PROSPECTUS
VISTA(SM) AMERICAN VALUE FUND
February 8, 1996
VISTA AMERICAN VALUE FUND (the "Fund") seeks to maximize total return,
consisting of capital appreciation (both realized and unrealized) and income.
The Fund seeks to achieve its objective by investing primarily in the equity
securities of well-established U.S. companies (i.e., companies with at least a
five-year operating history) which, in the opinion of the Fund's Sub-Adviser,
are considered to be undervalued by the market. The equity securities in which
the Fund invests generally include common stock, preferred stock and securities
convertible into or exchangeable for common or preferred stock. The Fund is a
diversified series of Mutual Fund Group (the "Trust"), an open-end, management
investment company organized as a business trust under the laws of the
Commonwealth of Massachusetts on May 11, 1987, presently consisting of 17
separate series (the "Funds").
Of course, there can be no assurance that the Fund will achieve its
investment objective. Prospective investors should carefully consider the risks
associated with an investment in the Fund. For a further discussion on the risks
associated with an investment in the Fund, see "Investment Objective and
Policies" in this Prospectus. Investors should also refer to "Additional
Information on Investment Policies and Techniques" on page 7.
The Chase Manhattan Bank, N.A. ("Chase" or the "Adviser") is the
investment adviser, custodian (the "Custodian") and administrator (the
"Administrator") and a shareholder servicing agent for the Fund. The parent
company of the Adviser, The Chase Manhattan Corporation has entered an Agreement
and Plan of Merger with Chemical Banking Corporation which, if affected will
have certain effects upon the Adviser, see "Management of the Fund -- The
Adviser" on page 12. Van Deventer & Hoch ("VD&H" or the "Sub-Adviser") is the
Fund's investment sub-adviser. Vista Broker-Dealer Services, Inc. ("VBDS") is
the Fund's distributor and is unaffiliated with Chase. INVESTMENTS IN THE FUND
ARE SUBJECT TO RISK--INCLUDING POSSIBLE LOSS OF PRINCIPAL--AND WILL FLUCTUATE IN
VALUE. SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, THE CHASE MANHATTAN BANK, N.A. OR ANY OF ITS AFFILIATES AND ARE
NOT INSURED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY.
Shares of the Fund are continuously offered for sale without a sales
load through VBDS, the Fund's distributor (the "Distributor"), to customers of a
financial institution, such as a federal or state-chartered bank, trust company
or savings and loan association with which the Trust has entered into a
shareholder servicing agreement (collectively, "Shareholder Servicing Agents")
or to customers of a securities broker or certain financial institutions who
have entered into Selected Dealer Agreements with the Distributor. The Fund has
a distribution plan and may incur distribution expenses, at an annual rate not
to exceed 0.25% of average daily net assets. An investor should obtain from his
Shareholder Servicing Agent, and should read in conjunction with this Prospectus
the materials provided by the Shareholder Servicing Agent describing the
procedures under which the shares may be purchased and redeemed through such
Shareholder Servicing Agent. Shares of the Fund may be redeemed by shareholders
at the net asset value next determined on any Fund Business Day as hereinafter
defined.
This Prospectus sets forth concisely the information concerning the
Fund that a prospective investor should know before investing. A Statement of
Additional Information for the Fund, dated February 8, 1996, which contains more
detailed information concerning the Fund including the trustees and officers of
the Fund, has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference. An investor may obtain a copy of
the Statement of Additional Information without charge by contacting his or her
Shareholder Servicing Agent, the Distributor or by calling the Vista Service
Center at 1-800-34-VISTA.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
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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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
For information about the Fund or your account, simply call the Vista
Service Center at the following toll-free number: 1-800-34-VISTA.
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TABLE OF CONTENTS
Expense Summary.........................................................4
Investment Objective and Policies.......................................5
Additional Information on Investment Policies and Techniques............6
Management of the Fund.................................................10
Purchases and Redemptions of Shares....................................12
Tax Matters............................................................16
Other Information Concerning Shares of the Fund........................17
Shareholder Servicing Agents, Transfer Agent and Custodian.............19
Yield and Performance Information .....................................21
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EXPENSE SUMMARY
The following table provides (i) a summary of the aggregate annual
operating expenses of the Fund, as a percentage of average net assets of the
Fund, and (ii) an example illustrating the dollar cost of such expenses on a
$1,000 investment in shares of the Fund.
Annual Fund Operating Expenses (After waiver of fees)
(as a percentage of net assets)
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Investment Advisory Fee......................................... 0.00%*
Rule 12b-1 Distribution Plan Fee+ (after estimated waiver) 0.00%**
Other Expenses
--Administration Fee (after estimated waiver)................. 0.00%***
--Sub-Administration Fee...................................... 0.05%
--Shareholder Servicing Fee+ (after estimated waiver)......... 0.12%
--Other Operating Expenses++.................................. 1.15%
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Total Other Expenses............................................ 1.32%
Total Fund Operating Expenses+++................................ 1.32%
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* The "Advisory Fee" for the Fund reflects estimated fee waivers pursuant
to the agreement described below; absent such waivers, the advisory fee
would be 0.70%.
** The "Rule 12b-1 Distribution Plan Fee" for the Fund reflects estimated
fee waivers pursuant to the agreement described below; absent such
waivers, such fees would be 0.25%.
*** The "Administration Fee" for the Fund reflects estimated fee waivers
pursuant to the agreement described below; absent such waivers, such
fees would be 0.10%.
+ The "Shareholder Servicing Fee" for the Fund reflects estimated fee
waivers pursuant to the agreement described below; absent such waivers,
such fee would be 0.25%.
++ "Other Operating Expenses" include custody fees, transfer agency fees,
registration fees, legal fees, audit fees, directors' fees, insurance
fees, and other miscellaneous expenses. A shareholder may incur a
$10.00 charge for certain wire redemptions.
+++ "Total Fund Operating Expenses" reflect the agreement by Chase and
certain other service providers to the Fund voluntarily to waive fees
payable to them and/or reimburse expenses for a period of at least one
year following the consummation of the Reorganization (as defined under
"General - Reorganization With Predecessor Fund" on page 16) to the
extent necessary to prevent Total Fund Operating Expenses of Shares of
the Fund for such period from exceeding the amounts indicated in the
table. In addition, Chase has agreed to waive fees payable to it and/or
reimburse expenses for a two year period following consummation of the
Reorganization to the extent necessary to prevent "Total Fund Operating
Expenses" for the Fund from exceeding 2.12% of average net assets
during such period.
Example:
You would pay the following expenses on a $1,000 investment in the Fund
based upon payment by the Fund of operating expenses at the levels set forth in
the table above, assuming (1) a 5% annual return and (2) redemption at the end
of each time period.
1 year ......................................................... $ 13
3 years......................................................... 42
5 years......................................................... 72
10 years........................................................ 159
As a result of distribution fees, a long-term shareholder in the Fund
may pay more than the economic equivalent of the maximum front-end sales charges
permitted by the rules of the National Association of Securities Dealers, Inc.
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THE "EXAMPLE" SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OR ANNUAL RETURN OF THE FUND; ACTUAL EXPENSES AND ANNUAL RETURN MAY BE
GREATER OR LESS THAN SHOWN.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to maximize total return,
consisting of capital appreciation (both realized and unrealized) and income.
The Fund seeks to achieve its objective by investing primarily in the equity
securities of well-established U.S. companies (i.e., companies with at least a
five-year operating history) which, in the opinion of the Fund's Sub-Adviser,
are undervalued by the market.
The equity securities in which the Fund invests generally consist of
common stock, preferred stock and securities convertible into or exchangeable
for common or preferred stock. Under normal market conditions, at least 65% of
the value of the Fund's total assets will be invested in the equity securities
of U.S. companies. The Fund may invest in companies without regard to market
capitalization, although it generally does not expect to invest in companies
with market capitalizations of less than $200 million. The securities in which
the Fund invests are expected to be either listed on an exchange or traded in an
over-the-counter market. The Fund may invest up to 20% of the value of its total
assets in the equity securities of foreign issuers, including American
Depositary Receipts ("ADRs"), which are described under "Additional Information
on Investment Policies and Techniques." The Fund expects that investments in
foreign issuers, if any, will generally be in companies which generate
substantial revenues from U.S.
operations and which are listed on U.S. securities exchanges.
In selecting investments for the Fund, the Fund's Sub-Adviser generally
seeks companies which it believes exhibit characteristics of financial soundness
and are undervalued by the market. In seeking to identify financially sound
companies, the Fund's Sub-Adviser looks for companies with strongly capitalized
balance sheets, an ability to generate substantial cash flow, relatively low
levels of leverage, an ability to meet debt service requirements and a history
of paying dividends. In seeking to identify undervalued companies, the Fund's
Sub-Adviser looks for companies with substantial tangible assets such as land,
timber, oil and other natural resources, or important brand names, patents,
franchises or other intangible assets which may have greater value than what is
reflected in the company's financial statements. The Sub-Adviser will often
select investments for the Fund which are considered to be unattractive by other
investors or are unpopular with the financial press.
COMMON STOCKS
Common stock represents the residual ownership interest in the issuer
after all of its obligations and preferred stocks are satisfied. Common stocks
fluctuate in price in response to many factors, including historical and
prospective earnings of the issuer, the value of its assets, general economic
conditions, interest rates, investor perceptions and market liquidity.
PREFERRED STOCKS
Preferred stock has a preference over common stock in liquidation and
generally in dividends as well, but is subordinated to the liabilities of the
issuer in all respects. Preferred stock may or may not be convertible into
common stock. As a general rule, the market value of preferred stock with a
fixed dividend rate and no conversion element varies inversely with interest
rates and perceived credit risk. Because preferred stock is junior to debt
securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar stated yield
characteristics.
CONVERTIBLE AND EXCHANGEABLE SECURITIES
Convertible securities generally offer fixed interest or dividend
yields and may be converted either at a stated price or stated rate for common
or preferred stock. Exchangeable securities may be exchanged on specified terms
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, conversely, tends to increase as
interest
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rates decline. In addition, because of the conversion or exchange feature, the
market value of convertible or exchangeable securities tends to vary with
fluctuations in the market value of the underlying common or preferred stock.
Debt securities that are convertible into or exchangeable for preferred or
common stock are liabilities of the issuer but are generally subordinated to
more senior elements of the issuer's balance sheet.
OTHER INVESTMENTS AND ACTIVITIES
Although the Fund invests primarily in equity securities, it may invest
up to 25% of the value of its total assets in high quality, short-term money
market instruments, repurchase agreements and cash ("Money Market Instruments"),
as described under "Additional Information on Investment Policies and
Techniques." In addition, the Fund may make substantial temporary investments in
investment grade U.S. debt securities and invest without limit in Money Market
Instruments when the Fund's Sub-Adviser believes a defensive posture is
warranted. To the extent that the Fund deviates from its investment policies
during temporary defensive periods, its investment objective may not be
achieved.
The Fund may also engage in certain other activities and utilize
certain other strategies, as described and subject to the limitations and risks
described under "Additional Information on Investment Policies and Techniques."
The Fund has no current intention to engage in the various investment strategies
described under "Additional Information on Investment Policies and Techniques"
under the caption "Hedging and Derivatives," but it is authorized to engage in
all of those strategies. A description of these investment strategies and
certain risks associated therewith is contained under the caption "Additional
Information on Investment Policies and Techniques" in this Prospectus and in the
Statement of Additional Information.
The investment objective of the Fund is fundamental and may not be
changed without the affirmative vote of a "majority" of the holders of the
Fund's outstanding shares. Of course, achievement of the objective cannot be
guaranteed. The investment policies and activities of the Fund, with the
exception of those which are identified as fundamental, are not fundamental and
may be changed by the Board of Trustees of the Trust without the approval of
shareholders. Additional fundamental investment policies of the Fund are
identified in the Statement of Additional Information.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES AND TECHNIQUES
Following is a description of certain additional types of investments
which the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
Subject to the limitations set forth above, the Fund may invest in cash
or high quality, short-term money market instruments. Such instruments may
include U.S. Government Securities; commercial paper of domestic issuers rated,
at the time of purchase, at least in the category P-1 by Moody's Investor's
Service, Inc. ("Moody's"), A-1 by Standard & Poors Corporation ("S&P"), F-1 by
Fitch Investor's Service, Inc. ("Fitch") or D-1 by Duff & Phelps ("D&P"), rated
comparably by another Nationally Recognized Statistical Rating Organization, or,
if not rated, of comparable quality as determined by the Sub-Adviser;
certificates of deposits, banker's acceptances or time deposits and repurchase
agreements. The Fund limits its investment in U.S. bank obligations to
obligations of U.S. banks that have more than $1 billion in total assets at the
time of investment and are subject to regulation by the U.S.
Government.
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers, although the Fund
does not currently intend to invest more than 20% of its assets in such
securities. Foreign securities may represent a greater degree of risk (e.g.,
risk related to exchange rate fluctuation, tax provisions war or expropriation)
than do securities of domestic issuers. Investing in securities issued by
foreign corporations and governments involves considerations and possible risks
not
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typically associated with investing in securities issued by domestic
corporations and the U.S. Government. The values of foreign investments are
affected by changes in foreign currency rates, exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary public (in the U.S. or other
countries) or changed circumstances in dealings between countries. Costs are
incurred in connection with conversions between various currencies. In addition,
foreign brokerage commissions are generally higher than in the United States,
and foreign securities markets may be less liquid, more volatile and less
subject to governmental supervision than in the United States. Investments in
foreign countries could be affected by other factors not present in the United
States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
The Fund may invest its assets in securities of foreign issuers in the
form of ADRs. ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying foreign securities. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets. The
Fund treats ADRs as interests in the underlying securities for purposes of its
investment policies. The Fund will limit its investment in ADRs 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). See the Statement of Additional
Information for certain risks related to unsponsored ADRs.
CORPORATE REORGANIZATIONS
The Fund may invest without limitation in securities for which a tender
or exchange offer has been made or announced and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of the Sub-Adviser, there is a reasonable
prospect of capital appreciation significantly greater than the added portfolio
turnover expenses inherent in the short-term nature of such transactions. The
principal risk is that such offers or proposals may not be consummated within
the time and under the terms contemplated at the time of the investment, in
which case, unless such offers or proposals are replaced by equivalent or
increased offers or proposals which are consummated, the Fund may sustain a
loss.
WARRANTS AND RIGHTS
The Fund may invest up to 5% of the value of its total assets (at the
time of investment) in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price during or at the end of a specific period of time. The Fund
will not invest more than 2% of the value of its total assets in warrants or
rights which are not listed on the New York or American Stock Exchanges.
REPURCHASE AGREEMENTS
When appropriate, the Fund may enter into repurchase agreements (a
purchase of and simultaneous commitment to resell a security at an agreed-upon
price and date which is usually not more than seven days from the date of
purchase). The Fund will enter into repurchase agreements only with
counterparties which are member banks of the Federal Reserve System and security
dealers believed creditworthy and only if fully collateralized by U.S.
Government Obligations or other securities in which the Fund is permitted to
invest. As an operating policy, the Fund, through its custodian bank, takes
constructive possession of the collateral underlying repurchase agreements. In
the event the seller fails to pay the agreed-to sum on the agreed-upon delivery
date, the underlying security could be sold by the Fund, but the Fund might
incur a loss in doing so, and in certain cases may not be permitted to sell the
security. Additionally, procedures have been established for the Fund to
monitor, on a daily basis, the market value of the collateral underlying all
repurchase agreements to ensure that the collateral is at least 102% of the
value of the repurchase agreements. Investments by the Fund in repurchase
agreements maturing in more than seven days are subject to the restrictions on
investments in illiquid securities discussed below under "Illiquid Securities."
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid
selling securities during unfavorable market conditions to meet redemptions.
Pursuant to a reverse repurchase agreement, the Fund will sell portfolio
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securities and agree to repurchase them from the buyer at a particular date and
price. Whenever the Fund enters into a reverse repurchase agreement, it will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal to the repurchase price marked to market daily (including
accrued interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the Fund's general limitation with respect to borrowings.
LOANS OF PORTFOLIO SECURITIES
Although the Fund does not anticipate engaging in such activity in the
ordinary course of business, the Fund may lend portfolio 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
its total assets. In connection with such loans, the 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 of the securities loaned plus accrued interest. The Fund
can earn income through the investment of such collateral. The Fund continues to
be entitled to the interest payable or any dividend-equivalent payments received
on a loaned security and, in addition, receive interest on the amount of the
loan. However, the receipt of any dividend-equivalent payments by the 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. The
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 risk
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 SubAdviser to be of good standing and will not be made unless, in
the judgment of the investment Sub-Adviser, the consideration to be earned from
such loans justifies the risk.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its total assets in illiquid
securities. In addition, the Fund may elect to treat as liquid, in accordance
with procedures established by the Board, 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.
WHEN-ISSUED AND FORWARD DELIVERY PURCHASES
The Fund may purchase new issues of securities in which it is permitted
to invest on a "when-issued" or, with respect to existing issues, on a "forward
delivery" basis, which means that the securities will be delivered at a future
date beyond the customary settlement time. There is no limit as to the amount of
the commitments which may be made by the Fund to purchase securities on a
"when-issued" or "forward delivery" basis. The Fund does not pay for such
obligations or start earning interest on them until the contractual settlement
date. Although commitments to purchase "when-issued" or "forward delivery"
securities will only be made with the intention of actually acquiring them,
these securities may be sold before the settlement date if deemed advisable by
the Sub-Adviser.
While it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a "when-issued" or "forward
delivery" basis can involve more risk than other types of purchase. For example,
when the time comes to pay for a "when-issued" or "forward delivery" security,
the Fund's portfolio securities may have to be sold in order to meet payment
obligations, and a sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gain or loss. Also, if it is
necessary to sell the "when-issued" or "forward delivery" security before
delivery, the Fund may incur a loss because of market fluctuations since the
time the commitment to purchase the "when-issued" or "forward delivery" security
was made. For additional information concerning these risks and other risks
associated with the purchase of "when-issued" or "forward delivery" securities
as well as other aspects of the purchase of securities on a "when-issued" or
forward delivery" basis, see "Investment
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Objective, Policies and Restrictions -- Investment Policies: When-Issued and
Forward Delivery Purchases" in the Statement of Additional Information.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in
shares of other investment companies, subject to such investments being
consistent with the overall objective and policies of the Fund and subject to
the limitations of the 1940 Act and the Fund's investment limitations as
described in the Statement of Additional Information.
HEDGING AND DERIVATIVES
Although the Fund has no current intention of doing so, the Fund is
permitted to invest its assets in derivative and related instruments to hedge
various market risks, to manage the effective maturity or duration of debt
instruments held by the Fund, or, with respect to certain strategies, to
increase the Fund's income or gain. Such investment will be subject only to the
Fund's investment objective and policies and the requirement that, to avoid
leveraging the Fund, the Fund maintains segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset.
The value of some derivative or similar instrument in which the Fund
invests may be particularly sensitive to changes in prevailing interest rates or
other economic factors, and -- like other investment of the Fund -- the ability
of the Fund to successfully utilize these instruments may depend in part upon
the ability of the Sub-Adviser to forecast interest rates and other economic
factors correctly. If the Sub-Adviser incorrectly forecasts such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Fund could be exposed to the risk of a loss. The Fund may not
employ any or all of the instruments described herein, and no assurance can be
given that any strategy used will succeed.
To the extent permitted by the Fund's investment objective and
policies, and as described more fully in the Statement of Additional
Information, the Fund may (i) purchase, write and exercise call and put options
on securities, securities indexes and foreign currencies (including using
options in combination with securities, other options or derivative
instruments); (ii) enter into futures contracts and options on futures
contracts; (iii) employ forward currency and interest-rate contracts; (iv)
purchase and sell mortgage-backed and asset backed securities; and (v) purchase
and sell structured products.
RISK FACTORS. As explained more fully in the Statement of Additional
Information, there are a number of risk factors 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. As incorrect correlation could result in a loss
on both the hedged assets in the Fund and the hedging vehicle so that the Funds
return might have been greater had hedging not been attempted. This risk is
particularly acute in the case of "cross-hedges" between currencies. The
investment adviser may incorrectly forecast interest rates, market values or
other economic factors in utilizing a derivatives strategy. In such a case, the
Fund may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing the 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 the Fund. Certain strategies, such as yield enhancement, can have
speculative characteristics and may result in more risk to the Fund than hedging
strategies using the same instruments. There can be no assurance that a liquid
market will exist at a time when the 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 a
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. 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, foreign exchanges or foreign boards of
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trade, 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 the 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.
PORTFOLIO MANAGEMENT AND TURNOVER
It is intended that the portfolio of the Fund will be fully managed by
buying and selling securities. The frequency of the Fund's portfolio
transactions -- the portfolio turnover rate -- will vary from year to year
depending upon market conditions. The Fund will engage in portfolio trading if
its Sub-Adviser believes a transaction, net of costs (including custodian
charges), will help it achieve its investment objective. The investment policies
of the Fund may lead to frequent changes in investments, particularly in periods
of rapidly changing market conditions or interest rates. High portfolio turnover
rates would generally result in higher transaction costs, including brokerage
commissions or dealer markups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
would also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Code, that less than
30% of the Fund's gross income in any tax year be derived from gains on the sale
of securities held for less than three months. For a description of the
strategies that may be used by the Sub-Adviser see "Investment Objective,
Policies and Restrictions -- Investment Policies: Portfolio Management" in the
Statement of Additional Information.
Generally, the primary consideration in placing the Fund's portfolio
securities transactions with broker-dealers for execution is to obtain, and
maintain the availability of, execution at the most favorable prices and in the
most effective manner possible. For a complete discussion of portfolio
transaction and brokerage allocation, see "Investment Objective, Policies and
Restrictions -- Investment Policies; Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund's Adviser is Chase, which also serves as the Fund's
administrator. Chase global investment management capabilities are supported by
investment professionals located in cities around the world, including New York,
Geneva and Hong Kong. The Fund's investment Sub-Adviser is VD&H.
THE ADVISER
The Adviser manages the assets of the Fund pursuant to an Investment
Advisory Agreement and, subject to such policies as the Board of Trustees may
determine, the Adviser makes investment decisions for the Fund. For its services
under the Investment Advisory Agreement, the Adviser is entitled to receive an
annual fee computed daily and paid monthly based at an annual rate equal to
0.60% of the Fund's average daily net assets. The Adviser may, from time to
time, voluntarily waive all or a portion of its fees payable under the Advisory
Agreement.
The Adviser, 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. Its headquarters is at One Chase Manhattan Plaza,
New York, NY 10081. The Adviser, including its predecessor organizations, has
over 100 years of money management experience. Also included among the Adviser's
accounts are commingled trust funds and a broad spectrum of individual trust and
investment management portfolios. These accounts have varying investment
objectives.
On August 27, 1995, The Chase Manhattan Corporation announced its entry
into an Agreement and Plan of Merger (the "Merger Agreement") with Chemical
Banking Corporation ("Chemical"), a bank holding company, pursuant to which The
Chase Manhattan Corporation will merge with and into Chemical (the "Holding
Company Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company
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<PAGE>
Merger, which will create the second largest bank holding company in the United
States based on assets. The consummation of the Holding Company Merger is
subject to certain closing conditions. On December 11, 1995, the respective
shareholders of The Chase Manhattan Corporation and Chemical voted to approve
the Holding Company Merger. The Holding Company Merger is expected to be
completed on or about March 31, 1996.
Subsequent to the Holding Company Merger, it is expected that the
adviser to the Funds, The Chase Manhattan Bank, N.A., will be merged with and
into Chemical Bank. a New York State chartered bank ("Chemical Bank") (the "Bank
Merger" and together with the Holding Company Merger, the "Mergers"). The
surviving bank will continue operations under the name The Chase Manhattan Bank
(as used herein, the term "Chase" refers to The Chase Manhattan Bank, N.A. and
its successor in the Bank Merger, and the term "Adviser" means Chase (including
its successor in the Bank Merger) in its capacity as investment adviser to the
Fund). The consummation of the Bank Merger is subject to certain closing
conditions, including the receipt of certain regulatory approvals. The Bank
Merger is expected to occur in July 1996.
Chemical is a publicly owned bank holding company incorporated under
Delaware law and registered under the Federal Bank Holding Company Act of 1956,
as amended. As of December 31, 1995, through its direct or indirect
subsidiaries, Chemical managed more than $57 billion in assets, including
approximately $6.9 billion in mutual fund assets in 11 mutual fund portfolios.
Chemical Bank is a wholly owned subsidiary of Chemical and is a New York State
chartered bank.
THE SUB-ADVISER
Under the investment advisory agreement between the Trust, on behalf of
the Fund, and Chase, Chase may delegate a portion of its responsibilities to a
sub-adviser. In addition, the investment 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 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 Fund, has entered into an investment
sub-advisory agreement (the "Sub-Advisory Agreement") with Van Deventer & Hoch
("VD&H"), whose principal offices are located at 800 North Brand Boulevard,
Suite 300, Glendale, California 91203. VD&H is a general partnership which is
equally owned by individuals who serve VD&H in key professional capacities and
by CBC Holdings (California), which is a wholly-owned subsidiary of Chemical
Banking Corporation, a bank holding company. VD&H provides a wide range of asset
management services to individuals, corporations, private and charitable trusts,
endowments, foundations and retirement funds.
CERTAIN RELATIONSHIPS AND ACTIVITIES. The Adviser and its affiliates
may have deposit, loan and other commercial banking relationships with the
issuers of securities purchased on behalf of the Fund, including outstanding
loans to such issuers which may be repaid in whole or in part with the proceeds
of securities so purchased. The Adviser 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. The Adviser and
its affiliates may sell U.S. Government obligations and municipal obligations
to, and purchase them from, other investment companies sponsored by the
Distributor or affiliates of the Distributor. The Adviser will not invest the
Fund's 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 the Adviser 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 the Fund. The Adviser has informed the Fund that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of the Adviser, including the
division that performs services for the Fund as Custodian, or in the possession
of any affiliate of the Adviser. Shareholders of the Fund are notified that
Chase and its affiliates may exchange among themselves certain information about
the shareholder and his account.
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<PAGE>
PORTFOLIO MANAGER. Richard D. Trautwein serves as executive Vice
President at VD&H and is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Trautwein joined VD&H in 1972 and heads the firm's
portfolio strategy group and is a member of the firm's investment policy
committee. Mr. Trautwein was responsible for the day-to-day management of the
Predecessor Fund since its inception.
THE ADMINISTRATOR
Pursuant to an Administration Agreement (the "Administration
Agreement") Chase serves as administrator of the Fund. Chase provides certain
administrative services, including, among other responsibilities, coordinating
relationships with independent contractors and agents; preparing for signature
by officers and filing of certain documents required for compliance with
applicable laws and regulations excluding those of the securities laws of the
various states; preparing financial statements; arranging for the maintenance of
books and records; and providing office facilities necessary to carry out the
duties thereunder. Chase is entitled to receive from the Fund a fee computed
daily and paid monthly at an annual rate equal to 0.10% of the Fund's average
daily net assets. Chase may, from time to time, voluntarily waive all or a
portion of its fees payable to it under the administration agreements.
REGULATORY MATTERS. Banking laws and regulations, including the
Glass-Steagall Act as currently interpreted by the Board of Governors of the
Federal Reserve System, prohibit a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, or any affiliate thereof from
sponsoring, organizing, controlling, or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such a bank holding company or affiliate from
acting as investment adviser, administrator, transfer agent, or custodian to
such an investment company or from purchasing shares of such a company as agent
for and upon the order of a customer. The Adviser and the Trust believe that
Chase, VD&H, or any other affiliate of Chase, may perform the investment
advisory, administrative, custody and transfer agency services for the Fund, as
the case may be, described in this Prospectus and that Chase, VD&H, or any other
affiliate of Chase, subject to such banking laws and regulations, may perform
the shareholder services contemplated by this Prospectus without violation of
such banking laws or regulations. However, future changes in legal requirements
relating to the permissible activities of banks and their affiliates, as well as
future interpretations of present requirements, could prevent Chase, VD&H or any
other affiliate of Chase from continuing to perform investment advisory,
administrative or custody services for the Fund, as the case may be, or require
Chase, VD&H or any other affiliate of Chase to alter or discontinue the services
provided by it to shareholders of the Fund.
If Chase, VD&H or any other affiliate of Chase were prohibited from
performing investment advisory, administrative, custody or transfer agency
services for the Fund, as the case may be, it is expected that the Board of
Trustees would recommend to shareholders that they approve new agreements with
another entity or entities qualified to perform such services and selected by
the Board of Trustees. If Chase, VD&H or any other affiliate of Chase were
required to discontinue all or part of its shareholder servicing activities, its
customers would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. Vista does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES
The shares of the Fund are continuously offered for sale without a
sales load at the net asset value next determined through Vista Broker-Dealer
Services, Inc. ("VBDS" or the "Distributor") after an order is received and
accepted by a Shareholder Servicing Agent if it is transmitted by VBDS prior to
4:00 p.m., Eastern time, on any business day during which the New York Stock
Exchange is open for trading ("Fund Business Day"). (See "Other
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<PAGE>
Information Concerning Shares of the Fund -- Net Asset Value"). Orders for Fund
shares received and accepted prior to 4:00 p.m., will be entitled to all
dividends declared on such day. Shares of the Fund are being offered exclusively
to customers of a Shareholder Servicing Agent (i.e., a financial institution,
such as a federal or state-chartered bank, trust company or savings and loan
association that has entered into a shareholder servicing agreement with the
Fund) or to customers of brokers or certain financial institutions which have
entered into Shareholder Servicing Agreements with VBDS. An investor may
purchase shares of the Fund by authorizing his Shareholder Servicing Agent,
broker or financial institution to purchase such shares on his behalf through
the Distributor, which the Shareholder Servicing Agent, broker or financial
institution must do promptly. All share purchases must be paid for in U.S.
dollars, and checks must be drawn on U.S. banks. In the event a check used to
pay for shares purchased is not honored by the bank on which it is drawn, the
purchase order will be cancelled and the shareholder will be liable for any
losses or expenses incurred by the Fund or its agents.
Shareholder Servicing Agents may offer services to their customers,
including specialized procedures for the purchase and redemption of shares of
the Fund, such as pre-authorized or systematic purchase and redemption programs
and "sweep" checking programs. Each Shareholder Servicing Agent may establish
its own terms, conditions and charges, including limitations on the amounts of
transactions, with respect to such services. Charges for these services may
include fixed annual fees, transaction fees, account maintenance fees and
minimum account balance requirements. The effect of any such fees will be to
reduce the yield on the investment of customers of that Shareholder Servicing
Agent. Conversely, certain Shareholder Servicing Agents may (although they are
not required by the Fund to do so) credit to the accounts of their customers
from whom they are already receiving other fees an amount not exceeding the fees
for their services as Shareholder Servicing Agents if they receive such fees
(see "Shareholder Servicing Agents, Transfer Agent and Custodian -- Shareholder
Servicing Agents"), which will have the effect of increasing the yield on the
investment of customers of that Shareholder Servicing Agent. Shareholder
Servicing Agents may also increase or reduce the minimum dollar amount required
to invest in the Fund and waive any applicable holding periods.
The Fund reserves the right to cease offering its shares for sale at
any time, to reject any order for the purchase of shares and to cease offering
any services provided by a Shareholder Servicing Agent. Fund shares will be
maintained in book entry form, and no certificates representing shares owned
will be issued to shareholders.
MINIMUM INVESTMENTS
The Fund has established minimum initial and additional investments for
the purchase of Fund Shares. The minimums detailed below vary by the type of
account being established:
Account Type
Minimum Initial Investment
Individual..................................................... $2,500 (1)
Individual Retirement Account (IRA)............................ $1,000 (2)
Spousal IRA.................................................... $ 250
SEP-IRA........................................................ $1,000 (2)
Purchase Accumulation Plan..................................... $ 250 (3)
Payroll Deduction Program...................................... $ 100 (4)
(401(k), 403(b), Keogh)
- ---------------
(1) Employees of the Adviser and its affiliates, and Qualified Persons as
defined in "Purchases of Class A Shares at Net Asset Value," are
eligible for a $1,000 minimum initial investment.
(2) A $250 minimum initial investment is allowed if the new account is
established with a $100 minimum monthly Systematic Investment Plan as
described below.
(3) Account must be established with a $200 minimum monthly Systematic
Investment Plan as described below.
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<PAGE>
(4) A $25 minimum monthly investment must be established through an
automated payroll cycle.
The minimum additional investment is $100 for all types of accounts.
SYSTEMATIC INVESTMENT PLAN
A shareholder may establish a monthly investment plan by which
investments are automatically made to his/her Vista Fund account through
Automatic Clearing House (ACH) deductions from a checking account. The minimum
monthly investment through this plan is $100. Shareholders may choose either to
have these investments made during the first or third week each month. Please
note that your initial ACH transactions may take up to 10 days from the receipt
of your request to be established.
Shareholders electing to start this Systematic Investment Plan when
opening an account should complete Section 8 of the account application. Current
shareholders may begin a Systematic Investment Plan at any time by sending a
signed letter with signature guarantee to the Vista Service Center, P.O. Box
419392, Kansas City, MO 64141-6392. The letter should contain your Vista Fund
account number, the desired amount and cycle of the systematic investment, and
must include a voided check from the checking account from which debits are to
be made. A signature guarantee may be obtained from a bank, trust company,
broker-dealer or other member of the national securities exchange. Please note
that a notary public cannot provide signature guarantees.
REDEMPTIONS
A shareholder may redeem all or any portion of the shares in his
account on any Fund Business Day at the net asset value next determined after a
redemption request in proper form is furnished by the shareholder to his
Shareholder Servicing Agent and transmitted by it to and received by the Fund's
Transfer Agent. Therefore, redemptions will be effected on the same day the
redemption order is received only if such order is received prior to 4:00 p.m.,
Eastern time, on any Fund Business Day. Shares which are redeemed earn dividends
up to and including the day prior to the day the redemption is effected. The
proceeds of a redemption normally will be paid on the next Fund Business Day
after the redemption is effected, but in any event within seven days. The
forwarding of proceeds from redemption of shares which were recently purchased
by check may be delayed up to 15 days. A shareholder who is a customer of a
Shareholder Servicing Agent may redeem his Fund shares by authorizing his
Shareholder Servicing Agent, its agent, or the Transfer Agent to redeem such
shares. The signature of both shareholders is required for any written
redemption requests (other than those by check) from a joint account. In
addition, a redemption request may be deferred for up to 15 calendar days if the
Transfer Agent has been notified of a change in either the address or the bank
account registration previously listed in the Fund records.
The value of shares of the Fund redeemed may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned his shares. Redemptions of shares are taxable events on which
the shareholder may recognize a gain or loss. Although the Fund generally
retains the right to pay the redemption price of shares in kind with securities
(instead of cash), the Trust has filed an election under Rule 18f-1 committing
to pay in cash all redemptions by a shareholder of record up to the amounts
specified in the rule (approximately $250,000).
The payment of redemption requests may be wired directly to a
previously designated domestic commercial bank account or mailed to the
shareholder's address of record. However, all telephone redemption requests in
excess of $25,000 will be wired directly to such previously designated bank
account, for the protection of shareholders. Normally, redemption payments will
be transmitted on the next business day following receipt of the request
(provided it is made prior to 4:00 p.m., Eastern time on any day redemptions may
be made). Redemption payments requested by telephone may not be available in a
previously deposited bank account for up to four days. For telephone
redemptions, call the Vista Service Center at (800) 34-VISTA.
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<PAGE>
The right of any shareholder to receive payment with respect to any
redemption may be suspended or the payment of the redemption proceeds postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on such Exchange is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists.
AUTOMATIC REDEMPTION PLAN. A shareholder owning $10,000 or more of the
shares of the Fund as determined by the then current net asset value may provide
for the payment monthly or quarterly of any requested dollar amount (subject to
limits) from his account to his order. A sufficient number of full and
fractional shares will be redeemed so that the designated payment is received on
approximately the 1st day of the month following the end of the selected payment
period.
REDEMPTION OF ACCOUNTS OF LESS THAN $500. The Fund may involuntarily
redeem the shares of any shareholder, if at such time, the aggregate net asset
value of the shares in such shareholder's account is less than $500. In the
event of any such redemption, a shareholder will receive at least 60 days'
notice prior to the redemption.
GENERAL
REORGANIZATION WITH PREDECESSOR FUND. The Fund has been established to
receive all the assets of The Hanover American Value Fund series of The Hanover
Investment Funds, Inc. (the "Predecessor Fund"). Subject to approval by the
shareholders of the Predecessor Fund, the Predecessor Fund will transfer all its
assets and liabilities to the Fund in exchange for shares of the Fund, which
will be distributed pro rata to shareholders of the Predecessor Fund, who will
become shareholders of the Fund (the "Reorganization"). The Predecessor Fund
will cease operations after the Reorganization. The Fund will have no assets and
will not begin operations until the Reorganization occurs.
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 Fund's Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in this Prospectus 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. To provide evidence of
telephone instructions, the Transfer Agent will record telephone conversations
with shareholders. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. In the event the Fund does
not employ such reasonable procedures, it may be liable for losses due to
unauthorized or fraudulent instructions.
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, the 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 the 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 the Fund in writing. Shareholders agree to release and hold
harmless the Fund, the Adviser, the Administrator, any Shareholder Servicing
Agent or subagent and broker-dealer, and the officers, directors, employees and
agents thereof against any claim, liability, loss, damage and expense for any
act or failure to act in connection with Fund shares, any related investment
account, any privileges or services selected in connection with such investment
account, or any written or oral instructions or requests with respect thereto,
or any written or oral instructions or requests from someone claiming to be a
shareholder if the Fund or any of the above-described parties follow
instructions which they reasonably believe to be genuine and act in good faith
by complying with the procedures that have been established for Fund accounts
and services.
Shareholders purchasing their shares through a Shareholder Servicing
Agent may not assign, transfer or pledge any rights or interest in any Fund
shares or any investment account established with a Shareholder Servicing
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<PAGE>
Agent to any other person without the prior written consent of such Shareholder
Servicing Agent, and any attempted assignment, transfer or pledge without such
consent may be disregarded.
The 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 the bank account specified in the Bank Account
Registration, or for any written requests for additional account services made
after a shareholder has submitted an initial account application to the Fund.
The Fund may also refuse to accept or carry out any transaction that does not
satisfy any restrictions then in effect.
TAX MATTERS
The following discussion is addressed primarily to noncorporate
investors and is for general information only. A prospective investor, including
a corporate investor, should also review the more detailed discussion of federal
income tax considerations relevant to the Fund that is contained in the
Statement of Additional Information. In addition, each prospective investor
should consult with his own tax advisers as to the tax consequences of an
investment in the Fund, including the status of distributions from the Fund in
his own state and locality.
The Fund intends to qualify each year and elect to be treated as a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If the Fund is treated as a
"regulated investment company" and all of its taxable income is distributed to
its shareholders in accordance with the timing requirements imposed by the Code,
it will not be subject to federal income tax on the amounts so distributed. If
for any taxable year the Fund does not qualify for the treatment as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to its shareholders, and
such distributions will be taxable to shareholders to the extent of the Fund's
current and accumulated earnings and profits. The Portfolio is not required to
pay any federal income or excise taxes.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the Commonwealth
of Massachusetts as long as the Fund (and each other series of the Trust)
qualifies as a regulated investment company under the Code.
Distributions by the Fund of its taxable ordinary income (net of
expenses) and the excess, if any, of its net short-term capital gain over its
net long-term capital loss are generally taxable to shareholders as ordinary
income. Such distributions are treated as dividends for federal income tax
purposes. A portion of the ordinary income dividends paid by the Fund with
respect to a year (which cannot exceed the aggregate amount of its share of
qualifying dividends received by the Portfolio from domestic corporations during
the year) may qualify for the 70% dividends-received deduction for corporate
shareholders, but any such dividends-received deduction will not be allowed in
computing a corporate shareholder's adjusted current earnings, upon which is
based a corporate preference item which may be subject to an alternative minimum
tax or to the environmental superfund tax. Distributions by the Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss are designated as capital gain dividends and are taxable to
shareholders as long-term capital gains, regardless of the length of time a
shareholder has held his shares. Ordinary income dividends and capital gain
dividends from the Fund may also be subject to state and local taxes.
Investors should be careful to consider the tax implications of
purchasing shares just prior to the next dividend date of any ordinary income
dividend or capital gain dividend. Those investors purchasing shares just prior
to an ordinary income dividend or capital gain dividend will be taxed on the
entire amount of the dividend received, even though the net asset value per
share on the date of such purchase reflected the amount of such dividend.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Fund. In general, distributions by the Fund are taken into account
by shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Fund and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
(or deemed made) during the fiscal
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year, including any portions which constitute ordinary income dividends (and any
portion thereof which qualify for the dividends-received deduction for
corporations) and capital gains dividends, will be sent to the Fund's
shareholders promptly after the end of each year.
Any loss realized upon a taxable disposition of shares within six
months from the date of their purchase will be treated as a long-term capital
loss to the extent of any capital gain dividends received on such shares. All or
a portion of any loss realized upon a taxable disposition of shares of the Fund
may be disallowed if other shares of the Fund are purchased within 30 days
before or after such disposition.
Under the backup withholding rules of the Code, certain shareholders
may be subject to a 31% withholding of federal income tax on distributions and
redemption payments made by the Fund. Generally, shareholders are subject to
backup withholding if they have not provided the Fund with a correct taxpayer
identification number and certain required certifications.
OTHER INFORMATION CONCERNING SHARES OF THE FUND
NET ASSET VALUE
The net asset value of the Fund is determined once daily based on
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.), on each Fund Business Day, by dividing net assets by the number of shares
outstanding. Values of assets held by the Fund (i.e., the value of its
investment in the Fund and its other assets) are determined on the basis of
their market or other fair value, as described in the Statement of Additional
Information. A share's net asset value is effective for orders received by a
Shareholder Servicing Agent prior to its calculation and received by the
Distributor prior to the close of business, usually 4:00 p.m. Eastern time, on
the Fund Business Day on which such net asset value is determined.
NET INCOME, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Substantially all of the net income from dividends and interest (if
any) of the Fund is paid to its shareholders annually (in the month of December)
as a dividend. The Fund's net investment income is calculated by adding the
value of all the Fund's investments, plus cash and other assets, deducting Fund
liabilities and then dividing the result by the number of shares outstanding.
The Fund will distribute its net realized short-term and long-term capital
gains, if any, to its shareholders at least annually.
The Fund intends to make additional distributions to the extent
necessary to avoid application of the 4% nondeductible excise tax on certain
undistributed income and net capital gains of mutual funds imposed by Section
4982 of the Code.
Subject to the policies of the shareholder's Shareholder Servicing
Agent, a shareholder of either class may elect to receive dividends and capital
gains distributions from the Fund in either cash or additional shares of that
class.
DISTRIBUTION PLAN AND DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trustees have adopted a Distribution Plan (the "Distribution Plan")
in accordance with Rule 12b-1 under the 1940 Act, after having concluded that
there is a reasonable likelihood that the Distribution Plan will benefit the
Fund and its shareholders.
The Class A Distribution Plan provides that the Fund shall pay
distribution fees, including payments to the Distributor, at annual rates not to
exceed 0.25% of its average daily net assets for distribution services. Some
payments under the Distribution Plan may be used to compensate broker-dealers
with trail or maintenance commissions in an amount not to exceed 0.25%
annualized of the assets value of the shares maintained in the Fund by such
broker-dealers' customers. Since the distribution fees are not directly tied to
expenses, the amount of
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distribution fees paid by the Fund during any year may be more or less than
actual expenses incurred pursuant to the Distribution Plan. 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 compensation
is directly linked to its expenses).
The Distribution and Sub-Administration Agreement dated August 21, 1995
(the "Distribution Agreement"), provides that the Distributor will act as the
principal underwriter of the Fund's shares and 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. In
addition, the Distributor will provide certain sub-administration services,
including providing officers, clerical staff and office space. The Distributor
currently receives a fee for sub-administration from the Fund at an annual rate
equal to 0.05% of the Fund's average daily net assets, on an annualized basis
for the Fund's then-current fiscal year. Other funds which have investment
objectives similar to those of the Fund, but which do not pay some or all of
such fees from their assets, may offer a higher return, although investors
would, in some cases, be required to pay a sales charge or a redemption fee.
The Distributor has agreed to use a portion of its distribution and
sub-administration fee to pay for certain expenses of the Fund incurred in
connection with organizing new series of the Trust and certain other ongoing
expenses of the Trust. The Distributor may, from time to time, waive all or a
portion of the fees payable to it under the Distribution Agreement.
The respective expenses of each of the Funds of the Trust include the
compensation of their respective Trustees: registration fees; interest charges;
taxes; fees and expenses of independent accountants, of legal counsel and of any
transfer agent, custodian, 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 Fund.
EXPENSES
The Fund intends to pay all of its pro rata share of the Trust's
expenses, including the compensation of the Trustees; all fees under the
Distribution Plan; governmental fees; interest charges; taxes; membership dues
in the Investment Company Institute; fees and expenses of independent
accountants, of legal counsel and of any transfer agent or dividend disbursing
agent; expenses of redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, reports, notices, proxy
statements and reports to shareholders and to governmental officers and
commissions; expenses connected with the execution, recording and settlement of
portfolio security transactions; insurance premiums; fees and expenses of the
Fund's custodian including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating its net asset value;
expenses of shareholder meetings; and the advisory fees payable to the Adviser
under the Investment Advisory Agreement, the administration fee payable to the
Administrator under the Administration Agreement and the sub-administration fee
payable to the Distributor under the Distribution and Sub-Administration
Agreement. Expenses relating to the issuance, registration and qualification of
shares of the Fund and the preparation, printing and mailing of prospectuses for
such purposes are borne by the Fund except that the Distribution and
Sub-Administration Agreement with the Distributor requires the Distributor to
pay for prospectuses which are to be used for sales to prospective investors.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Group is an open-end management investment company
organized as a Massachusetts business trust under the laws of the Commonwealth
of Massachusetts in 1987. The Trust has reserved the right to create and issue
additional series or classes. Each share of a series or class represents an
equal proportionate interest in that series or class with each other share of
that series or class. The shares of each series or class participate equally in
the earnings, dividends and assets of the particular series or class. Expenses
of the Trust which are not attributable to a specific series or class are
allocated among all the series in a manner believed by management of the Trust
to be fair and equitable. Shares have no pre-emptive or conversion rights.
Shares when issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each 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
- 18 -
<PAGE>
Trust shall not be voted. Shares of each series or class generally vote
separately, for example to approve an investment advisory agreement or
distribution plan, but shares of all series and classes vote together, to the
extent required under the 1940 Act, in the election or selection of Trustees and
independent accountants.
The Trust is not required to hold annual meetings of shareholders but
will hold special meetings of shareholders of a series or class or of all series
and classes when in the judgment of the Trustees it is necessary or desirable to
submit matters for a shareholder vote. A Trustee of the Trust may, in accordance
with certain rules of the Securities and Exchange Commission, be removed from
office when the holders of record of not less than two-thirds of the outstanding
shares either present a written declaration to the Trust's Custodian or vote in
person or by proxy at a meeting called for this purpose.
In addition, 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 the outstanding shares of the Trust. Finally, the Trustees
shall, in certain circumstances, give such shareholders access to a list of the
names and addresses of all other shareholders or inform them of the number of
shareholders and the cost of mailing their request. The Trust's Declaration of
Trust provides that, at any meeting of shareholders, a Shareholder Servicing
Agent may vote any shares as to which such Shareholder Servicing Agent is the
agent of record and which are otherwise not represented in person or by proxy at
the meeting, proportionately in accordance with the votes cast by holders of all
shares of the same series otherwise represented at the meeting in person or by
proxy as to which such Shareholder Servicing Agent is the agent of record. Any
shares so voted by a Shareholder Servicing Agent will be deemed represented at
the meeting for purposes of quorum requirements. Shareholders of each series or
class would be entitled to share pro rata in the net assets of that series or
class available for distribution to shareholders upon liquidation of that series
or class.
The Trust is an entity of the type commonly known as a "Massachusetts
business 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 exists and the Fund itself is unable to meet its
obligations.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
SHAREHOLDER SERVICING AGENTS
The shareholder servicing agreement with each Shareholder Servicing
Agent provides that such Shareholder Servicing Agent will, as agent for its
customers, perform various services, including but not limited to the following:
answer customer inquiries regarding account status and history, the manner in
which purchases and redemptions of shares may be effected for the Fund as to
which the Shareholder Servicing Agent is so acting and certain other matters
pertaining to the Fund; assist shareholders in designating and changing dividend
options, account designations and addresses; provide necessary personnel and
facilities to establish and maintain shareholder accounts and records; assist in
processing purchase and redemption transactions; arrange for the wiring of
funds; transmit and receive funds in connection with customer orders to purchase
or redeem shares; verify and guarantee shareholder signatures in connection with
redemption orders and transfers and changes in shareholder-designated accounts;
furnish (either separately or on an integrated basis with other reports sent to
a shareholder by a Shareholder Servicing Agent) quarterly and year-end
statements and confirmations of purchases and redemptions; transmit, on behalf
of the Fund, proxy statements, annual reports, updated prospectuses and other
communications to shareholders of the Fund; receive, tabulate and transmit to
the Fund proxies executed by shareholders with respect to meetings of
shareholders of the Fund; and provide such other related services as the Fund or
a shareholder may request. Shareholder servicing agents may be required to
register pursuant to state securities law.
For performing these services, each Shareholder Servicing Agent
receives certain fees, which may be paid periodically, determined by a formula
based upon the number of accounts serviced by such Shareholder Servicing Agent
during the period for which payment is being made, the level of activity in
accounts serviced by such Shareholder Servicing Agent during such period, and
the expenses incurred by such Shareholder Servicing Agent.
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<PAGE>
Fees relating to acting as liaison to shareholders and providing personal
services to shareholders, will not exceed, on an annual basis, 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is being made by investors for whom such Shareholder
Servicing Agent maintains a servicing relationship. Each Shareholder Servicing
Agent may, from time to time, voluntarily waive all or a portion of the fees
payable to it. In addition, Chase may provide other related services to the Fund
for which it may receive compensation.
The Shareholder Servicing Agent, and its affiliates, agents and
representatives acting as Shareholder Servicing Agents, may establish custodial
investment accounts ("Accounts"), known as Chase Investment Accounts or by any
other name designated by a Shareholder Servicing Agent. Through such Accounts,
customers can purchase, exchange and redeem Fund shares, receive dividends and
distributions on Fund investments, and take advantage of any services related to
an Account offered by such Shareholder Servicing Agent from time to time. All
Accounts and any related privileges or services shall be governed by the laws of
the State of New York, without regard to its conflicts of laws provisions.
The Glass-Steagall Act and other applicable laws generally prohibit
federally chartered or supervised banks from publicly underwriting or
distributing certain securities, such as the Fund's shares. The Trust, on behalf
of the Fund, will engage banks, including the Adviser, as Shareholder Servicing
Agents, only to perform advisory, custodial, administrative and shareholder
servicing functions as described above. While the matter is not free from doubt,
Trust management believes that such laws should not preclude a bank, including a
bank which acts as adviser, custodian or administrator, or in all such
capacities, for the Fund, from acting as a Shareholder Servicing Agent. However,
possible future changes in federal law or administrative or judicial
interpretations of current or future law, could prevent a bank from continuing
to perform all or part of its servicing activities. If that occurred, the bank's
shareholder clients would be permitted to remain Fund shareholders and
alternative means for continuing the servicing of such shareholders would be
sought. In such event, changes in the operation of the Fund might occur and a
shareholder serviced by such bank might no longer be able to avail himself of
any automatic investment or other services then being provided by such bank. The
Fund does not expect that shareholders would suffer any adverse financial
consequences as a result of these occurrences.
TRANSFER AGENT AND CUSTODIAN
DST Systems, Inc. ("DST") acts as transfer agent and dividend
disbursing agent (the "Transfer Agent") for the Fund. In this capacity, DST
maintains the account records of all shareholders in the Funds, including
statement preparation and mailing. DST is also responsible for disbursing
dividend and capital gain distributions to shareholders, whether taken in cash
or additional shares. From time to time, DST and/or the Fund may contract with
other entities to perform certain services for the Transfer Agent. For its
services as Transfer Agent, DST receives such compensation as is from time to
time agreed upon by the Trust and DST. DST's address is 127 W. 10th Street,
Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of the Fund, for which Chase receives compensation as is from time to
time agreed upon by the Trust and Chase. The Custodian's responsibilities
include safeguarding and controlling the Fund's cash and securities, handling
the receipt and delivery of securities, determining income and collecting
interest on the Fund's investments, maintaining books of original entry for
portfolio and Fund accounting and other required books and accounts, and
calculating the daily net asset value of beneficial interests in the Fund. Fund
securities and cash may be held by sub-custodian banks if such arrangements are
reviewed and approved by the Trustees. The internal division of Chase which
serves as the Fund's Custodian does not determine the investment policies of the
Fund or decide which securities will be bought or sold on behalf of the Fund or
otherwise have access to or share material inside information with the internal
division that performs advisory services for the Fund.
- 20 -
<PAGE>
TAX-SHELTERED RETIREMENT PLANS
Shares of the Fund are offered in connection with the following
qualified prototype retirement plans: IRA, Rollover IRA, SEP-IRA,
Profit-Sharing, and Money Purchase Pension Plans which can be adopted by
self-employed persons ("Keogh") and by corporations, 401(k) and 403(b)
Retirement Plans. Call or write the Transfer Agent for more information.
YIELD AND PERFORMANCE INFORMATION
From time to time, the 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
historical earnings, it should not be considered as an indication or
representation of the performance of any classes of the Fund in the future. From
time to time, the performance and yield of classes of the 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 the 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 the Fund or its classes. Additionally, the Fund may, with proper
authorization, reprint articles written about the Fund and provide them to
prospective shareholders.
The Fund may provide period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the 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. Period total rates of return may be annualized. An annualized total
rate of return assumes that the period total rate of return is generated over a
52-week period, and that all dividends and capital gains are reinvested;
annualized total rates of return will be slightly higher than period total rates
of return (if the periods are shorter than one year) because of the compounding
effect of the assumed reinvestment.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the yields and the net asset values of the classes
of shares of the Fund will vary based on interest rates, the current market
value of the securities held by the Fund and changes in the Fund's expenses. The
Adviser, the Shareholder Servicing Agent, the Administrator and the Distributor
may voluntarily waive a portion of their fees on a month-to-month basis.
In addition, the Distributor may assume a portion of the 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 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 shares of the Fund to yields and total rates of return
published for other investment companies and other investment vehicles
(including different classes of shares). The Fund is advised that certain
Shareholder Servicing Agents may credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding the Shareholder
Servicing Agent fees received (see "Purchases and Redemptions of Shares
- -Purchases"), which will have the effect of increasing the net return on the
investment of customers of those Shareholder Servicing Agents. Such customers
may be able to obtain through their Shareholder Servicing Agents quotations
reflecting such increased return. See the Statement of Additional Information
for further information concerning the calculation of the yields or total rates
of return quotations for classes of shares of the Fund.
- 21 -
<PAGE>
OTHER INFORMATION
The Statement of Additional Information contains more detailed
information about the Fund, including information related to (i) the Fund's
investment policies and restrictions, (ii) risk factors associated with Fund's
policies and investments, (iii) the Trust's Trustees, officers and the
administrators and the Adviser, (iv) portfolio transactions, (v) the Fund's
shares, including rights and liabilities of shareholders, and (vi) additional
performance information, including the method used to calculate yield or total
rate of return quotations.
The Code of Ethics of the Fund prohibits all affiliated personnel from
engaging in personal investment activities which compete with or attempt to take
advantage of the Fund's planned portfolio transactions. The objective of the
Code of Ethics of the Fund is that its operations be carried out for the
exclusive benefit of the Fund's shareholders. The Fund maintains careful
monitoring of compliance with the Code of Ethics.
- 22 -
<PAGE>
PROSPECTUS
VISTASM U.S. GOVERNMENT SECURITIES FUND February 8, 1996
VISTA U.S. GOVERNMENT SECURITIES FUND's (the "Fund") investment
objective is to provide investors with as high a level of total return,
consisting of income and capital appreciation, as is consistent with the
preservation of capital. The Fund seeks to achieve its objective by investing
under normal circumstances, at least 65% of the value of its total assets in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements with respect thereto. There is no
restriction on the maturity of the Fund's portfolio or any individual portfolio
security. The Fund is a diversified series of Mutual Fund Group (the "Trust"),
an open-end, management investment company organized as a business trust under
the laws of the Commonwealth of Massachusetts on May 11, 1987, presently
consisting of 17 separate series (the "Funds").
Of course, there can be no assurance that the Fund will achieve its
investment objective. Prospective investors should carefully consider the risks
associated with an investment in the Fund. For a further discussion on the risks
associated with an investment in the Fund, see "Investment Objective and
Policies" in this Prospectus. Investors should also refer to "Additional
Information on Investment Policies and Techniques" on page 6.
The Chase Manhattan Bank, N.A. ("Chase" or the "Adviser") is the Fund's
investment adviser, custodian (the "Custodian") and administrator (the
"Administrator") and a shareholders servicing agent. The parent company of the
Adviser, The Chase Manhattan Corporation has entered an Agreement and Plan of
Merger with Chemical Banking Corporation which, if affected will have certain
effects upon the Adviser, see "Management of the Fund - The Adviser" on page 12.
Chase Asset Management, Inc. ("CAM Inc." or the "Sub-Adviser") is the investment
sub-adviser to the Fund. Vista Broker-Dealer Services, Inc. ("VBDS") is the
Fund's distributor and is unaffiliated with Chase. INVESTMENTS IN THE FUND ARE
SUBJECT TO RISK--INCLUDING POSSIBLE LOSS OF PRINCIPAL--AND WILL FLUCTUATE IN
VALUE. SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, THE CHASE MANHATTAN BANK, N.A. OR ANY OF ITS AFFILIATES AND ARE
NOT INSURED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY.
Shares of the Fund are continuously offered for sale through VBDS, the
Fund's distributor (the "Distributor"), to customers of a financial institution,
such as a federal or state-chartered bank, trust company or savings and loan
association with which the Trust has entered into a shareholder servicing
agreement (collectively, "Shareholder Servicing Agents") or to customers of a
securities broker or certain financial institutions who have entered into
Selected Dealer Agreements with the Distributor. Shares of the Fund may be
redeemed by shareholders at the net asset value next determined on any Fund
Business Day as hereinafter defined. An investor should obtain from his or her
Shareholder Servicing Agent, if appropriate, and should read in conjunction with
this Prospectus, the materials provided by the Shareholder Servicing Agent
describing the procedures under which the shares of the Fund may be purchased
and redeemed through such Shareholder Servicing Agent. Investors may select
Class A or Institutional Class shares, each with a public offering price that
reflects different sales charges and expense levels. Class A shares are offered
at net asset value plus the applicable sales charge (maximum of 4.50% of public
offering price). Class A shares also have a distribution plan and may incur
distribution expenses, at an annual rate not to exceed 0.25% of average daily
net assets attributable to Class A. Institutional Class shares are offered at
net asset value without an initial sales charge to qualified institutions or
investors making an initial minimum investment of $1,000,000 or more.
Salespersons and any other person entitled to receive compensation for selling
or servicing shares of the Fund may receive different compensation with respect
to one particular class of shares over another in the Fund.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. A Statement of
Additional Information for the Fund, dated February 8, 1996, which contains more
detailed information concerning the Fund, has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. An
investor may obtain a copy of the Statement of Additional Information without
charge by contacting his Shareholder Servicing Agent, the Distributor or the
Fund.
<PAGE>
Investors should read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
For information about the Fund, simply call the Vista Service Center at
the following toll-free number: 1-800-34-VISTA.
- 2 -
<PAGE>
TABLE OF CONTENTS
Expense Summary.......................................................4
Financial Highlights..................................................5
Investment Objective and Policies.....................................7
Additional Information on Investment Policies and Techniques......... 8
Management of the Fund...............................................17
Purchases and Redemptions of Shares..................................19
Tax Matters..........................................................28
Other Information Concerning Shares of the Fund......................30
Shareholder Servicing Agents, Transfer Agent and Custodian...........34
Yield and Performance Information....................................40
Appendix A
Description of Ratings........................................ A-1
- 3 -
<PAGE>
EXPENSE SUMMARY
The following table provides (i) a summary of the aggregate annual operating
expenses of each class of the Fund, as a percentage of average net assets of
such class of the Fund, and (ii) an example illustrating the dollar cost of such
expenses on a $1,000 investment in shares of each class of the Fund.
<TABLE>
<CAPTION>
Institutional
Class A Class
Shareholder Transaction Expenses
<S> <C> <C>
Maximum Initial Sales Charge imposed on Purchases
(as a percentage of offering price)*.............................. 4.50% None
Maximum Sales Charge imposed on Reinvested Dividends None None
Exchange Fee........................................................ None None
Maximum Contingent Deferred Sales Charge (as a percentage of
redemption proceeds)+............................................. None None
Annual Fund Operating Expenses (as a percentage of net assets)
Investment Advisory Fee ............................................ .30% .30%
Rule 12b-1 Distribution Plan++ ..................................... .25% None
Administration Fee.................................................. .10% .10%
Other Expenses
- --Sub-administration Fee............................................ .05% .05%
- --Shareholder Servicing Fee......................................... .25% .20%
- --Other Operating Expenses+++....................................... .10% .20%
---- ----
Total Other Expenses................................................ 0.40% 0.45%
Total Fund Operating Expenses....................................... 1.05% .85%
==== =====
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment in the
class indicated based upon payment by the Fund of operating expenses at the
levels set forth in the table above, assuming (1) a 5% annual return and (2)
redemption at the end of each time period:
Three Five
One Year Years Years Ten Years
Class A Shares(1)....................... $57 $79 $102 $169
Institutional Class Shares.............. $9 $27 $47 $105
- ---------------
* The rules of the Securities and Exchange Commission require that the
Fund's maximum sales charge be reflected in the expense summary.
++ As a result of distribution fees, a long-term shareholder in Class A
shares of the Fund may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the National
Association of Securities Dealers, Inc.
+++ A shareholder may incur a $10.00 charge for certain wire redemptions.
(1) Assumes deduction at the time of purchase of the maximum 4.50%
initial sales charge, as applicable.
- 4 -
<PAGE>
The purpose of the expense summary provided above is to assist
investors in understanding the various costs and expenses that a shareholder in
each class of the Fund will bear directly or indirectly. A more complete
description of the Fund's expenses, including any each class of fee waivers, is
set forth herein.
THE "EXAMPLE" SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OR ANNUAL RETURN OF THE FUND; ACTUAL EXPENSES AND ANNUAL RETURN MAY BE
GREATER OR LESS THAN SHOWN.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide investors with as
high a level of total return, consisting of income and capital appreciation, as
is consistent with the preservation of capital. Under normal circumstances, at
least 65% of the value of the Fund's total assets will be invested in securities
issued or guaranteed by the U.S Government, its agencies or instrumentalities,
as described below ("U.S. Government Securities"), and repurchase agreements
with respect thereto. 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 shares of the Fund. There is no
restriction on the maturity of the Fund's portfolio or any individual portfolio
security. The SubAdviserwill be free to take advantage of the entire range of
maturities of securities eligible for inclusion in the Fund's portfolio and may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Since the
Fund invests extensively in U.S. Government Securities, certain of which have
less credit risk than that associated with other securities, the level of income
achieved by the Fund may not be as high as that of other funds which invest in
lower quality securities.
UNITED STATES TREASURY OBLIGATIONS
The Fund may invest in U.S. Treasury obligations, which are backed by
the full faith and credit of the U.S. Government as to payment of principal and
interest. U.S. Treasury obligations consist of bills, notes and bonds, which
generally differ in their interest rates and maturities.
UNITED STATES GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS
The Fund may invest in securities issued or guaranteed by U.S.
Government agencies and instrumentalities, including obligations that are
supported by: (i) the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association); (ii)
the limited authority of the issuer or guarantor to borrow from the U.S.
Treasury (e.g., obligations of Federal Home Loan Banks); or (iii) only the
credit of the issuer or guarantor (e.g., obligations of the Federal Home Loan
Mortgage Corporation). 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. Other agencies and
instrumentalities that issue or guarantee debt securities and that have been
established or sponsored by the U.S. Government include the Banks for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Intermediate Credit Banks, the Federal Land Banks, the Student Loan
Marketing Association and Resolution Funding Corporation.
The Fund may invest extensively in mortgage-backed securities issued or
guaranteed by certain agencies of the U.S. Government such as GNMA, FNMA or
FHLMC. Mortgage-backed securities typically may be prepaid by the issuer without
penalty; thus, when prevailing interest rates decline, the value of these
securities is not likely to rise on a comparable basis with other debt
securities that are not so prepayable. The proceeds of prepayments and scheduled
payments of principal of these securities will be reinvested by the Fund at then
prevailing interest rates, which may be lower than the rate of interest on the
securities on which these payments are received. The Fund will not invest in
principal-only or interest-only stripped mortgage-backed securities.
- 5 -
<PAGE>
OTHER INVESTMENTS AND ACTIVITIES
The Fund may invest the portion of its assets not invested in U.S.
Government Securities and repurchase agreements with respect thereto in
non-convertible corporate debt securities of domestic and foreign issuers, such
as bonds and debentures. Such securities must be rated, at the time of
investment, at least in the category A or the equivalent by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poors Ratings Corp. ("S&P"), Fitch
Investors Service Corp. ("Fitch"), Duff & Phelps ("D&P") or another nationally
recognized statistical rating organization ("NRSRO"), or if unrated, such
securities must be of comparable quality as determined by the SubAdviser.
Fixed income securities, (except for securities with floating or
variable interest rates) are generally considered to be interest rate sensitive,
which means that their value (and the Fund's share price) will tend to decrease
when interest rates rise and increase when interest rates fall. Securities with
shorter maturities generally provide greater price stability than longer-term
securities and are less effected by changes interest rates. There is no
restriction on the maturity of the Fund's portfolio or of any individual
portfolio security, and to the extent the 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 Fund may, at any time, invest up to 35% of the value of its total
assets in high quality, short-term money market instruments (as described below
under "Additional Information on Investment Policies and Techniques"). When a
temporary defensive posture in the market is appropriate in the Information on
Sub-Adviser's opinion, the Fund may invest without limitation in these
instruments
The Fund may enter into transactions in derivatives and related
instruments, as described and subject to the limitations and risks described
under "Additional Information on Investment Policies and Techniques." The Fund
may also hold cash pending investment in portfolio securities. A description of
these investment strategies and certain risks associated therewith is contained
under the caption "Additional Information on Investment Policies and Techniques"
in this Prospectus and in the Statement of Additional Information.
The investment objective of the Fund is fundamental and may not be
changed without the affirmative vote of a "majority" of the holders of its
outstanding shares. Of course, achievement of the objective cannot be
guaranteed. The investment policies and activities of the Fund, with the
exception of those which are identified as fundamental, are not fundamental and
may be changed by the Board of Trustees of the Trust without the approval of
shareholders. Additional fundamental investment policies of the Fund are
identified in the Statement of Additional Information.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES AND TECHNIQUES
Following is a description of certain additional types of investments
which the Fund may make, and certain activities in which the Fund may engage.
MONEY MARKET INSTRUMENTS
Subject to the limitations set forth above, the Fund may invest in cash
or high quality, short-term money market instruments. Such instruments may
include U.S. Government Securities; commercial paper or domestic and foreign
issuers rated, at the time of purchase, at least in the category P-1 by Moody's,
A-1 by S&P, F-1 by Fitch or D-1 by D&P rated comparably by another NRSRO, or, if
not rated, of comparable quality as determined by the Sub-Adviser; certificates
of deposits, banker's acceptances or time deposits and repurchase agreements.
The Fund limits its investment in U.S. bank obligations to obligations of U.S.
banks that have more than $1 billion in total assets at the time of investment
and are subject to regulation by the U.S. Government. The Fund limits its
investment in foreign bank obligations to obligations of foreign banks that at
the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets, and have branches or agencies in the United States.
- 6 -
<PAGE>
The Fund may also invest in obligations of foreign branches of U.S. banks, as
well as obligations of U.S. branches of foreign banks, if the Fund is permitted
to invest directly in obligations of the U.S. bank or foreign bank,
respectively, in accordance with the foregoing limitations. Investments in
foreign securities involve certain risks which are described under "Foreign
Securities" below.
ZERO COUPON SECURITIES
The Fund may invest without limitation in zero coupon securities,
subject to its investment objective and policies. Zero coupon securities may be
issued by both governmental and private issuers. Zero coupon securities are debt
securities that do not pay regular interest payments. Instead, zero coupon
securities are sold at substantial discounts from their value at maturity. When
a zero coupon security is held to maturity, its entire return, which consists of
the amortization of discount, comes from the difference between its purchase
price and maturity value. Because interest on a zero coupon security is not
distributed on a current basis, it tends to be subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The risk is greater
when the period to maturity is longer. The value of zero coupon securities
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates. Under the stripped bond rules of the
Code, investments by the Fund in zero coupon securities will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income. Among the zero coupon securities in which the
Fund may invest are STRIPS. See "STRIPS" below.
Zero coupon securities may also be created when a dealer deposits a
U.S. Treasury security or a federal agency security with a custodian for 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 ("CATS"), Treasury Investment Growth Receipts ("TIGRs")
and generic Treasury Receipts ("TRs") are stripped U.S. Treasury securities
separated into their component parts through custodial arrangement established
by their broker sponsors. The Company has been advised that the staff of the
Division of Investment Management of the Securities and Exchange Commission does
not consider privately stripped obligations to be U.S. Government securities, as
defined in the 1940 Act. Therefore the Fund will not treat such obligations as
U.S. Government securities.
STRIPS
The Fund may, subject to its investment objective and policies, invest
up to 20% of its total assets in separately traded principal and interest
components of securities backed by the full faith and credit of the United
States Treasury. 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.
Bonds issued by the Resolution Funding Corporation and other U.S. Government
agencies may also be stripped.
FOREIGN SECURITIES
The Fund may invest the portion of its assets not invested in U.S.
Government Securities and repurchase agreements with respect thereto in foreign
obligations issued or guaranteed by foreign governments or supranational
entities. In addition, the Fund may invest the portion of its assets not
invested as described above in commercial paper of foreign issuers and foreign
bank obligations, as described under "Money Market Instruments." Foreign
securities may represent a greater degree of risk (e.g., risk related to
exchange rate fluctuation, tax provisions, war or expropriation) than do
securities of domestic issuers.
Investing in securities issued by foreign corporations and governments
involves considerations and possible risks not typically associated with
investing in securities issued by domestic corporations and the U.S. Government.
The values of foreign investments are affected by changes in currency rates or
exchange control regulations, application of foreign tax laws, including without
withholding taxes, changes in governmental administration or
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economic or monetary policy (in the U.S. or other countries) or changed
circumstances in dealings between countries. Costs are incurred in connection
with conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods.
The Fund may invest in securities issued by supranational 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.
MORTGAGE-RELATED SECURITIES
The Fund may invest without limitation in mortgage-related 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 (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose the Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. 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 securities.
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 full faith and credit of the U.S. Government (in the case of
securities guaranteed by the Government National Mortgage Association ("GNMA"));
or guaranteed by agencies or instrumentalities of the U.S. Government (in the
case of securities guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage-related securities issued by FNMA include
Guaranteed Mortgage Pass-Through Certificates, also known as "Fannie Maes,"
which are guaranteed as to timely payment of principal and interest by FNMA, and
mortgage-related securities issued by the FHLMC include Mortgage Participation
Certificates, also known as "Freddie Macs," which are guaranteed as to timely
payment of interest and timely or ultimate payment of principal on the
underlying mortgage loans by FHLMC. Mortgage pass-through securities created by
non-government issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance, and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.
The Fund 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 mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs may be issued through real estate mortgage investment
conduits or REMICs. CMOs are structured into multiple classes, with each class
bearing a different expected average life or stated maturity. Monthly payments
of principal, including prepayments, are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only
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after the first class has been retired. To the extent a particular CMO is issued
by an investment company, the Funds' ability to invest in such CMOs will be
limited. See the Statement of Additional Information.
The Fund expects 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. As new types of mortgage-related securities
are developed and offered to investors, the Fund's investment adviser will,
consistent with the Fund's investment objectives, policies and quality
standards, consider making investments in such new types of mortgage-related
securities.
ASSET-BACKED SECURITIES
The Fund may purchase asset-backed securities, subject to the Fund's
investment objectives and policies. Asset-backed securities 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 and credit card receivables.
REPURCHASE AGREEMENTS
When appropriate, the Fund may enter into repurchase agreements (a
purchase of and simultaneous commitment to resell a security at an agreed-upon
price and date which is usually not more than seven days from the date of
purchase). The Fund will enter into repurchase agreements only with
counterparties which are member banks of the Federal Reserve System and security
dealers believed creditworthy and only if fully collateralized by U.S.
Government Obligations or other securities in which the Fund is permitted to
invest. As an operating policy, the Fund, through its custodian bank, takes
constructive possession of the collateral underlying repurchase agreements. In
the event the seller fails to pay the agreed-to sum on the agreed-upon delivery
date, the underlying security could be sold by the Fund, but the Fund might
incur a loss in doing so, and in certain cases may not be permitted to sell the
security. Additionally, procedures have been established for the Fund to
monitor, on a daily basis, the market value of the collateral underlying all
repurchase agreements to ensure that the collateral is at least 102% of the
value of the repurchase agreements. Investments by the Fund in repurchase
agreements maturing in more than seven days are subject to the restrictions on
investments in illiquid securities discussed below under "Illiquid Securities."
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements to avoid
selling securities during unfavorable market conditions to meet redemptions.
Pursuant to a reverse repurchase agreement, the Fund will sell portfolio
securities and agree to repurchase them from the buyer at a particular date and
price. Whenever the Fund enters into a reverse repurchase agreement, it will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal to the repurchase price marked to market daily (including
accrued interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. The Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act and are subject to
the Fund's general limitation with respect to borrowing.
LOANS OF PORTFOLIO SECURITIES
Although the Fund does not anticipate engaging in such activity in the
ordinary course of business, the Fund may lend portfolio 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
its total assets. In connection with such loans, the 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 of the securities loaned plus accrued interest. The Fund
can earn income through the investment of such collateral. The Fund continues to
be entitled to the interest payable or any dividend-equivalent payments received
on a loaned security and, in addition, receive interest on the amount
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of the loan. However, the receipt of any dividend-equivalent payments by the
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. The 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 risk 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 Sub-Adviser to be of good standing and will
not be made unless, in the judgment of the Sub-Adviser, the consideration to be
earned from such loans justifies the risk.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its total assets in illiquid
securities. In addition, the Fund may elect to treat as liquid, in accordance
with procedures established by the Board, 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.
WHEN-ISSUED OR FORWARD DELIVERY PURCHASES
The Fund may purchase new issues of securities in which it is permitted
to invest on a "when-issued" or, with respect to existing issues, on a "forward
delivery" basis, which means that the securities will be delivered at a future
date beyond the customary settlement time. There is no limit as to the amount of
the commitments which may be made by the Fund to purchase securities on a
"when-issued" or "forward delivery" basis. The Fund does not pay for such
obligations or start earning interest on them until the contractual settlement
date. Although commitments to purchase "when-issued" or "forward delivery"
securities will only be made with the intention of actually acquiring them,
these securities may be sold before the settlement date if deemed advisable by
the SubAdviser.
While it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a "when-issued" or "forward
delivery" basis can involve more risk than other types of purchase. For example,
when the time comes to pay for a "when-issued" or "forward delivery" security,
the Fund's portfolio securities may have to be sold in order to meet payment
obligations, and a sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gain or loss. Also, if it is
necessary to sell the "when-issued" or "forward delivery" security before
delivery, the Fund may incur a loss because of market fluctuations since the
time the commitment to purchase the "when-issued" or "forward delivery" security
was made. For additional information concerning these risks and other risks
associated with the purchase of "when-issued" or "forward delivery" securities
as well as other aspects of the purchase of securities on a "when-issued" or
forward delivery" basis, see "Investment Objective, Policies and Restrictions --
Investment Policies: When-Issued and Forward Delivery Purchases" in the
Statement of Additional Information.
STAND-BY COMMITMENTS
The Fund may enter into put transactions, including transactions
sometimes referred to as stand-by commitments, with respect to securities held
in their portfolios. In a put transaction, the 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 the 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. In the event that the
party obligated to purchase the underlying security from the Fund defaults on
its obligation to purchase the underlying security, then the Fund might be
unable to recover all or a portion of any loss sustained from having to sell the
security elsewhere. Acquisition of puts will have the effect of increasing the
cost of the securities subject to the put and thereby reducing the yields
otherwise available from such securities.
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OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of the value of its total assets in
shares of other investment companies, subject to such investments being
consistent with the overall objective and policies of the Fund and subject to
the limitations of the 1940 Act and the Fund's investment limitations as
described in the Statement of Additional Information.
VARIABLE RATE SECURITIES AND PARTICIPATION CERTIFICATES
The variable rate demand instruments that may be purchased by the Fund
are obligations (including bonds, notes, certificates of deposit and commercial
paper) that provide for a periodic adjustment in the interest rate paid on the
instrument and/or permit the holder to demand payment upon a specified number of
days' notice of the 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. Such variable rate securities include
participation certificates issued by a bank, insurance company or other
financial institution, and in variable rate securities owned by such
institutions or affiliated organizations. 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. Participation certificates may be deemed illiquid securities
(see "Investment Objective, Policies and Restrictions -- Investment Policies:
Variable Rate Securities and Participation Certificates" in the Statement of
Additional Information).
The Sub-Adviser will monitor on an on-going basis the ability of the
underlying issuers to meet their demand obligations. Although variable rate
securities may be sold, it is intended that they be held until an interest reset
date, except under certain specified circumstances (see "Investment Objective,
Policies and Restrictions -Investment Policies: Variable Rate Securities and
Participation Certificates" in the Statement of Additional Information).
As a result of the variable rate nature of these investments, the
Fund's yield will decline and its shareholders will forego the opportunity for
capital appreciation during periods when prevailing interest rates have
declined. Conversely, during periods where prevailing interest rates have
increased, the Fund's yield will increase and its shareholders will have reduced
risk of capital depreciation.
HEDGING AND DERIVATIVES
The Fund may invest its assets in derivative and related instruments to
hedge various market risks, to manage the effective maturity or duration of debt
instruments held by the Fund, or, with respect to certain strategies, to
increase the Fund's income or gain. Such investments will be subject only to the
Fund's investment objective and policies and the requirement that, to avoid
leveraging the Fund, the Fund maintains segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset.
The value of some derivative or similar instrument in which the Fund
invests may be particularly sensitive to changes in prevailing interest rates or
other economic factors, and -- like other investment of the Fund -- the ability
of the Fund to successfully utilize these instruments may depend in part upon
the ability of the Sub-Adviser to forecast interest rates and other economic
factors correctly. If the Sub-Adviser incorrectly forecasts such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Fund could be exposed to the risk of a loss. The Fund may not
employ any or all of the instruments described herein, and no assurance can be
given that any strategy used will succeed.
To the extent permitted by the Fund's investment objective and
policies, and as described more fully in the Statement of Additional
Information, the Fund may (i) purchase, write and exercise call and put options
on securities, securities indexes and foreign currencies (including using
options in combination with securities, other options or derivative
instruments); (ii) enter into futures contracts and options on futures
contracts; (iii) employ forward currency and interest-rate contracts; (iv)
purchase and sell mortgage-backed and asset backed securities; and (v) purchase
and sell structured products.
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Risk Factors. As explained more fully in the Statement of Additional
Information, there are a number of risk factors 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. As incorrect correlation could result in a loss
on both the hedged assets in the Fund and the hedging vehicle so that the Funds
return might have been greater had hedging not been attempted. This risk is
particularly acute in the case of "cross-hedges" between currencies. The
investment adviser may incorrectly forecast interest rates, market values or
other economic factors in utilizing a derivatives strategy. In such a case, the
Fund may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing the 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 the Fund. Certain strategies, such as yield enhancement, can have
speculative characteristics and may result in more risk to the Fund than hedging
strategies using the same instruments. There can be no assurance that a liquid
market will exist at a time when the 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 a
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. 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, foreign exchanges or foreign boards of trade, 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 the 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.
PORTFOLIO MANAGEMENT AND TURNOVER. It is intended that the portfolio of
the Fund will be fully managed by buying and selling securities and holding
certain securities to maturity. The frequency of the Fund's portfolio
transactions -- the portfolio turnover rate -- will vary from year to year
depending upon market conditions. The Fund will engage in portfolio trading if
the Sub-Adviser believes a transaction, net of costs (including custodian
charges), will help it achieve its investment objective. The investment policies
of the Fund may lead to frequent changes in investments, particularly in periods
of rapidly changing market conditions or interest rates. High portfolio turnover
rates would generally result in higher transaction costs, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. High portfolio turnover rates
would also make it more difficult for the Fund to satisfy the requirement for
qualification as a regulated investment company under the Code, that less than
30% of the Fund's gross income in any tax year be derived from gains on the sale
of securities held for less than three months. For a description of the
strategies that may be used by the Sub-Adviser, see "Investment Objective,
Policies and Restrictions -- Investment Policies:
Portfolio Management" in the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund's Adviser is Chase, which also serves as the Fund's
administrator. Chase global investment management capabilities are supported by
investment professionals located in cities around the world, including New York,
Geneva and Hong Kong. The Fund's investment Sub-Adviser is CAM, Inc.
THE ADVISER
The Chase Manhattan Bank, N.A. ("Chase" or the "Adviser") manages the
assets of the Fund pursuant to an Investment Advisory Agreement and, subject to
such policies as the Board of Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services under the Investment
Advisory Agreement, the Adviser is entitled to receive an annual fee computed
daily and paid monthly based at an annual rate equal to 0.30% of the Fund's
average daily net assets. The Adviser may, from time to time, voluntarily waive
all or a portion of its fees payable under the Advisory Agreement.
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The Adviser, 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. Its headquarters is at One Chase Manhattan Plaza,
New York, NY 10081. The Adviser, including its predecessor organizations, has
over 100 years of money management experience. Also included among the Adviser's
accounts are commingled trust funds and a broad spectrum of individual trust and
investment management portfolios. These accounts have varying investment
objectives.
On August 27, 1995, The Chase Manhattan Corporation announced its entry
into an Agreement and Plan of Merger (the "Merger Agreement") with Chemical
Banking Corporation ("Chemical"), a bank holding company, pursuant to which The
Chase Manhattan Corporation will merge with and into Chemical (the "Holding
Company Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The consummation of the
Holding Company Merger is subject to certain closing conditions. On December 11,
1995, the respective shareholders of The Chase Manhattan Corporation and
Chemical voted to approve the Merger Agreement. The Holding Company Merger is
expected to be completed on or about March 31, 1996.
Subsequent to the Holding Company Merger, it is expected that the
adviser to the Funds, The Chase Manhattan Bank, N.A., will be merged with and
into Chemical Bank. a New York State chartered bank ("Chemical Bank") (the "Bank
Merger" and together with the Holding Company Merger, the "Merger" and together
with the Holding Company Merger, the "Mergers"). The surviving bank will
continue operations under the name The Chase Manhattan Bank (as used herein, the
term "Chase" refers to The Chase Manhattan Bank, N.A. and its successor in the
Bank Merger, and the term "Adviser" means Chase (including its successor in the
Bank Merger) in its capacity as investment adviser to the Funds). The
consummation of the Bank Merger is subject to certain closing conditions,
including the receipt of certain regulatory approvals. The Bank Merger is
expected to be occur in July, 1996.
Chemical is a publicly owned bank holding company incorporated under
Delaware law and registered under the Federal Bank Holding Company Act of 1956,
as amended. As of December 31, 1995, through its direct or indirect
subsidiaries, Chemical managed more than $57 billion in assets, including
approximately $6.9 billion in mutual fund assets in 11 mutual fund portfolios.
Chemical Bank is a wholly-owned subsidiary of Chemical and is a New York State
chartered bank.
THE SUB-ADVISER
Under the investment advisory agreement between the Trust, on behalf of
the Fund, and Chase, Chase may delegate a portion of its responsibilities to a
sub-adviser. In addition, the investment 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 adviser of the Fund and are
under the common control of New Chase as long as all such persons are
functioning as part of an organized group of persons, managed by authorized
officers of Chase.
Chase has entered into an investment sub-advisory agreement with its
affiliate, CAM Inc., a registered investment adviser, on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of Chase. Subject to the supervision
and direction of the Adviser and the Board of Trustees, CAM Inc. provides
investment sub-advisory services to the Fund in accordance with the Fund's
objectives and policies, makes investment decisions for the Fund and places
orders to purchase and sell securities on behalf of the Fund. The Sub-Advisory
Agreement provides that, as compensation for services, the Sub-Adviser receives,
from the Adviser, a fee, based on the Fund's average daily net assets,
determined at a rate agreed upon from time to time between the Adviser and CAM
Inc.
CAM, Inc. is a wholly-owned operating subsidiary of Chase, and upon
consummation of the Bank Merger, will be a wholly-owned operating subsidiary of
the Adviser. CAM, Inc. is registered with the Commission as an investment
adviser and was formed for the purpose of providing discretionary investment
advisory services to institutional clients and to consolidate Chase's investment
management function, and the same individuals who serve
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as portfolio managers for CAM, Inc. also serve as portfolio managers for Chase.
CAM, Inc. is located at 1211 Avenue of the Americas, New York, New York 10036.
PORTFOLIO MANAGER. Effective upon consummation of the Reorganization
(as defined under "GeneralReorganization with Predecessor Fund" on page 23.),
John Schmucker will be responsible for the day-to-day management of the Fund for
CAM. Mr. Schmucker currently manages the Predecessor Fund and is a Vice
President and Senior Fixed Income Portfolio Manager at The Portfolio Group (the
investment adviser to the Predecessor Fund). Prior to joining The Portfolio
Group in 1992, Mr. Schumucker was the Chief Investment Officer of Chemical
Bank's Official Institutions Group. Previously, he was a portfolio manager with
Henry Kaufman & Company, Inc.
CERTAIN RELATIONSHIPS AND ACTIVITIES. The Adviser and its affiliates
may have deposit, loan and other commercial banking relationships with the
issuers of securities purchased on behalf of the Fund, including outstanding
loans to such issuers which may be repaid in whole or in part with the proceeds
of securities so purchased. The Adviser 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. The Adviser and
its affiliates may sell U.S. Government obligations and municipal obligations
to, and purchase them from, other investment companies sponsored by the
Distributor or affiliates of the Distributor. The Adviser will not invest the
Fund's 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 the Adviser 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 the Fund. The Adviser has informed the Fund that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of the Adviser, including the
division that performs services for the Fund as Custodian, or in the possession
of any affiliate of the Adviser. Shareholders of the Fund are notified that
Chase and its affiliates may exchange among themselves certain information about
the shareholder and his account.
THE ADMINISTRATOR
Pursuant to an Administration Agreement, (the "Administration
Agreement"), Chase serves as administrator of the Fund. The Administrator
provides certain administrative services, including, among other
responsibilities, coordinating relationships with independent contractors and
agents; preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations excluding those of
the securities laws of the various states; preparing financial statements;
arranging for the maintenance of books and records; and providing office
facilities necessary to carry out the duties thereunder. The Administrator is
entitled to receive from the Fund a fee computed daily and paid monthly at an
annual rate equal to 0.10% of the Fund's average daily net assets. The
Administrator may, from time to time, voluntarily waive all or a portion of its
fees payable to it under the Administration Agreement. The Administrator shall
not have any responsibility or authority for the Fund's investments, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
REGULATORY MATTERS. Banking laws and regulations, including the
Glass-Steagall Act as currently interpreted by the Board of Governors of the
Federal Reserve System, prohibit a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, or any affiliate thereof from
sponsoring, organizing, controlling, or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such a bank holding company or affiliate from
acting as investment adviser, administrator, transfer agent, or custodian to
such an investment company or from purchasing shares of such a company as agent
for and upon the order of a customer. The Adviser and the Trust believe that
Chase, CAM, Inc. or any other affiliate of Chase, may perform the investment
advisory, administrative, custody and transfer agency services for the Fund, as
the case may be, described in this Prospectus and that Chase, CAM, Inc., or any
other affiliate of Chase, subject
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<PAGE>
to such banking laws and regulations, may perform the shareholder services
contemplated by this Prospectus without violation of such banking laws or
regulations. However, future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent Chase, CAM, Inc. or any
other affiliate of Chase from continuing to perform investment advisory,
administrative or custody services for the Fund, as the case may be, or require
Chase, CAM, Inc. or any other affiliate of Chase to alter or discontinue the
services provided by it to shareholders of the Fund.
If Chase, CAM, Inc. or any other affiliate of Chase were prohibited
from performing investment advisory, administrative, custody or transfer agency
services for the Fund, as the case may be, it is expected that the Board of
Trustees would recommend to shareholders that they approve new agreements with
another entity or entities qualified to perform such services and selected by
the Board of Trustees. If Chase, CAM, Inc. or any other affiliate of Chase were
required to discontinue all or part of its shareholder servicing activities, its
customers would be permitted to remain the beneficial owners of Fund shares and
alternative means for continuing the servicing of such customers would be
sought. Vista does not anticipate that investors would suffer any adverse
financial consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES
Class A shares are sold to investors subject to an initial sales
charge. Institutional Class Shares are available only to qualified investors
making an initial minimum investment of $1,000,000 or more.
CLASS A SHARES
Classes A shares of the Fund may be purchased through selected
financial service firms, such as broker-dealer firms and banks ("Dealers") who
have entered into a selected dealer agreement with Vista Broker-Dealer Services,
Inc., at the public offering price which is computed once daily as of the close
of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) on
each business day during which the Exchange is open for trading ("Fund Business
Day"). (See "Other Information Concerning Shares of the Fund-Net Asset Value").
The public offering price of Class A shares is the next determined net asset
value, plus applicable initial sales charge. Orders received by Dealers prior to
the New York Stock Exchange closing time are confirmed at the offering price
effective at the close of such Exchange, provided the order is received by the
Transfer Agent prior to its close of business. Dealers are responsible for
forwarding orders for the purchase of shares on a timely basis. Fund shares
normally will be maintained in book entry form and only Class A share
certificates will be issued upon request. Management reserves the right to
refuse to sell shares of the Fund to any person.
All purchases made by check should be in U.S. dollars and made payable
to the Vista Funds. Third party checks, except those payable to an existing
shareholder who is a natural person (as opposed to a corporation or
partnership), credit cards and cash will not be accepted. When purchases are
made by check or periodic automatic investment, redemptions will not be allowed
until the investment being redeemed has been in the account for 15 business
days.
Shareholder Servicing Agents may offer additional services to their
customers, including specialized procedures for the purchase and redemption of
Fund shares, such as pre-authorized or systematic purchase and redemption plans.
Each Shareholder Servicing Agent may establish its own terms and conditions,
including reduced minimum initial purchase amounts and limitations on the
amounts of subsequent transactions, with respect to such services. Certain
Shareholder Servicing Agents may (although they are not required by the Trust to
do so) credit to the accounts of their customers from whom they are already
receiving other fees an amount not exceeding the fees for their services as
Shareholder Servicing Agents (see "Shareholder Servicing Agents, Transfer Agent
and
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<PAGE>
Custodian -- Shareholder Servicing Agents"), which will have the effect of
increasing the net return on the investment of customers of that Shareholder
Servicing Agent.
MINIMUM INVESTMENTS
The Fund has established minimum initial and additional investments for
the purchase of Class A Shares. The minimums detailed below vary by the type of
accounting being established:
Account Type Minimum Initial Investment
Individual........................................ $2,500(1)
Individual Retirement Account (IRA)............... $1,000(2)
Spousal IRA....................................... $ 250
SEP-IRA........................................... $1,000(2)
Purchase Accumulation Plan........................ $ 250(3)
Payroll Deduction Program......................... $ 100(4)
(401(k), 403(b), Keogh)
(1) Employees of the Adviser and its affiliates, and Qualified Persons as
defined in "Purchases of Class A Shares at Net Asset Value", are eligible for a
$1,000 minimum initial investment.
(2) A $250 minimum initial investment is allowed if the new account is
established with a $100 minimum monthly Systematic Investment Plan as described
below.
(3) Account must be established with a $200 minimum monthly Systematic
Investment Plan as described below.
(4) A $25 minimum monthly investment must be established through an automated
payroll cycle.
The minimum additional investment is $100 for all types of accounts.
Systematic Investment Plan. A shareholder may establish a monthly
investment plan by which investments are automatically made to his/her Vista
Fund account through Automatic Clearing House (ACH) deductions from a checking
account. The minimum monthly investment through this plan is $100. Shareholders
may choose either to have these investments made during the first or third week
each month. Please note that your initial ACH transactions may take up to 10
days from the receipt of your request to be established.
Shareholders electing to start this Systematic Investment Plan when
opening an account should complete Section 8 of the account application. Current
shareholders may begin a Systematic Investment Plan at any time by sending a
signed letter with signature guarantee to the Vista Service Center, P.O. Box
419392, Kansas City, MO 64141-6392. The letter should contain your Vista Fund
account number, the desired amount and cycle of the systematic investment, and
must include a voided check from the checking account from which debits are to
be made. A signature guarantee may be obtained from a bank, trust company,
broker-dealer or other member of the national securities exchange. Please note
that a notary public cannot provide signature guarantees.
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<PAGE>
INITIAL SALES CHARGES--CLASS A SHARES
The public offering price of Class A shares is the next determined net
asset value, plus any applicable initial sales charge, which will vary with the
size of the purchase as shown in the following table:
Concession
Sales Charge to Dealers
% of % of Net % of
Offering Amount Offering
Amount of Purchase Price Invested Price
Less than $100,000....................... 4.50 4.71 4.00
$100,000 to $249,999..................... 3.75 3.90 3.25
$250,000 to $499,000..................... 2.50 2.56 2.25
$500,000 to $999,999..................... 2.00 2.04 1.75
$1,000,000 to $2,499,999................. -- -- 0.75
$2,500,000 to $9,999,999................. -- -- 0.50
$10,000,000 to $49,999,999............... -- -- 0.25
$50,000,000 and over..................... -- -- 0.15
The initial sales charge on Class A shares varies with the size of the
purchase as shown above. The reduced charges apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person", which term
includes, among others, an individual, spouse and children under the age of 21,
or a Trustee or other fiduciary of a Trust estate or fiduciary account. The
Distributor may compensate Dealers for sales of $1,000,000 or more from its own
resources and/or the Distribution Plan.
Upon notice to Dealers with whom it has sales agreements, VBDS may
reallow up to the full applicable sales charge and such Dealer may therefore be
deemed an "underwriter" under the Securities Act of 1933, as amended, during
such periods. For the three-year period commencing July 19, 1993, for activities
in maintaining and servicing accounts of customers invested in the Fund,
Associated Securities Corp. ("Associated Securities") may receive payments from
the Adviser based, in part, on the amount of the aggregate asset values of the
Fund (and other Vista funds) in the accounts of shareholders attributable to
Associated Securities and the length of time such assets are in such accounts.
In addition, under an arrangement between Associated Securities and the
Distributor, Associated Securities will be entitled to receive either 50% or 70%
of the difference between the total front-end sales load, or in the case of
Class B shares 4.00%, and that portion paid to selling group member broker-
dealers.
To the extent permitted by applicable SEC and NASD regulations, the
Distributor may, from time to time, provide promotional incentives to certain
Dealers whose representatives have sold or are expected to sell significant
amounts of the Fund or other Funds in the Trust. At various times the
Distributor may implement programs under which a Dealer's sales force may be
eligible to win cash or awards for certain sales efforts or under which the
Distributor will reallow an amount not exceeding the total applicable initial
sales charges on the sales of Class A shares or the Maximum Contingent Deferred
Sales charge of Class B shares generated by the Dealer during such programs to
any Dealer that sponsors sales contests or recognition programs conforming to
criteria established by the Distributor or participates in sales programs
sponsored by the Distributor. The Distributor may provide marketing services to
Dealers with whom it has sales agreements, consisting of written informational
material relating to sales incentive campaigns conducted by such Dealers for
their representatives.
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<PAGE>
PURCHASES OF CLASS A SHARES AT NET ASSET VALUE
SHAREHOLDERS AS OF NOVEMBER 30, 1990
Shareholders of record of any Vista Fund as of November 30, 1990, may
purchase shares of the Fund at Net Asset Value without an initial sales charge
for as long as they continue to own shares of any Vista Fund, provided there is
no change in account registration. However, once a shareholder closes his or her
account by redeeming all shares, he or she will lose this privilege after 30
days. This provision applies to accounts registered in the name of the
shareholder and his or her spouse and children under 21 and for IRAs in their
names.
SHAREHOLDERS WHO ARE ELIGIBLE PERSONS
There is no initial sales charge on Class A Shares purchased by the
following "Eligible Persons:"
a) Active or retired Trustees, Directors, officers, partners
or employees (including their spouses, children, siblings and parents)
of the Adviser, Distributor, Transfer Agency or any affiliates or
subsidiaries thereof.
b) Employees (including their spouses and children under 21)
of Dealers having a selected dealers agreement with the distributor.
c) Any qualified retirement plan or IRA established for the
benefit of a person in (a) or (b).
QUALIFIED AND OTHER RETIREMENT PLANS
No initial sales charge will apply to the purchase of Class A Shares of
the Fund by:
a) An investor seeking to invest the proceeds of a qualified
retirement plan, where a portion of the plan was invested in Vista.
b) Any qualified retirement plan with 250 or more
participants.
c) An individual participant in a tax-qualified plan making a
tax-free rollover or transfer of assets from the plan in which the
adviser of the Fund serves as Trustee or custodian of the plan or
manages some portion of the plan's assets.
PURCHASES THROUGH INVESTMENT ADVISERS, BROKERS OR FINANCIAL PLANNERS
Purchase of Class A shares of the Fund may be made with no initial
sales charge through an investment adviser, broker, or financial planner who
charges a fee for their services. Purchase of Class A Shares of the Fund may be
made with no initial sales charge (i) by an investment adviser, broker or
financial planner, provided arrangements are pre-approved and purchases are
placed through an omnibus account with the Fund or (ii) by clients of such
investment advisor or financial planner who place trades for their own accounts,
if such accounts are linked to a master account of such investment adviser or
financial planner on the books and records of the broker or agent. Such
purchases may be made for retirement and deferred compensation plans and trusts
used to fund those plans, including but not limited to those defined in section
401(a), 403(b) or 457 of the Internal Revenue Code or rabbi trusts.
Investors may incur a fee if they effect transactions through a broker
or agent.
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<PAGE>
PURCHASES THROUGH A BANK AS FIDUCIARY
Purchases of Class A Shares of the Fund may be made with no initial
sales charge in accounts opened by a bank, trust company or thrift institution
which is acting as a fiduciary (i.e., exercises investment authority with
respect to such accounts), provided that appropriate notification of such
fiduciary relationship is reported at the time of the investment to the Fund,
the distributor or the Transfer Agent.
The Fund reserves the right to change any of these policies on
purchases without an initial sales charge at any time and may reject any such
purchase request.
REDUCED INITIAL SALES CHARGES ON CLASS A SHARES
CUMULATIVE QUANTITY DISCOUNT. Class A shares of the Fund may be
purchased by any person at a reduced initial sales charge which is determined by
(a) aggregating the dollar amount of the new purchase and the greater of the
purchaser's total (i) net asset value or (ii) cost of any shares acquired and
still held in the Fund, or any other Vista Fund, including any Vista money
market Fund acquired by exchange for which a sales charge had been incurred and
(b) applying the initial sales charge applicable to such aggregate dollar value.
The privilege of the cumulative quantity discount is subject to modification or
discontinuance at any time with respect to all Class A shares purchased
thereafter.
GROUP PURCHASES. An individual who is a member of a qualified group (as
hereinafter defined) may also purchase Class A shares of the Fund at the reduced
sales charge applicable to the group taken as a whole. The reduced initial sales
charge is based upon the aggregate dollar value of Class A shares previously
purchased and still owned by the group plus the securities currently being
purchased and is determined as stated above under "Cumulative Quantity
Discount." For example, if members of the group had previously invested and
still held $90,000 of Class A shares and now were investing $15,000, the initial
sales charge would be 3.75% on the $15,000 purchase. In order to obtain such
discount, the purchaser or investment dealer must provide the Transfer Agent
with sufficient information, including the purchaser's total cost, at the time
of purchase to permit verification that the purchaser qualifies for a cumulative
quantity discount, and confirmation of the order is subject to such
verification. Information concerning the current initial sales charge applicable
to a group may be obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more
than six months, (ii) has a purpose other than acquiring Class A shares at a
discount and (iii) satisfies uniform criteria which enables the Distributor to
realize economies of scale in its costs of distributing Class A shares. A
qualified group must have more than 10 members, must be available to arrange for
group meetings between representatives of the Fund and the members, must agree
to include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to the Distributor, and must seek to
arrange for payroll deduction or other bulk transmission of investments of the
Fund. This privilege is subject to modification or discontinuance at any time
with respect to all Class A shares purchased thereafter.
STATEMENT OF INTENTION. Investors in Class A shares may also qualify
for reduced initial sales charges by signing a Statement of Intention (the
"Statement"). This enables the investor to aggregate purchases of Class A shares
in the Fund with purchases of Class A shares of any other Vista Fund (or if a
fund has only one class, shares of such fund), including shares of any Vista
money market Fund acquired by exchange from a fund which charged an initial
sales charge, during a 13-month period. The sales charge is based on the total
amount to be invested in Class A shares during the 13-month period. All Class A
or other qualifying shares of these Funds currently owned by the investor will
be credited as purchases (at their current offering prices on the date the
Statement is signed) toward completion of the Statement. A 90-day back-dating
period can be used to include earlier purchases at the investor's cost. The
13-month period would then begin on the date of the first purchase during the
90-day period. No retroactive adjustment will be made if purchases exceed the
amount indicated in the Statement. A shareholder must notify the Transfer Agent
or Distributor whenever a purchase is being made pursuant to a Statement.
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<PAGE>
The Statement is not a binding obligation on the investor to purchase
the full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares
registered in the shareholder's name in order to assure payment of the proper
sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted towards satisfying the Statement.
REINSTATEMENT PRIVILEGE. Class A shareholders have a one time privilege
of reinstating their investment in the Fund, subject to the terms of exchange
(see "Exchange Privilege") at net asset value next determined. A written request
for reinstatement must be received by the Transfer Agent within 30 calendar days
of the redemption, accompanied by payment for the shares (not in excess of the
redemption). This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereafter.
EXCHANGES FOR CLASS A SHARES OF OTHER VISTA FUNDS. Class A shares of
the Fund may be obtained without an initial sales charge through exchanges for
Class A shares of other Vista Funds. See "Exchange Privilege."
INSTITUTIONAL SHARES
The Institutional Shares are continuously offered for sale without a
sales load at the net asset value next determined through Vista Broker-Dealer
Services, Inc. ("VBDS" or the "Distributor") after an order is received and
accepted by a Shareholder Servicing Agent if it is transmitted by the
Distributor prior to 4:00 p.m., Eastern time on any business day during which
the New York Stock Exchange is open for trading ("Fund Business Day"). (See
"Other Information Concerning Shares of the Fund--Net Asset Value"). Orders for
Institutional Shares received and accepted prior to the above designated times
will be entitled to all dividends declared on such day. Institutional Shares of
the Fund are offered exclusively to customers of a Shareholder Servicing Agent
(i.e., a financial institution, such as a federal or state-chartered bank, trust
company or savings and loan association that has entered into a shareholder
servicing agreement with Vista) or to customers of brokers or certain financial
institutions which have entered into Shareholder Servicing Agreements with the
Distributor. An investor may purchase Institutional Shares of the Fund by
authorizing his or her Shareholder Servicing Agent, broker or financial
institution to purchase such shares on his behalf through the Distributor, which
the Shareholder Servicing Agent, broker or financial institution must do
promptly.
The minimum initial purchase is $1,000,000. Shareholders must maintain
a minimum account balance of $1,000,000 in the Institutional Shares at all
times. All share purchases must be paid for by federal funds wire. If federal
funds are not available with respect to any such order by the close of business
on the day the order is received by the Transfer Agent, the order will be
cancelled. Any order received after the times noted above will not be accepted.
Any funds received in connection with late orders will be invested on the next
business day. The Fund may at its discretion reject any order for shares. The
Fund also reserves the right to suspend sales of shares to the public at any
time, in response to the conditions in the securities market or otherwise. Fund
shares will be maintained in book entry form, and no certificates representing
shares owned will be issued to shareholders.
Federal regulations require that each investor provide a certified
Taxpayer Identification Number upon opening an account.
The Fund intends to be as fully invested at all times as is reasonably
practicable in order to enhance the yield on its assets. Accordingly, in order
to make investments which will immediately generate income, the Fund must have
federal funds available to it (i.e., monies credited to the account of the
Fund's custodian bank by a Federal Reserve Bank).
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<PAGE>
REDEMPTIONS
CLASS A SHARES
Shareholders may redeem all or any portion of the shares in their
account at any time at the net asset value next determined after a redemption
request in proper form is furnished by the shareholder to his Shareholder
Servicing Agent or Dealer and transmitted to and received by the Transfer Agent.
Therefore, redemptions will be effected on the same day the redemption order is
received only if such order is received prior to 4:00 p.m., Eastern time on any
Fund Business Day. The proceeds of a redemption normally will be paid on the
next Fund Business Day after a redemption request has been received by the Fund,
but in any event within seven days. The forwarding of proceeds from redemption
of shares which were recently purchased by check may be delayed up to 15 days. A
shareholder may redeem his shares by authorizing his Shareholder Servicing
Agent, Dealer or its agent to redeem such shares, which the Shareholder
Servicing Agent, Dealer or its agent must do on a timely basis. The signature of
both shareholders is required for written redemption requests from a joint
account. In addition, a redemption request may be deferred for up to 15 calendar
days if the Transfer Agent has been notified of a change in either the address
or the bank account registration previously listed in the Fund's records.
The value of shares of the Fund redeemed may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned his shares. Redemptions of shares are taxable events on which
the shareholder may recognize a gain or a loss. Although the Fund generally
retains the right to pay the redemption price of shares in kind with securities
(instead of cash), the Trust has filed an election under Rule 18f-1 under the
Investment Company Act of 1940, as amended (the "1940 Act") committing it to pay
in cash all redemptions by a shareholder of record up to the amounts specified
by the rule (approximately $250,000).
The payment of redemption requests may be wired directly to a
previously designated domestic commercial bank account or mailed to the
shareholder's address of record. For the protection of shareholders, all
telephone redemption requests in excess of $25,000 will be wired directly to
such previously designated bank account. Normally, redemption payments will be
transmitted on the next business day following receipt of the request (provided
it is made prior to 4:00 p.m. Eastern time on any day redemptions may be made).
Redemption payments requested by telephone may not be available in a previously
designated bank account for up to four days. There is a $10.00 charge for each
federal funds wire transaction. If no share certificates have been issued, a
wire redemption may be requested by telephone or wire to the Vista Service
Center. For telephone redemptions, call the Vista Service Center at (800)
34-VISTA.
The right of any shareholder to receive payment with respect to any
redemption may be suspended or the payment of the redemption proceeds postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on such Exchange is restricted or, to the
extent otherwise permitted by the 1940 Act if an emergency exists.
SYSTEMATIC REDEMPTION PLAN--CLASS A SHARES. A shareholder owning
$10,000 or more of the Class A shares of the Fund as determined by the then
current net asset value may provide for the payment monthly or quarterly of at
least $100 from his account. A sufficient number of full and fractional Class A
shares will be redeemed so that the designated payment is received on
approximately the 1st day of the month following the end of the selected payment
period.
For further information as to how to direct a Shareholder Servicing
Agent to redeem shares of the Fund, a shareholder should contact his Shareholder
Servicing Agent.
REDEMPTION OF ACCOUNTS OF LESS THAN $500. The Fund may involuntarily
redeem the shares of any shareholder, if at such time, the aggregate net asset
value of the shares in such shareholder's account is less than $500. In the
event of any such redemption, a shareholder will receive at least 60 days notice
prior to the redemption.
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<PAGE>
INSTITUTIONAL SHARES
An investor may redeem all or any portion of the shares in his account
on any Fund Business Day at the net asset value next determined after a
redemption request in proper form is received by the Fund's Transfer Agent.
Therefore, redemptions will be effected on the same day the redemption order is
received only if such order is received prior to 4:00 p.m., Eastern time on any
Fund Business Day. Shares which are redeemed earn dividends up to an including
the day prior to the day redemption is effected. The proceeds of a redemption
will be paid by wire in federal funds normally on the Fund Business Day the
redemption is effected but in any event within seven days. Payment for
redemption requests received prior to the above-mentioned times is normally made
in federal funds wired to the redeeming shareholder on the same Business Day.
Payment for redeemed shares for which a redemption order is received after the
times stated above on a Business Day is normally made in federal funds wired to
the redeeming shareholder on the next Business Day following redemption. In
order to allow the Sub-Adviser to most effectively manage the Fund's portfolio,
investors are urged to make redemption requests as early in the day as possible.
In making redemption requests, the names of the registered shareholders and
their account numbers must be supplied. While the Fund retains the right to pay
the redemption price of shares in kind with securities (instead of cash), the
Trust has filed an election under Rule 18f-1 under the Investment Company Act of
1940, as amended (the "1940 Act") committing to pay in cash all redemptions by a
shareholder of record up to the amounts specified in the rule (approximately
$250,000).
A wire redemption may be requested by telephone or wire to the Vista
Service Center. For telephone redemptions, call the Vista Service Center at
(900) 622-4273.
The right of any shareholder to receive payment with respect to any
redemption may be suspended or the payment of the redemption proceeds postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on such Exchange is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exits.
EXCHANGE PRIVILEGE
Shareholders may exchange, at respective net asset value, Class A
shares of the Fund for Class A shares of the other Vista Funds, in accordance
with the terms of the then current prospectus of the Fund being acquired. No
initial sales charge is imposed on the Class A shares being acquired. The
prospectus of the other Vista Fund into which shares are being exchanged should
be read carefully prior to any exchange and retained for future reference. Under
the Exchange Privilege, Class A shares of the Fund also may be exchanged for
shares of such other Vista Funds only if those Funds and their shares are
registered in the states where the exchange may legally be made. Shares of the
Fund may only be exchanged into the same class of another Vista Fund and only if
the account registrations are identical.
With respect to exchanges from any Vista money market Fund,
shareholders must have acquired their shares in such money market Fund by
exchange from one of the other Funds in the Trust, or any exchange directly from
one of such Vista money market Funds will be done at relative net asset value
plus the appropriate sales charge.
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 through
an exchange transaction are purchased on the redemption date, but such purchase
may be delayed by either Fund up to five business days if the Fund determines
that it would be disadvantaged by an immediate transfer of the proceeds. This
privilege may be amended or terminated at any time without notice. Arrangements
have been made for the acceptance of instructions by telephone to exchange
shares if certain preauthorizations or indemnifications are accepted and on
file. Further information and telephone exchange forms are available from the
Transfer Agent.
Institutional shares do not have an exchange privilege.
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<PAGE>
MARKET TIMING. The exchange privilege described in each Prospectus 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 other
circumstances where the Trustees, or Adviser or Sub-Adviser believes doing so
would be in the best interest of the Fund, the 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 $5.00 administration fee per each such exchange.
GENERAL
REORGANIZATION WITH PREDECESSOR FUND. The Fund has been established to receive
all the assets of The Hanover U.S. Government Securities Fund series of The
Hanover Investment Funds, Inc. (the "Predecessor Fund"). Subject to approval by
the shareholders of the Predecessor Fund, the Predecessor Fund will transfer all
its assets and liabilities to the Fund in exchange for Institutional Shares of
the Fund, which will be distributed pro rata to shareholders of the Predecessor
Fund, who will then become shareholders of the Fund (the "Reorganization"). The
Predecessor Fund will cease operations after the Reorganization. The Fund will
have no assets and will not begin operations until the Reorganization occurs.
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 Fund's Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in this Prospectus 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. To provide evidence of
telephone instructions, the Transfer Agent will record telephone conversations
with shareholders. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. In the event the Fund does
not employ such reasonable procedures, it may be liable for losses due to
unauthorized or fraudulent instructions.
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, the 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 the 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 the Fund in writing. Shareholders agree to release and hold
harmless the Fund, the Adviser, the Administrator, any Shareholder Servicing
Agent or sub-agent and broker-dealer, and the officers, directors, employees and
agents thereof against any claim, liability, loss, damage and expense for any
act or failure to act in connection with Fund shares, any related investment
account, any privileges or services selected in connection with such investment
account, or any written or oral instructions or requests with respect thereto,
or any written or oral instructions or requests from someone claiming to be a
shareholder if the Fund or any of the above-described parties follow
instructions which they reasonably believe to be genuine and act in good faith
by complying with the procedures that have been established for Fund accounts
and services.
Shareholders purchasing their shares through a Shareholder Servicing
Agent may not assign, transfer or pledge any rights or interest in any Fund
shares or any investment account established with a Shareholder Servicing Agent
to any other person without the prior written consent of such Shareholder
Servicing Agent, and any attempted assignment, transfer or pledge without such
consent may be disregarded.
The 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 the bank account specified in the Bank Account
Registration, or for any written requests for additional account services made
after a shareholder has
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<PAGE>
submitted an initial account application to the Fund. The Fund may also refuse
to accept or carry out any transaction that does not satisfy any restrictions
then in effect.
TAX MATTERS
The following discussion is addressed primarily to noncorporate
investors and is for general information only. A prospective investor, including
a corporate investor, should also review the more detailed discussion of federal
income tax considerations relevant to the Fund that is contained in the
Statement of Additional Information. In addition, each prospective investor
should consult with his own tax advisers as to the tax consequences of an
investment in the Fund, including the status of distributions from the Fund in
his own state and locality and the possible applicability of a federal
alternative minimum tax to a portion of the distributions of the Fund.
The Fund intends to qualify each year and elect to be treated as a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If the Fund is treated as a
"regulated investment company" and all of its taxable income, if any, is
distributed to its shareholders in accordance with the timing requirements
imposed by the Code, it will not be subject to federal income tax on the amounts
so distributed. If for any taxable year the Fund does not qualify for the
treatment as a regulated investment company, all of its taxable income will be
subject to tax at regular corporate rates without any deduction for
distributions to its shareholders, and such distributions will be taxable to
shareholders to the extent of the Fund's current and accumulated earnings and
profits.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the Commonwealth
of Massachusetts as long as the Fund (and each other series of the Trust)
qualifies as a regulated investment company under the Code.
Distributions by the Fund of its tax-exempt interest income (net of
expenses) are designated as "exemptinterest dividends" which are excluded from
gross income for regular federal income tax purposes. In accordance with the
investment objectives of the Fund, it is expected that most or all of the net
investment income of the Fund will be attributable to interest from Municipal
Obligations, although from time to time a portion of the portfolio of the Fund
may be invested in short-term taxable obligations since the preservation of
capital and the maintenance of liquidity are important aspects of the Fund's
investment objective. As a result, most or all of the dividends paid out of the
Fund's net investment income will be designated "exempt-interest dividends". The
percentage of such dividends so designated will be applied uniformly to all such
dividends from the Fund made during each fiscal year and may differ from the
actual percentage for any particular month.
Although excluded from gross income for regular federal income tax
purposes, exempt-interest dividends, together with other tax-exempt interest,
are required to be reported on shareholders' federal income tax returns, and are
taken into account in determining the portion, if any, of Social Security
benefits which must be included in gross income for federal income tax purposes.
In addition, exempt-interest dividends paid out of interest on certain Municipal
Obligations that may be purchased by the Fund will be treated as a tax
preference item for both individual and corporate shareholders potentially
subject to an alternative minimum tax ("AMT"), and all exempt-interest dividends
will be included in computing a corporate shareholder's adjusted current
earnings, upon which is based a separate corporate preference item which may be
subject to AMT and to the environmental superfund tax. Interest on indebtedness
incurred, or continued, to purchase or carry shares of the Fund is not
deductible. Further, entities or persons who may be "substantial users" (or
persons related to "substantial users") of facilities financed by certain types
of Municipal Obligations should consult with their own tax advisers before
purchasing shares of the Fund.
Distributions by the Fund of any taxable ordinary income (net of
expenses) and the excess, if any, of its net short-term capital gain over its
net long-term capital loss are generally taxable to shareholders as ordinary
income. Such distributions are treated as dividends for federal income tax
purposes, but do not qualify for the dividends-received deduction for
corporations. Distributions by the Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss are designated as
capital gain dividends and are taxable to shareholders as long-term capital
gains, regardless of the length of time a shareholder has held his shares.
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<PAGE>
Investors should be careful to consider the tax implications of
purchasing shares just prior to the next dividend date of any ordinary income
dividend or capital gain dividend. Those investors purchasing shares just prior
to an ordinary income dividend or capital gain dividend will be taxed on the
entire amount of the dividend received, even though the net asset value per
share on the date of such purchase reflected the amount of such dividend.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Fund. In general, distributions by the Fund are taken into account
by shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Fund and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
(or deemed made) during the fiscal year, including any portions which constitute
ordinary income dividends, capital gain dividends and exemptinterest dividends,
will be sent to the Fund's shareholders promptly after the end of each year.
Any loss realized upon a taxable disposition of shares within six
months from the date of their purchase will be disallowed to the extent of any
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 any
capital gain dividends received on such shares. All or a portion of any loss
realized upon a taxable disposition of shares of the Fund may be disallowed if
other shares of the Fund are purchased within 30 days before or after such
disposition.
Under the backup withholding rules of the Code, certain shareholders
may be subject to 31% withholding of federal income tax on distributions and
redemption payments made by the Fund. Generally, shareholders are subject to
backup withholding if they have not provided the Fund with a correct taxpayer
identification number and certain required certifications.
The exclusion from gross income for federal income tax purposes of
exempt-interest dividends does not necessarily result in an exclusion under the
income or other tax laws of any state or local taxing authority. Shareholders of
the Fund may be exempt from state and local taxes on exempt-interest dividends
paid out of interest on Municipal Obligations of the state and/or municipalities
of the state in which they reside but may be subject to state and local tax on
exempt-interest dividends paid out of interest on Municipal Obligations of other
jurisdictions.
No gain or loss will be recognized by a shareholder as a result of a
conversion from Class B shares to Class A shares.
STATE AND LOCAL INCOME TAXES
Some states provide that a regulated investment company 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 the 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
regulated investment company 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 regulated investment company holds at lest a
required amount of U.S. Government securities. Accordingly, for residents of
these states, distributions derived from the 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 the
Fund's income from repurchase agreements generally are subject to state and
local income taxes. 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 the Fund invests to a substantial degree in U.S.
Government securities which are subject to favorable state and local tax
treatment, shareholders of the Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
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<PAGE>
OTHER INFORMATION CONCERNING SHARES OF THE FUND
NET ASSET VALUE
The net asset value of a class of shares of the Fund 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), on each Fund Business
Day, by dividing the net assets attributable to that class by the number of its
shares outstanding. Values of assets in the Fund's portfolio are determined on
the basis of their market or other fair value, as described in the Statement of
Additional Information. A share's net asset value is effective for orders
received by a Shareholder Servicing Agent prior to its calculation and received
by the Distributor prior to the close of business, usually 4:00 p.m. Eastern
time, on the Fund Business Day on which such net asset value is determined.
The per share net asset value of Class A shares of the Fund will
generally be lower than that of the Institutional Class shares because of the
higher expenses borne by the Class A shares. The net asset values per share of
Class A and Institutional Class differ due to differing allocations of
class-specific expenses.
NET INCOME, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Income dividends are declared daily and paid monthly. The Fund's net
investment income is calculated by adding the value of all the Fund's
investments, plus cash and other assets, deducting Fund liabilities and then
dividing the result by the number of shares outstanding. Certain expenses are
applied on a per-class basis only and are deducted accordingly. The Fund will
distribute its net realized short-term and long-term capital gains, if any, to
its shareholders at least annually. In general, dividends on Class A shares are
expected to be lower than those on Institutional Class shares due to the higher
distribution expenses, and certain other expenses borne by the Class A shares.
The Fund intends to make additional distributions to the extent
necessary to avoid application of the 4% nondeductible excise tax on certain
undistributed income and net capital gains of mutual funds imposed by Section
4982 of the Code.
Subject to the policies of the shareholder's Shareholder Servicing
Agent, a shareholder may elect to receive dividends and capital gains
distributions from the Fund in either cash or additional shares.
DISTRIBUTION PLANS AND DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trustees have adopted a Distribution Plan (the "Distribution Plan")
for the Class A shares in accordance with Rule 12b-1 under the 1940 Act, after
having concluded that there is a reasonable likelihood that the Distribution
Plan will benefit that class and its shareholders. The Institutional Shares do
not have a Distribution Plan.
The Class A Distribution Plan provides that the Fund shall pay
distribution fees including payments to the Distributor, at an annual rate not
to exceed 0.25% of its average daily net assets for distribution services. Some
payments under the Distribution Plan may be used to compensate broker-dealers
with trail or maintenance commissions in amounts not to exceed 0.25% annualized
of the asset value of Class A shares, maintained in the Fund by such
broker-dealers' customers. Since the distribution fees are not directly tied to
expenses, the amount of distribution fees paid by the 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 compensation is directly linked to its expenses).
Class A shares are entitled to exclusive voting rights with respect to
matters concerning its Distribution Plan.
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<PAGE>
The Distribution and Sub-Administration Agreement dated April 15, 1994
(the "Distribution Agreement"), provides that the Distributor will act as the
principal underwriter of the Fund's shares and bear the expenses of printing,
distributing and filing prospectuses and statements of additional information
and reports used for sales purposes, and of preparing and printing sales
literature and advertisements not paid for by the Distribution Plans. In
addition, the Distributor will provide certain sub-administration services,
including providing officers, clerical staff and office space. The Distributor
currently receives a fee for sub-administration from the Fund at an annual rate
equal to 0.05% of the Fund's average daily net assets, on an annualized basis
for the Fund's then-current fiscal year. Other funds which have investment
objectives similar to those of the Fund, but which do not pay some or all of
such fees from their assets, may offer a higher return, although investors
would, in some cases, be required to pay a sales charge or a redemption fee.
The Distributor has agreed to use a portion of its distribution and
sub-administration fee to pay for certain expenses of the Fund incurred in
connection with organizing new series of the Trust and certain other ongoing
expenses of the Trust. The Distributor may, from time to time, waive all or a
portion of the fees payable to it under the Distribution Agreement.
EXPENSES
The Fund intends to pay all of its pro rata share of the Trust's
expenses, including the compensation of the Trustees; all fees under the
Distribution Plan; governmental fees; interest charges; taxes; membership dues
in the Investment Company Institute; fees and expenses of independent
accountants, of legal counsel and of any transfer agent or dividend disbursing
agent; expenses of redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, reports, notices, proxy
statements and reports to shareholders and to governmental officers and
commissions; expenses connected with the execution, recording and settlement of
portfolio security transactions; insurance premiums; fees and expenses of the
Fund's custodian including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating its net asset value;
expenses of shareholder meetings; and the advisory fees payable to the Adviser
under the Investment Advisory Agreement, the administration fee payable to the
Administrator under the Administration Agreement and the subadministration fee
payable to the Distributor under the Distribution and Sub-Administration
Agreement. Expenses relating to the issuance, registration and qualification of
shares of the Fund and the preparation, printing and mailing of prospectuses for
such purposes are borne by the Fund except that the Distribution and
Sub-Administration Agreement with the Distributor requires the Distributor to
pay for prospectuses which are to be used for sales to prospective investors.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Group is an open-end, management investment company
organized as a Massachusetts business trust under the laws of the Commonwealth
of Massachusetts in 1987. The Trust has reserved the right to create and issue
additional series and classes. Each share of a series or class including Class A
and Institutional Class, represents an equal proportionate interest in that
series or class with each other share of that series or class. The shares of
each series or class participate equally in the earnings, dividends and assets
of the particular series or class. Shares have no pre-emptive or conversion
rights. Shares when issued are fully paid and non-assessable, except as set
forth below. Shareholders are entitled to one vote for each whole share held,
and each fractional share shall be entitled to a proportionate fractional vote,
except that Trust shares held in the treasury of the Trust shall not be voted.
Shares of Class A and Institutional Class generally vote separately, for example
to approve distribution plans, but shares of all series or classes vote
together, to the extent required under the 1940 Act, in the election or
selection of Trustees and independent accountants.
The categories of investors that are eligible to purchase shares may be
different for each class of the Fund's shares. In addition, classes of the
Fund's shares are subject to differences in sales charge arrangements, ongoing
distribution and service fee levels, and levels of certain other expenses, which
may affect the relative performance of the different classes of shares.
Investors may call the Vista Service Center at 1-800-34-VISTA to obtain
additional information about the classes of shares of the Fund that are offered.
Any person entitled to receive
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<PAGE>
compensation for selling or servicing shares of the Fund may receive different
levels of compensation with respect to one class of shares over another.
The Trust is not required to hold annual meetings of shareholders but
will hold special meetings of shareholders of Class A or Institutional Class or
of all series or classes when in the judgment of the Trustees it is necessary or
desirable to submit matters for a shareholder vote. A Trustee of the Trust may,
in accordance with certain rules of the Securities and Exchange Commission, be
removed from office when the holders of record of not less than two-thirds of
the outstanding shares either present a written declaration to the Funds'
Custodian or vote in person or by proxy at a meeting called for this purpose. In
addition, 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. Finally, the Trustees shall, in
certain circumstances, give such shareholders access to a list of the names and
addresses of all other shareholders or inform them of the number of shareholders
and the cost of mailing their request. The Trust's Declaration of Trust provides
that, at any meeting of shareholders, a Shareholder Servicing Agent may vote any
shares as to which such Shareholder Servicing Agent is the agent of record and
which are otherwise not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares of
the same portfolio otherwise represented at the meeting in person or by proxy as
to which such Shareholder Servicing Agent is the agent of record. Any shares so
voted by a Shareholder Servicing Agent will be deemed represented at the meeting
for purposes of quorum requirements. Shareholders of each series or class,
including Class A and Class B, would be entitled to share pro rata in the net
assets of that series or class available for distribution to shareholders upon
liquidation of the Fund or that series or class.
The Trust reserves the right to create and issue a number of series of
shares, in which case the shares of each series would participate equally in the
earnings, dividends and assets of the particular series (except for differences
among any classes of shares of any series).
The Trust is an entity of the type commonly known as a "Massachusetts
business 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.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
SHAREHOLDER SERVICING AGENTS
The shareholder servicing agreement with each Shareholder Servicing
Agent provides that such Shareholder Servicing Agent will, as agent for its
customers, perform various services, including but not limited to the following:
answer customer inquiries regarding account status and history, the manner in
which purchases and redemptions of shares may be effected for the Fund as to
which the Shareholder Servicing Agent is so acting and certain other matters
pertaining to the Fund; assist shareholders in designating and changing dividend
options, account designations and addresses; provide necessary personnel and
facilities to establish and maintain shareholder accounts and records; assist in
processing purchase and redemption transactions; arrange for the wiring of
funds; transmit and receive funds in connection with customer orders to purchase
or redeem shares; verify and guarantee shareholder signatures in connection with
redemption orders and transfers and changes in shareholder-designated accounts;
furnish (either separately or on an integrated basis with other reports sent to
a shareholder by a Shareholder Servicing Agent) monthly and year-end statements
and confirmations of purchases and redemptions; transmit, on behalf of the Fund,
proxy statements, annual reports, updated prospectuses and other communications
to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and provide such other related services as the Fund or a shareholder may
request. Shareholder Servicing Agents may be required to register pursuant to
state securities law.
For performing these services, each Shareholder Servicing Agent
receives certain fees, which may be paid periodically, determined by a formula
based upon the number of accounts serviced by such Shareholder Servicing
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<PAGE>
Agent during the period for which payment is being made, the level of activity
in accounts serviced by such Shareholder Servicing Agent during such period, and
the expenses incurred by such Shareholder Servicing Agent. The fees relating to
acting as liaison to shareholders and providing personal services to
shareholders will not exceed, on an annual basis, 0.25% of the average daily net
assets of each class of the Fund represented by shares owned during the period
for which payment is being made by investors for whom such Shareholder Servicing
Agent maintains a servicing relationship. Each Shareholder Servicing Agent may,
from time to time, voluntarily waive all or a portion of the fees payable to it.
In addition, Chase may provide other related services to the Fund for which it
may receive compensation.
The Shareholder Servicing Agent, and its affiliates, agents and
representatives acting as Shareholder Servicing Agents, may establish custodial
investment accounts ("Accounts"), known as Chase Investment Accounts or by any
other name designated by a Shareholder Servicing Agent. Through such Accounts,
customers can purchase, exchange and redeem Class A or Institutional Class
shares, receive dividends and distributions on Fund investments, and take
advantage of any services related to an Account offered by such Shareholder
Servicing Agent from time to time. All Accounts and any related privileges or
services shall be governed by the laws of the State of New York, without regard
to its conflicts of laws provisions.
The Glass-Steagall Act and other applicable laws generally prohibit
federally chartered or supervised banks from publicly underwriting or
distributing certain securities, such as the Fund's shares. The Trust, on behalf
of the Fund, will engage banks, including the Adviser Administrator, as
Shareholder Servicing Agents, only to perform advisory, custodial,
administrative and shareholder servicing functions as described above. While the
matter is not free from doubt, Trust management believes that such laws should
not preclude a bank, including a bank which acts as investment adviser,
custodian or administrator, or in all such capacities, for the Fund, from acting
as a Shareholder Servicing Agent. However, possible future changes in federal
law or administrative or judicial interpretations of current or future law,
could prevent a bank from continuing to perform all or part of its servicing
activities. If that occurred, the bank's shareholder clients would be permitted
to remain Fund shareholders and alternative means for continuing the servicing
of such shareholders would be sought. In such event, changes in the operation of
the Fund might occur and a shareholder serviced by such bank might no longer be
able to avail himself of any automatic investment or other services then being
provided by such bank. The Fund does not expect that shareholders would suffer
any adverse financial consequences as a result of these occurrences.
TRANSFER AGENT AND CUSTODIAN
DST Systems, Inc. ("DST") acts as transfer agent and dividend
disbursing agent (the "Transfer Agent") for the Fund. In this capacity, DST
maintains the account records of all shareholders in the Funds, including
statement preparation and mailing. DST is also responsible for disbursing
dividend and capital gain distributions to shareholders, whether taken in cash
or additional shares. From time to time, DST and/or the Fund may contract with
other entities to perform certain services for the Transfer Agent. For its
services as Transfer Agent, DST receives such compensation as is from time to
time agreed upon by the Trust and DST. DST's address is 127 W.
10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of the Fund for which Chase receives compensation as is from time to time
agreed upon by the Trust and Chase. The Custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Fund's investments, maintaining books of original entry for portfolio and
Fund accounting and other required books and accounts, and calculating the daily
net asset value of shares of the Fund. Portfolio securities and cash may be held
by sub-custodian banks if such arrangements are reviewed and approved by the
Trustees. The internal division of Chase which serves as the Fund's Custodian
does not determine the investment policies of the Fund or decide which
securities will be bought or sold on behalf of the Fund or otherwise have access
to or share material inside information with the internal division that performs
advisory services for the Fund.
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<PAGE>
TAX-SHELTERED RETIREMENT PLANS
Shares of the Fund are offered in connection with the following
qualified prototype retirement plans: IRA, Rollover IRA, SEP-IRA,
Profit-Sharing, and Money Purchase Pension Plans which can be adopted by
self-employed persons ("Keogh") and by corporations, 401(k) and 403(b)
Retirement Plans. Call or write the Transfer Agent for more information.
YIELD AND PERFORMANCE INFORMATION
From time to time, the 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
historical earnings, it should not be considered as an indication or
representation of the performance of any classes of the Fund in the future. From
time to time, the performance and yield of the classes of the 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 the 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 the Fund or its classes. Additionally, the Fund may, with proper
authorization, reprint articles written about the Fund and provide them to
prospective shareholders.
The 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
the 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. For
Class A shares, the average annual total rate of return will assume payment of
the maximum initial sales load at the time of purchase. For Class B shares, the
average annual total rate of return figures will assume deduction of the
applicable contingent deferred sales charge imposed on a total redemption of
shares held for the period. One-, five- and ten-year periods will be shown,
unless the class has been in existence for a shorter period.
The Fund may provide "yield" quotations in addition to total rate of
return quotations. The "yield" quotations of the Fund will be based upon a
hypothetical net investment income earned by the Fund over a thirty day or one
month period (which period shall be stated in any advertisement or communication
with a shareholder). The "yield" is then "annualized" by assuming that the
income generated over the period will be generated over a one year period. A
"yield" quotation, unlike a total rate of return quotation, does not reflect
changes in investment value.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the yields and the net asset values of classes of
shares of the Fund will vary based on interest rates, the current market value
of the securities held in the Fund's portfolio and changes in the Fund's
expenses. The Adviser, the Shareholder Servicing Agent, the Administrator or the
Distributor have all voluntarily agreed to waive a portion of their fees on a
month-to-month basis. In addition, the Distributor may assume a portion of the
Fund's operating expenses on a month-to-month basis. These actions have the
effect of increasing the net income (and therefore the yield and total rate of
return) of the Fund during the period such waivers are in effect. These factors
and possible differences in the methods used to calculate the yield and total
rate of return should be considered when comparing the yields or total rates of
return of the classes of shares of the Fund to yields and total rates of return
published for other investment companies and other investment vehicles
(including different classes of shares). The Fund is
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<PAGE>
advised that certain Shareholder Servicing Agents may credit to the accounts of
their customers from whom they are already receiving other fees amounts not
exceeding the Shareholder Servicing Agent fees received (see "Purchases and
Redemptions of Shares -- Purchases"), which will have the effect of increasing
the net return on the investment of customers of those Shareholder Servicing
Agents. Such customers may be able to obtain through their Shareholder Servicing
Agents quotations reflecting such increased return. See the Statement of
Additional Information for further information concerning the calculation of the
yields or total rates of return quotations for classes of shares of the Fund.
The Fund is the successor to the Hanover U.S. Government Securities
Fund. The Fund may also quote historical performance of the Hanover U.S.
Government Securities Fund.
OTHER INFORMATION
The net asset value of shares of the Fund changes as the general levels
of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested at lower yields can be
expected to decline. Although changes in the value of the portfolio securities
of the Fund subsequent to their acquisition are reflected in their net asset
values, such changes will not affect the income received by them from such
securities. Debt securities with longer maturities such as those intended for
investment by the Fund generally tend to produce higher yields and are subject
to greater market fluctuation as a result of changes in interest rates than debt
securities with shorter maturities. Since available yields vary over time, no
specific level of income can ever be assured. The dividends paid on shares of
the Fund will increase or decrease in relation to the income received by the
Fund from its investments, which will in any case be reduced by the Fund's
expenses before being distributed to its shareholders.
The Code of Ethics of the Trust prohibits all affiliated personnel from
engaging in personal investment activities which compete with or attempt to take
advantage of the Fund's planned portfolio transactions. The objective of the
Code of Ethics is to ensure that the operations of the Fund be carried out for
the exclusive benefit of the Fund's shareholders. The Trust maintains careful
monitoring of Compliance with the Code of Ethics. See "General Information" in
the Fund's Statement of Additional Information.
The Statement of Additional Information contains more detailed
information about the Trust and the Fund, including information related to (i)
the Fund's investment policies and restrictions, (ii) risk factors associated
with Fund's policies and investments, (iii) the Trust's Trustees, officers and
the Administrator and the Adviser, (iv) portfolio transactions, (v) the Funds'
shares, including rights and liabilities of shareholders, and (vi) additional
performance information, including the method used to calculate yield or total
rate of return quotations of the Fund. The audited financial statements for the
Fund for its last fiscal year end are incorporated by reference in the Statement
of Additional Information.
- 31 -
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 8, 1996
VISTA^(SM) AMERICAN VALUE FUND
125 WEST 55TH STREET, NEW YORK, NEW YORK 10019
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Prospectus
offering the Fund. This Statement of Additional Information should be read in
conjunction with the Prospectus offering shares of Vista American Value Fund
(the "Fund"), dated February 8, 1996. A copy of the Prospectus may be obtained
by an investor without charge by contacting Vista Broker-Dealer Services, Inc.,
the Fund's distributor, at the above-listed address or by calling the Vista
Service Center at the toll-free number listed below.
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.
For more information about the Fund or your account, simply call the Vista
Service Center at our toll-free number:
1-800-34-VISTA
Vista Service Center
P.O. Box 419392
Kansas City, MO 64141
VAM-SAI
<PAGE>
Table of Contents Page
- ----------------- ----
The Fund.................................................. 3
Investment Objective, Policies and Restrictions........... 3
Additional Investment Activities.......................... 4
Limiting Investment Risks................................. 9
Performance Information................................... 12
Determination of Net Asset Value.......................... 13
Tax Matters............................................... 14
Management of the Fund.................................... 20
Independent Accountants................................... 28
General Information....................................... 29
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THE FUND
Mutual Fund Group (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 May 11, 1987. The Trust presently consists of 17 separate
series (a "Fund" or 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 Fund has been established to receive all the assets of The Hanover American
Value Fund series of The Hanover Investment Funds, Inc. (the "Predecessor
Fund"). Subject to approval by the shareholders of the Predecessor Fund, the
Predecessor Fund will transfer all its assets and liabilities to the Fund in
exchange for shares of the Fund, which will be distributed pro rata to
shareholders of the Predecessor Fund, who will then become shareholders of the
Fund (the "Reorganization"). The Predecessor Fund will cease operations after
the Reorganization. The Fund will have no assets and will not begin operations
until the Reorganization occurs.
The Funds' Shares are continuously offered for sale through Vista Broker-Dealer
Services, Inc. ("VBDS"), the Fund's distributor (the "Distributor"), which is
not affiliated with Chase Manhattan Bank, N.A. or its affiliates, to investors
who are customers of a financial institution, such as a federal or
state-chartered bank, trust company, or savings and loan association that has
entered into a shareholder servicing agreement with the Trust on behalf of the
Fund (collectively, "Shareholder Servicing Agents") or customers of a securities
broker or certain financial institutions who have entered into Selected Dealer
Agreements with the Distributor. VBDS receives a distribution fee from the Fund,
pursuant to the plan of distribution adopted pursuant to Rule 12b-1 of the 1940
Act.
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust including the Fund. The Chase Manhattan Bank, N.A. ("Chase") is the
investment adviser (the "Adviser") for the Fund. Van Deventer & Hoch (VD&H) is
the investment Sub-Adviser (the "Sub-Adviser") for the Fund. Chase also serves
as the Trust's administrator (the "Administrator") and supervises the overall
administration of the Trust, including the Fund. The Sub-Adviser continuously
manages the investments of the Fund in accordance with the investment objective
and policies of the Fund. The selection of investments for the Fund and the way
in which the Fund is managed depend on the conditions and trends in the economy
and the financial marketplaces. Occasionally, communications to shareholders may
contain the views of the investment adviser 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 the Fund. A majority of the Trustees of the Trust are not
affiliated with the Sub-Adviser.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
VISTA AMERICAN VALUE FUND'S (the "Fund") investment objective is to maximize
total return, consisting of capital appreciation (both realized and unrealized)
and income. The Fund seeks to achieve its objective by investing primarily in
the equity securities of well-established U. S. companies (i.e., companies with
at least a five-year operating history) which, in the opinion of the Fund's
Sub-Adviser, are considered to be undervalued by the market. The equity
securities in which the Fund invests generally include common stock, preferred
stock and securities convertible into or exchangeable for common or preferred
stock.
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<PAGE>
INVESTMENT POLICIES
The Prospectus sets forth the various investment policies applicable to the
Fund. The following information supplements and should be read in conjunction
with the sections of the Prospectus entitled "Investment Objective and Policies"
and "Additional Information on Investment Policies and Techniques." Except for
the matters specified under "Limiting Investment Risks" in the Prospectus and in
this Statement of Additional Information, and as otherwise stated in the
Prospectus, all matters described herein and in the Prospectus are not
fundamental and may be changed by the Board of Trustees of the Trust without the
approval of shareholders. See "General Information."
ADDITIONAL INVESTMENT ACTIVITIES
The discussion below supplements the information set forth in the Prospectuses
under "Other Investment Activities."
BANK OBLIGATIONS
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 the Fund cannot realize the proceeds thereon within seven days
are deemed "illiquid" for the purposes of the third investment limitation set
forth under "Limiting Investment Risks" in the Prospectus. 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 investment
risks in addition to those relating to domestic bank obligations. Such
investment risks are discussed in the Prospectus under the caption "Special
Considerations and Risk Factors."
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase American Depositary Receipts ("ADRs"). The Fund will limit
its investment in "unsponsored" ADRs to no more than 5% of the value of its net
assets (at the time of investment). A purchaser of an unsponsored ADR may not
have unlimited voting rights and may not receive as much information about the
issuer of the underlying securities as with a sponsored ADR.
CORPORATE REORGANIZATIONS
The Fund may invest in securities for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or similar reorganization proposal has been announced
("reorganization securities"). Frequently the holders of securities of companies
involved in such transactions will receive new securities in exchange therefor.
The principal risk of this type of investing is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of investment,
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<PAGE>
in which case, unless such offers or proposals are replaced by equivalent or
increased offers or proposals which are consummated, the Fund may sustain a
loss.
In general, securities that are the subject of such an 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 Fund's SubAdviser
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 the Fund and increase its brokerage
and other transaction expenses.
WARRANTS AND RIGHTS
The Fund may invest in warrants and rights. Warrants basically are options to
purchase equity securities at a specified price valid for a specific period of
time. Their prices do not necessarily move parallel to the prices of the
underlying securities. Rights are similar to but normally have a short duration
and are distributed directly by the issuer to its shareholders. Rights and
warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
RULE 144A SECURITIES AND SECTION 4(2) PAPER
As indicated in the Prospectus, the Fund may purchase certain restricted
securities ("Rule 144A securities") for which there may be a secondary market of
qualified institutional buyers, as contemplated by Rule 144A under the
Securities Act of 1933 (the "Securities Act") and may invest in 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 the 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 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 Board
of Trustees of the Trust has 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 Fund's limitation
on investment in illiquid securities. Pursuant to those policies and procedures,
the Board of Trustees will delegate to the Sub-Adviser 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 Board of Trustees will periodically review the Fund's purchases
and sales of Rule 144A securities and Section 4(2) paper.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
Although the Fund has no current intention to do so, as explained more fully
below, the Fund is authorized to 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
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<PAGE>
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. Third, 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 the Fund.
The Fund may invest its assets in derivative and related instruments subject
only to the Fund's investment objective and policies and the requirement that
the Fund maintain segregated accounts consisting of liquid assets, such as cash,
U. S. government securities, or other high-grade debt obligations (or, as
permitted by applicable regulation, enter into certain offsetting positions) to
cover its obligations under such instruments with respect to positions where
there is no underlying portfolio asset so as to avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Fund is
authorized to invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and--like other investments of the
Fund-the ability of the Fund to successfully utilize these instruments may
depend in part upon the ability of the SubAdviser to forecast interest rates and
other economic factors correctly. If the Sub-Adviser incorrectly forecasts such
factors and has taken positions in derivative or similar instruments contrary to
prevailing market trends, the Fund could be exposed to the risk of a loss. THE
FUND 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 Fund may employ along with risks or special attributes
associated with them. This discussion is intended to supplement the Fund's
current prospectuses as well as provide useful information to prospective
investors.
DERIVATIVE AND RELATED INSTRUMENTS
To the extent permitted by the investment objective and policies of the Fund,
and as described more fully below, the Fund may purchase, write and exercise
call and put options on securities, securities indexes (including using options
in combination with securities, other options and derivative instruments); enter
into futures contracts and options on futures contracts; purchase and sell
mortgage-backed and asset-backed securities; and purchase and sell structured
products.
RISK FACTORS
As explained more fully below and in the discussion 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 the 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 "crosshedges" between currencies. The
Sub-Adviser may incorrectly forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the opportunity
for gain. In other words, hedging usually limits both potential losses as well
as potential gains. Strategies not involving hedging may increase the risk to
the Fund. Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Fund than hedging strategies
using the same instruments. There can be no assurance that a liquid market will
exist at a time when the 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
6
<PAGE>
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 the 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, foreign exchanges or foreign
boards of trade, 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, the 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 in which the Fund is authorized to engage.
OPTIONS ON SECURITIES, SECURITIES INDEXES, CURRENCIES AND DEBT INSTRUMENTS. The
Fund may PURCHASE, SELL or EXERCISE call and put options on (i) securities; (ii)
securities indexes (iii) currencies; or (iv) debt instruments.
Although in most cases these options will be exchange-traded, the Fund 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. The Fund may also use combinations of options
to minimize costs, gain exposure to markets or take advantage of price
disparities or market movements. For example, the 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. The Fund
may write a call or put option in order to earn the related premium from such
transactions. Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and writing of
options involve certain special risks. During the option period, a fund writing
a covered call (i.e., where the underlying securities are held by the fund) has,
in return for the premium on the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, but has
retained the risk of loss should the price of the underlying securities decline.
The writer of an option has no control over the time when it may be required to
fulfill its obligation as a writer of the option. Once an option writer has
received an exercise notice, it cannot effect a closing purchase transaction in
order to terminate its obligation under the option and must deliver the
underlying securities at the exercise price.
If a put or call option purchased by the 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, the 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
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Fund may be
unable to close out a position.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund is also authorized
to purchase or sell (i) interest-rate futures contracts; (ii) stock index
futures contracts; (iii) foreign currency futures contracts; (iv) futures
contracts on specified instruments; and (v) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various securities in
which the Fund 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) and other
financial instruments and indices.
These instruments may be used to hedge portfolio positions and transactions as
well as to gain exposure to markets. For example, the 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 the Fund intends to acquire an instrument or enter into a position.
For example, the 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 Fund 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 of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Fund 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 Fund will only
enter into futures contracts or options or futures contracts which are
standardized and traded on a U. S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. The Fund is authorized to 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. The Fund may invest in
securities denominated in foreign currencies may, in 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
involved 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, the 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, the Fund reduces its exposure to changes in the
value of the currency it will delivery and increases its exposure to changes in
the value of the currency it will exchange into. The effect on the value of the
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 "crosshedges."
The 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. The 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.
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<PAGE>
The 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.
LIMITING INVESTMENT RISKS
The Fund has adopted the following investment restrictions which may not be
changed without approval by a "majority of the outstanding shares" of the Fund
or which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of the Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
The Fund may not:
(1) borrow money, except that the 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 total assets
must be repaid before the Fund may make additional investments;
(2) make loans, except that the 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 objective and
policies; (ii) enter into repurchase agreements with respect to
portfolio securities; and (iii) lend portfolio securities with a value
not in excess of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in
the securities of companies whose principal business activities are in
the same industry. Notwithstanding the foregoing, with respect the
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;
(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not
prevent the Fund from (i) purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities or (ii) engaging in forward purchases or sales
of foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business ). Investments by the 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) the 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) the 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, the 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
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<PAGE>
(7) underwrite securities issued by other persons except insofar as the
Fund may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes Real
Estate Limited Partnerships. For purposes of investment restriction (3)
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."
In addition, the Fund will be subject to the following nonfundamental
restrictions which may be changed without shareholder approval:
(1) The Fund may not, with respect to 75% of its assets, hold more than
10% of the outstanding voting securities of an issuer.
(2) The 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 the Fund.
(3) The Fund may not purchase or sell interests in oil, gas or mineral
leases.
(4) The Fund may not invest more than 15% of its net assets in illiquid
securities.
(5) The 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 the Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of
puts, calls or combinations thereof with respect to futures.
(6) The 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.
Notwithstanding any other investment policy or restriction, the 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 the Fund's 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 limitation on investment or use of assets is adhered to at the
time a transaction is effected, later changes in percentage resulting from any
cause other than actions by the Fund will not be considered a violation. If the
value of the 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.
It is the Trust's position that proprietary strips, such as CATS and TIGRS, are
United States Government securities. However, the Trust has been advised that
the staff of the Commission's Division of Investment Management does not
consider these to be United States Government securities, as defined under the
Investment Company Act of 1940, as amended.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations
described above and in the Prospectus. Should the Fund determine that any such
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commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Specific decisions to purchase or sell securities for the Fund are made by the
Fund's portfolio manager who is an employee of the Sub-Adviser and who is
appointed and supervised by senior officers of such Sub-Adviser. Changes in the
Fund's investments are reviewed by the Board of Trustees. The Fund's portfolio
manager may serve other clients of the Sub-Adviser in a similar capacity.
The frequency of the 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 (see "Tax Matters" in the Prospectus), the Sub-Adviser will
weigh the added costs of short-term investment against anticipated gains. For
the fiscal period ending October 31, 1996 the annual rate of portfolio turnover
for the Fund is expected not to exceed 100%.
Under the Advisory Agreement and the Sub-Advisory Agreement, the Adviser shall
use its best efforts to seek to execute portfolio transactions at prices which,
under the circumstances, result in total costs or proceeds being the most
favorable to the Funds.
The Sub-Adviser attempts to achieve this result by selecting broker-dealers to
execute portfolio transactions on behalf of the Fund and other clients of the
Sub-Adviser on the basis of their professional capability, the value and quality
of their brokerage services, and the level of their brokerage commissions. 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 Sub-Adviser 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 Sub-Adviser on the tender of the Fund's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by the Sub-Adviser. At present, no other
recapture arrangements are in effect.
Under the Fund's Investment Advisory (Sub-Advisory) Agreement and as permitted
by Section 28(e) of the Securities Exchange Act of 1934, the Sub-Adviser may
cause the Fund to pay a broker-dealer which provides brokerage and research
services to the Sub-Adviser, the Funds and/or other accounts for which the
Adviser or Sub-Adviser exercises investment discretion an amount of commission
for effecting a securities transaction for the Funds in excess of the amount
other broker-dealers would have charged for the transaction if the Sub-Adviser
determines 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 the Adviser
or Sub-Adviser's overall responsibilities to the Fund or to accounts over which
they exercise investment discretion. Not all of such services are useful or of
value in advising the Fund. The Sub-Adviser shall report to the Board of
Trustees of the Trust regarding overall commissions paid by the Funds and their
reasonableness in relation to 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.
Although commissions paid on every transaction will, in the judgment of the
Sub-Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser or Sub-Adviser's other clients as part of providing
advice as to the availability of securities or of purchasers or sellers
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of securities and services in effecting securities transactions and performing
functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Sub-Adviser for no consideration
other than brokerage or underwriting commissions. Securities may be bought or
sold through such broker-dealers, but at present, unless otherwise directed by
the Fund, a commission higher than one charged elsewhere will not be paid to
such a firm solely because it provided Research to the Sub-Adviser.
The Sub-Adviser's investment management personnel will attempt to evaluate the
quality of Research provided by brokers. Results of this effort are sometimes
used by the Sub-Adviser as a consideration in the selection of brokers to
execute portfolio transactions. However, the Sub-Adviser would be unable to
quantify the amount of commissions which are paid as a result of such Research
because a substantial number of transactions are effected through brokers which
provide Research but which are selected principally because of their execution
capabilities.
The management fees that the Fund pays to the Sub-Adviser will not be reduced as
a consequence of the Adviser or Sub-Adviser's receipt of brokerage and research
services. To the extent the Fund's portfolio transactions are used to obtain
such services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid, by an amount which cannot be presently determined. Such
services would be useful and of value to the Sub-Adviser in serving one or more
of the Fund and other clients and, conversely, such services obtained by the
placement of brokerage business of other clients would be useful to the
Sub-Adviser in carrying out its obligations to the Fund. While such services are
not expected to reduce the expenses of the Sub-Adviser, the Adviser or
Sub-Adviser would, through use of the services, avoid the additional expenses
which would be incurred if it should attempt to develop comparable information
through its own staff.
In certain instances, there may be securities that are suitable for one or more
of the Funds as well as one or more of the Sub-Adviser's other clients.
Investment decisions for the Fund and for the Sub-Adviser's other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. In executing portfolio transactions for a Fund, the
Adviser or Sub-Adviser may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be sold
or purchased with those of other Funds or its other clients if, in the
Sub-Adviser's reasonable judgment, such aggregation (i) will result in an
overall economic benefit to the Fund, taking into consideration the advantageous
selling or purchase price, brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies set forth in the
Trust's registration statement and the Fund's Prospectus and Statement of
Additional Information. In such event, the Sub-Adviser will allocate the
securities so purchased or sold, and the expenses incurred in the transaction,
in an equitable manner, consistent with its fiduciary obligations to the Fund
and such other clients. 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
Fund is concerned. However, it is believed that the ability of the Fund to
participate in volume transactions will generally produce better executions for
the Fund.
No portfolio transactions are executed with the Sub-Adviser or a Shareholder
Servicing Agent, or with any affiliate of the Adviser or Sub-Adviser or a
Shareholder Servicing Agent, acting either as principal or as broker.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN
The Fund's total rate of return for any period will be calculated by (a)
dividing (i) the sum of the net asset value per share on the last day of the
period and the net asset value per share on the last day of the period of shares
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<PAGE>
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.
YIELD QUOTATIONS
Any current "yield" quotation of the Fund shall consist of an annualized
hypothetical yield, carried at least to the nearest hundredth of one percent,
based on a thirty calendar day period and shall be calculated by (a) raising to
the sixth power the sum of 1 plus the quotient obtained by dividing the Fund's
net investment income earned during the period by the product of the average
daily number of shares outstanding during the period that were entitled to
receive dividends and the maximum offering price per share on the last day of
the period, (b) subtracting 1 from the result, and (c) multiplying the result by
2.
NON-STANDARDIZED PERFORMANCE RESULTS
From time to time, the Fund may provide certain non-standardized performance
results, if any, in addition to the total rate of return quotations required by
the Securities and Exchange Commission. As discussed more fully in the
Prospectus, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Fund in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Fund with those published for other investment companies and
other investment vehicles.
DETERMINATION OF NET ASSET VALUE
The Fund determines its net asset value per Share once each day based on prices
determined as of the regular close of the New York Stock Exchange, or 4:15 p.m.
for options, during which the New York Stock Exchange is open for trading (a
"Fund Business Day"), by dividing the value of its net assets (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued), by the number of its shares outstanding at the time the
determination is made. (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.)
Purchases and redemptions will be effected at the time of determination of net
asset value next following the receipt of any purchase or redemption order. (See
"Purchases and Redemptions of Shares" in the Prospectus.)
Equity securities 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) 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.
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Interest income on long-term obligations in the 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.
Subject to compliance with applicable regulations, the Fund has reserved the
right to pay the redemption price of its Shares, either totally or partially, by
a distribution in kind of 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.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussions here and in
the Prospectus are not intended as substitutes for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must: (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement"); and (2) derive less than 30% of its gross
income (exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the sale
or other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the Fund may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the Fund at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
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In general, gain or loss recognized by the Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation (including a municipal obligation) purchased by the Fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the Fund held the debt obligation.
Further, the Code also treats as ordinary income, a portion of the capital gain
attributable to a transaction where substantially all of the return realized is
attributable to the time value of the Fund's net investment in the transaction
and: (1) the transaction consists of the acquisition of property by the Fund and
a contemporaneous contract to sell substantially identical property in the
future; (2) the transaction is a straddle within the meaning of Section 1092 of
the Code; (3) the transaction is one that was marketed or sold to the Fund on
the basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction; and (2) the
capitalized interest on acquisition indebtedness under Code Section 263(g).
Builtin losses will be preserved where the Fund has a built-in loss with respect
to property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Fund's shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by the Fund on the disposition of an asset is long-term or short-term, the
holding period of the asset may be affected if: (1) the asset is used to close a
"short sale" (which includes for certain purposes the acquisition of a put
option) or is substantially identical to another asset so used, (2) the asset is
otherwise held by the Fund as part of a "straddle" (which term generally
excludes a situation where the asset is stock and the Fund grants a qualified
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto); or (3) the asset is stock and the Fund grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (i) above. In addition, the Fund
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss recognized
by the Fund from a closing transaction with respect to, an option written by the
Fund will be treated as a short-term capital gain or loss. For purposes of the
Short-Short Gain Test, the holding period of an option written by the Fund will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, the Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
The Fund's investments in options, futures contracts and forward contracts,
options on futures contracts and stock indices and certain other securities,
including transactions involving actual or deemed short sales or foreign
exchange gains or loses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. Certain transactions that
may be engaged in by the Fund (such as regulated futures contracts, certain
foreign currency contracts, and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contracts have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is generally treated as 60% long-term
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<PAGE>
capital gain or loss and 40% short-term capital gain or loss. The Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts. The Internal Revenue Service (the "IRS") has held in
several private rulings (and Treasury Regulations now provide) that gains
arising from Section 1256 contracts will be treated for purposes of the
Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under Code
Section 1256.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument. For purposes of asset diversification
testing, obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government such as the Federal Agricultural Mortgage Corporation, the
Farm Credit System Financial Assistance Corporation, a Federal Home Loan Bank,
the Federal Home Loan Mortgage Association, the Government National Mortgage
Corporation, and the Student Loan Marketing Association are treated as U.S.
Government Securities.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of ordinary
taxable income for the calendar year and 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election"))(Tax-exempt
interest on municipal obligations is not subject to the excise tax). The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses incurred after October 31 of any year (or after the end of its
taxable year if it has made a taxable year election) in determining the amount
of ordinary taxable income for the current calendar year (and, instead, include
such gains and losses in determining ordinary taxable income for the succeeding
calendar year).
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The 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 the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will qualify for the 70% dividends-received deduction for
corporations only to the extent discussed below.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The 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. The Code provides, however, that under certain conditions
only 50% of the capital gain recognized upon the Fund's disposition of "small
business" stock will be subject to tax.
Conversely, if the 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 the Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders of record on
the last day of its taxable year treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as Subchapter S corporations, which
are not eligible for the deduction because of their special characteristics and
other than for purposes of special taxes such as the accumulated earnings tax
and the personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by the 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),
excluding for this purpose under the rules of Code Section 246(c) (3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the 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 (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996 at
the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for that tax and the AMT net operating loss
deduction) over $2 million. For purposes of
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the Corporate AMT and the environmental Superfund tax, 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 AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining its 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)) includible in AMTI.
Investment income that may be received by the Fund 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
the 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 the Fund's assets to be invested in various countries is not known.
Distributions by the Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the 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 the 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 the 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.
The 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 shareholder will recognize gain or loss on the sale or redemption of shares
of the 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 the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares. For
this purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of shares.
Long-term capital gains of noncorporate taxpayers are currently taxed at a
maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
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 the Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
a foreign shareholder will be subject to U.S. withholding tax at the rate of 30%
(or lower treaty rate) upon the gross amount of the dividend. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund, capital gain dividends and
exempt-interest dividends and amounts retained by the Fund that are designated
as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the 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.
19
<PAGE>
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends and capital gain dividends from regulated investment companies often
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in the Fund.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers and their principal occupations for at least the past
five years are set forth below. Their titles may have varied during that period.
Asterisks indicate those Trustees and officers that are "interested persons" (as
defined in the 1940 Act). Unless otherwise indicated below, the address of each
officer is 125 W. 55th Street, New York, New York 10019.
TRUSTEES
FERGUS REID, III* - Chairman of the Board of Trustees. Chairman of the Board of
Trustees of Mutual Fund Trust and Trustee of Certain Portfolios advised by Chase
(the "Portfolios"); Chairman and Chief Executive Officer, Lumelite Corporation,
since September 1985; Trustee, Morgan Stanley Portfolios; from 1982 through
1984, Managing Director, Bernhard Associates (venture capital firm). Address:
971 West Road, New Canaan, Connecticut 06840.
DR. RICHARD E. TEN HAKEN - Trustee. Trustee of Mutual Fund Trust and the
Portfolios; Former District Superintendent of Schools, Monroe No.2 and Orleans
Counties, New York; Chairman of the Finance and the Audit and Accounting
Committees, Member of the Executive Committee; Chairman of the Board and
President, New York State Teachers' Retirement System.
Address: 4 Barnfield Road, Pittsford, New York 14534.
WILLIAM J. ARMSTRONG - Trustee. Trustee of Mutual Fund Trust; Vice President and
Treasurer, Ingersoll-Rand Company.
Address: 49 Aspen Way, Upper Saddle River, New Jersey 07458.
JOHN R.H. BLUM - Trustee. Trustee of Mutual Fund Trust; Attorney in Private
Practice; formerly, a Partner in the law firm of Richards, O'Neil & Allegaert;
Commissioner of Agriculture - State of Connecticut, 1992-1995.
Address: 322 Main Street, Lakeville, Connecticut 06039.
JOSEPH J. HARKINS* - Trustee. Trustee of Mutual Fund Trust; Retired; formerly,
Commercial Sector Executive and Executive Vice President of The Chase Manhattan
Bank, N.A. from 1985 through 1989. He has been employed by Chase in numerous
capacities and offices since 1954. Director of Blessings Corporation, Jefferson
Insurance Company of New York, Monticello Insurance Company and Nationar.
Address: 257 Plantation Circle South, Ponte Vedra Beach, Florida 32082.
H. RICHARD VARTABEDIAN* - Trustee. President and Trustee of the Trust and Mutual
Fund Trust; Chairman and President of the Portfolios; Consultant, Republic Bank
of New York; formerly, Senior Investment Officer, Division Executive of the
Investment Management Division of The Chase Manhattan Bank, N.A., 1980 through
1991.
Address: P.O. Box 296, Beach Road, Hendrick's Head, Southport, Maine 04576
20
<PAGE>
STUART W. CRAGIN, JR. - Trustee. Trustee of Mutual Fund Trust and the
Portfolios; Retired; formerly, President, Fairfield Testing Laboratory, Inc. He
has previously served in a variety of marketing, manufacturing and general
management positions with Union Camp Corp., Trinity Paper & Plastics Corp., and
Conover Industries.
Address: 108 Valley Road, Cos Cob, Connecticut 06807.
IRVING L. THODE - Trustee. Trustee of Mutual Fund Trust and the Portfolios;
Retired; formerly Vice President of Quotron Systems. He has previously served in
a number of executive positions with Control Data Corp., including President of
its Latin American Operations, and General Manager of its Data Services
business.
Address: 80 Perkins Road, Greenwich, Connecticut 06830.
The Board of Trustees met seven times during the twelve months ended December
31, 1995, and each of the Trustees attended at least 75% of those meetings.
The Board of Trustees of the Trust presently has an Audit Committee. The members
of the Audit Committee are Messrs. Ten Haken (Chairman), Blum, Cragin, Thode,
Armstrong, Harkins*, Reid, and Vartabedian*. The function of the Audit Committee
is to recommend independent auditors and monitor accounting and financial
matters. The Audit Committee met two times during the fiscal year ended October
31, 1995.
* Interested Trustees as defined under the 1940 Act.
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 Adviser is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the Adviser. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component. Effective August 21, 1995, each Trustee of the Vista Funds receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Adviser.
Set forth below is information regarding compensation paid or accrued during the
fiscal year ended October 31, 1995 for each Trustee of the Trust:
<TABLE>
<CAPTION>
Vista Vista
Vista Equity Growth Vista Vista Vista
Balanced Income and Capital Equity Bond
Fund Fund Income Growth Fund Fund
Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee 241.30 $96.13 $14,393.16 $7,594.67 $540.99 $468.64
Richard E. Ten Haken, 160.88 64.07 9,595.45 5,063.12 360.67 312.41
Trustee
William J. Armstrong, Trustee 160.88 64.07 9595.45 5,063.12 360.67 312.41
John R.H. Blum, Trustee 190.83 62.60 9,376.63 4,955.42 352.06 305.11
Joseph J. Harkins, Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
H. Richard Vartabedian, 169.60 67.79 10,159.13 5,376.61 330.18 330.18
Trustee
Stuart W. Cragin, Jr., Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
Irving L. Thode, Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Vista Vista Vista
Short Vista Small Vista Global Vista
Term U.S. Cap International Fixed Southeast Vista Vista
Bond Government Equity Equity Income Asian Japan European
Fund Fund Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee 298.13 $919.27 $172.16 $315.97 $8.47 0 0 0
Richard E. Ten Haken, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
William J. Armstrong, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
John R.H. Blum, Trustee 190.83 598.68 114.79 205.42 5.64 0 0 0
Joseph J. Harkins, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
H. Richard Vartabedian, Trustee 206.44 646.75 133.68 219.47 5.64 0 0 0
Stuart W. Cragin, Jr., Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
Irving L. Thode, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
</TABLE>
Pension or Total
Retirement Compensation
Benefits Accrued from "Fund
as Fund Expenses Complex"(1)
---------------- -----------
Fergus Reid, III, Trustee 0 $78,456.65
Richard E. Ten Haken, Trustee 0 52,304.39
William J. Armstrong, Trustee 0 52,304.39
John R.H. Blum, Trustee 0 51,304.37
Joseph J. Harkins, Trustee 0 52,304.39
H. Richard Vartabedian, Trustee 0 74,804.44
Stuart W. Cragin, Jr., Trustee 0 52,304.39
Irving L. Thode, Trustee 0 52,304.39
(1) Data reflects total compensation earned during the period January 1,
1995 to December 31, 1995 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Adviser.
VISTA FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES
Effective August 21, 1995, the Trustees also instituted a Retirement Plan for
Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of any of the Portfolios, the Adviser, Administrator or Distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the
22
<PAGE>
Adviser (collectively, the "Covered Portfolios"). Each Eligible Trustee is
entitled to receive from the Covered Portfolios an annual benefit commencing on
the first day of the calendar quarter coincident with or following his date of
retirement equal to 10% of the highest annual compensation received from the
Covered Portfolios multiplied by the number of such Trustee's years of service
(not in excess of 10 years) completed with respect to any of the Covered
Portfolios. Such benefit is payable to each eligible Trustee in monthly
installments for the life of the Trustee.
Set forth in the table below are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian,
Cragin, and Thode are 11, 11, 8, 11, 3, 3 and 3, respectively.
HIGHEST ANNUAL COMPENSATION PAID BY ALL VISTA FUNDS
40,000 45,000 50,000 55,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Effective August 21, 1995, the Trustees instituted a Deferred Compensation Plan
for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each
Trustee (who is not an employee of any of the Funds, the Adviser, Administrator
or Distributor or any of their affiliates) may enter into agreements with the
Funds whereby payment of the Trustees' fees are deferred until the payment date
elected by the Trustee (or the Trustee's termination of service). The deferred
amounts are deemed invested in shares of a Fund on whose Board the Trustee sits,
subject to the Trustee's election. The deferred amounts are paid out in a lump
sum or over a period of several years as elected by the Trustee at the time of
deferral. If a deferring Trustee dies prior to the distribution of amounts held
in the deferral account, the balance of the deferral account will be distributed
to the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
Trustees have executed a deferred compensation agreement for the 1996 calendar
year: Messrs. Ten Haken, Thode and Vartabedian.
23
<PAGE>
PRINCIPAL EXECUTIVE OFFICERS:
The principal executive officers of the Trust are as follows:
H. Richard Vartabedian - President and Trustee.
Martin R. Dean - Treasurer and Assistant Secretary; Vice President, BISYS Funds
Group, Inc.
Ann Bergin - Secretary and Assistant Treasurer; Vice President, BISYS Funds
Group, Inc.; Secretary, Vista BrokerDealer Services, Inc.
OWNERSHIP OF SHARES OF THE PORTFOLIOS. The Trustees and officers as a group
directly or beneficially own less than 1% of each Portfolio.
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 wilful 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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
The Fund pays no direct remuneration to any officer of the Trust.
THE ADVISER
Chase serves as the Adviser to the Fund pursuant to an Investment Advisory
Agreement, to become effective prior to the Fund's commencement of operations
(the "Advisory Agreement"). Subject to such policies as the Board of Trustees
may determine, Chase makes investment decisions for the Fund. Pursuant to the
terms of the Advisory Agreement, the Adviser provides the Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of the Fund's investments. The Adviser continuously provides
investment programs and determines from time to time what securities shall be
purchased, sold or exchanged and what portion of the Fund's assets shall be held
uninvested. The Adviser furnishes, at its own expense, all services, facilities
and personnel necessary in connection with managing the investments and
effecting portfolio transactions for the Fund. The other expenses attributable
to, and payable by the Fund, are described under "Expenses" in the Prospectus.
The Advisory Agreement for the Fund 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 the 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.
On August 27, 1995, The Chase Manhattan Corporation announced its entry into an
Agreement and Plan of Merger (the "Merger Agreement") with Chemical Banking
Corporation ("Chemical"), a bank holding company, pursuant to which The Chase
Manhattan Corporation will merge with and into Chemical (the "Holding Company
Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The
24
<PAGE>
consummation of the Holding Company Merger is subject to certain closing
conditions. On December 11, 1995, the shareholders of The Chase Manhattan
Corporation and Chemical voted to approve the Holding Company Merger. The
Holding Company Merger is expected to be completed on or about March 31, 1996.
Subsequent to the Holding Company Merger, it is expected that the Adviser will
be merged with and into Chemical Bank. a New York State chartered bank
("Chemical Bank") (the "Bank Merger" and together with the Holding Company
Merger, the "Mergers"). The surviving bank will continue operations under the
name The Chase Manhattan Bank (as used herein, the term "Chase" refers to The
Chase Manhattan Bank, N.A. and its successor in the Bank Merger, and the term
"Adviser" means Chase (including its successor in the Bank Merger) in its
capacity as investment adviser to the Fund). The consummation of the Bank Merger
is subject to certain closing conditions, including the receipt of certain
regulatory approvals. The Bank Merger is expected to occur in July, 1996.
Chemical is a publicly owned bank holding company incorporated under Delaware
law and registered under the Federal Bank Holding Company Act of 1956, as
amended. As of December 31, 1995, through its direct or indirect subsidiaries,
Chemical managed more than $57 billion in assets, including approximately $6.9
billion in mutual fund assets in 11 mutual fund portfolios. Chemical Bank is a
wholly-owned subsidiary of Chemical and is a New York State chartered bank.
Pursuant to the terms of the Advisory Agreement, the Adviser is permitted to
render services to others. The Advisory Agreement is terminable without penalty
by the Trust on behalf of the Fund on not more than 60 days', nor less than 30
days', written notice when authorized either by a majority vote of the Fund's
shareholders or by a vote of a majority of the Board of Trustees of the Trust,
or by the 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 Agreement provides that the Adviser under
the 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 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 the Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of the Fund is 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 or Sub-Adviser shall be deducted from the monthly advisory fee otherwise
payable with respect to the Fund during such fiscal year; and if such amounts
should exceed the monthly fee, the Adviser shall pay to the 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 the Adviser pursuant to the
Advisory Agreement, the Fund pays an investment advisory fee computed and paid
monthly based on a rate equal to 0.70% the Fund's average daily net assets, on
an annualized basis for the Fund's then-current fiscal year. However, the
Adviser may voluntarily agree to waive a portion of the fees payable to it on a
month-to-month basis.
THE SUB-ADVISER
Under an investment advisory agreement between the Trust, on behalf of the Fund,
and Chase, Chase may delegate a portion of its responsibilities to a subadviser.
In addition, the investment 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 New Chase as long as all such persons are
functioning as part of an organized group of persons, managed by authorized
officers of Chase.
25
<PAGE>
Chase, on behalf of the Fund, has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with Van Deventer & Hoch ("VD&H"),
whose principal offices are located at 800 North Brand Boulevard, Suite 300,
Glendale, California 91203. VD&H is a general partnership which is equally owned
by individuals who serve VD&H in key professional capacities and by CBC Holdings
(California), which is a wholly-owned subsidiary of Chemical Banking
Corporation, a bank holding company. With respect to the day to day management
of the Fund, under the sub-advisory agreement, the Sub-Adviser makes decisions
concerning, and places all orders for, purchases and sales of securities and
helps maintain the records relating to such purchases and sales. The Sub-Adviser
may, in its discretion, provide such services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser to the Company under applicable laws and are under the common
control of New 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 Fund.
ADMINISTRATOR
Chase serves as administrator of the Trust, pursuant to an Administration
Agreement (the "Administration Agreement"). Chase provides certain
administrative services to the Trust, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Trust's 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 Trust and providing, at its own expense, office facilities, equipment and
personnel necessary to carry out its duties. The Administrator does not have any
responsibility or authority for the management of the Fund, the determination of
investment policy, or for any matter pertaining to the distribution of Fund
shares.
Under the Administration Agreement Chase renders administrative services to
others. The Administration Agreement 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 the Fund's outstanding voting securities
and 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 the Fund on 60 days' written notice when authorized either by a
majority vote of the 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 the Administrator on
60 days' written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration or
management of the Fund, except for wilful 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 the Fund
imposed by the securities laws or regulations thereunder of any state in which
the shares of the Fund is 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
26
<PAGE>
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, the Administrator receives from the Fund a fee
computed and paid monthly at an annual rate equal to 0.10% 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.
DISTRIBUTOR
DISTRIBUTION PLAN
The Trust has adopted separate plans of distribution pursuant to Rule 12b-1
under the 1940 Act (a "Distribution Plan") including a Distribution Plan on
behalf of the Fund, which provides that the Fund shall pay a distribution fee
(the "Distribution Fee"), including payments to the Distributor, at an annual
rate not to exceed 0.25% of its Shares average daily net assets for distribution
services. 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.
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 the 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 by
vote of a majority of the outstanding voting Shares of the 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. The Fund 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.
Since the Distribution Fee is not directly tied to actual expenses, the amount
of Distribution Fee paid by each of the Shares during any year may be more or
less than actual expenses incurred pursuant to the Distribution Plan. 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, such as those in which the
Distributor's compensation is directly linked to its expenses). However, the
Shares are not liable for any distribution expenses incurred in excess of the
Distribution Fee paid.
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Distribution and Sub-Administration Agreement dated
August 21, 1995 (the "Distribution Agreement"), with the Distributor, pursuant
to which the Distributor acts as the Fund's exclusive underwriter, provides
certain administration services and promotes and arranges for the sale of the
Fund's 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
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not paid for by the Distribution Plan. The Trust pays for all of the expenses
for qualification of the shares of the 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 the Fund only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the Fund's
outstanding voting securities and 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 the Fund on 60 days' written notice when
authorized either by a majority vote of the 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 wilful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties.
In the event the operating expenses of the 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 the Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of the 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 the 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 the Fund during
such fiscal year; and if such amounts should exceed the monthly fee, the
Distributor shall pay to the 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 the Fund. However, the
Distributor has voluntarily agreed to waive a portion of the fees payable to it
under the Distribution Agreement with respect to the Fund on a month-to-month
basis.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services.
The fees relating to acting as liaison to shareholders and providing personal
services to shareholders will not exceed, on an annualized basis, 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is being made by investors with whom such Shareholder
Servicing Agent maintains a servicing relationship. However, each Shareholder
Servicing Agent has voluntarily agreed to waive a portion of the fees payable to
it under its Servicing Agreement with respect to the Fund on a month-to-month
basis.
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.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the assets of
the Fund for which Chase receives compensation as is from time to time agreed
upon by the Trust and Chase. For additional information, see "Shareholder
Servicing Agents, Transfer Agent and Custodian" in the Prospectus.
In certain circumstances Shareholder Servicing Agents may be required to
register as dealers under state law.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
serves as independent accountants of the Fund. Price Waterhouse LLP provides the
Fund with audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.
GENERAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Group is an open-end, management investment company organized as a
Massachusetts business trust under the laws of the Commonwealth of Massachusetts
in 1987. The Trust currently consists of 17 Funds of shares of beneficial
interest without par value. Certain of the Funds in 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 pre-emptive or conversion rights.
Shares when issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each share held. Shares of each series
or class generally vote separately, for example to approve investment advisory
agreements or distribution plans, but shares of all series and classes vote
together, to the extent required under the 1940 Act, in the election or
selection of Trustees and independent accountants. With respect to shares
purchased through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by the Fund or its designated agent prior to a
shareholder meeting at which a proxy is to be voted and the shareholder does not
attend the meeting in person, the Shareholder Servicing Agent for such
shareholder will be authorized pursuant to an applicable agreement with the
shareholder to vote the shareholder's outstanding shares in the same proportion
as the votes cast by other Fund shareholders represented at the meeting in
person or by proxy.
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. The Trust's Declaration of
Trust provides that, at any meeting of shareholders of the Trust or of any
series or class, a Shareholder Servicing Agent may vote any shares as to which
such Shareholder Servicing Agent is the agent of record and which are not
represented in person or by proxy at the meeting, proportionately in accordance
with the votes cast by holders of all shares of that portfolio otherwise
represented at the meeting in person or by proxy as to which such Shareholder
Servicing Agent is the agent of record. Any shares so voted by a Shareholder
Servicing Agent will be deemed represented at the meeting for purposes of quorum
requirements. 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.
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Stock certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares that may be
redeemed through expedited or automated procedures established by a Shareholder
Servicing Agent.
The Trust is an entity of the type commonly known as a "Massachusetts business
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 Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of wilful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
The Board of Trustees has adopted a Code of Ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The Code of Ethics substantially conforms to the
recommendations made by the Investment Company Institute ("ICI") (except where
noted) and includes such provisions as:
o Prohibitions on investment personnel acquiring securities in
initial offerings;
o A requirement that access persons obtain prior to acquiring
securities in a private placement and that the officer granting
such approval have no interest in the issuer making the private
placement;
o A restriction on access persons executing transactions for
securities on a recommended list until 14 days after distribution
of that list;
o A prohibition on access persons acquiring securities that are
pending execution by one of the Portfolios until 7 days after the
transactions of the Portfolios are completed;
o A prohibition of any buy or sell transaction in a particular
security in a 30-day period, except as may be permitted in certain
hardship cases or exigent circumstances where prior approval is
obtained. This provision differs slightly from the ICI
recommendation;
o A requirement for pre-clearance of any buy or sell transaction in a
particular security after 30 days, but within 60 days;
o A requirement that any gift exceeding $75.00 from a customer must
be reported to the appropriate compliance officer;
o A requirement that access persons submit in writing any request to
serve as a director or trustee of a publicly traded company;
o A requirement that all securities transactions in excess of $1,000
be pre-cleared, except that if a person has engaged in more than
$10,000 of securities transactions in a calendar quarter all
securities of such person require pre-clearance (this de minimus
exception differs slightly from the ICI recommendations);
o A requirement that all access persons direct their broker-dealer to
submit duplicate confirmation and customer statements to the
appropriate compliance unit; and
o A requirement that all access persons sign a Code of Ethics
acknowledgment, affirming that they have read and understood the
Code and submit a personal security holdings report upon
commencement of employment or status and a personal security
transaction report within 10 days of each calendar quarter
thereafter.
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STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 8, 1996
VISTA(SM) U.S. GOVERNMENT SECURITIES FUND
125 WEST 55TH STREET, NEW YORK, NEW YORK 10019
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Prospectus
offering the Fund. This Statement of Additional Information should be read in
conjunction with the Prospectus offering shares of Vista U.S. Government
Securities Fund (the "Fund"), dated February 8, 1996. A copy of the Prospectus
may be obtained by an investor without charge by contacting Vista Broker-Dealer
Services, Inc., the Fund's distributor, at the above-listed address or by
calling the Vista Service Center at the toll-free number listed below.
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.
For more information about the Fund or your account, simply call the Vista
Service Center at our toll-free number:
1-800-34-VISTA
Vista Service Center
P.O. Box 419392
Kansas City, MO 64141
VUSGS-SAI
<PAGE>
Table of Contents Page
The Fund 3
Investment Objective, Policies and Restrictions 3
Additional Investment Activities 4
Limiting Investment Risks 9
Performance Information 13
Determination of Net Asset Value 14
Tax Matters 14
Management of the Fund 20
Independent Accountants 30
General Information 30
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THE FUND
Mutual Fund Group (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 May 11, 1987. The Trust presently consists of 17 separate
series (a "Fund" or 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"). Under a multiple class distribution
system, the Fund is offered through two classes of shares.
The Fund has been established to receive all the assets of the Hanover U.S.
Government Securities Fund series of The Hanover Investment Funds, Inc. (the
"Predecessor Fund"). Subject to approval by the shareholders of the Predecessor
Fund, the Predecessor Fund will transfer all its assets and liabilities to the
Fund in exchange for Institutional Shares of the Fund, which will be distributed
pro rata to shareholders of the Predecessor Fund, who will then become
shareholders of the Fund (the "Reorganization"). The Predecessor Fund will cease
operations after the Reorganization. The Fund will have no assets and will not
begin operations until the Reorganization occurs.
The Fund's shares are continuously offered for sale through Vista Broker-Dealer
Services, Inc. ("VBDS"), the Fund's distributor (the "Distributor"), which is
not affiliated with Chase Manhattan Bank, N.A.' or its affiliates, TO CUSTOMERS
OF A FINANCIAL INSTITUTION, SUCH AS A FEDERAL OR STATE-CHARTERED BANK, TRUST
COMPANY OR SAVINGS AND LOAN ASSOCIATION WITH WHICH THE TRUST HAS ENTERED INTO A
SHAREHOLDER SERVICING AGREEMENT (COLLECTIVELY, "SHAREHOLDER SERVICING AGENTS")
OR TO CUSTOMERS OF A SECURITIES BROKER OR CERTAIN FINANCIAL INSTITUTIONS WHO
HAVE ENTERED INTO SELECTED DEALER AGREEMENTS WITH THE DISTRIBUTOR. VBDS receives
a distribution fee from the Fund, pursuant to the plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust including the Fund. The Chase Manhattan Bank, N.A. ("Chase") is the
investment adviser (the "Adviser") for the Fund. Chase Asset Management, Inc.
("CAM Inc.") is the investment sub-adviser (the "Sub-Adviser") for the Fund.
Chase also serves as the Trust's administrator (the "Administrator") and
supervises the overall administration of the Trust, including the Fund. The
Sub-Adviser continuously manages the investments of the Fund in accordance with
the investment objective and policies of the Fund. The selection of investments
for the Fund and the way in which the Fund is managed depend on the conditions
and trends in the economy and the financial marketplaces. Occasionally,
communications to shareholders may contain the views of the investment adviser
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 the Fund. A
majority of the Trustees of the Trust are not affiliated with the Adviser.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
VISTA U.S. GOVERNMENT SECURITIES FUND's (the "Fund") investment objective is to
provide investors with as high a level of total return, consisting of income and
capital appreciation as is consistent with the preservation of capital. The Fund
seeks to achieve its objective by investing primarily in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements with respect thereto.
INVESTMENT POLICIES
The Prospectus sets forth the various investment policies applicable to the
Fund. The following information supplements and should be read in conjunction
with the sections of the Prospectus entitled "Investment Objective and Policies"
and "Additional Information on Investment Policies and Techniques." Except for
the matters specified under "Limiting Investment Risks" in this Statement of
Additional Information, and as otherwise stated in the Prospectus, all matters
described herein and in the Prospectus are not fundamental and may be changed by
the Board of Trustees of the Trust without the approval of shareholders. See
"General Information."
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ADDITIONAL INVESTMENT ACTIVITIES
The discussion below supplements the information set forth in the Prospectus
under "Other Investment Activities."
UNITED STATES GOVERNMENT SECURITIES
UNITED STATES TREASURY OBLIGATIONS. The United States Treasury issues various
types of marketable securities. These securities are direct obligations of the
United States Government and differ primarily in the length of their maturity.
UNITED STATES GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS. Agencies and
instrumentalities that issue or guarantee debt securities and that have been
established or sponsored by the United States Government include the Government
National Mortgage Association, the Banks for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Home Loan Banks, the Federal
Home Loan Mortgage Corporation, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association, the Student Loan
Marketing Association and Resolution Funding Corporation.
BANK OBLIGATIONS
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 the Fund cannot realize the proceeds thereon within seven days
are deemed "illiquid" for the purposes of the third investment limitation set
forth under "Limiting Investment Risks" in the Prospectus. 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 investment
risks in addition to those relating to domestic bank obligations. Such
investment risks are discussed in the Prospectus under the caption "Special
Considerations and Risk Factors."
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Assetbacked securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Asset-backed securities frequently carry credit protection in the form of extra
collateral, subordinate certificates, cash reserve accounts, letters of credit
or other enhancements. For example, payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or other enhancement issued by a financial institution unaffiliated with
the entities issuing the securities. Assets which, to date, have been used to
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back asset-backed securities include motor vehicle installment sales contracts
or installment loans secured by motor vehicles, and receivables from revolving
credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
assets are not realized. Because assetbacked securities are relatively new, the
market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
RULE 144A SECURITIES AND SECTION 4(2) PAPER
As indicated in the Prospectus, the Fund may purchase certain restricted
securities ("Rule 144A securities") for which there may be a secondary market of
qualified institutional buyers, as contemplated by Rule 144A under the
Securities Act of 1933 (the "Securities Act") and may invest in 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 the 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 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 Board
of Trustees of the Trust has 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 Fund's limitation
on investment in illiquid securities. Pursuant to those policies and procedures,
the Board of Trustees will delegate to the Sub-Adviser 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 Board of Trustees will periodically review the Fund's purchases
and sales of Rule 144A securities and Section 4(2) paper.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the obligations that the Fund may purchase have a floating or
variable rate of interest. Such obligations may include obligations issued or
guaranteed by agencies or instrumentalities of the United States Government,
certificates of deposit and municipal obligations. Floating or variable rate
obligations bear interest at rates that are not fixed, but vary with changes in
specified market rates or indices, such as the prime rate, and at specified
intervals. Except with respect to temporary defensive investments in short-term
money market instruments, the Fund does not expect to invest more than 5% of the
value of its total assets in obligations which have a floating or variable rate
of interest.
Certain of the floating or variable rate obligations that may be purchased by
the Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the underlying instrument, or to a third party, at
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<PAGE>
par value prior to maturity. Such obligations include variable rate demand or
master notes, which provide for periodic adjustments in the interest rate.
Master demand notes, which are instruments issued pursuant to an agreement
between the issuer and the holder may permit the indebtedness thereunder to
vary.
The demand features of certain floating or variable rate obligations may permit
the Fund to tender the obligations to foreign banks. The Fund's ability to
receive payment in such circumstances under the demand feature from such foreign
banks may involve certain of the risks associated with foreign investments, 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.
STAND-BY COMMITMENTS
The Fund may acquire rights to "put" its securities at an agreed upon price
within a specified period prior to their maturity date. The Fund may also enter
into put transactions sometimes referred to as "stand-by commitments," which
entitle the holder 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 Fund's right to exercise a stand-by commitment will
be unconditional and unqualified.
The Fund expects that stand-by commitments will generally be available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund may pay for certain stand-by commitments either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to a stand-by commitment (thus reducing the yield to maturity otherwise
available for the same securities). The Fund intends to enter into stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes. The actual stand-by
commitment will be valued at zero in determining net asset value. Where the Fund
pays any consideration directly or indirectly for a stand-by commitment, its
cost will be reflected as unrealized depreciation for the period during which
the stand-by commitment is held by the Fund and will be reflected in realized
gain or loss when the standby commitment is exercised or expires.
In the event that the issuer of a stand-by commitment acquired by the Fund
defaults on its obligation to purchase the underlying security, then the Fund
might be unable to recover all or a portion of any loss sustained from having to
sell the security elsewhere.
If the value of the underlying security increases, the potential for unrealized
or realized gain is reduced by the cost of the stand-by commitment. The maturity
of a portfolio security will not be considered shortened by a stand-by
commitment to which such obligation is subject. Therefore, stand-by commitment
transactions will not affect the average weighted maturity of the Fund's
portfolio.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
As explained more fully below, the Fund employs 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. Third, 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 the Fund.
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The Fund may invest its assets in derivative and related instruments subject
only to the Fund's investment objective and policies and the requirement that
the Fund maintain segregated accounts consisting of liquid assets, such as cash,
U. S. government securities, or other high-grade debt obligations (or, as
permitted by applicable regulation, enter into certain offsetting positions) to
cover its obligations under such instruments with respect to positions where
there is no underlying portfolio asset so as to avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Fund invests
may be particularly sensitive to changes in prevailing interest rates or other
economic factors, and--like other investments of the Fund--the ability of the
Fund to successfully utilize these instruments may depend in part upon the
ability of the Sub-Adviser to forecast interest rates and other economic factors
correctly. If the Sub-Adviser incorrectly forecasts such factors and has taken
positions in derivative or similar instruments contrary to prevailing market
trends, the Fund could be exposed to the risk of a loss. THE FUND 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 Fund may employ along with risks or special attributes
associated with them. This discussion is intended to supplement the Fund's
current prospectuses as well as provide useful information to prospective
investors.
DERIVATIVE AND RELATED INSTRUMENTS
To the extent permitted by the investment objective and policies of the Fund,
and as described more fully below, the Fund may purchase, write and exercise
call and put options on securities, securities indexes (including using options
in combination with securities, other options and derivative instruments); enter
into futures contracts and options on futures contracts; purchase and sell
mortgage-backed and asset-backed securities; and purchase and sell structured
products.
RISK FACTORS
As explained more fully below and in the discussion 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 the 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 "crosshedges" between currencies.
TheSub-Adviser may incorrectly forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the opportunity
for gain. In other words, hedging usually limits both potential losses as well
as potential gains. Strategies not involving hedging may increase the risk to
the Fund. Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Fund than hedging strategies
using the same instruments. There can be no assurance that a liquid market will
exist at a time when the 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 the 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, foreign exchanges or foreign boards of trade, 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, the 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.
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SPECIFIC USES AND STRATEGIES
Set forth below are explanations of the Fund's use of various strategies
involving derivatives and related instruments.
OPTIONS ON SECURITIES, SECURITIES INDEXES, CURRENCIES AND DEBT INSTRUMENTS. The
Fund may PURCHASE, SELL or EXERCISE call and put options on (i) securities; (ii)
securities indexes (iii) currencies; or (iv) debt instruments.
Although in most cases these options will be exchange-traded, the Fund 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. The Fund may also use combinations of options
to minimize costs, gain exposure to markets or take advantage of price
disparities or market movements. For example, the 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. The Fund
may write a call or put option in order to earn the related premium from such
transactions. Prior to exercise or expiration, an option may be closed out by an
offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and writing of
options involve certain special risks. During the option period, a fund writing
a covered call (i.e., where the underlying securities are held by the fund) has,
in return for the premium on the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, but has
retained the risk of loss should the price of the underlying securities decline.
The writer of an option has no control over the time when it may be required to
fulfill its obligation as a writer of the option. Once an option writer has
received an exercise notice, it cannot effect a closing purchase transaction in
order to terminate its obligation under the option and must deliver the
underlying securities at the exercise price.
If a put or call option purchased by the 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, the 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
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Fund may be
unable to close out a position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may purchase or
sell (i) interest-rate futures contracts; (ii) stock index futures contracts;
(iii) foreign currency futures contracts; (iv) futures contracts on specified
instruments; and (v) options on these futures contracts ("futures options").
The futures contracts and futures options may be based on various
securities in which the Fund 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) and
other financial instruments and indices.
These instruments may be used to hedge portfolio positions and transactions as
well as to gain exposure to markets. For example, the 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 the Fund intends to
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acquire an instrument or enter into a position. For example, the 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 Fund 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 of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Fund 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 Fund will only
enter into futures contracts or options or futures contracts which are
standardized and traded on a U. S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. The 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. The Fund may invest in
securities denominated in foreign currencies may, in 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
involved 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, the 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, the Fund reduces its exposure to changes in the
value of the currency it will delivery and increases its exposure to changes in
the value of the currency it will exchange into. The effect on the value of the
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 "crosshedges."
The 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. The 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.
The 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.
LIMITING INVESTMENT RISKS
The Fund has adopted the following investment restrictions which may not be
changed without approval by a "majority of the outstanding shares" of the Fund
or which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of the Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
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The Fund may not:
(1) borrow money, except that the 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 total assets
must be repaid before the Fund may make additional investments;
(2) make loans, except that the 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 objective and
policies; (ii) enter into repurchase agreements with respect to
portfolio securities; and (iii) lend portfolio securities with a value
not in excess of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in
the securities of companies whose principal business activities are in
the same industry. Notwithstanding the foregoing, with respect the
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;
(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not
prevent the Fund from (i) purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities or (ii) engaging in forward purchases or sales
of foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Fund from investing insecurities or other instruments
backed by real estate or securities of companies engaged in the real
estate business). Investments by the 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) the 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) the 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, the 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 the
Fund may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes Real
Estate Limited Partnerships. For purposes of investment restriction (3)
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."
In addition, the Fund will be subject to the following nonfundamental
restrictions which may be changed without shareholder approval:
(1) The Fund may not, with respect to 75% of its assets, hold more than
10% of the outstanding voting securities of an issuer.
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(2) The 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 the Fund.
(3) The Fund may not purchase or sell interests in oil, gas or mineral
leases.
(4) The Fund may not invest more than 15% of its net assets in illiquid
securities.
(5) The 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 the Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of
puts, calls or combinations thereof with respect to futures.
(6) The 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.
Notwithstanding any other investment policy or restriction, the 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 the Fund's 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 limitation on investment or use of assets is adhered to at the
time a transaction is effected, later changes in percentage resulting from any
cause other than actions by the Fund will not be considered a violation. If the
value of the 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.
It is the Trust's position that proprietary strips, such as CATS and TIGRS, are
United States Government securities. However, the Trust has been advised that
the staff of the Commission's Division of Investment Management does not
consider these to be United States Government securities, as defined under the
Investment Company Act of 1940, as amended.
In order to permit the sale of its shares in certain states, the Fund may make
commitments more restrictive than the investment policies and limitations
described above and in the Prospectus. Should the Fund determine that any such
commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Specific decisions to purchase or sell securities for the Fund are made by the
Fund's portfolio manager who is an employee of the Sub-Adviser and who is
appointed and supervised by senior officers of such Sub-Adviser. Changes in the
Fund's investments are reviewed by the Board of Trustees. The Fund's portfolio
manager may serve other clients of the Adviser or Sub-Adviser in a similar
capacity.
The frequency of the 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 (see "Tax Matters" in the Prospectus), the Sub-Adviser will
weigh the added costs of
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short-term investment against anticipated gains. For the fiscal year ending
October 31, 1996 the annual rate of portfolio turnover for the Fund is expected
not to exceed 100%.
Under the Sub-Advisory Agreement, the Sub-Adviser shall use its best efforts to
seek to execute portfolio transactions at prices which, under the circumstances,
result in total costs or proceeds being the most favorable to the Fund. The
Sub-Adviser attempts to achieve this result by selecting broker-dealers to
execute portfolio transactions on behalf of the Fund and other clients of the
Sub-Adviser on the basis of their professional capability, the value and quality
of their brokerage services, and the level of their brokerage commissions. 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 Sub-Adviser 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 Sub-Adviser on the tender of the Fund's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by the SubAdviser. At present, no other
recapture arrangements are in effect.
Under The Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Sub-Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the SubAdviser,
the Funds and/or other accounts for which the Sub-Adviser exercises investment
discretion an amount of commission for effecting a securities transaction for
the Funds in excess of the amount other broker-dealers would have charged for
the transaction if the Sub-Adviser determines 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 the Sub-Adviser's overall responsibilities to the Fund
or to accounts over which they exercise investment discretion. Not all of such
services are useful or of value in advising the Fund. The Sub-Adviser shall
report to the Board of Trustees of the Trust regarding overall commissions paid
by the Funds and their reasonableness in relation to 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.
Although commissions paid on every transaction will, in the judgment of the
Sub-Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Sub-Adviser's other clients as part of providing advice as to
the availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Sub-Adviser for no consideration
other than brokerage or underwriting commissions. Securities may be bought or
sold through such broker-dealers, but at present, unless otherwise directed by
the Fund, a commission higher than one charged elsewhere will not be paid to
such a firm solely because it provided Research to the Sub-Adviser.
The Sub-Adviser's investment management personnel will attempt to evaluate the
quality of Research provided by brokers. Results of this effort are sometimes
used by the Sub-Adviser as a consideration in the selection of brokers to
execute portfolio transactions. However, the Sub-Adviser would be unable to
quantify the amount of commissions which are paid as a result of such Research
because a substantial number of transactions are effected through brokers which
provide Research but which are selected principally because of their execution
capabilities.
The management fees that the Fund pays to the Adviser will not be reduced as a
consequence of the Sub-Adviser's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such
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services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid, by an amount which cannot be presently determined. Such
services would be useful and of value to the Sub-Adviser in serving one or more
of the Fund and other clients and, conversely, such services obtained by the
placement of brokerage business of other clients would be useful to the
Sub-Adviser in carrying out its obligations to the Fund. While such services are
not expected to reduce the expenses of the Sub-Adviser, the Sub-Adviser would,
through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
In certain instances, there may be securities that are suitable for one or more
of the Funds as well as one or more of the Sub-Adviser's other clients.
Investment decisions for the Fund and for the Sub-Adviser's other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. In executing portfolio transactions for the Fund, the
Sub-Adviser may, to the extent permitted by applicable laws and regulations, but
shall not be obligated to, aggregate the securities to be sold or purchased with
those of other Funds or its other clients if, in the Sub-Adviser's reasonable
judgment, such aggregation (i) will result in an overall economic benefit to the
Fund, taking into consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading requirements, and (ii) is
not inconsistent with the policies set forth in the Trust's registration
statement and the Fund's Prospectus and Statement of Additional Information. In
such event, the Sub-Adviser will allocate the securities so purchased or sold,
and the expenses incurred in the transaction, in an equitable manner, consistent
with its fiduciary obligations to the Fund and such other clients. 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 Fund is concerned. However, it is
believed that the ability of the Fund to participate in volume transactions will
generally produce better executions for the Fund.
No portfolio transactions are executed with the Adviser or Sub-Adviser or a
Shareholder Servicing Agent, or with any affiliate of the Adviser or Sub-Adviser
or a Shareholder Servicing Agent, acting either as principal or as broker.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN
The total rate of return for a class 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.
YIELD QUOTATIONS
Any current "yield" quotation of a class 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 net
investment income earned by such class 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.
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NON-STANDARDIZED PERFORMANCE RESULTS
From time to time, the Fund may provide certain non-standardized performance
results of a class, if any, in addition to the total rate of return quotations
required by the Securities and Exchange Commission. As discussed more fully in
the Prospectus, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of such
class in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of such class with those published for other investment companies and
other investment vehicles.
DETERMINATION OF NET ASSET VALUE
The Fund determines the net asset value of each class of the Fund once each day
based upon prices of securities as of the regular close of the New York Stock
Exchange, or 4:15 p.m. for options, on each day which the New York Stock
Exchange is open for trading (a "Fund Business Day"), by dividing the value of
its net assets (i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued, by the number of its shares
outstanding at the time the determination is made. (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.) Purchases and redemptions will be effected at
the time of determination of net asset value next following the receipt of any
purchase or redemption order. (See "Purchases and Redemptions of Shares" in the
Prospectus.)
Bonds and other fixed income securities (other than short-term obligations, but
including listed issues) are valued on the basis of valuations furnished by a
pricing service, the use of which has been approved by the Board of Trustees. In
making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques that take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-Term obligations which mature in 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures and option contracts that are traded on commodities or securities
exchanges are normally valued at the settlement price on the exchange on which
they are traded. Portfolio securities (other than short-term obligations) for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in the 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.
Subject to compliance with applicable regulations, the Fund has reserved the
right to pay the redemption price of its Shares, either totally or partially, by
a distribution in kind of 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.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussions here and in
the Prospectus are not intended as substitutes for careful tax planning.
-14-
<PAGE>
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement. In addition
to satisfying the Distribution Requirement, a regulated investment company must:
(1) derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement"); and (2) derive less than 30% of its gross
income (exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the sale
or other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the Fund may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the Fund at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation (including a municipal obligation) purchased by the Fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the Fund held the debt obligation.
Further, the Code also treats as ordinary income, a portion of the capital gain
attributable to a transaction where substantially all of the return realized is
attributable to the time value of the Fund's net investment in the transaction
and: (1) the transaction consists of the acquisition of property by the Fund and
a contemporaneous contract to sell substantially identical property in the
future; (2) the transaction is a straddle within the meaning of Section 1092 of
the Code; (3) the transaction is one that was marketed or sold to the Fund on
the basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction; and (2) the
capitalized interest on acquisition indebtedness under Code Section 263(g).
Builtin losses will be preserved where the Fund has a built-in loss with respect
to property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Fund's shareholders.
-15-
<PAGE>
In general, for purposes of determining whether capital gain or loss recognized
by the Fund on the disposition of an asset is long-term or short-term, the
holding period of the asset may be affected if: (1) the asset is used to close a
"short sale" (which includes for certain purposes the acquisition of a put
option) or is substantially identical to another asset so used, (2) the asset is
otherwise held by the Fund as part of a "straddle" (which term generally
excludes a situation where the asset is stock and the Fund grants a qualified
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto); or (3) the asset is stock and the Fund grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (i) above. In addition, the Fund
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss recognized
by the Fund from a closing transaction with respect to, an option written by the
Fund will be treated as a short-term capital gain or loss. For purposes of the
Short-Short Gain Test, the holding period of an option written by the Fund will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, the Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
The Fund's investments in options, futures contracts and forward contracts,
options on futures contracts and stock indices and certain other securities,
including transactions involving actual or deemed short sales or foreign
exchange gains or loses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. Certain transactions that
may be engaged in by the Fund (such as regulated futures contracts, certain
foreign currency contracts, and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contracts have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is generally treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. The Fund, however, may elect not to have this
special tax treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the Fund that are not Section 1256
contracts. The Internal Revenue Service (the "IRS") has held in several private
rulings (and Treasury Regulations now provide) that gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which
-16-
<PAGE>
are engaged in the same or similar trades or businesses. Generally, an option
(call or put) with respect to a security is treated as issued by the issuer of
the security not the issuer of the option. However, with regard to forward
currency contracts, there does not appear to be any formal or informal authority
which identifies the issuer of such instrument. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S.
Government Securities.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of ordinary
taxable income for the calendar year and 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election"))(Tax-exempt
interest on municipal obligations is not subject to the excise tax). The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses incurred after October 31 of any year (or after the end of its
taxable year if it has made a taxable year election) in determining the amount
of ordinary taxable income for the current calendar year (and, instead, include
such gains and losses in determining ordinary taxable income for the succeeding
calendar year).
The 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 the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will qualify for the 70% dividends-received deduction for
corporations only to the extent discussed below.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The 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. The Code provides, however, that under certain conditions
only 50% of the capital gain recognized upon the Fund's disposition of "small
business" stock will be subject to tax.
Conversely, if the 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 the 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
-17-
<PAGE>
as if each received a distribution of his pro rata share of such gain, with the
result that each shareholder will be required to report his pro rata share of
such gain on his tax return as long-term capital gain, will receive a refundable
tax credit for his pro rata share of tax paid by the Fund on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as Subchapter S corporations, which
are not eligible for the deduction because of their special characteristics and
other than for purposes of special taxes such as the accumulated earnings tax
and the personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by the 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),
excluding for this purpose under the rules of Code Section 246(c) (3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the 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 (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996 at
the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for that tax and the AMT net operating loss
deduction) over $2 million. For purposes of the Corporate AMT and the
environmental Superfund tax, 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 AMTI. However, corporate
shareholders will generally be required to take the full amount of any dividend
received from the Fund into account (without a dividends-received deduction) in
determining its 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)) includible in AMTI.
Investment income that may be received by the Fund 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
the 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 the Fund's assets to be invested in various countries is not known.
Distributions by the Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the 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 the Fund reflects undistributed net
investment income or recognized capital gain net
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<PAGE>
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 the 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.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
SALE OR REDEMPTION OF SHARES
Each shareholder will recognize gain or loss on the sale or redemption of shares
of the 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 the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares. For
this purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of shares.
Long-term capital gains of noncorporate taxpayers are currently taxed at a
maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
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 the Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
a foreign shareholder will be subject to U.S. withholding tax at the rate of 30%
(or lower treaty rate) upon the gross amount of the dividend. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund, capital gain dividends and
exempt-interest dividends and amounts retained by the Fund that are designated
as undistributed capital gains.
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<PAGE>
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the 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 the Fund, including the
applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends and capital gain dividends from regulated investment companies often
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in the Fund.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers and their principal occupations for at least the past
five years are set forth below. Their titles may have varied during that period.
Asterisks indicate those Trustees and officers that are "interested persons" (as
defined in the 1940 Act). Unless otherwise indicated below, the address of each
officer is 125 W. 55th Street, New York, New York 10019.
TRUSTEES
The Trustees and officers and their principal occupations for at least the past
five years are set forth below. Their titles may have varied during that period.
Asterisks indicate those Trustees and officers that are "interested persons" (as
defined in the 1940 Act). Unless otherwise indicated below, the address of each
officer is 125 W. 55th Street, New York, New York 10019.
FERGUS REID, III* - Chairman of the Board of Trustees. Chairman of the Board of
Trustees of Mutual Fund Trust and Trustee of certain Portfolios advised by Chase
(the "Portfolios"). Chairman and Chief Executive Officer, Lumelite Corporation,
since September 1985; Trustee, Morgan Stanley Portfolios; from 1982 through
1984, Managing Director, Bernhard Associates (venture capital firm). Address:
971 West Road, New Canaan, Connecticut 06840.
DR. RICHARD E. TEN HAKEN - Trustee. Trustee of Mutual Fund Trust and the
Portfolios. Former District Superintendent of Schools, Monroe No.2 and Orleans
Counties, New York; Chairman of the Finance and the Audit and Accounting
Committees, Member of the Executive Committee; Chairman of the Board and
President, New York State Teachers' Retirement System. Address: 4 Barnfield
Road, Pittsford, New York 14534.
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<PAGE>
WILLIAM J. ARMSTRONG - Trustee. Trustee of Mutual Fund Trust. Vice President and
Treasurer, Ingersoll- Rand Company. Address: 49 Aspen Way, Upper Saddle River,
New Jersey 07458.
JOHN R.H. BLUM - Trustee. Trustee of Mutual Fund Trust. Attorney in Private
Practice; formerly, a Partner in the law firm of Richard, O'Neil & Allegaert;
Commissioner of Agriculture - State of Connecticut, 1992-1995. Address: 322 Main
Street, Lakeville, Connecticut 06039.
JOSEPH J. HARKINS* - Trustee. Trustee of Mutual Fund Trust. Retired; formerly,
Commercial Sector Executive and Executive Vice President of The Chase Manhattan
Bank, N.A. from 1985 through 1989. He has been employed by Chase in numerous
capacities and offices since 1954. Director of Blessings Corporation, Jefferson
Insurance Company of New York, Monticello Insurance Company and Nationar.
Address: 257 Plantation Circle South, Ponte Vedra Beach, Florida 32082.
H. RICHARD VARTABEDIAN* - Trustee and President. Trustee and President of Mutual
Fund Trust. Chairman of the Board of the Portfolios. Consultant, Republic Bank
of New York; formerly, Senior Investment Officer, Division Executive of the
Investment Management Division of The Chase Manhattan Bank, N.A., 1980 through
1991. Address: P.O. Box 296, Beach Road, Hendrick's Head, Southport, Maine 04576
STUART W. CRAGIN, JR. - Trustee. Trustee of Mutual Fund Trust and the
Portfolios. Retired; formerly, President, Fairfield Testing Laboratory, Inc. He
has previously served in a variety of marketing, manufacturing and general
management positions with Union Camp Corp., Trinity Paper & Plastics Corp., and
Conover Industries. Address: 108 Valley Road, Cos Cob, Connecticut 06807.
IRVING L. THODE - Trustee. Trustee of Mutual Fund Trust and the Portfolios.
Retired; Vice President of Quotron Systems. He has previously served in a number
of executive positions with Control Data Corp., including President of its Latin
American Operations, and General Manager of its Data Services business. Address:
80 Perkins Road, Greenwich, Connecticut 06830.
The Board of Trustees met seven times during the twelve months ended December
31, 1995, and each of the Trustees attended at least 75% of those meetings.
The Board of Trustees of the Trust presently has an Audit Committee. The members
of the Audit Committee are Messrs. Ten Haken (Chairman), Blum, Cragin, Thode,
Armstrong, Harkins*, Reid, and Vartabedian*. The function of the Audit Committee
is to recommend independent auditors and monitor accounting and financial
matters. The Audit Committee met two times during the fiscal year ended October
31, 1995.
* Interested Trustees as defined under the 1940 Act.
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 Adviser is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the Adviser. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component. Effective August 21, 1995, each Trustee of the Vista Funds receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Adviser.
Set forth below is information regarding compensation paid or accrued during the
fiscal year ended October 31, 1995 for each Trustee of the Trust:
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<TABLE>
<CAPTION>
Vista
Vista Growth Vista
Vista Equity and Capital Vista Vista
Balanced Income Income Growth Equity Bond
Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee 241.30 $96.13 $14,393.16 $7,594.67 $540.99 $468.64
Richard E. Ten Haken, 160.88 64.07 9,595.45 5,063.12 360.67 312.41
Trustee
William J. Armstrong, 160.88 64.07 9595.45 5,063.12 360.67 312.41
Trustee
John R.H. Blum, Trustee 190.83 62.60 9,376.63 4,955.42 352.06 305.11
Joseph J. Harkins, Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
H. Richard Vartabedian, 169.60 67.79 10,159.13 5,376.61 330.18 330.18
Trustee
Stuart W. Cragin, Jr., Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
Irving L. Thode, Trustee 160.88 64.07 9,595.45 5,063.12 360.67 312.41
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Vista
Glob
Vista Vista Vista Vista al Vista
Short U.S. Small Inter- Fixed Southea Vista Vista
Term Governm Cap national Inco st Japa Europe
Bond ent Equity Equity me Asian n an
Fund Fund Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee $298.13 $919.27 $172.16 $315.97 $8.47 0 0 0
Richard E. Ten Haken, 195.40 612.85 114.79 210.64 5.64 0 0 0
Trustee
William J. Armstrong, 195.40 612.85 114.79 210.64 5.64 0 0 0
Trustee
John R.H. Blum, Trustee 190.83 598.68 114.79 205.42 5.64 0 0 0
Joseph J. Harkins, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
H. Richard Vartabedian, 206.44 646.75 133.68 219.47 5.64 0 0 0
Trustee
Stuart W. Cragin, Jr., 195.40 612.85 114.79 210.64 5.64 0 0 0
Trustee
Irving L. Thode, Trustee 195.40 612.85 114.79 210.64 5.64 0 0 0
</TABLE>
Pension or Total
Retirement Compensation
Benefits Accrued from "Fund
as Fund Expenses Complex"(1)
Fergus Reid, III, Trustee 0 $78,456.65
Richard E. Ten Haken, Trustee 0 52,304.39
William J. Armstrong, Trustee 0 52,304.39
John R.H. Blum, Trustee 0 51,304.37
Joseph J. Harkins, Trustee 0 52,304.39
H. Richard Vartabedian, Trustee 0 74,804.44
Stuart W. Cragin, Jr., Trustee 0 52,304.39
Irving L. Thode, Trustee 0 52,304.39
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(1) Data reflects total compensation earned during the period January 1, 1995
to December 31, 1995 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Adviser.
VISTA FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES
Effective August 21, 1995, the Trustees also instituted a Retirement Plan for
Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of any of the Portfolios, the Adviser, Administrator or Distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the Adviser (collectively, the "Covered Portfolios"). Each
Eligible Trustee is entitled to receive from the Covered Portfolios an annual
benefit commencing on the first day of the calendar quarter coincident with or
following his date of retirement equal to 10% of the highest annual compensation
received from the Covered Portfolios multiplied by the number of such Trustee's
years of service (not in excess of 10 years) completed with respect to any of
the Covered Portfolios. Such benefit is payable to each eligible Trustee in
monthly installments for the life of the Trustee.
Set forth in the table below are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian,
Cragin, and Thode are 11, 11, 8, 11, 3, 3 and 3, respectively.
HIGHEST ANNUAL COMPENSATION PAID BY ALL VISTA FUNDS
40,000 45,000 50,000 55,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Effective August 21, 1995, the Trustees instituted a Deferred Compensation Plan
for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each
Trustee (who is not an employee of any of the Funds, the Adviser, Administrator
or Distributor or any of their affiliates) may enter into agreements with the
Funds whereby payment of the Trustees' fees are deferred until the payment date
elected by the Trustee (or the Trustee's termination of service). The deferred
amounts are deemed invested in shares of a Fund on whose Board the Trustee sits,
subject to the Trustee's election. The deferred amounts are paid out in a lump
sum or over a period of several years as elected by the Trustee at the time of
deferral. If a deferring Trustee dies prior to the distribution of amounts held
in the deferral account, the balance of the deferral account will be distributed
to the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
-24-
<PAGE>
Trustees have executed a deferred compensation agreement for the 1996 calendar
year: Messrs. Ten Haken, Thode and Vartabedian.
PRINCIPAL EXECUTIVE OFFICERS:
The principal executive officers of the Trust are as follows:
H. Richard Vartabedian - President and Trustee.
Martin R. Dean - Treasurer and Assistant Secretary; Vice President, BISYS
Portfolios Group, Inc.
Ann Bergin - Secretary and Assistant Treasurer; Vice President, BISYS Funds
Group, Inc.; Secretary, Vista BrokerDealer Services, Inc.
OWNERSHIP OF SHARES OF THE PORTFOLIOS. The Trustees and officers as a group
directly or beneficially own less than 1% of each Portfolio.
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 wilful 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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
The Fund pays no direct remuneration to any officer of the Trust.
THE ADVISER
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement to become effective prior to the Fund's commencement of operations
(the "Advisory Agreement"). Subject to such policies as the Board of Trustees
may determine, Chase makes investment decisions for the Fund. Pursuant to the
terms of the Advisory Agreement, the Adviser provides the Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of the Fund's investments. The Adviser continuously provides
investment programs and determines from time to time what securities shall be
purchased, sold or exchanged and what portion of the Fund's assets shall be held
uninvested. The Adviser furnishes, at its own expense, all services, facilities
and personnel necessary in connection with managing the investments and
effecting portfolio transactions for the Fund. The other expenses attributable
to, and payable by the Fund, are described under "Expenses" in the Prospectus.
The Advisory Agreement for the Fund 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 the 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.
On August 27, 1995, The Chase Manhattan Corporation announced its entry into an
Agreement and Plan of Merger (the "Merger Agreement") with Chemical Banking
Corporation ("Chemical"), a bank holding company, pursuant to which The Chase
Manhattan Corporation will merge with and into Chemical (the "Holding Company
-25-
<PAGE>
Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The consummation of the
Holding Company Merger is subject to certain closing conditions. On December 11,
1995, the respective shareholders of The Chase Manhattan Corporation and
Chemical voted to approve the Merger Agreement. The Holding Company Merger is
expected to be completed on or about March 31, 1996.
Subsequent to the Holding Company Merger, it is expected that the Adviser will
be merged with and into Chemical Bank. a New York State chartered bank
("Chemical Bank") (the "Bank Merger" and together with the Holding Company
Merger, the "Mergers"). The surviving bank will continue operations under the
name The Chase Manhattan Bank (as used herein, the term "Chase" refers to The
Chase Manhattan Bank, N.A. and its successor in the Bank Merger, and the term
"Adviser" means Chase (including its successor in the Bank Merger) in its
capacity as investment adviser to the Funds). The consummation of the Bank
Merger is subject to certain closing conditions, including the receipt of
certain regulatory approvals. The Bank Merger is expected to occur in July,
1996.
Chemical is a publicly owned bank holding company incorporated under Delaware
law and registered under the Federal Bank Holding Company Act of 1956, as
amended. As of December 31, 1995, through its direct or indirect subsidiaries,
Chemical managed more than $57 billion in assets, including approximately $6.9
billion in mutual fund assets in 11 mutual fund portfolios. Chemical Bank is
wholly-owned subsidiary of Chemical and is a New York State chartered bank.
Under the Advisory Agreement, the Adviser may utilize the specialized portfolio
skills of all its various affiliates, thereby providing the Fund with greater
opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement, the Adviser is permitted to
render services to others. The Advisory Agreement is terminable without penalty
by the Trust on behalf of the Fund on not more than 60 days', nor less than 30
days', written notice when authorized either by a majority vote of the Fund's
shareholders or by a vote of a majority of the Board of Trustees of the Trust,
or by the 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 Agreement provides that the 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 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 the Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of the Fund is 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 Fund during such fiscal year; and if such amounts should exceed
the monthly fee, the Adviser shall pay to the 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 the Adviser pursuant to the
Advisory Agreement, the Fund pays an investment advisory fee computed and paid
monthly based on a rate equal to 0.30% of the Fund's average daily net assets,
on an annualized basis for the Fund's then-current fiscal year. However, the
Adviser may voluntarily agree to waive a portion of the fees payable to it on a
month-to-month basis.
-26-
<PAGE>
THE SUB-ADVISER
Under an investment advisory agreement between the Trust, on behalf of the Fund,
and Chase, Chase may delegate a portion of its responsibilities to a
sub-adviser. In addition, the investment 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 New 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 Fund, has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with Chase Asset Management , Inc.
("CAM, Inc."), whose principal offices are located at 1211 Sixth Avenue, New
York, New York 10019. CAM, Inc. is a wholly-owned subsidiary of the Adviser.
With respect to the day to day management of the Fund, under the sub-advisory
agreement, the Sub-Adviser makes decisions concerning, and places all orders
for, purchases and sales of securities and helps maintain the records relating
to such purchases and sales. The Sub-Adviser may, in its discretion, provide
such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of New 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 Fund.
ADMINISTRATOR
Pursuant to an Administration Agreement, dated August 21, 1995 (the
"Administration Agreement"), Chase serves as administrator of the Trust. Chase
provides certain administrative services to the Trust, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Trust's 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 Trust and providing, at its own expense, office
facilities, equipment and personnel necessary to carry out its duties. The
Administrator does not have any responsibility or authority for the management
of the Fund, the determination of investment policy, or for any matter
pertaining to the distribution of Fund shares.
Under the Administration Agreement Chase renders administrative services to
others. The Administration Agreement 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 the Fund's outstanding voting securities
and 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 the Fund on 60 days' written notice when authorized either by a
majority vote of the 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 the Administrator on
60 days' written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration or
management of the Fund, except for wilful 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 the Fund
imposed by the securities laws or regulations thereunder of any state in which
the shares of the Fund is qualified for sale, as such limitations may be raised
or lowered from time to time, Chase shall
-27-
<PAGE>
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, the Administrator receives from the Fund a fee
computed and paid monthly at an annual rate equal to 0.10% 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 the Fund on a month-to-month basis.
DISTRIBUTOR
DISTRIBUTION PLAN
The Trust has adopted separate plans of distribution pursuant to Rule 12b-1
under the 1940 Act (a "Distribution Plan") including several Distribution Plans
on behalf of the Class A Shares of certain of the Funds, including the Fund,
which provides that the Fund shall pay a distribution fee (the "Distribution
Fee"), including payments to the Distributor, at an annual rate not to exceed
0.25% of its Shares average daily net assets for distribution services. The
Distributor may use all or any portion of such Basic 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.
The Class A 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 by vote of a majority of the outstanding voting Shares of the
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 of the affected class and may not be materially amended
in any case without a vote of the majority of both the Trustees and the
Qualified Trustees. The Fund will preserve copies of any plan, agreement or
report made pursuant to the Distribution Plans 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.
Since the Distribution Fee is not directly tied to actual expenses, the amount
of Distribution Fee paid by each of the Class A shares during any year may be
more or less than actual expenses incurred pursuant to the Distribution Plan.
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 in which the
Distributor's compensation is directly linked to its expenses). However, the
Shares are not liable for any distribution expenses incurred in excess of the
Basic Distribution Fee paid.
DISTRIBUTION AND SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Distribution and Sub-Administration Agreement dated
August 21, 1995 (the "Distribution Agreement"), with the Distributor, pursuant
to which the Distributor acts as the Fund's exclusive underwriter, provides
certain administration services and promotes and arranges for the sale of the
Fund's shares.
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<PAGE>
The Distributor became a wholly-owned subsidiary of Concord Financial Group. 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 the 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 the Fund only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the Fund's
outstanding voting securities and 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 the Fund on 60 days' written notice when
authorized either by a majority vote of the 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 wilful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties.
In the event the operating expenses of the 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 the Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of the 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 the 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 the Fund during
such fiscal year; and if such amounts should exceed the monthly fee, the
Distributor shall pay to the 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 the Fund. However, the
Distributor has voluntarily agreed to waive a portion of the fees payable to it
under the Distribution Agreement with respect to the Fund on a month-to-month
basis.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services.
The fees relating to acting as liaison to shareholders and providing personal
services to shareholders will not exceed, on an annualized basis, 0.25% of the
average daily net assets of the Fund represented by shares owned during the
period for which payment is being made by investors with whom such Shareholder
Servicing Agent maintains a servicing relationship. However, each Shareholder
Servicing Agent has voluntarily agreed to waive a portion of the fees payable to
it under its Servicing Agreement with respect to the Fund on a month-to-month
basis.
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.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the assets of
the Fund for which Chase receives compensation as is from time to time agreed
upon by the Trust and Chase. For additional information, see "Shareholder
Servicing Agents, Transfer Agent and Custodian" in the Prospectus.
-29-
<PAGE>
In certain circumstances Shareholder Servicing Agents may be required to
register as dealers under state law.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
serves as independent accountants of the Fund. Price Waterhouse LLP provides the
Fund with audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission.
GENERAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Mutual Fund Group is an open-end, management investment company organized as
Massachusetts business trust under the laws of the Commonwealth of Massachusetts
in 1987.
The Trust currently consists of 17 Funds of shares of beneficial interest
without par value. Certain of the Funds in 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 pre-emptive or conversion rights. Shares when
issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each share held. Shares of each series
or class generally vote separately, for example to approve investment advisory
agreements or distribution plans, but shares of all series and classes vote
together, to the extent required under the 1940 Act, in the election or
selection of Trustees and independent accountants. With respect to shares
purchased through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by the Fund or its designated agent prior to a
shareholder meeting at which a proxy is to be voted and the shareholder does not
attend the meeting in person, the Shareholder Servicing Agent for such
shareholder will be authorized pursuant to an applicable agreement with the
shareholder to vote the shareholder's outstanding shares in the same proportion
as the votes cast by other Fund shareholders represented at the meeting in
person or by proxy.
Class A shares are sold at net asset value plus an initial sales charge of up to
a maximum of 4.50% of the offering price.
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. The Trust's Declaration of
Trust provides that, at any meeting of shareholders of the Trust or of any
series or class, a Shareholder Servicing Agent may vote any shares as to which
such Shareholder Servicing Agent is the agent of record and which are not
represented in person or by proxy at the meeting, proportionately in accordance
with the votes cast by holders of all shares of that portfolio otherwise
represented at the meeting in person or by proxy as to which such Shareholder
Servicing Agent is the agent of record. Any shares so voted by a Shareholder
Servicing Agent will be deemed represented at the meeting for
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<PAGE>
purposes of quorum requirements. 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.
Stock certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares that may be
redeemed through expedited or automated procedures established by a Shareholder
Servicing Agent.
The Trust is an entity of the type commonly known as a "Massachusetts business
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 Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of wilful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
The Board of Trustees has adopted a Code of Ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The Code of Ethics substantially conforms to the
recommendations made by the Investment Company Institute ("ICI") (except where
noted) and includes such provisions as:
o Prohibitions on investment personnel acquiring securities in initial
offerings;
o A requirement that access persons obtain prior to acquiring
securities in a private placement and that the officer granting such
approval have no interest in the issuer making the private placement;
o A restriction on access persons executing transactions for securities
on a recommended list until 14 days after distribution of that list;
o A prohibition on access persons acquiring securities that are pending
execution by one of the Portfolios until 7 days after the
transactions of the Portfolios are completed;
o A prohibition of any buy or sell transaction in a particular security
in a 30-day period, except as may be permitted in certain hardship
cases or exigent circumstances where prior approval is obtained. This
provision differs slightly from the ICI recommendation;
o A requirement for pre-clearance of any buy or sell transaction in a
particular security after 30 days, but within 60 days;
o A requirement that any gift exceeding $75.00 from a customer must be
reported to the appropriate compliance officer;
o A requirement that access persons submit in writing any request to
serve as a director or trustee of a publicly traded company;
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<PAGE>
o A requirement that all securities transactions in excess of $1,000 be
pre-cleared, except that if a person has engaged in more than $10,000
of securities transactions in a calendar quarter all securities of
such person require pre-clearance (this de minimus exception differs
slightly from the ICI recommendations);
o A requirement that all access persons direct their broker-dealer to
submit duplicate confirmation and customer statements to the
appropriate compliance unit; and
o A requirement that all access persons sign a Code of Ethics
acknowledgment, affirming that they have read and understood the Code
and submit a personal security holdings report upon commencement of
employment or status and a personal security transaction report
within 10 days of each calendar quarter thereafter.
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APPENDIX A
DESCRIPTION OF RATINGS
BOND RATINGS
Moody's Investors Service, Inc. Bonds which are rated Aaa are judged to be
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a large
or 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 positions of such issues. Bonds
which are rated Aa are judged to be of high quality by all standards. Together
with 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 fluctuations 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. Bonds which are rated
A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future. Moody's applies numerical modifiers "1,"
"2" and "3" in each generic rating classification from Aa through B in its
corporate bond rating system. 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 CorporationBonds rated AAA have the highest rating
assigned by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from AAA issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than bonds in higher rated categories.
A-1
<PAGE>
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions liable to but slight market fluctuation other than through changes
in the money rate. The prime feature of an AAA bond is showing of earnings
several times or many times interest requirements, with such stability of
applicable earnings that safety is beyond reasonable question whatever changes
occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety
virtually beyond question and are readily salable, whose merits are not unlike
those of the AAA class, but whose margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured but influenced
as to rating by the lesser financial power of the enterprise and more local type
market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1-Highest Quality; Prime 2-Higher
Quality; Prime 3-High Quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety. The designation
A-1 indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. A "+" designation is applied to those issues rated
"A-1" which possess safety characteristics. Capacity for timely payment on
issues with the designation A-2 is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Issues carrying the
designation A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
A-2
