was
approximately $19.0 billion. A small portion (approximately $102.3 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to State enabling legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than the City authorized by State law to issue debt
to finance deficits during the period that such deficit financing is
outstanding. Eighteen
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localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.
Litigation. Certain litigation pending against the State or its
officers or employees could have a substantial or long-term adverse effect on
State finances. Among the more significant of these cases are those that
involve: (i) employee welfare benefit plans where plaintiffs are seeking a
declaratory judgment nullifying on the ground of federal preemption provisions
of Section 2807-c of the Public Health Law and implementing regulations which
impose a bad debt and charity care allowance on all hospital bills and a 13
percent surcharge on inpatient bills paid by employee welfare benefit plans;
(ii) several challenges to provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology; (iii) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central and upstate New York; (iv) challenges to the
practice of using patients' Social Security benefits for the costs of care of
patients of State Office of Mental Health facilities; (v) an action against
State and City officials alleging that the present level of shelter allowance
for public assistance recipients is inadequate under statutory standards to
maintain proper housing; (vi) alleged responsibility of State officials to
assist in remedying racial segregation in the City of Yonkers; (vii) alleged
responsibility of the State Department of Environmental Conservation for a
plaintiff's inability to complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (viii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (ix) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (x) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law; (xi) a challenge to the constitutionality of the Clean
Water/Clean Air Bond Act of 1996 and its implementing regulations; (xii) two
challenges to regulations
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promulgated by the Superintendent of Insurance that established excess medical
malpractice premium rates for the 1986-87 through 1996-97 fiscal years; and
(xiii) an action to compel the State to enforce sales and excise taxes imposed
on tobacco products and motor fuel sold to non-Indian customers on Indian
reservations.
Adverse developments in the proceedings described above or the
initiation of new proceedings could affect the ability of the State to maintain
balanced 1997-98 and 1998-99 State Financial Plans. In its Notes to its General
Purpose Financial Statements for the fiscal year ended March 31, 1997, the State
reports its estimated liability for awards and anticipated unfavorable judgments
at $364 million. There can be no assurance that an adverse decision in any of
the above cited proceedings would not exceed the amount that the 1997-98 and
1998-99 State Financial Plans reserve for the payment of judgments and,
therefore, could affect the ability of the State to maintain balanced plans.
New York City
The fiscal health of the State may also be particularly affected by the
fiscal health of the City, which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the City
to balance its budget and to meet its cash requirements. The State could also be
affected by the ability of the City to market its securities successfully in the
public credit markets. The City has achieved balanced operating results for each
of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP standards. Current law requires the City to prepare
four-year annual financial plans, which are reviewed and revised on a quarterly
basis and includes capital, revenue, and expense projections and outlines
proposed gap-closing for the years with projected budget gaps. An annual
financial report for its most recent completed fiscal year is prepared at the
end of October of each year.
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to
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28
exercise various fiscal-monitoring functions over the City, and upon the
occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including, but not limited to a City operating budget deficit of
more than $100 million, the Control Board is required by law to reimpose a
Control Period.
Currently, the City and its "Covered Organizations" (i.e., those which
receive or may receive money from the City directly, indirectly or contingently)
operate under a four-year financial plan (the "City Financial Plan"), which the
City prepares annually and updates periodically and which includes the City's
capital revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's projections set forth
in the City 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.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State aid
is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State. 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.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service requirements
for, and financial plan compliance by, the City and its Covered Organizations.
According to recent staff reports, while economic recovery 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 generated a substantial
surplus for the City in fiscal year 1996-97. Although several sectors of the
City's economy have expanded recently, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the course of the
national economy. These reports have also indicated that recent City budgets
have been balanced in part through the
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29
use of non-recurring resources; that the City Financial Plan tends to rely on
actions outside its direct control; that the City has not yet brought its
long-term expenditure growth in line with recurring revenue growth; and that the
City is therefore likely to continue to face substantial 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.
The 1998-2002 Financial Plan. On January 29, 1998, the City published
the Financial Plan for the 1998 through 2002 fiscal years, which relates to the
City and certain entities which receive funds from the City. The Financial Plan
is a modification to the four-year financial plan submitted to the Control Board
on June 10, 1997 (the "June Financial Plan").
The 1998-2002 Financial Plan reflects actual receipts, expenditure, and
changes in forecast revenues and disbursements since the June Financial Plan.
The 1998-2002 Financial Plan projects revenues and expenditures for the 1998 and
1999 fiscal years to be balanced in accordance with GAAP. Gaps are projected,
however, of $1.8 billion, $2.0 billion, and $1.9 billion for the 2000, 2001, and
2002 years, respectively. Changes since the June Financial Plan include: (i) an
increase in projected tax revenue in 1998 ($841 million), 1999 ($738 million),
2000 ($808 million), and ($802 million), including an increase in sales tax
revenues resulting from the state adopting a smaller than expected sales tax
reduction; (ii) a reduction in assumed State aid of $283 million in the 1998
fiscal year and between $134-142 million in each year from 1999-2001; (iii) a
reduction in the projected debt service expenditures totaling $164 million, $291
million, $127 million, and $145 million in the 1998 through 2001 fiscal years,
respectively; (iv) an increase in Board of Education (the "BOE") spending of $70
million, $182 million, $59 million, and $61 million in the 1998 through 2001
fiscal years, respectively; and (v) an increase in expenditures totaling $71
million in the 1998 fiscal year and between $214 million and $273 million in
each of the 1999 and 2001 fiscal years, reflecting additional spending for the
City's proposed drug initiative and other agency spending. The 1998-2002
Financial Plan also includes a proposed discretionary transfer in the 1998
fiscal year of an additional $920 million in debt service due in the 1999 fiscal
year, and a proposed discretionary transfer in the 1999 fiscal year of $210
million of debt service due in fiscal year 2000, included in the Budget
Stabilization Account for 1998 and 1999 fiscal years, respectively, raising the
total in the Budget Stabilization Account for the 1998 fiscal year to $1.2
billion.
Additionally, the 1998-2002 Financial Plan sets forth gapclosing
actions to eliminate a previously projected budget gap for the 1999 fiscal year
and to reduce projected gaps for fiscal
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30
years 2000 through 2002. Gap-closing actions for 1998 through 2002 fiscal years
include: (i) additional agency actions totaling $122 million, $429 million, $354
million, $303 million, and $311 million in fiscal years 1998 through 2002,
respectively; (ii) assumed additional Federal aid of $250 million in each of
fiscal years 1999 through 2002, which could include funds to be distributed from
the tobacco settlement, increased Medicaid assistance, unrestricted Federal
revenue sharing aid or increased funds for school construction; and (iii)
assumed additional State aid of $200 million in each of fiscal years 1999
through 2002, including an increase in revenue sharing payments and
reimbursement of inmate costs proposed by the City. The gap-closing actions are
partially offset by proposed new tax reduction programs totalling $237 million,
$537 million, $610 million, and $774 million in fiscal years 1999 through 2002,
respectively.
The City's projected budget gap for the 2001 and 2002 fiscal years does
not reflect the savings expected to result from prior years' programs to close
the gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 2000 budget are not taken into account in projecting budget gaps for
the 2001 and 2002 fiscal years.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years and is projected to achieve a balanced operating results
for the 1998 fiscal year, thee can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases, or expenditure reductions. Additional tax increases and
reductions in essential City services could also adversely affect the City's
economic base.
Assumptions. The Financial Plan assumes (i) approval by the Governor
and the State Legislature of the extension of the 14% personal income tax
surcharge, which is scheduled to expire on December 31, 1999 and the extension
of which is projected to provide revenue of $168 million, $507 million, and $530
million in the 2000, 2001, and 2002 fiscal years, respectively, and of the
extension of the 12.5% personal income tax surcharge, which is scheduled to
expire on December 31, 1998 the extension of which is projected to provide
revenue of $187 million, $531 million and $554 million, and $579 million in the
1999 through 2002 fiscal years, respectively; (ii) collection of the projected
rent payments for the City's airports, totaling $365 million, $175 million, $170
million, and $70 million in the 1999 through 2002 fiscal years, respectively,
which may depend on the successful completion of negotiations with the Port
Authority or the enforcement of the City's rights under the existing leases
through pending legal actions; and (iii) State approval of the repeal of the
Wicks law relating to contracting requirements for
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31
City construction projects and the additional State funding assumed in the
Financial Plan, and State and Federal approval of the State and Federal
gap-closing actions proposed by the City in the Financial Plan. It is expected
that the Financial Plan will engender public debate which will continue through
the time the budget is scheduled to be adopted in June 1998, and that there will
be alternative proposals to reduce taxes (including the 12.5% personal income
tax surcharge) and increase in spending. Accordingly, the Financial Plan may be
changed by the time the budget for the 1999 fiscal year is adopted. Moreover,
the Financial Plan provides no additional wage increases for City employees
after their contracts expire in fiscal years 2000 and 2001. In addition, the
economic and financial condition of the City may be affected by various
financial, social, economic and political factors which could have a material
effect on the City.
The City's Financial Plan is based on numerous additional assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1998 through 2002 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the City's
required pension fund contributions; the willingness and ability of the State,
in the context of the State's current financial condition, to provide the aid
contemplated by the City Financial Plan and to take various other actions to
assist the City; the ability of HHC, BOE and other such agencies to maintain
balanced budgets; the willingness of the Federal government to provide the
amount of Federal aid contemplated in the City Financial Plan; the impact on the
City revenues and expenditures of Federal and State welfare reform and any
future legislation affecting Medicare or other entitlement programs; adoption of
the City's budgets by the City Council in substantially the forms submitted by
the Mayor; the ability of the City to implement proposed reductions in City
personnel and other cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
The Governor presented his 1998-1999 Executive Budget to the
Legislature on January 20, 1998. In recent years, however, the State has failed
to adopt a budget prior to the beginning of the fiscal year. A prolonged delay
in the adoption of the State's budget beyond the statutory April 1 deadline
without interim appropriations could delay the projected receipt of State aid,
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32
and there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline.
City Employees. Substantially all of the City's full-time employees
are members of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan, except for
certain awards arrived at through impasse procedures. During a Control Period,
and subject to the foregoing exception, the Control Board would be required to
disapprove collective bargaining agreements that are inconsistent with the
City's current financial plan.
Under applicable law, the City may not make unilateral changes in
wages, hours or working conditions under any of the following circumstances: (i)
during the period of negotiations between the City and a union representing
municipal employees concerning a collective bargaining agreement; (ii) if an
impasse panel is appointed, then during the period commencing on the date on
which such panel is appointed and ending sixty days thereafter or thirty days
after it submits its report, whichever is sooner, subject to extension under
certain circumstances to permit completion of panel proceedings; or (iii) during
the pendency of an appeal to the Board of Collective Bargaining. Although State
law prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
The 1998-2002 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds or water and sewer funds, will decrease from
an estimated level of 204,685 on June 30, 1998 to an estimated level of 203,987
by June 30, 2002, before implementation of the gap-closing program outlined in
the City Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995
and 1996 fiscal years. The City has reached settlements with unions representing
approximately 86% of the City's work force. The City Financial Plan reflects the
costs of the settlements and assumes similar increases for all other City-funded
employees. The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The City's pension expenditures for the 1998 fiscal year are expected
to approximate $1.5 billion. In each of fiscal years 1999 through 2002, these
expenditures are expected to approximate $1.4 billion, $1.4 billion, $1.4
billion, and $1.3 billion, respectively. Certain of the systems may provide
pension benefits of 50% to 55% of "final pay" after 20 to 25 years of service
without additional benefits for subsequent years of service. For the 1997 fiscal
year, the City's total annual pension costs,
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including the City's pension costs not associated with the five major actuarial
systems, plus Federal Social Security tax payments by the City for the year,
were approximately 19.04% of total payroll costs. In addition, contributions are
also made by certain component units of the City and government units directly
to the three cost sharing multiple employer actuarial systems. The State
Constitution provides that pension rights of public employees are contractual
and shall not be diminished or impaired.
Reports on the City Financial Plan. From time to time, the Control
Board staff, MAC, OSDC, the City Comptroller and others issue reports and make
public statements regarding the City's financial condition, commenting on, among
other matters, the City's financial plans, projected revenues and expenditures
and actions by the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the City
may not have adequately provided for future contingencies. Certain of these
reports have analyzed the City's future economic and social conditions and have
questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that reports and statements will
continue to be issued and to engender public comment, and it is expected that
the staff of the Control Board will issue a report on the 1998-2002 Financial
Plan in the near future.
On February 26, 1998, the City Comptroller issued a report on the 1998
fiscal year and the preliminary budget for the 1999 fiscal year, as reflected in
the 1997-2001 Financial Plan. With respect to the 1998 fiscal year, the report
identified a possible surplus of between $71 million and $293 million above the
level projected in the City's plan. The report stated that the additional
surplus reflects the possibility of the receipt of an additional $225 million of
tax revenues, and that the size of the possible surplus depends primarily on
whether the sale of the New York Coliseum for $200 million is completed. With
respect to the 1999 fiscal year, the report identified a possible gap of $153
million or a possible surplus of $269 million, depending upon whether the State
approves the extension of 12.5% personal income tax surcharge and the amount of
surplus for the 1998 fiscal year available for debt service in the 1999 fiscal
year.
The potential risks identified in the City Comptroller's report for the
1999 fiscal year include: (i) assumed payments from the Port Authority relating
to the City's claims for back rentals and an increase in future rentals, part of
which are the subject of the arbitration, totaling $335 million; (ii) State
approval of the 12.5% personal income tax surcharge beyond December 1, 1998,
which would generate $188 million in the 1999 fiscal year and which the Speaker
of the City Counsel has opposed; and (iii) the receipt of an additional $450
million of
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State and Federal aid assumed in the financial plan. The potential risks are
offset by potential additional resources for the 1999 fiscal year, including the
potential for an additional $150 million of State educational aid, $150 million
of additional debt service savings, $176 million in tax revenues if the proposed
sales tax reduction on clothing is not approved, $294 million of higher than
projected tax revenues and the availability in the 1999 fiscal year of an
additional $71 million to $293 million surplus from the 1998 fiscal year. The
report also noted that the City Comptroller will begin writing off outstanding
education-aid receivables that are 10 years past due, which are estimated to be
approximately $4 million in the 1998 fiscal year and $39 million in the 1999
fiscal year, and which total $914 million for fiscal years 1989 through 1997. In
addition, the report noted that City-funded expenditures for the 1998 fiscal
year are expected to exceed the ceiling established in the May 1996 agreement
between the City and MAC, which would permit MAC to recover from the City in the
1999 fiscal year an amount equal to such excess spending, up to $125 million.
Finally, the report noted that, while the City is in a relatively strong
financial position, its reliance on State and Federal aid to close its budget
gap for the 1999 fiscal year raises concerns, and that the City's spending will
again be under pressure in the event of an economic downturn. The City
Comptroller also noted (in a separate report on the City's capital debt) that
debt burden measures, such as annual debt service as a percentage of tax
revenues, debt per capita, and debt assessed value of real property, are
approaching historically high post-fiscal crises levels, which calls for
restraint in the City's capital program, while the City's infrastructure
requires additional resources.
Also on February 26, 1998, the staff of OSDC issued a report on the
Financial Plan. With respect to the 1998 fiscal year, the OSCD report noted that
the City's revenues could be $200 million greater than projected in the
Financial Plan. While noting a potential delay in the receipt of proceeds from
the sale of the New York Coliseum, the report projects that it is not likely
that those resources will be needed in the 1998 fiscal year. The report
projected potential budget gaps of $462 million, $2.6 billion, $2.7 billion, and
$2.3 billion for the 1999 through 2002 fiscal years, respectively, which include
the gaps projected in the Financial Plan for fiscal years 2000 through 2002 and
the additional net risks identified in the report totaling $762 million, $1.012
billion, $913 million, and $774 million for the 1999 through 2002 fiscal years,
respectively, which are reduced by the potential for greater than forecast
revenues and lower than forecast pension costs for fiscal years 2000 through
2002. The largest risks identified in the report relate to (i) the receipt of
projected Port Authority lease payments which are the subject of arbitration and
lease negotiations; (ii) City gap-closing proposals for additional State and
Federal assistance; and (iii) State approval of a three-year extension of the
City's 12.5% personal income tax surcharge. Additional risks identified in the
report include unfunded expenditures for project READ
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totaling $125 million for each of the 2000 through 2002 fiscal years and the
potential for additional funding needs for the City's labor reserve, which total
$104 million in the 1999 fiscal year and exceed $200 million in each of the 2000
through 2002 years, to pay for collective bargaining increases for the Covered
Organizations, which the Plan assumes the Covered Organizations will pay instead
of the City. The report noted that these risks could be reduced if the Tax
Reduction Program proposed in the Financial Plan is not approved by the City
Counsel and the State. The report also noted that: (i) HHC faces potential
budget gaps starting in the 1999 fiscal year and reflecting the expected loss of
revenues associated with the implementation of Medicaid mandatory managed care;
(ii) the Financial Plan assumes that the State will extend the 14% personal
income tax surcharge; (iii) the City faces potential liability for State
education aid owed from prior years which the City could be required to write
off if a plan is not reached to fund these claims; and (iv) the City might be
required to reimburse MAC up to $125 million on the 1999 fiscal year if the City
spending limits set forth in the May 1996 agreement with MAC are exceeded in the
1998 fiscal year. However, the report noted that actual fiscal year 1998
spending will not be determined until October 1998, and in the interim, City and
MAC officials are discussing solutions to the reimbursement problem.
The OSDC report noted also that, while the City's financial outlook has
improved because of actions taken by the City, Federal, and State governments
and record securities industry performance, the staff remained concerned about
the City's dependence on the securities industry and whether the City will be
able to sustain a relatively high level of spending. The report noted that
City-funded spending is projected to grow by 7.2% in fiscal year 1998 and by
4.5% in fiscal year 1999, while revenues are projected to grow by only 1.8% in
fiscal year 1999. Moreover, the report noted that while the budget gaps for
fiscal years 2000 through 2002 have been reduced, they are still large by
historical standards, and the budget makes no provisions for wage increases
after the expiration of current contacts, which, at the projected inflation
rate, would increase costs by $375 million in fiscal year 2001 and by $725
million in fiscal year 2002. Finally, the report noted that the Asian financial
and economic crises could intensify and create greater impact on financial
markets in the U.S. economy than currently anticipated, or that the Federal
Reserve Board could raise interest rates, which could adversely affect the
financial markets and the City's financial condition.
On January 13, 1998, the IBO released a report setting forth its
forecast for the City's revenues and expenditures for the 1998 through 2001
fiscal years, assuming continuation of current spending policies and tax laws.
In the report, the IBO forecasts that the City will end the 1998 fiscal year
with a surplus of $120 million, in addition to $514 million in the Budget
Stabilization Account. Additionally, the report forecasts that
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36
the City will face gaps of $1.4 billion, $2.6 billion, and $2.8 billion in the
1999 through 2001 fiscal years, respectively, resulting from 4.8% annual growth
in spending form 1998 through 2001, compared with 2.2% annual revenue growth.
The report noted that slow revenue growth is attributable to a variety of
factors, including a gradual deceleration in economic growth through the first
half of calendar year 1999, the impact of recently enacted tax cuts and
constraints on increases in the real property tax, as well as uncertain back
rent payments from the Port Authority, while future costs for existing programs
will increase to reflect inflation and scheduled pay increases for the City
employees during the term of existing labor agreements. The report also noted
that debt service and education spending will increase rapidly, while spending
for social services rise more slowly due to lower projected caseloads.
Finally, the report noted that the new welfare law's most significant
fiscal impact is likely to occur in the years 2002 and beyond, reflecting the
full impact of the lifetime limit on welfare participation which only begins to
be felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief. In addition, the report noted that, given
the constitutional requirement to care for the needy, the 1996 Welfare Act might
well prompt a migration of benefit-seekers into the City, thereby increasing
City welfare expenditures in the long run. The report concluded that the impact
of the 1996 Welfare Act on the City will ultimately depend on the decisions of
State and City officials, the performance of the local economy and the behavior
of thousands of individuals in response to the new system.
Previous Reports. On September 18, 1997, the City Comptroller issued a
report commenting on developments with respect to the 1998 fiscal year. The
report noted that the City's adopted budget, which is reflected in the City
Financial Plan, had assumed additional State resources of $612 million in the
1998 fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while the
City will receive $322 million more in education aid in the 1998 fiscal year
than assumed in the City's adopted budget, it is unlikely that the funding will
be entirely available for gap-closing purposes. In addition, the report noted
that the City's financial statements currently contain approximately $643
million in uncollected State education aid receivables from prior years as a
result of the failure of the State to appropriate funds to pay these claims, and
that the staff of BOE has indicated that an additional $302 million in prior
year claims is available for accrual. The report stated that the City
Comptroller maintains the position that no further accrual of prior year aid
will take place, including $75 million in aid assumed in the City's adopted
budget for the 1998 fiscal year, unless the State makes significant progress to
retire the outstanding prior year receivables. On October 28, 1997, the City
Comptroller issued a subsequent report commenting
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37
on recent developments. With respect to the 1997 fiscal year, the report noted
that the City ended the 1997 fiscal year with an operating surplus of $1.367
billion, before certain expenditures and discretionary transfers, of which
$1.362 billion was used for expenditures due in the 1998 fiscal year. With
respect to tax revenues for the 1998 fiscal year, the report noted that total
tax revenues in the first quarter of the 1998 fiscal year were $244.3 million
above projections in the City Financial Plan, excluding audit collections which
were $31.2 million less than projected. The report stated that the increased tax
revenues included $110.3 million of greater than projected general property tax
receipts, which resulted, in part, from a prepayment discount program, and
increased revenues from the personal income, banking corporation, general
corporation and unincorporated business taxes. The report noted that Wall Street
profits exceeded expectations in the first half of the 1997 calendar year.
However, the report noted that the stock market in the last two weeks of October
has declined as a result of currency turmoil in Southeast Asia. The report noted
that, while tax revenues in the 1998 fiscal year should not be significantly
affected by the recent stock market decline, since there is a lag between
activity on Wall Street and City tax revenues, if the current stock market
decline persists, tax revenue forecasts for subsequent years will have to be
revised downward. The report noted that the City was not affected by the October
1987 stock market crash until the 1990 fiscal year, when revenues from the
City's business and real estate taxes fell by 20% over the 1989 fiscal year. The
report also noted that expenditures for short-term and long-term debt issued
during the first half of the 1998 fiscal year are estimated to be between
approximately $53.9 million and $58.8 million below levels anticipated in the
City's adopted budget for the 1998 fiscal year, approximately $20 million below
anticipated levels in the 1999 fiscal year and approximately $30 million below
anticipated levels in each of fiscal years 2000 and 2001 due to less borrowing
and lower interest rates than assumed.
On August 25, 1997, the IBO issued a report relating to recent
developments regarding welfare reform. The report noted that Federal legislation
adopted in August 1997, modified certain aspects of the 1996 Welfare Act, by
reducing SSI eligibility restrictions for certain legal aliens residing in the
country as of August 22, 1996, resulting in the continuation of Federal
benefits, by providing funding to the states to move welfare recipients from
public assistance and into jobs and by providing continued Medicaid Coverage for
those children who lose SSI due to stricter eligibility criteria. In addition,
the report noted that the State had enacted the Welfare Reform Act of 1997
which, among other things, requires the City to achieve work quotas and other
work requirements and requires all able-bodied recipients to work after
receiving assistance for two years. The report noted that this provision could
require the City to spend substantial funds over the next several years for
workfare and day care in addition to the funding reflected in the City
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Financial Plan. The report also noted that the State Welfare Reform Act of 1997
established a Food Assistance Program designed to replace Federal food stamp
benefits for certain classes of legal aliens denied eligibility for such
benefits by the 1996 Welfare Act. The report noted that if the City elects to
participate in the Food Assistance Program, it will be responsible for 50% of
the costs for the elderly and disabled. The IBO has stated that it will release
an updated report to provide a detailed analysis of these developments and their
likely impact on the City.
On July 16, 1997, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1998 fiscal year, the report identified a
possible $112 million surplus or a possible total net budget gap of up to $440
million, depending primarily on whether the tax reduction program proposed in
the City Financial Plan is implemented and the 14% personal income tax surcharge
is extended beyond December 31, 1997. The risks identified in the report for the
1998 fiscal year include (i) $178 million related to BOE, resulting primarily
from unidentified expenditure reductions and prior year State aid receivables;
(ii) State aid totaling $115 million which is assumed in the City Financial Plan
but not provided for in the Governor's Executive Budget; (iii) State approval of
the extension of the 14% personal income tax surcharge beyond December 31, 1997,
which would generate $169 million in the 1998 fiscal year; (iv) City proposals
for State aid totaling $271 million, including the acceleration of $142 million
of State revenue sharing payments from the 1999 fiscal year to the 1998 fiscal
year, which are subject to approval by the Governor and/or the State
Legislature; and (v) the assumed sale of the Coliseum for $200 million, which
may be delayed. The report noted that these risks could be partially offset by
between $597 million and $765 million in potentially available resources,
including $200 million of higher projected tax revenues, $150 million of
possible additional State education aid and the possibility that the proposed
sales tax reduction will not be enacted, which would result in $157 million of
additional tax revenues in the 1998 fiscal year. With respect to the 1998 fiscal
year, the report stated that the City has budgeted $200 million in the General
Reserve and included in the City Financial Plan a $300 million surplus to be
used in the 1999 fiscal year, making the potential $440 million budget gap
manageable. However, the report also expressed concern as to the sustainability
of profits in the securities industry.
With respect to the 1999 and subsequent fiscal years, the report
identified total net budget gaps of between $1.9 billion and $2.8 billion, $2.6
billion and $4.0 billion, and $2.4 billion and $3.8 billion for the 1999 through
2001 fiscal years, respectively, which include the gaps set forth in the City
Financial Plan. The potential risks and potential available resources identified
in the report for the 1999 through 2001 fiscal years include most of the risks
and resources identified
<PAGE>
39
for the 1998 fiscal year, except that the additional risks for the 1999 through
2001 fiscal years include (i) assumed payments from the Port Authority relating
to the City's claim for back rentals and an increase in future rentals, part of
which are the subject of arbitration, totaling $350 million, $140 million and
$135 million in the 1999-2001 fiscal years, respectively; and (ii) State
approval of the extension of the 12.5% personal income tax surcharge beyond
December 31, 1998, which would generate $190 million, $527 million and $554
million in the 1999 through 2001 fiscal years, respectively.
On July 15, 1997, the staff of the Control Board issued a report
commenting on the City Financial Plan. The report stated that, while the City
should end the 1998 fiscal year with its budget in balance, the City Financial
Plan still contains large gaps beginning in the 1999 fiscal year, reflecting
revenues which are not projected to grow during the Financial Plan Period and
expenditures which are projected to grow at about the rate of inflation. The
report identified net risks totaling $485 million, $930 million, $1.2 billion
and $1.4 billion for 1998 through 2001 fiscal years, respectively, in addition
to the gaps projected in the City Financial Plan for fiscal years 1999 through
2001. The principal risks identified in the report included (i) potential tax
revenues shortfalls totaling $150 million, $300 million and $400 million for the
1999 through 2001 fiscal years, respectively, based on historical average
trends; (ii) BOE's structural gap, uncertain State funding of BOE and
implementation by BOE of various unspecified actions, totaling $163 million,
$209 million, $218 million and $218 million in the 1998 through 2001 fiscal
years, respectively; (iii) the proposed sale of certain assets in the 1998
fiscal year totaling $248 million, which could be delayed; (iv) assumed
additional State actions totaling $271 million, $121 million, $125 million and
$129 million in the 1998 through 2001 fiscal years, respectively; (v) revenues
from the extension of the 12.5% personal income tax surcharge beyond December
31, 1998, totaling $188 million, $527 million and $554 million in the 1999
through 2001 fiscal years, respectively, which requires State legislation; and
(vi) the receipt of $350 million, $140 million and $135 million from the Port
Authority in the 1999 through 2001 fiscal years, respectively, which is the
subject of arbitration. Taking into account the risks identified in the report
and the gaps projected in the City Financial Plan, the report projected a gap of
$485 million for the 1998 fiscal year, which could be offset by available
reserves, and gaps $2.7 billion, $4.1 billion and $4.0 billion for the 1999
through 2001 fiscal years, respectively. The report also noted that (i) if the
securities industry or economy slows down to a greater extent than projected,
the City could face sudden and unpredictable changes to its forecast; (ii) the
City's entitlement reduction assumptions require a decline of historic
proportions in the number of eligible welfare recipients; (iii) the City has not
yet shown how the City's projected debt service, which would consume 20% of tax
revenues by the 1999 fiscal year, can be accommodated on a recurring
<PAGE>
40
basis; (iv) the City is deferring recommended capital maintenance; and (v)
continuing growth in enrollment at BOE has helped create projected gaps of over
$100 million annually at BOE. However, the report noted that if proposed tax
reductions are not approved, additional revenue will be realized, ranging from
$272 million in the 1998 fiscal year to $481 million in the 2001 fiscal year.
On July 2, 1997, the staff of the OSDC issued a report on the City
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $190 million, due primarily to the potential for greater than forecast
tax revenues, and projected budget gaps for the 1999 through 2001 fiscal years
which are slightly less than the gaps set forth in the City Financial Plan for
such years. The report also identified risks of $518 million, $1.1 billion, $1.3
billion and $1.4 billion for the 1998 through 2001 fiscal years, respectively.
The additional risks identified in the report relate to: (i) the receipt of Port
Authority lease payments totaling $350 million, $140 million and $135 million in
the 1999 through 2001 fiscal years, respectively; (ii) City proposals for State
aid totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively, including the acceleration of $142
million of State revenue sharing payments from the 1999 fiscal year to the 1998
fiscal year, which are subject to approval by the Governor and/or the State
Legislature; (iii) the receipt of $200 million in the 1998 fiscal year in
connection with the proposed sale of the New York Coliseum; (iv) the receipt of
$47 million in the 1998 fiscal year from the sale of certain other assets; (v)
uncertain State education aid and expenditure reductions relating to BOE
totaling $325 million in each of the 1999 through 2001 fiscal years; (vi) State
approval of a three-year extension to the City's 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and which would
generate revenues of $230 million, $525 million and $550 million in the 1999
through 2001 fiscal years, respectively; and (vii) the potential for additional
funding needs for the City's labor reserve totaling $104 million, $225 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay for
collective bargaining increases for the Covered Organizations, which the City
Financial Plan assumes will be paid for by the Covered Organizations, rather
than the City. The report also noted that the City Financial Plan assumes that
the State will extend the 14% personal income tax that is scheduled to expire in
December 1997, which would generate revenues of $200 million in the 1998 fiscal
year and $500 million annually in subsequent fiscal years, and that the City
Financial Plan makes no provision for wage increases after the expiration of
current contracts in fiscal year 2000, which would add $430 million to the 2001
fiscal year budget gap if employees receive wage increases at the projected rate
of inflation. The report noted that the City Financial Plan includes an annual
General Reserve of $200 million and sets aside an additional $300 million in the
1998 fiscal year to reduce the
<PAGE>
41
budget gap for the 1999 fiscal year if such funds are not needed in the 1998
fiscal year. With respect to the gap-closing program for the 1999 through 2001
fiscal years, the report noted that the City has broadly outlined a program that
relies heavily on unspecified agency actions, savings from reinvention and other
unspecified initiatives and uncertain State aid and entitlement program
reductions which depend on the cooperation of others.
The report concluded that while 1997 was an unexpectedly good fiscal
year for City revenues, the City projects that the rate of spending for the 1998
fiscal year will grow substantially faster than the rate of revenues, reflecting
increasing costs for labor, debt service, Medicaid and education, and that the
gaps for the subsequent fiscal years continue to present a daunting challenge.
With respect to the economy, the report noted that the major risks to the City's
economic and revenue forecasts continue to relate to the pace of both the
national economy and activity on Wall Street, that the potential exists for a
national recession over the next four years, and that Wall Street volatility can
have a negative effect, as was apparent in 1994 when the Federal Reserve
repeatedly raised interest rates and the profits of securities firms fell. Other
concerns identified in the report include: (i) $76 million in retroactive claims
for State education aid included in the City Financial Plan for the 1998 fiscal
year which may not be realized; (ii) a potential risk of $698 million in State
education aid owed to the City by the State for prior years, all or a portion of
which the City could be forced to write-off if further delays occur in the State
agreeing to fund these claims; and (iii) the potential adverse impact on HHC
over the long-term of the planned expansion of managed care which emphasizes
out-patient services with fixed monthly fees, uncertainty covering projected
savings from a proposal that most Medicaid recipients be required to enroll in
managed care, which is subject to approval by the Federal Government, and the
possibility that the recent Federal budget agreement could substantially reduce
aid to hospitals which serve a large number of medically indigent patients.
On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the "May Financial Plan"). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9 billion and $2.9
billion for the 1997 through 2001 fiscal years, respectively, which include the
gaps set forth in the May Financial Plan for fiscal years 1999 through 2001. The
gaps estimated in the IBO report reflect (i) uncertainty concerning the size and
timing of projected airport rents of $270 million and $215 million in the 1998
and 1999 fiscal years, respectively, which are the subject of an ongoing dispute
between the Port Authority and the City; and (ii) additional funding needs for
the City's labor reserve totaling $104 million, $224 million and $231 million in
the 1999 through 2001 fiscal years, respectively, to pay for collective
bargaining increases for the Covered Organizations, which the May Financial Plan
assumes will be paid for by the Covered Organizations,
<PAGE>
42
rather than the City. These reduced revenues and increased expenditures
identified in the IBO report are substantially offset by tax revenue forecasts
which exceed those in the May Financial Plan. However, the report noted that the
May Financial Plan assumes continued strong revenue growth and that, in the
event of an economic downturn, the City will be required to increase taxes in a
slow economy or reduce spending when it is most needed. With respect to the tax
reductions proposed in the May Financial Plan, the IBO stated that the principal
question is whether the City will be able to afford the tax reductions. In
addition, the report discussed various issues with implications for the City's
1998 budget. These issues include the reliance in the budget on a number of
State legislative actions, including (i) $294 million from legislation the City
has requested to increase State aid; (ii) $128 million in savings attributable
to both a larger City share of Federal welfare grant funds and State reforms to
Medicaid; and (iii) $115 million to restore expenditure reductions proposed in
the Governor's Executive Budget. The report also noted that the City's claim for
$900 million of State reimbursement of prior year education expenditures remains
unresolved, that proposals affecting the MTA, including proposals to eliminate
two-fare zones for bus and subway riders, will result in a significant reduction
in revenues for the MTA, and that the implementation of changes in the City's
computer system, resulting from the inability of the current computer system to
recognize the year 2000, could cost the City up to $150 million to $200 million
over the next three years. In a subsequent report released on June 16, 1997, the
IBO noted that in the City Financial Plan the City had deferred to fiscal years
1999 through 2001 the assumed receipt of back airport rents, and that the tax
revenue forecasts for the 1998 fiscal year in the City Financial Plan are closer
than the forecasts in the May Financial Plan to the IBO's forecast of City tax
revenues in its May report.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act, which, among
other things, replaces the AFDC entitlement program with TANF, imposes a
five-year time limit on TANF assistance, requires 50% of states' TANF caseload
to be employed by 2002, and restricts assistance to legal aliens. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report further noted that, if
economic performance weakened, resulting in an increased number of public
assistance cases, potential costs to the City could substantially increase.
States are required to develop plans during 1997 to implement the new law. The
report noted that decisions to be made by the State which will have a
significant impact on the City budget include the allocation of block grant
funds between the State and New York local governments such as the City and the
division between the State and its local
<PAGE>
43
governments of welfare costs not funded by the Federal government.
Seasonal Financing. The City since 1981 has fully satisfied its
seasonal financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City has issued $1.075
billion of short-term obligations for the fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. Seasonal financing requirements
for the 1996 fiscal year increased to $2.4 billion from $2.2 billion and $1.75
billion in the 1995 and 1994 fiscal years, respectively. Seasonal financing
requirements were $1.4 billion in the 1993 fiscal year. The delay in the
adoption of the State's budget in certain past fiscal years has required the
City to issue short-term notes in amounts exceeding those expected early in such
fiscal years.
Litigation. The City is a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other violations of
law and condemnation proceedings. While the ultimate outcome and fiscal impact,
if any, on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the City Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of outstanding
claims against it as of June 30, 1997 amounted to approximately $3.5 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
Ratings Agencies. On February 3, 1998, S&P raised its credit outlook
for New York City's outstanding general obligation bonds from stable to positive
but maintained its BBB-plus rating. The City has held this rating since July 10,
1995, when S&P lowered its rating from A-to BBB+ and removed City bonds from
CreditWatch. S&P stated that "structural budgetary balance remains elusive
because of persistent softness in the City's economy, highlighted by weak job
growth and a growing dependence on the historically volatile financial services
sector." Other factors identified by S&P's in lowering its rating on City bonds
included a trend of using one-time measures, including debt refinancings, to
close projected budget gaps, dependence on unratified labor savings to help
balance the City Financial Plan, optimistic projections of additional federal
and State aid or mandate relief, a history of cash flow difficulties caused by
State budget delays and continued high debt levels. In 1975, S&P
<PAGE>
44
suspended its A rating of City bonds. This suspension remained in effect until
March 1981, at which time the City received an investment grade rating of BBB
from S&P. On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On July 10, 1995, S&P revised its rating of
City bonds downward to BBB+, as discussed above. On November 25, 1996, S&P
issued a report which stated that, if the City reached its debt limit without
the ability to issue bonds through other means, it would cause a deterioration
in the City's infrastructure and significant cutbacks in the capital plan which
would eventually impact the City's economy and revenues, and could have eventual
negative credit implications.
On February 24, 1998 Moody's raised its rating for City general
obligation bonds from Baa1 to A3, based on improvement in its financial
condition and economy. Previously, on July 17, 1997, Moody's had changed its
outlook on City bonds to positive from stable. On March 1, 1996, Moody's stated
that the rating for the City's Baa1 general obligation bonds remains under
review for a possible downgrade pending the outcome of the adoption of the
City's budget for the 1997 fiscal year and in light of the status of the debate
on public assistance and Medicaid reform; the enactment of a State budget, upon
which major assumptions regarding State aid are dependent, which may be
extensively delayed; and the seasoning of the City's economy with regard to its
strength and direction in the face of a potential national economic slowdown.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1.
On February 3, 1998, Fitch Investors Service, Inc. ("Fitch") its rating
of City general obligation bonds at A-, which it has maintained since July 15,
1993. On February 28, 1996, Fitch placed the City's general obligation bonds on
FitchAlert with negative implications. On November 5, 1996, Fitch removed the
City's general obligation bonds from FitchAlert although Fitch stated that the
outlook remains negative. Since then Fitch has revised the outlook to stable.
There is no assurance that such ratings will continue for any given period of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of the City's general obligation bonds.
On October 9, 1995, Standard & Poor's issued a report which concluded
that proposals to replace the graduated Federal income tax system with a "flat"
tax could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
<PAGE>
45
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Prospectus:
Financial Highlights
Included in the Statement of Additional Information: #
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for each of the two years in the period
ended December 31, 1997 and December 31, 1997
# Incorporated by reference to the Registrant's Annual Report filed
with the Securities and Exchange Commission on March 13, 1998
(Accession No. 0000944209-98-00534).
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(b) Exhibits
1. Declaration of Trust dated as of September 19, 1997.*
2. By-Laws.*
3. None.
4. None.
5.1 Form of Investment Advisory Agreement between Trust and The Chase
Manhattan Bank.*
5.2 Form of Sub-Advisory Agreement between The Chase Manhattan Bank and
Texas Commerce Bank National Association.*
5.3 Form of Administration Agreement.*
5.4 Form of Investment Advisory Agreement.*
6. Form of Distribution and Sub-Administration Agreement.*
7. None.
8.1 Form of Custodian Agreement.*
8.2 Form of Transfer Agency Agreement.*
9. None.
II-1
<PAGE>
10. Opinion and consent of counsel as to the legality of the securities
being registered.*
11. Consent of Independent Auditors.
12. None.
13. None.
14. None.
15. Distribution Plan.*
16. Schedules for computation of each performance quotation provided in
the Registration Statement.*
17. Financial Data Schedules.
18. None.
* Previously filed with Registration Statement and Post-effective
Amendments and are herein incorporated by reference.
II-2
<PAGE>
Item 25. Persons Controlled by or under Common Control with
Registrant
Inapplicable.
Item 26. Number of Holders of Securities
Number of Record
Holders as of
Title of Class April 15, 1998
-------------- -----------------
Money Market Fund 11
Income Fund 10
Intermediate Term Bond Fund 10
Equity Growth Fund 12
Equity Income Fund 11
Balanced Fund 10
Short-Intermediate U.S. 10
Government Securities Fund 10
U.S. Government Securities Fund 11
Small Capitalization Fund 12
Core Equity Fund
Item 27. Indemnification
Sections 10.2 and 10.4 of the Amended and Restated Declaration of Trust, filed
as Exhibit 1, are incorporated herein by reference. Section 10.2 contains
provisions limiting the liabilities of members of the Supervisory Committee and
Section 10.4 contains provisions for indemnification of the Trustee, members of
the Supervisory Committee and officers of the Trust.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Trust and the Trustee pursuant to the foregoing provisions or otherwise,
the Trust has been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Trust of expenses incurred or paid by
a director, officer, or controlling person of the Trust and the Trustee in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Trust by such director, officer or controlling person or
the Trustee in connection with the Units being registered, the Trust will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
(a) The Chase Manhattan Bank ("Chase") is the investment adviser of the Trust.
Chase is a commercial bank providing a wide range of banking and investment
services.
II-3
<PAGE>
To the knowledge of the Registrant, none of the Directors or executive officers
of Chase, except those described below, are or have been, at any time during the
past two years, engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain Directors and executive
officers of Chase also hold or have held various positions with bank and
non-bank affiliates of Chase, including its parent, The Chase Manhattan
Corporation. Each Director listed below is also a Director of The Chase
Manhattan Corporation.
<TABLE>
<CAPTION>
Name Position with Chase Principal Occupation
---- ------------------- --------------------
<S> <C> <C>
Hans W. Becherer Director Chairman and CEO, Deere & Co.
Frank A. Bennack, Jr. Director Chairman and CEO, The Hearst
Corp.
Susan V. Berresford Director President, The Ford Foundation
Donald L. Boudreau Vice Chairman None
Of the Board
M. Anthony Burns Director Chairman of the Board,
President and Chief Executive
Officer of Ryder System, Inc.
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director
of Amoco Corporation and
Director of Abbott Laboratories
Melvin R. Goodes Director Chairman and CEO, Warner-Lambert
Co.
William H. Gray III Director President and CEO, The College
Fund/UNCF
George V. Grune Director Chairman and CEO, The Reader's
Digest Assoc., Inc.
William Harrison Vice Chairman None
Of the Board
Harold S. Hook Director Retired Chairman, American
General Corp.
Helene Kaplan Director Of Counsel, Skaden, Arps, Slate,
Meager & Flom LLP
Thomas G. Labreque President and Chief Chairman, Chief Executive
Operating Officer Officer and a Director of The
and Director Chase Manhattan Corporation and
a Director of AMAX, Inc.
Donald H. Layton Vice Chairman None
Of the Board
James B. Lee Vice Chairman None
Of the Board
Denis O'Leary Executive None
Vice President
Marc J. Shapiro Vice Chairman None
Of the Board
Joseph G. Sponholz Vice Chairman None
Of the Board
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.
II-4
<PAGE>
Walter V. Shipley Chairman of the None
Board and Chief
Executive Officer
Andrew C. Sigler Director Chairman of the Board and Chief
Executive Officer, Champion
International Corporation
John R. Stafford Director Chairman, President and Chief
Executive Officer, American
Home Products Corporation
Marina V. N. Whitman Director Professor of Business
Administration and Public
Policy, University of Michigan
</TABLE>
(b) Chase Bank of Texas, N.A. ("CBT") is investment sub-adviser with respect to
certain of the Funds. Its business has been solely that of a national bank.
The directors and executive officers (i.e., members of management committee) of
the investment adviser have held during the past two fiscal years the following
positions of a substantial nature:
II-5
<PAGE>
<TABLE>
<CAPTION>
Position(s) Position(s)
and Offices and Offices Other Substantial
with with Business, Profession,
Name CBT Registrant Vocation or Employment
----- -------------- ----------- ----------------------
<S> <C> <C> <C>
John L. Adams Chairman, None None
President and
CEO
Elaine B. Agather CEO, CBT -- None None
Fort Worth,
Vice Chairman,
CBT -- Metroplex
Alan R. Buckwalter, III Director, None None
Vice Chairman
II-6
<PAGE>
Position(s) Position(s)
and Offices and Offices Other Substantial
with with Business, Profession,
Name CBT Registrant Vocation or Employment
----- -------------- ------------- ----------------------
Robert C. Hunter Director, None None
Vice Chairman
S. Todd Maclin Director, None None
Vice Chairman
Beverly H. McCaskill Director, None None
Executive
Vice President
Scott J. McLean Executive None None
Vice President
Cathy S. Nunnally Executive None None
Vice President
Jeffrey B. Reitman Director, None None
General Counsel
Harriet S. Wasserstrum Director, None None
Vice Chairman
</TABLE>
Item 29. Principal Underwriters
Inapplicable.
Item 30. Location of Accounts and Records
Accounts and other documents are maintained at the offices of the Registrant.
II-7
<PAGE>
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings
(a) Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting upon the question of
removal of one or more of Registrant's directors when
requested in writing to do so by the holders of at least 10%
of Registrant's outstanding shares of common stock and, in
connection with such meeting, to assist in communications
with other shareholders in this regard, as provided under
Section 16(c) of the 1940 Act.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without change.
(c) Registrant undertakes to file a post-effective amendment, using
reasonably current financial statements which need not be
certified, within four to six months from the date of
commencement of investment operations for Tax Free Money Market
Fund, Tax Free Income Fund, New York Tax Free Income Fund, Mid
Cap Growth Fund and International Equity Fund.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has certified that it meets all of the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to its Registration Statement on Form N-1A to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of New York and the
State of New York on the 29th day of April, 1998.
MUTUAL FUND INVESTMENT TRUST
By /s/ Sarah E. Jones
--------------------------
Sarah E. Jones
Chair
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
/s/ Sarah E. Jones Chair April 29, 1998
- ------------------------- and
Sarah E. Jones Trustee
/s/ Frank A. Liddell, Jr.
- ------------------------- Trustee April 29, 1998
Frank A. Liddell, Jr.
/s/ George E. McDavid
- ------------------------- Trustee April 29, 1998
George E. McDavid
/s/ Kenneth L. Otto
- ------------------------- Trustee April 29, 1998
Kenneth L. Otto
/s/ Fergus Reid, III
- ------------------------- Trustee April 29, 1998
Fergus Reid, III
/s/ H. Michael Tyson
- ------------------------- Trustee April 29, 1998
H. Michael Tyson
<PAGE>
47
/s/ Martin Dean
- ------------------------- Treasurer April 29, 1998
Martin Dean and
Principal
Financial
Officer
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- ----
<S> <C> <C>
1. Declaration of Trust dated as of September 19, 1997.*
2. By-Laws.
3. None.
4. None.
5.1 Form of Investment Advisory Agreement between Trust and The Chase Manhattan Bank.*
5.2 Form of Sub-Advisory Agreement between The Chase Manhattan Bank and Texas Commerce Bank
National Association.*
5.3 Form of Administration Agreement.*
5.4 Form of Investment Advisory Agreement.*
6. Form of Distribution and Sub-Administration Agreement.*
7. None.
8.1 Form of Custodian Agreement.*
8.2 Form of Transfer Agency Agreement.*
9. None.
10. Opinion and consent of counsel as to the legality of the securities being registered.*
11. Consent of Independent Auditors.
12. None.
13. None.
14. None.
15. Distribution Plan.*
16. Schedules for computation of each performance quotation provided in the Registration
Statement.*
17. Financial Data Schedules.*
18. None.
</TABLE>
- ------------------
* Previously filed with Registration Statement and Post-effective Amendments and
are herein incorporated by reference.
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 16, 1998, relating to the financial statements and financial highlights
of the AVESTA Trust ("the Trust") which is incorporated by reference into the
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectuses which constitute part of this Registration
Statement. We also consent to the references to us under the headings
"Independent Accountants" in such Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "Independent
Accountants" in such Prospectuses.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, TX
April 24, 1998
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<NAME> AVESTA TRUST
<SERIES>
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<NAME> SHORT INTERMEDIATE TERM US GOVERNMENT SECURITIES FUND
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<NAME> AVESTA TRUST
<SERIES>
<NUMBER> 09
<NAME> U.S. GOVERNMENT SECURITIES FUND
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