<PAGE> 1
As filed with the Securities and Exchange Commission
on March 29, 1996
Registration Nos. 33-24753
811-5668
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
---
Post-Effective Amendment No. 15 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 17 /X/
(Check appropriate box or boxes)
THE HANOVER FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
237 Park Avenue
New York, New York 10017
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, including Area Code (800) 821-2371
Joan V. Fiore
Secretary
The Hanover Funds, Inc.
237 Park Avenue
New York, New York 10017
---------------------------------------
(Name and Address of Agent for Service)
Copies to:
Molly Sheehan, Esq. Gary Schpero, Esq.
Chemical Bank Simpson Thacher & Bartlett
270 Park Avenue 425 Lexington Avenue
New York, New York 10017 New York, New York 10017
-------------------
Page 1 of ___ Pages
Index to Exhibits on Page ___
<PAGE> 2
Approximate Date of Proposed Public Offering: As soon as practicable after
this Post-Effective Amendment becomes effective.
It is proposed that this filing will become effective (check appropriate box):
X immediately upon filing pursuant to Rule 485(b)
___ on _______ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)
___ 75 days after filing pursuant to Rule 485(a)
___ on _______ pursuant to Rule 485(a)
The Registrant has previously registered an indefinite number
of shares of Capital Stock, $.001 par value per share, of all series of the
Registrant then existing or thereafter created, under the Securities Act of
1933, as amended, pursuant to Rule 24f-2 under the Investment Company Act of
1940, as amended. The Registrant filed its Rule 24f-2 Notice for the fiscal
year ended November 30, 1995 on January 19, 1996.
<PAGE> 3
THE HANOVER FUNDS, INC.
Registration Statement on Form N-1A
Cross Reference Sheet
Pursuant to Rule 495(A)
Under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
Part A Prospectus Captions
- ------ -------------------
<S> <C> <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . . . . Overview; The Funds' Expenses
Item 3. Condensed Financial
Information . . . . . . . . . . . . . . . . . The Funds' Expenses
Item 4. General Description of
Registrant . . . . . . . . . . . . . . . . . . Organization and Capital Stock; Investment Objectives and
Policies; Limiting Investment Risks
Item 5. Management of the Fund . . . . . . . . . . . . Management
Item 5A. Management's Discussion
of Fund Performance . . . . . . . . . . . . . Not Applicable
Item 6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . Organization and Capital Stock; Dividends and Distributions;
Reports to Shareholders
Item 7. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . . Distributor and Plan of Distribution; Pricing of Shares; How to
Purchase and Redeem Shares
Item 8. Redemption or Repurchase . . . . . . . . . . . How to Purchase and Redeem Shares
Item 9. Pending Legal Proceedings . . . . . . . . . . Not Applicable
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
Statement of Additional
Part B Information Caption
- ------ -----------------------
<S> <C> <C>
Item 10. Cover Page . . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . . Table of Contents
Item 12. General Information and
History . . . . . . . . . . . . . . . . . . . Not Applicable
Item 13. Investment Policies . . . . . . . . . . . . . Investment Objectives and Policies; Additional Investment
Activities; Limiting Investment Risks
Item 14. Management of the
Registrant . . . . . . . . . . . . . . . . . . Management
Item 15. Control Persons and
Principal Holders of
Securities . . . . . . . . . . . . . . . . . . Capital Stock
Item 16. Investment Advisory and
Other Services . . . . . . . . . . . . . . . . Management; Distributor
Item 17. Brokerage Allocation . . . . . . . . . . . . . Portfolio Transactions
Item 18. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . Capital Stock
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . . . . . . . . . . . . Distributor; Net Asset Value
Item 20. Tax Status . . . . . . . . . . . . . . . . . . Additional Information Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . . . . . . Distributor
Item 22. Calculation of
Performance Data . . . . . . . . . . . . . . . Yield
Item 23. Financial Statements . . . . . . . . . . . . . Incorporated Financial Statements; Audited Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C of this Post-Effective
Amendment to the Registration Statement.
<PAGE> 5
THE HANOVER FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
THE HANOVER FUNDS, INC. (the "Company") is an open-end, management
investment company offering shares in six separate money market portfolios: The
100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money Market
Fund, The Government Money Market Fund, The Cash Management Fund, The Tax Free
Money Market Fund and The New York Tax Free Money Market Fund. This Prospectus
describes each of these money market portfolios (the "Funds"), each having its
own investment objectives and policies. Each of the Funds, other than The New
York Tax Free Money Market Fund, is a diversified portfolio of the Company.
THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND'S investment objective
is to seek as high a level of current income as is consistent with liquidity and
maximum safety of principal. The 100% U.S. Treasury Securities Money Market Fund
invests only in short-term United States Treasury obligations, which are backed
by the full faith and credit of the United States Government. Because The 100%
U.S. Treasury Securities Money Market Fund invests exclusively in direct United
States Treasury obligations, investors may benefit from income tax exclusions
and exemptions that are available in certain states or localities.
THE U.S. TREASURY MONEY MARKET FUND'S investment objective is to seek as
high a level of current income as is consistent with safety, liquidity and
stability of principal. The U.S. Treasury Money Market Fund invests only in
short-term United States Treasury obligations, which are backed by the full
faith and credit of the United States Government, and repurchase agreements in
respect of such obligations.
THE GOVERNMENT MONEY MARKET FUND'S investment objective is to seek as high a
level of current income as is consistent with liquidity and stability of
principal. The Government Money Market Fund invests in short-term obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities, and may also enter into repurchase agreements with respect to
such obligations.
THE CASH MANAGEMENT FUND'S investment objective is to seek as high a level
of current income as is consistent with liquidity and stability of principal.
The Cash Management Fund invests in high-quality, short-term United States
dollar-denominated money market instruments.
THE TAX FREE MONEY MARKET FUND'S investment objective is to seek as high a
level of current income exempt from federal income tax as is consistent with
liquidity and stability of principal. The Tax Free Money Market Fund invests
primarily in high-quality, short-term municipal obligations, the interest on
which is exempt from federal income tax.
THE NEW YORK TAX FREE MONEY MARKET FUND'S investment objective is to seek as
high a level of current income exempt from federal income tax and New York State
and New York City personal income tax as is consistent with liquidity and
stability of principal. The New York Tax Free Money Market Fund invests
primarily in high-quality, short-term municipal obligations issued by or on
behalf of the State of New York or by its instrumentalities or political
subdivisions, the interest on which is exempt from federal income tax and New
York State and New York City personal income taxes.
INVESTMENTS IN THE FUNDS ARE NOT GUARANTEED OR INSURED BY THE UNITED STATES
GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE FUNDS ARE NOT DEPOSITS
OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY, CHEMICAL BANK OR ITS
AFFILIATES, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORP. ("FDIC"), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE
FUNDS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Shares are sold without a sales charge by the Funds' distributor. The Funds
may bear certain costs in connection with the distribution of their shares as
provided in a plan adopted pursuant to Rule 12b-1 promulgated under the
Investment Company Act of 1940, as amended (the "1940 Act"). All purchase and
redemption orders must be placed through a Shareholder Servicing Agent, which is
a financial institution that has entered into an agreement with the Company to
provide various shareholder services to the beneficial owners of Fund shares, or
the Funds' distributor. For more information about Shareholder Servicing Agents,
see "Management -- Shareholder Servicing Agents" in this Prospectus.
This Prospectus sets forth concisely the information concerning the Funds
that a prospective investor should know before investing in the Funds. This
Prospectus should be read and retained for ready reference to information about
the Funds. Separate prospectuses with respect to the Funds may be used in
addition to this Prospectus. A Statement of Additional Information dated March
29, 1996, containing additional information about the Funds has been filed with
the Securities and Exchange Commission and is hereby incorporated by reference
into this Prospectus. An investor may obtain a Statement of Additional
Information without charge by writing the Company at its address shown above.
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.
March 29, 1996
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Overview.............................................................................. 3
The Funds' Expenses................................................................... 4
Financial Highlights.................................................................. 6
Investment Objectives and Policies.................................................... 10
The 100% U.S. Treasury Securities Money Market Fund................................. 10
The U.S. Treasury Money Market Fund................................................. 10
The Government Money Market Fund.................................................... 11
The Cash Management Fund............................................................ 12
The Tax Free Money Market Fund...................................................... 15
The New York Tax Free Money Market Fund............................................. 17
Additional Investment Activities.................................................... 19
Limiting Investment Risks............................................................. 25
Management............................................................................ 26
Investment Advisers................................................................. 26
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent.................... 27
Shareholder Servicing Agents........................................................ 27
Regulatory Matters.................................................................. 28
Other Information Concerning Fees and Expenses...................................... 28
Pricing of Shares..................................................................... 29
How to Purchase and Redeem Shares..................................................... 29
Purchase of Shares.................................................................. 29
Redemption of Shares................................................................ 30
Dividends and Distributions........................................................... 31
Distributor........................................................................... 31
Yield................................................................................. 32
Taxes................................................................................. 33
Organization and Capital Stock........................................................ 36
Reports to Shareholders............................................................... 36
</TABLE>
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 7
OVERVIEW
The Company is an open-end management investment company designed to meet
short-term investment needs. This Prospectus describes the operations and offers
the shares of the following six Funds:
-- THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
-- THE U.S. TREASURY MONEY MARKET FUND
-- THE GOVERNMENT MONEY MARKET FUND
-- THE CASH MANAGEMENT FUND
-- THE TAX FREE MONEY MARKET FUND
-- THE NEW YORK TAX FREE MONEY MARKET FUND
3
<PAGE> 8
THE FUNDS' EXPENSES
The following expense table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of shares in each of the Funds. The table reflects
information for the fiscal year ended November 30, 1995 for The 100% U.S.
Treasury Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund.
<TABLE>
<CAPTION>
THE 100% THE
U.S. TREASURY THE U.S. THE THE TAX NEW YORK
SECURITIES TREASURY GOVERNMENT FREE TAX FREE
MONEY MONEY MONEY THE CASH MONEY MONEY
MARKET MARKET MARKET MANAGEMENT MARKET MARKET
FUND FUND FUND FUND FUND FUND
------------- -------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net
assets)
Management fees (after waivers)*...... .12% .12% .12% .12% .12% .12%
12b-1 fees**.......................... .00% .00% .00% .00% .00% .00%
Shareholder servicing fees............ .35% .35% .35% .35% .35% .35%
Other expenses (includes audit,
administration, custody, legal,
registration, transfer agency and
miscellaneous other charges, after
waivers)+........................... .11% .11% .12% .11% .15% .13%
-- -- -- -- --
---
Total operating expenses
(after waivers)++............. .58% .58% .59% .58% .62% .60%
============= ======== ============ ============ ======== ==========
</TABLE>
- ---------------
* Reflects voluntary waivers of advisory fees for each of the Funds, which are
expected to continue for the Company's current fiscal year. Absent these
voluntary waivers, the ratio of management fees to the average daily net
assets of each Fund would be .15%.
** Each Fund is authorized to spend up to .10% of its net assets annually in
accordance with its Plan of Distribution to reimburse its distributor for
activities primarily intended to result in the sale of its shares, but is not
expected to do so for the Company's current fiscal year. See "Distributor" in
this Prospectus.
+ Restated to eliminate the effect of certain fee waivers which were in effect
during the fiscal year ended November 30, 1995. Absent other voluntary
waivers, the ratio of other expenses to average daily net assets would have
been .13%, .12%, .16% and .14% for The U.S. Treasury Money Market Fund, The
Cash Management Fund, The Tax Free Money Market Fund and The New York Tax
Free Money Market Fund, respectively.
++ Absent the voluntary waivers of fees, the ratio of total operating expenses
to average daily net assets would be .61%, .63%, .62%, .62%, .66% and .64%
for The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury
Money Market Fund, The Government Money Market Fund, The Cash Management
Fund, The Tax Free Money Market Fund and The New York Tax Free Money Market
Fund, respectively.
For additional information with respect to the expenses identified in the
table above, see "Financial Highlights," "Management" and "Distributor" in this
Prospectus and in the Statement of Additional Information.
4
<PAGE> 9
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
THE 100% THE
U.S. TREASURY THE U.S. THE THE TAX NEW YORK
SECURITIES TREASURY GOVERNMENT FREE TAX FREE
MONEY MONEY MONEY THE CASH MONEY MONEY
MARKET MARKET MARKET MANAGEMENT MARKET MARKET
FUND FUND FUND FUND FUND FUND
------------- --------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
One year............................... $ 6 $ 6 $ 6 $ 6 $ 6 $ 6
Three years............................ $19 $19 $ 19 $ 19 $20 $ 19
Five years............................. $32 $32 $ 33 $ 32 $35 $ 34
Ten years.............................. $73 $73 $ 74 $ 73 $77 $ 75
</TABLE>
The example demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in each of the Funds, based upon payment by the Funds of
operating expenses at the respective levels set forth in the estimated expense
table. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, each Fund's actual performance
will vary and may result in actual returns that are greater or less than 5%.
Credits or charges, not reflected in the expense table above, may be
incurred directly by customers of financial institutions in connection with an
investment in the Funds. The Company understands that Shareholder Servicing
Agents may credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from a Fund with respect to those accounts.
See "Management -- Shareholder Servicing Agents."
5
<PAGE> 10
FINANCIAL HIGHLIGHTS
The condensed financial information included below is supplementary
information to the financial statements contained in the Funds' Statement of
Additional Information and sets forth certain information concerning the
investment results for shares of The 100% U.S. Treasury Securities Money Market
Fund, The U.S. Treasury Money Market Fund, The Government Money Market Fund, The
Cash Management Fund, The Tax Free Money Market Fund and The New York Tax Free
Money Market Fund for the periods presented. For all or a portion of the periods
prior to October 1, 1992 presented below, each Fund had different service
providers and fee arrangements in place, and financial information for such
periods should therefore not be viewed as indicative of subsequent financial
results. The financial information in the following tables has been audited in
conjunction with the annual audits of the financial statements of the Company by
KPMG Peat Marwick LLP. Financial statements for the Company included in the
Company's Annual Report for the year ended November 30, 1995 and the unqualified
report of KPMG Peat Marwick LLP thereon are included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
THE 100% U.S. TREASURY
SECURITIES MONEY MARKET FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
------------------------------------------------- NOVEMBER 30,
1995 1994 1993 1992 1991*
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- ------------
Income from Investment Operations:
Net investment income.............................. 0.050 0.033 0.026 0.033 0.021
---------- ---------- -------- -------- ------------
Less Distributions:
Dividends from net investment income............... (0.050) (0.033) (0.026) (0.033) (0.021)
---------- ---------- -------- -------- ------------
Net Asset Value, End of Period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ======== ======== =============
Total Return**....................................... 5.15% 3.32% 2.62% 3.33% 2.58%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)........... $1,337,549 $1,024,125 $873,631 $383,688 $141,875
Ratio of Expenses to Average Net Assets++.......... 0.58% 0.59% 0.58% 0.55% 0.45%+
Ratio of Net Investment Income to Average Net
Assets........................................... 4.99% 3.26% 2.58% 3.28% 5.02%+
</TABLE>
- ---------------
* Commencement of Operations July 1, 1991.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.61, 0.62%, 0.61%, 0.67%, and 0.74%
annualized, respectively.
6
<PAGE> 11
<TABLE>
<CAPTION>
THE U.S. TREASURY MONEY MARKET FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
---------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
-------------------------------------------- NOVEMBER 30,
1995 1994 1993 1992*
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- ------------ ------------
Income from Investment Operations:
Net investment income.............................. 0.052 0.034 0.025 0.004
---------- ---------- ------------ ------------
Less Distributions:
Dividends from net investment income............... (0.052) (0.034) (0.025) (0.004)
---------- ---------- ------------ ------------
Net Asset Value, End of Period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ============= ==============
Total Return**....................................... 5.28% 3.45% 2.57% 0.43%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)........... $1,663,829 $1,221,133 $929,115 $1,073,194
Ratio of Expenses to Average Net Assets++.......... 0.58% 0.59% 0.59% 0.65%+
Ratio of Net Investment Income to Average Net
Assets........................................... 5.14% 3.46% 2.54% 2.58%+
</TABLE>
- ---------------
* Commencement of Operations October 1, 1992.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.63%, 0.63%, 0.62% and 0.68%
annualized, respectively.
<TABLE>
<CAPTION>
THE GOVERNMENT MONEY MARKET FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
---------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
------------------------------------------------------------------ NOVEMBER 30,
1995 1994 1993 1992 1991 1990 1989*
---------- ---------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- -------- -------- ------------
Income from Investment Operations:
Net investment income.................. 0.054 0.036 0.027 0.035 0.057 0.075 0.074
---------- ---------- -------- -------- -------- -------- ------------
Less Distributions:
Dividends from net investment income... (0.054) (0.036) (0.027) (0.035) (0.057) (0.075) (0.074)
---------- ---------- -------- -------- -------- -------- ------------
Net Asset Value, End of Period........... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ======== ======== ======== ======== =============
Total Return**........................... 5.49% 3.62% 2.71% 3.52% 5.81% 7.73% 7.65%
Ratios/Supplemental Data:
Net Assets, End of Period
(in thousands)....................... $1,551,998 $1,141,899 $546,264 $471,279 $335,093 $328,629 $294,939
Ratio of Expenses to Average Net
Assets++............................. 0.59% 0.61% 0.61% 0.66% 0.66% 0.67% 0.67%+
Ratio of Net Investment Income to
Average Net Assets................... 5.35% 3.75% 2.68% 3.46% 5.65% 7.45% 8.50%+
</TABLE>
- ---------------
* Commencement of Operations January 19, 1989.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.62%, 0.64%, 0.64%, 0.70%, 0.72%,
0.72%, and 0.72% annualized, respectively.
7
<PAGE> 12
<TABLE>
<CAPTION>
THE CASH MANAGEMENT FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
--------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
------------------------------------------------------ NOVEMBER 30,
1995+++ 1994 1993 1992 1991 1990 1989*
---------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- -------- -------- -------- ------------
Income from Investment Operations:
Net investment income................... 0.054 0.036 0.027 0.035 0.059 0.077 0.076
---------- -------- -------- -------- -------- -------- ------------
Less Distributions:
Dividends from net investment income.... (0.054) (0.036) (0.027) (0.035) (0.059) (0.077) (0.076)
---------- -------- -------- -------- -------- -------- ------------
Net Asset Value, End of Period............ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ======== ======== ======== ======== ======== ==============
Total Return**............................ 5.49% 3.62% 2.74% 3.51% 6.01% 7.94% 7.83%
Ratios/Supplemental Data:
Net Assets, End of Period
(in thousands)........................ $1,634,493 $990,045 $861,025 $560,173 $343,166 $196,103 $134,503
Ratio of Expenses to Average Net
Assets++.............................. 0.58% 0.58% 0.61% 0.67% 0.67% 0.67% 0.67%+
Ratio of Net Investment Income to
Average Net Assets.................... 5.35% 3.62% 2.70% 3.41% 5.84% 7.65% 8.62%+
</TABLE>
- ---------------
* Commencement of Operations January 17, 1989.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.62%, 0.62%, 0.64%, 0.72%, 0.73%,
0.73%, and 0.74% annualized, respectively.
+++ Effective September 1, 1995, the Fund's investment adviser changed from
Texas Commerce Investment Management Company to Texas Commerce Bank,
National Association.
<TABLE>
<CAPTION>
THE TAX FREE MONEY MARKET FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
---------------------------------------------------- NOVEMBER 30,
1995+++ 1994 1993 1992 1991 1990 1989*
-------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- ------------
Income from Investment Operations:
Net investment income.................... 0.032 0.022 0.019 0.026 0.041 0.053 0.050
-------- -------- -------- -------- -------- -------- ------------
Less Distributions:
Dividends from net investment income..... (0.032) (0.022) (0.019) (0.026) (0.041) (0.053) (0.050)
-------- -------- -------- -------- -------- -------- ------------
Net Asset Value, End of Period............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ==============
Total Return**............................. 3.29% 2.23% 1.91% 2.61% 4.21% 5.41% 5.14%
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)............................. $314,466 $359,042 $235,196 $195,952 $135,514 $175,682 $107,357
Ratio of Expenses to Average Net
Assets++............................... 0.62% 0.61% 0.63% 0.67% 0.67% 0.67% 0.67%+
Ratio of Net Investment Income to Average
Net Assets............................. 3.29% 2.22% 1.89% 2.55% 4.13% 5.27% 5.90%+
</TABLE>
- ---------------
* Commencement of Operations January 25, 1989.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.66%, 0.64%, 0.66%, 0.74%, 0.74%,
0.73%, and 0.74% annualized, respectively.
+++ Effective September 1, 1995, the Fund's investment adviser changed from
Texas Commerce Investment Management Company to Texas Commerce Bank,
National Association.
8
<PAGE> 13
<TABLE>
<CAPTION>
THE NEW YORK TAX FREE MONEY MARKET FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
---------------------------------------------------- NOVEMBER 30,
1995 1994 1993 1992 1991 1990 1989*
-------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- ------------
Income from Investment Operations:
Net investment income.................... 0.032 0.020 0.016 0.024 0.037 0.049 0.045
-------- -------- -------- -------- -------- -------- ------------
Less Distributions:
Dividends from net investment income..... (0.032) (0.020) (0.016) (0.024) (0.037) (0.049) (0.045)
-------- -------- -------- -------- -------- -------- ------------
Net Asset Value, End of Period............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ==============
Total Return**............................. 3.20% 1.99% 1.63% 2.29% 3.77% 5.07% 4.56%
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)............................. $252,621 $182,007 $163,638 $146,640 $ 39,776 $ 27,256 $ 26,522
Ratio of Expenses to Average Net
Assets++............................... 0.60% 0.60% 0.63% 0.66% 0.67% 0.67% 0.67%+
Ratio of Net Investment Income to Average
Net Assets............................. 3.15% 1.97% 1.64% 2.26% 3.70% 4.95% 5.39%+
</TABLE>
- ---------------
* Commencement of Operations February 3, 1989.
** Total return computed for the period.
+ Annualized.
++ Ratios before effect of waivers were 0.64%, 0.65%, 0.66%, 0.81%, 0.80%,
0.80%, and 0.79% annualized, respectively.
9
<PAGE> 14
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Fund are set forth below.
The investment objective of each Fund is fundamental and may not be changed
without the affirmative vote of a majority of its outstanding shares. Of course,
achievement of these objectives cannot be guaranteed.
Each Fund invests exclusively in United States dollar-denominated
securities which present minimal credit risks and are rated in the highest
short-term rating category (the two highest short-term rating categories in the
case of The New York Tax Free Money Market Fund) by at least two nationally
recognized statistical rating organizations (NRSROs), or by the only NRSRO that
has rated the security, and in comparable unrated securities. If a security is
backed by an unconditional demand feature, the issuer of the demand feature
rather than the issuer of the underlying security, may be relied upon in
determining whether the foregoing criteria have been met. In addition, all
securities purchased by the Funds have remaining maturities of thirteen months
or less, and the Funds are managed so that the average maturity of all portfolio
instruments (on a dollar-weighted basis) will not exceed 90 days. The Funds seek
to maintain a stable net asset value of $1.00 per share; however, there is no
assurance that this will be achieved. Because the Funds invest only in
short-term securities which present minimal credit risks, they will not achieve
as high a level of income as would be the case if they had the ability to invest
in lower quality, longer term securities.
THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
The investment objective of The 100% U.S. Treasury Securities Money Market
Fund (the "100% U.S. Treasury Fund") is to seek as high a level of current
income as is consistent with liquidity and maximum safety of principal. The 100%
U.S. Treasury Fund invests exclusively in obligations of the United States
Treasury, which are backed by the full faith and credit of the United States
Government as to payment of principal and interest. United States Treasury
securities consist of bills, notes and bonds, which generally differ only in
their interest rates, maturities and times of issuance. The 100% U.S. Treasury
Fund does not purchase securities issued or guaranteed by agencies or
instrumentalities of the United States Government, nor does it enter into
repurchase agreements.
Interest on United States Treasury obligations is exempt from state and
local income taxes under federal law; the interest is not exempt from federal
income tax. However, shareholders of the 100% U.S. Treasury Fund do not directly
receive interest on United States Treasury obligations, but rather receive
dividends from the 100% U.S. Treasury Fund that are derived from such interest.
Although many states allow the character of the 100% U.S. Treasury Fund's income
to pass through to its shareholders, certain states do not, so that
distributions from the 100% U.S. Treasury Fund derived from interest that is
exempt from state and local income taxes when received directly by a taxpayer
may not be exempt from such taxes when earned as a dividend by a shareholder of
the 100% U.S. Treasury Fund. Shareholders of the 100% U.S. Treasury Fund should
consult their tax advisers as to state and local consequences of involvement in
that Fund.
THE U.S. TREASURY MONEY MARKET FUND
The investment objective of The U.S. Treasury Money Market Fund (the "U.S.
Treasury Fund") is to seek as high a level of current income as is consistent
with safety, liquidity and stability of principal. The U.S. Treasury Fund
invests exclusively in the United States Treasury obligations in which the 100%
U.S. Treasury Fund may invest, and in repurchase agreements in respect of such
obligations. The U.S.
10
<PAGE> 15
Treasury Fund does not purchase securities issued or guaranteed by agencies or
instrumentalities of the United States Government or enter into repurchase
agreements in respect of such securities.
Interest on United States Treasury obligations is exempt from state and
local income taxes; such interest is not exempt from federal income tax.
However, shareholders of the U.S. Treasury Fund do not directly receive interest
on United States Treasury obligations, but rather receive dividends from the
U.S. Treasury Fund that are derived in part from such interest. Although many
states allow the character of the U.S. Treasury Fund's interest income from
United States Treasury obligations to pass through to its shareholders, certain
states do not, so that distributions from the U.S. Treasury Fund attributable to
interest that is exempt from state and local income taxes when received directly
by a taxpayer may not be exempt from such taxes when earned as a dividend by a
shareholder of the U.S. Treasury Fund. Shareholders' dividends from the U.S.
Treasury Fund attributable to that portfolio's income from repurchase agreements
are subject to federal, state and local income taxes, although states and
localities vary in their treatment of such income. In addition, certain states
(including New York) will treat shareholders' dividends from the U.S. Treasury
Fund attributable to that portfolio's income from STRIPS (as described below) in
the same manner as interest income from United States Treasury obligations;
accordingly, such income may be exempt from state and local income taxes.
Shareholders of the U.S. Treasury Fund should consult their tax advisers as to
state and local tax consequences of an investment in that Fund.
THE GOVERNMENT MONEY MARKET FUND
The investment objective of The Government Money Market Fund (the
"Government Fund") is to seek as high a level of current income as is consistent
with liquidity and stability of principal. The Government Fund invests all of
its assets in a diversified portfolio of short-term obligations issued or
guaranteed by the United States Government or its agencies or instrumentalities,
as described below, and may enter into repurchase agreements with respect to
such obligations. Guarantees of principal and interest on obligations that may
be purchased by the Government Fund are not guarantees of the market value of
such obligations, nor do they extend to the value of shares of the Government
Fund. State and local tax consequences vary with respect to investments by the
Government Fund in obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities, and the Government Fund's
income from repurchase agreements is subject to taxation as described above
under "The U.S. Treasury Money Market Fund." As a result, shareholders may be
subject to state and local income taxation with respect to dividends from the
Government Fund.
UNITED STATES TREASURY OBLIGATIONS
The Government Fund may invest in any United States Treasury obligations in
which the 100% U.S. Treasury Fund and the U.S. Treasury Fund may invest, as
described above.
UNITED STATES GOVERNMENT AGENCY AND INSTRUMENTALITY OBLIGATIONS
The Government Fund may invest in securities issued or guaranteed by United
States Government agencies and instrumentalities, including obligations that are
supported by: (i) the full faith and credit of the United States 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 United States 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
11
<PAGE> 16
obligations not backed by the full faith and credit of the United States
Treasury, the agency issuing or guaranteeing the obligation is principally
responsible for ultimate repayment.
Securities that may be purchased by the Government Fund include obligations
issued or guaranteed by the agencies and instrumentalities of the United States
Government set forth in the Statement of Additional Information. See "Additional
Information on Portfolio Instruments -- United States Government
Securities -- United States Government Agency and Instrumentality Obligations"
in the Statement of Additional Information.
PARTICIPATION CERTIFICATES
The Government Fund may purchase participation certificates as described
under "Additional Investment Activities -- Participation Certificates" below.
THE CASH MANAGEMENT FUND
The investment objective of The Cash Management Fund (the "Cash Management
Fund") is to seek as high a level of current income as is consistent with
liquidity and stability of principal. The Cash Management Fund will invest in a
diversified portfolio of high-quality, short-term United States dollar-
denominated money market instruments, such as those described below, and
repurchase obligations with respect thereto.
UNITED STATES GOVERNMENT SECURITIES
The Cash Management Fund may invest in any obligations in which the 100%
U.S. Treasury Fund, the U.S. Treasury Fund or the Government Fund may invest, as
described above.
BANK OBLIGATIONS
The Cash Management Fund may invest in bank obligations (including bank
obligations subject to repurchase agreements). Bank obligations that may be
purchased by the Cash Management Fund are limited to 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 having notice periods of more than seven days are
deemed "illiquid" for the purposes of the fourth investment limitation set forth
under "Limiting Investment Risks" below. 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, although the
Cash Management Fund will only acquire deposit notes with remaining maturities
of thirteen months or less.
The Cash Management Fund limits its investments in United States bank
obligations to obligations of United States banks that have more than $1 billion
in total assets at the time of investment and are subject to regulation by the
United States Government. The Cash Management Fund limits its
12
<PAGE> 17
investments in foreign bank obligations to United States dollar-denominated
obligations of foreign banks which banks 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. The Cash Management Fund may
also invest in obligations of foreign branches of United States banks, as well
as obligations of United States branches of foreign banks, if the Cash
Management Fund is permitted to invest directly in obligations of the United
States bank or foreign bank, respectively, in accordance with the foregoing
limitations.
PARTICIPATION CERTIFICATES
The Cash Management Fund may purchase participation certificates as
described under "Additional Investment Activities -- Participation Certificates"
below.
ASSET-BACKED SECURITIES
The Cash Management Fund may purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent undivided
fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose of
owning the underlying assets and issuing such securities. In the latter case,
such securities are secured by and payable from a stream of payments generated
by the underlying assets. The assets underlying asset-backed securities are
often a pool of assets similar to one another, such as motor vehicle receivables
or credit card receivables. Alternatively, the underlying assets may be
particular types of securities, various contractual rights to receive payments
and/or other types of assets. Asset-backed securities frequently carry credit
protection in the form of extra collateral, subordinate certificates, cash
reserve accounts, letters of credit or other enhancements. Any asset-backed
securities held by the Fund must comply with the Fund's portfolio maturity and
credit quality requirements.
COMMERCIAL PAPER
The commercial paper purchased by the Cash Management Fund consists of
direct obligations of domestic and foreign issuers which: (i) are rated in the
highest short-term rating category by at least two NRSROs or by the only NRSRO
that has rated the security; or (ii) if not rated, are of an investment quality
comparable to rated commercial paper in which the Cash Management Fund may
invest.
CORPORATE DEBT SECURITIES
The Cash Management Fund may invest in non-convertible corporate debt
securities such as bonds and debentures that have thirteen months or less
remaining to maturity and which are of an investment quality comparable to rated
commercial paper in which the Cash Management Fund may invest.
FOREIGN GOVERNMENT OBLIGATIONS AND OBLIGATIONS ISSUED BY SUPRANATIONAL ENTITIES
The Cash Management Fund may invest in foreign government obligations
issued or guaranteed by the governments of countries located in Western Europe
and Scandinavia, and of Australia, Japan and Canada (including provinces). For a
description of certain risks associated with investment by the Cash Management
Fund in foreign obligations, see "Risk Factors" below.
13
<PAGE> 18
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Supranational entities, the obligations of which may be purchased by
the Cash Management Fund, are the International Bank for Reconstruction and
Development (the World Bank), the Inter-American Development Bank, The
International Finance Corporation, the European Investment Bank, The European
Coal and Steel Community, the Nordic Investment Bank and the Asian Development
Bank. In general, supranational entities have no taxing authority and are
dependent upon their members for payments of interest and principal. Moreover,
the lending activities of supranational entities are limited to a percentage of
their total capital (including "callable capital" contributed by a member at an
entity's call), reserves and net income.
MUNICIPAL OBLIGATIONS
The Cash Management Fund may also invest in high-quality, short-term
municipal obligations that carry yields that are competitive with those of other
types of money market instruments in which the Cash Management Fund may invest.
Dividends paid by the Cash Management Fund derived from interest on
municipal obligations that may be purchased by it will be taxable to
shareholders for federal income tax purposes.
RISK FACTORS
In view of the ability of the Cash Management Fund to invest without
limitation in domestic bank obligations, an investment in the Cash Management
Fund should be made with an understanding of the characteristics of the United
States banking industry and the risks that such an investment may entail. Banks
in the United States are subject to extensive government 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.
The Cash Management Fund may invest without limitation in United States
dollar-denominated securities of foreign issuers. Investments by the Cash
Management Fund in securities of foreign banks, foreign branches of United
States banks, and foreign governmental and private issuers may involve
investment risks such as future political and economic developments, the
possible imposition of foreign withholding taxes on interest income payable on
such securities held by the Cash Management Fund, the possible seizure or
nationalization of foreign assets and the possible establishment of exchange
controls or other foreign governmental laws or restrictions that might adversely
affect the payment of the principal of and interest on such securities held by
the Cash Management Fund. In addition, there may be less publicly available
information about a foreign issuer than about a United States issuer, and
foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as United States issuers.
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for the Cash Management Fund to obtain or enforce a judgment
against the issuers of such securities.
The Cash Management Fund does not purchase securities that it believes, at
the time of purchase, will be subject to exchange controls or foreign
withholding taxes; however, there can be no assurance that such laws may not
become applicable to certain of the Cash Management Fund's investments. In
14
<PAGE> 19
the event unforeseen exchange controls or foreign withholding taxes are imposed
with respect to the Cash Management Fund's investments, the effect may be to
reduce the income received by the Cash Management Fund on such investments.
THE TAX FREE MONEY MARKET FUND
The investment objective of The Tax Free Money Market Fund (the "Tax Free
Fund") is to seek as high a level of current income exempt from federal income
tax as is consistent with liquidity and stability of principal. The Tax Free
Fund invests primarily in a diversified portfolio of high-quality, short-term
municipal obligations, the interest on which is exempt from federal income tax.
MUNICIPAL COMMERCIAL PAPER
Investments in municipal commercial paper by the Tax Free Fund consist of
commercial paper which is rated in the highest short-term rating category by at
least two NRSROs or by the only NRSRO that has rated the security, or, if not
rated, is of investment quality comparable to rated municipal commercial paper
in which the Tax Free Fund may invest.
MUNICIPAL NOTES
The Tax Free Fund may invest in municipal notes with remaining maturities
of thirteen months or less and which are rated in the highest short-term rating
category by at least two NRSROs or by the only NRSRO that has rated the
security, or, if not rated, are of investment quality comparable to rated
municipal notes in which the Tax Free Fund may invest.
Municipal notes generally have maturities at the time of issuance of three
years or less. Municipal notes that may be purchased by the Tax Free Fund
include, but are not limited to:
TAX ANTICIPATION NOTES. Tax anticipation notes ("TANs") are sold as interim
financing in anticipation of collection of taxes. An uncertainty in a municipal
issuer's capacity to raise taxes as a result of such things as a decline in its
tax base or a rise in delinquencies could adversely affect the issuer's ability
to meet its obligations on outstanding TANs.
BOND ANTICIPATION NOTES. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to meet its obligations on its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
REVENUE ANTICIPATION NOTES. Revenue anticipation notes ("RANs") are sold as
interim financing in anticipation of receipt of other revenues. A decline in the
receipt of certain revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its obligations
on outstanding RANs.
Municipal notes also include construction loan notes and project notes.
TANs, BANs and RANs are usually general obligations of the issuer. Project notes
are issued by local housing authorities to finance urban renewal and public
housing projects and are secured by the full faith and credit of the United
States Government.
15
<PAGE> 20
MUNICIPAL BONDS
Investments by the Tax Free Fund in municipal bonds consist of bonds with
remaining maturities of thirteen months or less and which are of investment
quality comparable to rated municipal commercial paper or municipal notes in
which the Tax Free Fund may invest.
------------------------------------
Municipal obligations are debt obligations issued by or on behalf of
states, cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the Tax Free Fund
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Revenue
securities may include private activity bonds. Such bonds may be issued by or on
behalf of public authorities to finance various privately operated facilities
and are not payable from the unrestricted revenues of the issuer. As a result,
the credit quality of private activity bonds is frequently related directly to
the credit standing of private corporations or other entities.
The Tax Free Fund's portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality that created the issuer.
In addition, the Tax Free Fund may invest without limitation in
participations in lease obligations or installment purchase contract obligations
(collectively, "municipal lease obligations") of municipal authorities or
entities. Certain "non-appropriation" municipal lease obligations may present
special risks because the municipality's obligation to make future lease or
installment payments depends on money being appropriated each year for this
purpose. The Tax Free Fund will seek to minimize these risks by not investing
more than 10% of its assets in non-appropriation municipal lease obligations,
and by only investing in those non-appropriation municipal lease obligations
that meet certain criteria of the Tax Free Fund. See "Additional Investment
Activities" for further information about lease obligations. The Tax Free Fund
may also invest in resource recovery bonds, which may be general obligations of
the issuing municipality or supported by corporate or bank guarantees. The
viability of the resource recovery project, environmental protection regulations
and project operator tax incentives may affect the value and credit quality of
resource recovery bonds.
As a fundamental policy, the Tax Free Fund will maintain, under normal
market conditions, at least 80% of the value of its total assets in obligations
that are exempt from federal income tax and that are not a specific tax
preference item under the federal alternative minimum tax for either individuals
or corporations. See "Taxes." The Tax Free Fund currently intends to invest
substantially all of its assets in such obligations. To the extent not so
invested, the remaining 20% of the value of the Tax Free Fund's assets may be
invested in obligations which are tax preference items under the federal
alternative minimum tax ("AMT Items") or high quality, short-term government and
money market instruments of the types in which the Cash Management Fund may
invest, and repurchase agreements with respect to such instruments, the income
from which is subject to federal income tax ("Other Taxable Instruments").
16
<PAGE> 21
The Tax Free Fund may hold uninvested cash reserves pending investment if,
in the opinion of the Tax Free Fund's investment adviser, suitable tax-exempt
obligations are unavailable, or during temporary defensive periods. Uninvested
cash reserves will not earn income. In addition to or in lieu of holding
uninvested cash reserves under these circumstances, the Tax Free Fund may elect
to invest temporarily in excess of 20% of the current value of its total assets
in AMT Items or Other Taxable Instruments. To the extent that the Tax Free Fund
deviates from its investment policies as a result of the unavailability of
suitable obligations or for other temporary defensive purposes, its investment
objective of seeking income exempt from federal income tax may not be achieved.
RISK FACTORS
The Tax Free Fund does not intend to concentrate its investments in any one
industry. This limitation, however, is not applicable to investments by the Tax
Free Fund in municipal obligations where the issuer is regarded as a state,
city, municipality or other public authority since such entities are not members
of any industry. Thus, from time to time (although there is no current intention
to do so) the Tax Free Fund may invest 25% or more of its assets in municipal
obligations which are related in such a way that an economic, business or
political development or change affecting one such obligation could also affect
the other obligations; for example, municipal obligations the interest on which
is paid from revenues of similar types of projects or municipal obligations
whose issuers are located in the same state.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
its investment adviser will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.
THE NEW YORK TAX FREE MONEY MARKET FUND
The investment objective of The New York Tax Free Money Market Fund (the
"New York Tax Free Fund") is to seek as high a level of current income exempt
from federal income tax and New York State and New York City personal income
taxes as is consistent with liquidity and the stability of principal. The New
York Tax Free Fund invests primarily in a non-diversified portfolio of
high-quality, short-term municipal obligations issued (i) by the State of New
York and its cities, municipalities and other public authorities, and (ii) by
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
sub-divisions, the interest on which is exempt from federal income tax and from
the personal income taxes of New York State and New York City.
MUNICIPAL COMMERCIAL PAPER
The New York Tax Free Fund may invest in municipal commercial paper that is
rated in the two highest short-term rating categories by at least two NRSROs or
by the only NRSRO that has rated the security or, if not rated, is of investment
quality comparable to rated municipal commercial paper in which the New York Tax
Free Fund may invest.
MUNICIPAL NOTES
The New York Tax Free Fund may invest in municipal notes with remaining
maturities of thirteen months or less and which are rated in the two highest
short-term rating categories by at least two NRSROs or by the only NRSRO that
has rated the security or, if not rated, are of investment quality
17
<PAGE> 22
comparable to rated municipal notes in which the New York Tax Free Fund may
invest. Municipal notes are further described above. See "Tax Free Money Market
Fund -- Municipal Notes."
MUNICIPAL BONDS
Municipal bonds purchased by the New York Tax Free Fund consist of bonds
with remaining maturities of thirteen months or less and which are of investment
quality comparable to rated municipal commercial paper or municipal notes in
which the New York Tax Free Fund may invest.
------------------------------------
The general classifications of municipal obligations in which the New York
Tax Free Fund may invest are described above. See "The Tax Free Money Market
Fund -- Municipal Bonds."
The New York Tax Free Fund currently intends to invest substantially all of
its assets in obligations that are exempt from federal income tax and from the
personal income taxes of the State of New York and its cities and that are not
AMT Items. See "Taxes." To the extent that the unavailability of suitable
obligations for investment by the New York Tax Free Fund prevents it from
investing substantially all of its assets in such obligations, the New York Tax
Free Fund's investment adviser may purchase municipal obligations issued by
other states, their agencies and instrumentalities. Under normal market
conditions, however, the New York Tax Free Fund will invest at least 65% of its
total assets in obligations that are exempt from federal income tax and from the
personal income taxes of the State of New York and its cities, as described
above. In addition, it is a fundamental policy of the New York Tax Free Fund to
invest, under normal market conditions, at least 80% of its total assets in
obligations that are exempt from federal income tax and that are not AMT Items.
The remaining 20% of the New York Tax Free Fund's assets may be invested in AMT
Items or Other Taxable Instruments.
The New York Tax Free Fund may hold uninvested cash reserves pending
investment if, in the opinion of the New York Tax Free Fund's investment
adviser, suitable tax-exempt obligations are unavailable, or during temporary
defensive periods. Uninvested cash reserves will not earn income. In addition to
or in lieu of holding uninvested cash reserves under these circumstances, the
New York Tax Free Fund may elect to invest temporarily in excess of 20% of the
current value of its total assets in AMT Items or Other Taxable Instruments.
If at some future date, in the opinion of its investment adviser, adverse
conditions prevail in the market for obligations exempt from federal income tax
and from the personal income taxes of the State of New York and its cities
(including conditions under which such obligations are unavailable for
investment), the New York Tax Free Fund may, for temporary defensive purposes,
invest more than 35% of its assets in municipal obligations issued by other
states, their agencies or instrumentalities or in AMT Items or Other Taxable
Instruments. Moreover, if at some future date, in the opinion of the investment
adviser, adverse conditions in the market for municipal bonds generally should
prevail, the New York Tax Free Fund may temporarily invest more than 20% of its
assets in cash reserves or in AMT Items or Other Taxable Instruments in order to
maintain a defensive posture. To the extent that the New York Tax Free Fund
deviates from its investment policies as a result of the unavailability of
suitable obligations or for other temporary defensive purposes, its investment
objective of seeking income exempt from federal income tax and the personal
income taxes of New York State and its cities may not be achieved.
RISK FACTORS
The New York Tax Free Fund is not subject to the diversification
requirements set forth in the 1940 Act and may have a larger position in a
single issuer than would be the case if the New York Tax Free
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<PAGE> 23
Fund were diversified. However, as a fundamental investment limitation, the New
York Tax Free Fund limits its investments so that with regard to 50% of total
assets, no more than 5% of assets are invested in the securities of a single
issuer, and with respect to the remaining 50% of total assets, no more than 25%
of total assets are invested in the securities of a single issuer. This ability
to concentrate in particular issuers is designed to permit the investment
adviser to the New York Tax Free Fund to maximize, subject to the aforementioned
fundamental investment limitation, the percentage of the New York Tax Free
Fund's assets that are municipal obligations exempt from New York State and New
York City personal income taxes, as well as federal income tax. The investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number of
securities held in a diversified portfolio. The New York Tax Free Fund's
assumption of large positions in the obligations of a small number of issuers
will affect the value of the New York Tax Free Fund's portfolio to a greater
extent than that of a diversified portfolio in the event of changes in the
financial condition or in the market's assessment of the issuers.
Because the New York Tax Free Fund will invest primarily in obligations
issued by the State of New York and its cities, municipalities and other public
authorities, it is more susceptible to factors adversely affecting issuers of
such obligations than a comparable municipal bond fund that is not so
concentrated. New York State and New York City have a recent history of
financial difficulties. If either New York State or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the New York Tax Free Fund and its ability to preserve capital and
liquidity could be adversely affected. See "Special Factors Affecting The New
York Tax Free Money Market Fund" in the Statement of Additional Information for
further information.
In addition, from time to time, the New York Tax Free Fund may invest 25%
or more of its assets in municipal obligations that are related in other ways
such that an economic, business or political development or change affecting one
such obligation could also affect the other obligations; for example, municipal
obligations the interest on which is paid from revenues of similar types of
projects. In addition, from time to time the New York Tax Free Fund may invest
25% or more of its assets in industrial development bonds, which, although
issued by industrial development authorities, may be backed only by those assets
and revenues of non-governmental users.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax (and, with respect to New
York municipal obligations, to the exemption of interest thereon from New York
State and New York City personal income taxes) are rendered by bond counsel to
the respective issuers at the time of issuance. Neither the Fund nor its
investment adviser will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.
ADDITIONAL INVESTMENT ACTIVITIES
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the obligations that the Funds 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.
Certain of the floating or variable rate obligations that may be purchased
by the Funds may carry a demand feature that would permit the holder to tender
them back to the issuer of the underlying
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instrument, or to a third party, at 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 holder of an obligation with
a third party demand feature may be required to pay the third party a "tender
fee," the amount of which would be periodically adjusted so that the
obligation/demand feature combination would reasonably be expected to have a
market value that approximates the par value of the obligation. The
obligation/demand feature combination would therefore be functionally equivalent
to ordinary variable or floating rate obligations as described above, and the
Funds may purchase such obligations subject to certain conditions specified by
the Securities and Exchange Commission (the "Commission").
The Tax Free Fund and the New York Tax Free Fund may also invest in
participation interests in variable rate municipal obligations held by a bank in
trust or otherwise, which have demand features that permit the Fund to tender
its bonds to a third party at periodic intervals and receive par value. The
Funds consider variable rate instruments structured as participations to be
essentially equivalent to other variable rate demand obligations it purchases.
The Internal Revenue Service has not ruled on whether the interest on such
participations is tax-exempt, and, accordingly, the Funds would purchase such
instruments based on opinions of bond counsel.
Each of the Cash Management Fund, the Tax Free Fund and the New York Tax
Free Fund may invest without limitation in obligations that have a demand
feature permitting that Fund to tender the obligation to a foreign bank. A
Fund's ability to receive payment in such circumstances under the demand feature
from such foreign banks may involve certain of the risks described under
"Investment Objectives and Policies -- Cash Management -- Risk Factors" above,
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.
Each of the Funds may invest in floating and variable rate obligations with
stated maturities in excess of thirteen months, upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. For example, Rule 2a-7 would permit a
Fund to purchase a variable rate demand instrument with a stated maturity in
excess of thirteen months, provided that the next interest readjustment date and
the next date on which the Fund could demand payment fell within thirteen
months. Each Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to purchase.
STRIPS AND ZERO COUPON OBLIGATIONS
Each of the Funds, other than the 100% U.S. Treasury Securities Money
Market Fund, may invest 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. In accordance
with Rule 2a-7, the Funds' investments in STRIPS are limited to those with
maturity components not exceeding thirteen months. The Funds will not actively
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trade in STRIPS. Each Fund permitted to invest in STRIPS will limit such
investments to 20% of its total assets.
In addition to investing in STRIPS, the Tax Free Fund and the New York Tax
Free Fund may invest in zero coupon municipal obligations. Such obligations are
debt securities that do not pay regular interest payments. Instead, zero coupon
municipal obligations are sold at a substantial discount from their value at
maturity and, when held to maturity, their entire return, which consists of the
amortization of discount, comes from the difference between their purchase price
and maturity value. Because interest on a zero coupon obligation is not
distributed on a current basis, the obligation tends to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying securities with similar maturities. The value of zero coupon
obligations appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. In accordance with
Rule 2a-7, investments by the Tax Free Fund and the New York Tax Free Fund in
zero coupon municipal obligations are limited to those with maturities not
exceeding thirteen months. Investments by the Tax Free Fund and the New York Tax
Free Fund in zero coupon municipal obligations will be limited, together with
any investments in STRIPS, to 20% of the respective total assets of those Funds.
Under the stripped bond rules of the Internal Revenue Code of 1986, as amended
(the "Code"), investments by the relevant Funds in STRIPS and zero coupon
obligations will result in the accrual of interest income on such investments in
advance of the receipt of the cash corresponding to such income.
MUNICIPAL LEASE OBLIGATIONS
The Tax Free Fund and the New York Tax Free Fund may invest in municipal
obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "municipal lease
obligations") of a municipal authority or entity. Although municipal lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a municipal lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although nonappropriation municipal lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. The Tax Free Fund and the New York Tax Free Fund will seek to
minimize the special risks associated with such securities by not investing more
than 10% of their assets in municipal lease obligations that contain
non-appropriation clauses, and by only investing in those non-appropriation
leases where (1) the nature of the leased equipment or property is such that its
ownership or use is essential to a governmental function of the municipality,
(2) appropriate covenants will be obtained from the municipal obligor
prohibiting the substitution or purchase of similar equipment if lease payments
are not appropriated, (3) the lease obligor has maintained good market
acceptability in the past, (4) the investment is of a size that will be
attractive to institutional investors, and (5) the underlying leased equipment
has elements of portability and/or use that enhance its marketability in the
event foreclosure on the underlying equipment were ever required. Municipal
lease obligations provide a premium interest rate which along with regular
amortization of the principal may make them attractive for a portion of the
assets of the Tax Free Fund and New York Tax Free Fund.
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REPURCHASE AGREEMENTS
Securities held by the Funds may be subject to repurchase agreements.
Pursuant to a repurchase agreement, a Fund will purchase portfolio securities
from a seller which commits itself, at the time of sale, to repurchase the
securities at a mutually agreed upon time and price. Repurchase agreements may
be characterized as loans which are collateralized by the underlying securities.
The term of a repurchase agreement will always be less than thirteen months. The
Funds will enter into repurchase agreements with commercial banks only if such
banks meet the standards set forth under "The Cash Management Fund -- Bank
Obligations," and will enter into repurchase agreements with brokers and dealers
only if such parties are deemed creditworthy in accordance with standards
adopted by the Company's Board of Directors. At the time a Fund enters into a
repurchase agreement, the value of the underlying security, including accrued
interest, will equal or exceed the value of the repurchase agreement, and, in
the case of repurchase agreements exceeding one day, the seller will agree that
the value of the underlying security, including accrued interest, will on each
day equal or exceed the value of the repurchase agreement. In addition, the
investment adviser for that Fund will monitor, on an ongoing basis, the
creditworthiness of the seller and the value of the underlying security,
including accrued interest, to ensure that such value equals or exceeds the
value of the repurchase agreement. In the event of default by the seller under
the repurchase agreement, a Fund could experience losses that include: (i)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (ii) additional expenses to the
Fund for enforcing those rights; (iii) possible loss of all or part of the
income or proceeds of the repurchase agreement; and (iv) possible delay in the
disposition of the underlying security pending court action or possible loss of
rights in such securities. Repurchase agreements are considered to be loans
under the 1940 Act, collateralized by the underlying securities. There is no
limitation on the amount of the Funds' assets that may be subject to repurchase
agreements.
REVERSE REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES
Each 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, a Fund will sell portfolio
securities and agree to repurchase them from the buyer at a particular date and
price. Whenever a 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 Funds pay interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Funds under the 1940 Act and are subject to
the limitations with respect to entering reverse repurchase agreements included
in the third investment limitation under "Limiting Investment Risks" below.
In addition to entering into reverse repurchase agreements, each Fund may
lend portfolio securities in order to generate additional income. Such loans may
involve risks that the borrower may fail to return the securities or may fail to
provide additional collateral. No Fund currently intends to make loans of
portfolio securities with a value in excess of 5% of the value of its total
assets.
ILLIQUID OR RESTRICTED SECURITIES
Each Fund, except the 100% U.S. Treasury Fund, may purchase securities for
which there is a limited trading market or which are subject to restrictions on
resale to the public. Investments in securities which are "restricted" may
involve added expenses to the Funds should the Funds be
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<PAGE> 27
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Funds with respect to redemptions. As set forth under "Limiting
Investment Risks", no Fund will invest more than 10% of the value of its total
assets in illiquid investments, such as "restricted securities" which are
illiquid, and securities that are not readily marketable. As more fully
described in the Statement of Additional Information, the Funds, except the 100%
U.S. Treasury Fund and the Treasury Securities 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. Rule 144A is a relatively recent development
and there is no assurance that a liquid market in Rule 144A securities will
develop or be maintained. To the extent that the number of qualified
institutional buyers is reduced, a previously liquid Rule 144A security may be
determined to be illiquid, thus increasing the percentage of illiquid assets in
a Fund's portfolio. Each Fund, except the 100% U.S. Treasury Fund and the
Treasury Securities Fund, may also 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 of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Funds which agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, which can thus
provide liquidity. The Funds' holdings of Rule 144A securities and Section 4(2)
paper which are liquid securities will not be subject to the 10% limitation
described above. The Board of Directors of the Company will be responsible for
monitoring the liquidity of Rule 144A securities and Section 4(2) paper and the
selection by the investment advisers of such securities pursuant to procedures
adopted by the Board of Directors. For a more complete discussion of Rule 144A
securities and Section 4(2) paper, see "Additional Investment Activities -- Rule
144A Securities and Section 4(2) Paper" in the Statement of Additional
Information.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. Such securities are recorded as an asset and are subject to changes in
value based upon changes in the general level of interest rates. The Funds will
make commitments to purchase securities on a firm commitment basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable.
No income accrues to the purchaser of a security on a firm commitment basis
prior to delivery. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery.
Each Fund will establish a segregated account in which it will maintain
liquid assets in an amount at least equal in value to the Fund's commitments to
purchase securities on a firm commitment basis. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
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STAND-BY COMMITMENTS
Each Fund, except the 100% U.S. Treasury Fund and the U.S. Treasury 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, a Fund acquires the right to sell a security at an agreed upon
price within a specified period prior to its maturity date, and a stand-by
commitment entitles a Fund to same-day settlement and to receive an exercise
price equal to the amortized cost of the underlying security plus accrued
interest, if any, at the time of exercise. In the event that the party obligated
to purchase the underlying security from a Fund defaults on its obligation to
purchase the underlying security, then that 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 securities
subject to the put and thereby reducing the yields otherwise available from such
securities.
PARTICIPATION CERTIFICATES
The instruments that may be purchased by the Government Fund and the Cash
Management Fund include participation certificates issued by a bank, insurance
company or other financial institution in obligations owned by such institutions
or affiliated organizations that may otherwise be purchased by the Funds, and
loan participation certificates. A participation certificate gives a Fund an
undivided interest in the underlying obligations in the proportion that such
Fund's interest bears to the total principal amount of such obligations. Certain
of such participation certificates may carry a demand feature that would permit
the holder to tender them back to the issuer or to a third party prior to
maturity. See "Floating and Variable Rate Instruments" for additional
information with respect to demand instruments that may be purchased by the
Funds. The Funds may invest in participation certificates even if the underlying
obligations carry stated maturities in excess of thirteen months, upon
compliance with certain conditions contained in Rule 2a-7. Loan participation
certificates are considered by the Funds to be "illiquid" for purposes of the
fourth investment limitation under "Limiting Investment Risks" below.
OTHER MONEY MARKET FUNDS
Each of the Government Fund, the Cash Management Fund, the Tax Free Fund
and the New York Tax Free Fund may invest up to 10% of the value of its total
assets in shares of other money market funds subject, in the case of the Tax
Free Fund and the New York Tax Free Fund, to the limitations on investing in
taxable money market instruments. A Fund will only invest in other money market
funds which are subject to the requirements of Rule 2a-7 under the 1940 Act and
which are considered to present minimal credit risks, and its investment adviser
will monitor the policies and investments of other money market funds in which
it invests, based on information furnished to shareholders of those funds, with
respect to their compliance with their investment objectives and Rule 2a-7.
------------------------------------
For more detailed descriptions of certain of the Funds' investment
activities, see "Investment Policies -- Additional Investment Activities" in the
Statement of Additional Information.
Except with respect to investment by the Tax Free Fund and the New York Tax
Free Fund of at least 80% of their respective assets in tax-exempt obligations
and the limitation on investment by the Funds in illiquid investments, as
described above, the foregoing investment policies and activities are not
fundamental and may be changed by the Board of Directors of the Company without
the approval
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<PAGE> 29
of shareholders. Additional fundamental investment policies of the Funds are
identified under "Limiting Investment Risks" below and in the Statement of
Additional Information.
LIMITING INVESTMENT RISKS
To further protect investors, the Funds have adopted the following
investment limitations, certain of which are subject to additional operating
limitations as described below:
(i) the Cash Management Fund may not invest more than 5% of the
current value of its total assets in the securities of any one issuer,
other than obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities; however, up to 25% of the
value of the total assets of the Cash Management Fund may be invested
without regard to this limitation, so long as no more than 25% of its total
assets are invested in the securities of any one issuer;
(ii) neither the Tax Free Fund nor the New York Tax Free Fund may
invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities;
however, up to 25% of the value of the total assets of the Tax Free Fund
may be invested without regard to this limitation, and up to 50% of the
value of the total assets of the New York Tax Free Fund may be invested
without regard to this limitation, so long as no more than 25% of its total
assets are invested in the securities of any one issuer;
(iii) none of the Funds may issue senior securities, borrow money or
pledge or mortgage their assets, except that each Fund may borrow from
banks up to one-third of the current value of their total assets for
temporary purposes and these borrowings may be secured by the pledge of not
more than one-third of the current value of the Fund's total assets, and
each Fund may enter into reverse repurchase agreements in accordance with
its investment policies and in amounts not in excess of one-third of the
value of their assets, less bank borrowings outstanding for temporary
purposes, at the time of entry into such agreements; provided that
additional portfolio securities may not be purchased by such Fund while
borrowings and reverse repurchase agreements which together exceed 5% of
the Fund's total assets exist; and
(iv) none of the Funds may invest an amount equal to 10% or more of
the current value of their total assets in investments that are illiquid,
including, in the case of the U.S. Treasury Fund, the Government Fund, the
Cash Management Fund, the Tax Free Fund and the New York Tax Free Fund,
repurchase agreements having notice periods of more than seven days and
fixed time deposits subject to withdrawal penalties having notice periods
of more than seven days.
For purposes of the fourth investment limitation above, the Funds consider
instruments which they cannot terminate and realize the proceeds thereon within
seven days to be instruments having notice periods of more than seven days.
The foregoing investment limitations and those described in the Statement
of Additional Information are fundamental policies of each of the Funds that may
be changed only when permitted by law and approved by the holders of a majority
of such Fund's outstanding shares, as described under "Capital Stock" in the
Statement of Additional Information.
These investment limitations are applied at the time investment securities
are purchased. With respect to investment limitation (i), the Cash Management
Fund intends (as a matter of non-fundamental policy) to limit investments in the
securities of any single issuer (other than securities issued or guaranteed by
the United States Government, its agencies or instrumentalities) to not more
than 5% of the Cash Management Fund's total assets at the time of purchase,
provided that the Cash
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<PAGE> 30
Management Fund may invest up to 25% of its total assets in the securities of a
single issuer for a period of up to three business days.
With respect to investment limitation (i), the Cash Management Fund, and
with respect to investment limitation (ii), the Tax Free Fund and the New York
Tax Free Fund, will consider unconditional demand features as not being issued
by the entity providing the demand feature, provided that the value of all
securities held by each such Fund issued by or subject to demand features from
each such entity and owned by such Fund does not exceed 10% of such Fund's total
assets. In addition, with respect to investment restrictions (i) and (ii), the
Cash Management Fund, the Tax Free Fund and the New York Tax Free Fund treat
repurchase agreements as an acquisition of the underlying securities, provided
that the obligation to repurchase the underlying securities is fully
collateralized.
MANAGEMENT
The business and affairs of the Funds are managed under the general
direction and supervision of the Company's Board of Directors. The Funds'
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISERS
The Portfolio Group, Inc. ("The Portfolio Group") provides investment
advisory services to the 100% U.S. Treasury Fund, the U.S. Treasury Fund, the
Government Fund and the New York Tax Free Fund and Texas Commerce Bank, National
Association ("TCB") provides investment advisory services to the Cash Management
Fund and the Tax Free Fund, in each case pursuant to an Advisory Agreement with
the Company (together, the "Advisory Agreements"). Subject to such policies as
the Company's Board of Directors may determine, each of The Portfolio Group and
TCB makes investment decisions for the respective Funds it advises. The Advisory
Agreements provide that, as compensation for services under the Advisory
Agreements, each of The Portfolio Group and TCB is entitled to receive from the
respective Funds it advises a monthly fee at an annual rate of .15% of the
average daily net assets of such Funds.
The Portfolio Group was organized in March 1983 and is ultimately
controlled and owned by Chemical Banking Corporation, a bank holding company
("Chemical"). The Portfolio Group provides a wide range of asset management
services to individuals, institutions and retirement benefit plans. Its
investment management responsibilities, as of January 31, 1996, included
accounts with aggregate assets in excess of $11 billion.
TCB has been in the investment counselling business since 1987, and is
ultimately controlled and owned by Chemical. TCB renders investment advice to a
wide variety of corporations, pension plans, foundations, trusts and
individuals. Its investment management responsibilities, as of January 31, 1996,
included accounts with aggregate assets in excess of $10 billion.
The principal business address of The Portfolio Group is 600 Fifth Avenue,
New York, New York 10020. The principal business address of TCB is 600 Travis,
Houston, Texas 77002. Chemical Bank, a wholly-owned subsidiary of Chemical and
an affiliate of The Portfolio Group and TCB, provides additional services to the
Company, as described below.
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<PAGE> 31
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT
AND SUB-TRANSFER AGENT
Furman Selz LLC ("Furman Selz") and Chemical Bank (together, the
"Administrators") serve as the Company's administrators and generally assist the
Company in all aspects of its administration and operation. As compensation for
its administrative services, Furman Selz receives a monthly fee, based upon the
aggregate average daily net assets of the Funds, at an annual rate of 0.06% of
the first $500 million of average daily net assets, 0.05% of the next $500
million of average daily net assets and 0.04% of average daily net assets in
excess of $1 billion, and an annual fee of $25,000 per Fund for fund accounting
services. As compensation for its administrative services, Chemical Bank
receives a monthly fee at an annual rate of 0.03% of average daily net assets of
the Funds.
Chemical Bank serves as custodian of the assets of the Funds. Chemical Bank
has also entered into an agreement with the Company for the provision of
transfer agency and dividend disbursing services for the Funds. Furman Selz
serves as sub-transfer agent for the Funds.
A further discussion of the terms of the Company's administrative, custody,
transfer agency, sub-transfer agency and fund accounting arrangements is
contained in the Statement of Additional Information.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: (i) aggregating and processing purchase and redemption
orders; (ii) placing net purchase and redemption orders with the Company's
distributor; (iii) providing necessary personnel and facilities to establish and
maintain customer accounts and records; (iv) processing dividend payments; and
(v) providing information periodically to beneficial owners showing their
positions in the Fund's shares. Shareholder Servicing Agents may enter into
arrangements with, and pay a portion of their fees to, other entities that
perform or assist in performing shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Company to pay fees to Shareholder Servicing Agents from each Fund at an
annual rate of up to 0.35% of the average daily net asset value of shares in the
Funds for which such Shareholder Servicing Agents provide services for the
benefit of customers. The Company has entered into Shareholder Servicing
Agreements with Chemical Bank, certain of its affiliates, Furman Selz and
certain other broker-dealers, pursuant to which it pays them a monthly fee from
each Fund at an annual rate of 0.35% of the average daily net asset value of the
shares in the Funds for which they provide services. The Company may appoint
additional Shareholder Servicing Agents in the future. The Company's Board of
Directors has determined that the amount payable by each Fund in respect of
"service fees" (as defined in Article III, Section 26 of the Rules of Fair
Practice of the NASD) does not exceed 0.25% of the average annual net assets of
that Fund. No Fund will charge Rule 12b-1 fees and "service fees" (as defined in
Article III, Section 26 of the Rules of Fair Practice of the NASD) which, in the
aggregate, exceed .25% of the Fund's annual average net assets, without first
advising shareholders in the Fund.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Funds' shares.
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<PAGE> 32
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. Chemical Bank and the Company believe that Chemical Bank,
The Portfolio Group and TCB, or any other affiliate of Chemical Bank, may
perform the investment advisory, administrative, custody and transfer agency
services for the Company, as the case may be, described in this Prospectus, and
that Chemical Bank, TCB or any other affiliate of Chemical Bank, 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 Chemical Bank, The Portfolio Group, TCB, or
any other affiliate of Chemical Bank from continuing to perform investment
advisory, administrative, custody or transfer agency services for the Company,
as the case may be, or require Chemical Bank, TCB or any other affiliate of
Chemical Bank to alter or discontinue the services provided by it to
shareholders of the Funds.
If Chemical Bank, The Portfolio Group, TCB or any other affiliate of
Chemical Bank were prohibited from performing investment advisory,
administrative, custody or transfer agency services for the Company, as the case
may be, it is expected that the Company's Board of Directors would recommend to
the Company's shareholders that they approve new agreements with another entity
or entities qualified to perform such services and selected by the Board of
Directors. If Chemical Bank, TCB or any other affiliate of Chemical Bank 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. The Company 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.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of the Funds to the
organizations retained to provide services for the Funds may be waived from time
to time in order to increase such Funds' net investment income available for
distribution to shareholders.
Except as noted below, The Portfolio Group, TCB and the Administrators bear
all expenses in connection with the performance of their advisory and
administrative services. The Company bears the expenses incurred in its
operations, including: organizational expenses; taxes; interest; fees (including
fees paid to its directors); fees payable to the Commission; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; advisory and
administration fees; charges of its custodian, transfer agent, sub-transfer
agent and
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<PAGE> 33
shareholder servicing agents; certain insurance costs; auditing and legal
expenses; fees of independent pricing services; costs of shareholders' reports
and shareholder meetings; and any extraordinary expenses. The Company also pays
for brokerage fees and commissions, if any, in connection with the purchase of
portfolio securities, and reimburses the Company's distributor for certain
expenses incurred by it in connection with activities primarily intended to
result in the sale of shares of any of the Funds.
PRICING OF SHARES
The price of the shares of each Fund is based on the net asset value of
such Fund, as described below under "How to Purchase and Redeem Shares". The net
asset value of each Fund is currently determined as of 12:00 noon and 4:00 p.m.,
Eastern time, on each Business Day. "Business Day" means each weekday except
those holidays on which the Federal Reserve Bank of New York, the New York Stock
Exchange (the "Exchange") or the investment advisers are closed. Currently,
those holidays include: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day. Net asset value per share for
purposes of pricing sales and redemptions is calculated by dividing the value of
all securities and other assets belonging to a Fund, less the liabilities
charged to that Fund, by the number of outstanding shares of that Fund.
Each Fund uses the amortized cost method to value its portfolio securities
and seeks to maintain a constant net asset value of $1.00 per share. The
Company's Board of Directors will review the holdings of each Fund, at such
intervals as it may deem appropriate, to determine whether that Fund's net asset
value calculated by using available market quotations (or an appropriate
substitute which reflects current market conditions) deviates from $1.00 per
share based on amortized cost. In the event the Company's Board of Directors
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, the Board will take such
corrective action as it regards as necessary and appropriate. See "Net Asset
Value" in the Statement of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
All purchase orders must be placed through a Shareholder Servicing Agent or
the Company's distributor in accordance with procedures established by it in
connection with the requirements of the accounts of customers. Shareholder
Servicing Agents may offer additional services to their customers, including
specialized procedures and payment methods for the purchase and redemption of
Fund shares, such as pre-authorized or automatic purchase and redemption
programs, "sweep" programs, cash advances and redemption checks. Each
Shareholder Servicing Agent may establish its own terms and conditions with
respect to the services provided by it, including the requirement of a minimum
initial investment and limitations on the amounts of transactions, with respect
to such services. Shareholder Servicing Agents will provide their customers with
a schedule of any credits, fees or other conditions that may be applicable to
the investment of customer assets in Fund shares.
Shares of the Funds may be held of record by a customer's Shareholder
Servicing Agent. Customers may have or be given the right to vote shares held of
record by Shareholder Servicing Agents. Beneficial ownership of the Company's
shares will be recorded by the Shareholder Servicing Agents and reflected in the
account statements provided by them to their customers.
29
<PAGE> 34
Purchase orders will be effected only on Business Days. A purchase order
for shares of a Fund must generally be received by the Company's distributor by
12:00 noon, Eastern time, to be executed on the same day, and will be executed
at the price per share next determined after receipt of such order, provided
that the Company's custodian receives federal funds or other immediately
available funds by 4:00 p.m., Eastern time, that day. A purchase order for
shares of a Fund received by the Company's distributor after 12:00 noon, Eastern
time, will only be accepted at the Company's discretion. Purchase orders
received by the Company's distributor after 4:00 p.m., Eastern time, and
purchase orders for which funds have not been received by the Company's
custodian by 4:00 p.m., Eastern time, will not be accepted. If a purchase order
is not accepted, notice thereof will be given to the Shareholder Servicing Agent
placing the order (or the customer if the order is placed directly through the
Company's distributor), and any funds received will be returned promptly unless
other instructions are given by the Shareholder Servicing Agent (or such
customer) placing the order with respect to such shares. Shares of the Funds
begin earning dividends on the day the purchase order is executed. The Company
reserves the right to reject any purchase order.
If orders placed through the Company's distributor are paid for by check,
the order will become effective on the day on which funds are made available
with respect to the check, which will generally be the Business Day following
receipt of the check if the check is received by 2:00 p.m., Eastern time. A
customer who purchases Fund shares through the Company's distributor by personal
check will be permitted to redeem those shares only after the purchase check has
been collected, which may take up to 15 days or more. Customers who anticipate
the need for more immediate access to their investment should purchase shares
with federal funds. A customer purchasing Fund shares through a Shareholder
Servicing Agent should contact his or her Shareholder Servicing Agent with
respect to the ability to purchase shares by check and the related procedures.
For further information as to how to direct a Shareholder Servicing Agent
to purchase shares of any Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Funds' distributor.
REDEMPTION OF SHARES
A customer may redeem all or part of his shares only on any Business Day
either through the Company's distributor or in accordance with instructions and
limitations pertaining to his account with his Shareholder Servicing Agent.
Redemption orders are effected at the net asset value per share next determined
after the order is received by the Company's distributor. Payment for redemption
orders received by the Company's distributor before 12:00 noon, Eastern time,
will normally be wired or credited to the Shareholder Servicing Agent on the
same day. Payment for redemption orders that are received between 12:00 noon,
Eastern time, and the close of business or on a non-Business Day will normally
be wired or credited to the Shareholder Servicing Agent on the next Business
Day.
No charge for wiring redemption payments is imposed by the Company,
although Shareholder Servicing Agents may charge their customers' accounts for
redemption services.
The Company may suspend the right of redemption or postpone the day of
payment for shares for more than seven days during any period when (i) trading
on the Exchange is restricted by applicable rules and regulations of the
Commission; (ii) the Exchange is closed for other than customary weekend and
holiday closings; (iii) the Commission has by order permitted such suspension;
or (iv) an emergency exists as determined by the Commission.
30
<PAGE> 35
In connection with a written redemption request, a shareholder may be
required to have the signatures of all registered owners or authorized parties
guaranteed by a domestic bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association. Corporations, partnerships, trusts or other legal entities may be
required to submit additional documentation.
For further information as to how to direct a Shareholder Servicing Agent
to redeem shares of a Fund on his behalf, a customer should contact his
Shareholder Servicing Agent or the Company's distributor.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund is declared daily as a dividend to
the respective shareholders of each Fund as of the time on the day of
declaration that corresponds to the latest time of day as of which such Fund's
net asset value is determined. Net investment income for dividend purposes
consists of (i) interest accrued and discount earned on the Fund's assets
(including both original issue and market discount), less (ii) amortization of
market premium on such assets, and the accrued expenses of the Fund. Fund shares
begin earning dividends on the day the purchase order is executed and continue
earnings dividends through and including the day before the redemption order for
the shares is executed. Net realized short-term capital gains, if any, will be
distributed at least annually.
Dividends are generally paid to Shareholder Servicing Agents, as
shareholders of record, on the first Business Day of each month, but in any
event within the first five Business days of each month. Dividends are paid in
the form of additional shares of the same Fund, unless the shareholder of record
has elected prior to the date of distribution to receive payment in cash. Such
election, or any revocation thereof, must be made in writing to the Fund's
transfer agent and will become effective with respect to dividends paid after
its receipt. The procedure by which a customer or a Shareholder Servicing Agent
may elect to receive dividends in cash and the method of payment of such
dividends by the Shareholder Servicing Agent to its customer will be determined
by the Shareholder Servicing Agent. Dividends that are otherwise taxable are
taxable to investors whether received in cash or in additional shares of a Fund.
The Funds do not expect to realize net long-term capital gains.
DISTRIBUTOR
Shares in each Fund are sold on a continuous basis without a sales load by
the Company's distributor, Hanover Funds Distributor, Inc. (the "Distributor"),
an affiliate of Furman Selz. The Distributor's principal offices are located at
237 Park Avenue, New York, New York 10017.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of its shares, each Fund is authorized
to spend up to 0.10% of its net assets annually in accordance with a Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 promulgated under the 1940 Act.
Activities for which the Distributor may be reimbursed include (but are not
limited to) the development and implementation of direct mail promotions and
advertising for the Funds and the preparation, printing and distribution of
prospectuses for the Funds to recipients other than existing shareholders.
31
<PAGE> 36
Although it is anticipated that some promotional activities will be
conducted on a Company-wide basis, payments made by the Funds under the Plan
will generally be used to finance the distribution of shares of the Funds.
Expenses incurred in connection with Company-wide activities may be allocated
pro rata among all portfolios of the Company on the basis of their relative net
assets. Allocation of expenses on the basis of relative net assets may result in
the subsidization by larger Funds of the distribution of shares of smaller
Funds.
YIELD
From time to time, the Funds may make available information as to their
"yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of
each Fund refers to the income generated by an investment in that Fund over a
seven-day period. This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reinvestment. For the seven-day period ended November 30, 1995,
the annualized yields of the 100% U.S. Treasury Fund, the U.S. Treasury Fund,
the Government Fund, the Cash Management Fund, the Tax Free Fund and the New
York Tax Free Fund were 4.86%, 5.18%, 5.20%, 5.22%, 3.33% and 3.21%,
respectively, and the effective yields of such Funds were 4.98%, 5.31%, 5.33%,
5.36%, 3.38% and 3.26%, respectively.
The 100% U.S. Treasury Fund may quote a "pass-through yield" to demonstrate
the taxable yield necessary to produce an after-tax yield equivalent to a
particular state's tax-exempt yield achieved by that Fund. The "pass-through
yield" refers to that portion of income derived from interest income on direct
obligations of the United States Government that qualified for exemption from
state taxes. Based on the foregoing calculation and assuming state income tax
rates of 3%, 7% and 11%, the state pass-through yields of the 100% U.S. Treasury
Fund for the seven-day period ended November 30, 1995 were 5.01%, 5.23% and
5.46%, respectively.
The Tax Free Fund and the New York Tax Free Fund may make available
information as to their "tax equivalent yields." The "tax equivalent yield"
refers to the yield on a taxable investment necessary to produce an after-tax
yield equal to a Fund's tax free yield, and is calculated by increasing the
annualized yield shown for the Fund to the extent necessary to reflect the
payment of specified tax rates. Thus the tax equivalent yield for a Fund will
always exceed such Fund's yield. For the same seven-day period ended November
30, 1995, the tax equivalent yields for the Tax Free Fund and the New York Tax
Free Fund were 4.83% and 5.14%, respectively, assuming an effective tax rate of
31% for the Tax Free Fund and 37.5% for the New York Tax Free Fund.
The yield of the Funds may be quoted and compared to those of other mutual
funds with similar investment objectives and to 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
yield of the Funds may be compared to yields set forth in the weekly statistical
release designated H.15(519) or the monthly statistical release designated
G.13(415) published by the Board of Governors of the Federal Reserve System and
the yield of the Fund may be compared to yields published by Lipper Analytical
Services, Inc. or set forth in such publications as Donoghue's Money Fund Report
and Bank Rate Monitor. Performance and yield data as reported in various
national and local financial publications may also be used in comparing the
performance and yields of the Funds.
32
<PAGE> 37
Credits and charges incurred by customers of Shareholder Servicing Agents
in connection with an investment in a Fund will not be reflected in yield
quotations published by such Fund. See "Management -- Shareholder Servicing
Agents."
TAXES
The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, the Funds and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers with specific reference to their own tax
situation.
Each Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code, applicable to regulated
investment companies generally will be applied to each Fund separately, rather
than to the Company as a whole. In addition, net realized long-term capital
gains, net investment income (i.e., investment company taxable income, as that
term is defined in the Code, without regard to the deduction for dividends paid)
and operating expenses will be determined separately for each Fund. The Company
believes that each Fund has qualified in the past, and intends to qualify in the
future, as a regulated investment company under Subchapter M of the Code. If so
qualified, each Fund will not be subject to federal income taxes with respect to
net investment income and net realized long-term capital gains, if any, that are
distributed to its shareholders, provided that the Fund distributes each taxable
year at least 90% of its net investment income net of certain deductions
allocable to such income. Each Fund will be subject to a 4% nondeductible excise
tax on its taxable income to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund intends to make
sufficient distributions to avoid application of this excise tax.
Dividends paid by each Fund from net investment income (including net
realized short-term capital gains), will be taxable to shareholders that are
otherwise subject to tax as ordinary income. Dividends declared in October,
November or December of any year, payable to shareholders of record on a
specified date in such a month, will be deemed to have been received by the
shareholders and paid by the Fund on December 31, provided such dividends are
paid during January of the following year. Although each Fund does not expect to
realize net long-term capital gains, such gains, if realized, will be
distributed at least annually and will be taxable as long-term capital gains,
whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held shares of the Fund.
Because substantially all of the income of each Fund will arise from
interest, no part of the distributions to shareholders is expected to qualify
for the dividends-received deduction allowed to corporations under the Code.
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 United States Government
securities (such as United States Treasury obligations). Thus, for residents of
these states, distributions derived from a Fund's investment in certain types of
United States 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
33
<PAGE> 38
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 United States Government securities unless the regulated investment
company holds at least a required amount of United States Government securities.
Accordingly, for residents of these states, distributions derived from a Fund's
investment in certain types of United States Government securities may not be
entitled to the exemptions from state and local income taxes that would be
available if the shareholders had purchased United States Government securities
directly. However, since the dividends from the 100% U.S. Treasury Fund will be
derived exclusively from interest on United States Treasury obligations, most
states (including most of those imposing threshold requirements) will allow the
character of the 100% U.S. Treasury Fund's income from United States Treasury
obligations to pass through to its shareholders. Shareholders' dividends from a
Fund attributable to income from repurchase agreements generally are subject to
state and local income taxes, although localities vary in their treatment of
such income. In addition, certain states (including New York) will treat
shareholders' dividends from the U.S. Treasury Fund attributable to the U.S.
Treasury Fund's income from STRIPS in the same manner as interest income from
United States Treasury obligations; accordingly, such income may be exempt from
state and local income taxes. Each shareholder of the 100% U.S. Treasury Fund
and the U.S. Treasury Fund will receive an annual statement showing the amount
of dividends received from obligations the interest on which is exempt from
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 United
States Government securities.
THE TAX FREE FUND AND THE NEW YORK TAX FREE FUND
The Tax Free Fund and the New York Tax Free Fund each intend to qualify to
pay "exempt-interest dividends," as that term is defined in the Code, by holding
at the end of each quarter of its taxable year at least 50% of the value of its
total assets in the form of obligations described in section 103(a) of the Code.
Each of these Fund's policy is to pay in each taxable year exempt-interest
dividends equal to at least 90% of such Fund's interest from tax-exempt
obligations net of certain deductions. Except as discussed below,
exempt-interest dividends will be exempt from federal income tax. In addition,
dividends from the New York Tax Free Fund will not be subject to New York State
and New York City personal income taxes to the extent that such distributions
qualify as exempt-interest dividends and represent interest income attributable
to federally tax-exempt obligations of the State of New York and its political
subdivisions (as well as certain other federally tax-exempt obligations the
interest on which is exempt from New York State and New York City personal
income taxes, such as certain obligations of Puerto Rico). Dividends from the
New York Tax Free Fund, however, are not excluded in determining New York State
or New York City franchise taxes on corporations and financial institutions.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of dividends from the Tax Free Fund or the New York Tax
Free Fund may increase a corporate shareholder's liability for environmental
taxes under Section 59A of the Code and a foreign corporate shareholder's
liability under the branch profits tax. Furthermore, the receipt of
exempt-interest
34
<PAGE> 39
dividends may be a factor in determining the extent to which a shareholder's
Social Security benefits are taxable, and may also affect the federal tax
liability of certain Subchapter S corporations and insurance companies.
The exemption of interest income for federal income tax purposes and, in
the case of the New York Tax Free Fund, for New York State and New York City
personal income tax purposes, may not result in similar exemptions under the tax
law of state and local authorities outside New York. In general, a state exempts
from state income tax only interest earned on obligations issued by that state
or its political subdivisions and instrumentalities.
Each year the Company will notify shareholders of the federal and state
income tax, and in the case of the New York Tax Free Fund, the New York City
personal income tax, consequences of distributions made by the Tax Free Fund and
the New York Tax Free Fund. Under the Omnibus Budget Reconciliation Act of 1993,
all or a portion of a Tax Free Fund's gain from the sale or redemption of
tax-exempt obligations acquired after April 30, 1993 attributable to market
discount will be treated as ordinary income rather than capital gain. This rule
may increase the amount of ordinary income dividends received by shareholders.
FOREIGN SHAREHOLDERS
The preceding description concerning taxes does not apply to shareholders
who, as to the United States, are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships ("Foreign
Shareholders"). Foreign Shareholders may be subject to U.S. withholding taxes
and should consult with their own tax advisors concerning the specific tax
consequences of an investment in any of the Funds. See "Additional Information
Concerning Taxes -- Foreign Shareholders" in the Statement of Additional
Information.
------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. In
addition, descriptions of state and local income tax consequences in this
Prospectus and in the Statement of Additional Information have not been
independently verified by the Company, its investment advisers or their counsel
and should not be relied upon as authoritative, although the Company will
investigate the state and, if applicable, the local tax rate in effect in any
given state or locality to the extent necessary to quote a tax equivalent yield
for that state or locality in its advertisements.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
35
<PAGE> 40
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated in Maryland on October 5, 1988. The authorized
capital stock of the Company consists of 10,000,000,000 shares having a par
value of $.001 per share. The Company's Articles of Incorporation authorize the
issuance of six series of shares corresponding to shares in the 100% U.S.
Treasury Fund, the U.S. Treasury Fund, the Government Fund, the Cash Management
Fund, the Tax Free Fund and the New York Tax Free Fund. The Company's Board of
Directors may, in the future, authorize the issuance of additional series of
capital stock representing shares of additional investment portfolios or
additional classes of capital stock in the Company's existing portfolios.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class.
Under the corporate law of Maryland, the Company's state of incorporation, and
the Company's By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings of
shareholders for the election of directors. Shareholders, however, do have the
right to call for a meeting to consider the removal of one or more of the
Company's directors if such a request is made, in writing, by the holders of at
least 10% of the Company's outstanding voting securities. In such cases, the
Company will assist in calling the meeting (including effecting any necessary
shareholder communications) as required under the 1940 Act. A more complete
statement of the voting rights of shareholders is contained in the statement of
Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
REPORTS TO SHAREHOLDERS
Shareholders of record will receive unaudited semi-annual reports showing
the portfolio for the Funds in which such shareholder is invested and other
information, and an annual report containing financial statements audited by
independent certified public accountants. KPMG Peat Marwick LLP has been
appointed as the Company's auditors. The Company's fiscal year ends on November
30.
Customers can write or call their Shareholder Servicing Agent with any
questions relating to their investment in the Funds.
36
<PAGE> 41
- ---------------------------------
SHAREHOLDER SERVICES
For yield quotes, prospectuses or general product
information, please call
The Hanover Funds at:
1-800-821-2371
INVESTMENT ADVISERS
The Portfolio Group, Inc.
Texas Commerce Bank, National Association
HOMM 03/95
---------------------------------------------------------------
The Hanover
---------------------------------------------------------------
Money Market
---------------------------------------------------------------
Funds
---------------------------------------------------------------
- -------------------------------------------------------------
-THE 100% U.S. TREASURY SECURITIES FUND
- -------------------------------------------------------------
-THE U.S. TREASURY FUND
- -------------------------------------------------------------
-THE GOVERNMENT FUND
- -------------------------------------------------------------
-THE CASH MANAGEMENT FUND
- -------------------------------------------------------------
-THE TAX-FREE FUND
- -------------------------------------------------------------
-THE NEW YORK TAX-FREE FUND
- -------------------------------------------------------------
Prospectus
March 29, 1996
LOGO
<PAGE> 42
THE HANOVER FUNDS, INC.
237 PARK AVENUE
NEW YORK, NEW YORK 10017
(800) 821-2371
------------------------
STATEMENT OF ADDITIONAL INFORMATION
The Hanover Funds, Inc. (the "Company") is a professionally managed
open-end investment company that currently has six investment portfolios: The
100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money Market
Fund, The Government Money Market Fund, The Cash Management Fund, The Tax Free
Money Market Fund and The New York Tax Free Money Market Fund (collectively, the
"Funds"). The investment objective of each Fund is described in the prospectus
of the Company dated March 29, 1996, as amended or supplemented from time to
time (the "Prospectus") under the caption "Investment Objectives and Policies."
This Statement of Additional Information is not a prospectus and is
authorized for distribution only when preceded or accompanied by the Prospectus.
This Statement of Additional Information contains additional information to that
set forth in the Prospectus and should be read in conjunction with it. Copies of
the Prospectus may be obtained without charge by writing or calling the Company
at its address or telephone number above.
MARCH 29, 1996
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies................................................................... 1
Additional Information on Portfolio Instruments....................................... 1
Ratings............................................................................... 2
Additional Investment Activities...................................................... 2
Special Factors Affecting the New York Tax Free Money Market Fund..................... 4
Limiting Investment Risks............................................................. 28
Management............................................................................ 30
Directors and Officers........................................................... 30
Investment Advisers.............................................................. 32
Administrators, Custodian, Transfer Agent and Sub-Transfer Agent................. 34
Shareholder Servicing Agents..................................................... 37
Expense Limitations................................................................... 39
Portfolio Transactions................................................................ 39
Distributor........................................................................... 40
Net Asset Value....................................................................... 41
How to Purchase and Redeem Shares..................................................... 42
Dividends............................................................................. 42
Yield................................................................................. 42
Additional Information Concerning Taxes............................................... 43
Capital Stock......................................................................... 45
Validity of Shares.................................................................... 47
Auditors.............................................................................. 47
Audited Financial Statements.......................................................... F-1
</TABLE>
I.i
<PAGE> 44
INVESTMENT POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Funds found under "Investment Objectives and
Policies" in the Prospectus. 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 Directors of the Company without the approval of shareholders. See "Capital
Stock."
In addition to the obligations and investment activities described below
and in the Prospectus, the Funds may invest in types of securities and engage in
investment activities that become permissible in the future to the extent
consistent with the requirements of Rule 2a-7 promulgated under the Investment
Company Act of 1940, as amended (the "1940 Act").
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
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. Treasury bills, the most frequently issued marketable United States
Government security, have a maturity of up to one year and are issued on a
discount basis.
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 and fixed time deposits. Descriptions of these obligations and of
the banks the obligations of which the Funds may purchase are set forth in the
Prospectus.
MUNICIPAL OBLIGATIONS
Municipal Commercial Paper. Municipal commercial paper is a debt
obligation with a stated maturity of 270 days or less that is issued by a
municipality to finance seasonal working capital needs or as short-term
financing in anticipation of longer-term debt.
Municipal Notes. Municipal notes generally have maturities at the time of
issuance of three years or less.
Municipal Bonds. Municipal bonds generally have maturities at the time of
issuance of up to thirty years.
The taxable market is a broader and more liquid market with a greater
number of investors, issuers and market makers than the market for municipal
obligations. The more limited marketability of tax-exempt municipal obligations
may make it difficult in certain circumstances to dispose of large investments
advantageously. In general, tax-exempt municipal obligations are also subject to
credit risks such as the loss of credit ratings or possible default. In
addition, interest on certain tax-exempt municipal obligations might lose its
tax-exempt status in the event of a change in the tax laws.
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RATINGS
The rating "P-1" is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's") and the ratings "A-1" and "A-1+" are the
highest commercial paper ratings assigned by Standard & Poor's Ratings Group
("S&P").
Municipal commercial paper rated "Prime-1" by Moody's or "A-1" by S&P is of
the highest quality, with a degree of safety regarding timely payment that is
either overwhelming or very strong. Municipal commercial paper rated "Prime-2"
by Moody's or "A-2" by S&P is of high quality, indicating a strong capacity for
timely repayment.
Other nationally recognized statistical rating organizations ("NRSROs")
have rating categories similar to those used by Moody's and S&P.
After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require the Fund to sell such security. However, the investment
adviser for that Fund will reassess promptly whether the security presents
minimal credit risks and determine whether continuing to hold the security is in
the best interests of the Fund. To the extent the ratings given by any NRSRO may
change as a result of changes in such organizations or in their rating systems,
the Funds will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
Statement of Additional Information.
ADDITIONAL INVESTMENT ACTIVITIES
The discussion below supplements the information set forth in the
Prospectus under "Additional Investment Activities." A Fund will enter into the
following types of transactions only with institutions considered by that Fund's
investment adviser, based on guidelines established by the Company's Board of
Directors, to present minimal credit risks.
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. Asset-backed 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
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
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or losses if the full amounts due on underlying assets are not realized. Because
asset-backed 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.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend securities from its portfolio if liquid assets in an
amount at least equal to the current market value of the securities loaned
(including accrued interest thereon) plus the interest payable to the Fund with
respect to the loan is maintained by the Fund in a segregated account. The Funds
will typically loan their portfolio securities only on a short-term basis, and
will not enter into any portfolio security lending arrangements having a
duration of longer than thirteen months. Any securities that a Fund may receive
as collateral will not become a part of its portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay the Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn additional income or receive an
agreed-upon fee from a borrower that has delivered cash equivalent collateral.
Cash collateral received by a Fund will be invested in securities in which such
Fund is permitted to invest. The value of securities loaned will be marked to
market daily. Portfolio securities purchased with cash collateral are subject to
possible depreciation. Loans of securities by a Fund will be subject to
termination at the Fund's or the borrower's option. A Fund may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker. No Fund currently intends to
make loans of portfolio securities with a value in excess of 5% of the value of
its total assets.
RULE 144A SECURITIES AND SECTION 4(2) PAPER
As indicated in the Prospectus, each Fund, except The 100% U.S. Treasury
Securities Money Market Fund and The U.S. Treasury Money Market 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 in an exempt
transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Board of Directors of the Company 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
Funds' limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Board of Directors will delegate to the investment
advisers for each Fund the determination for the Funds which they advise 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 Directors will periodically review the Funds' purchases
and sales of Rule 144A securities and Section 4(2) paper.
STAND-BY COMMITMENTS
Each Fund, except The 100% U.S. Treasury Securities Money Market Fund and
The U.S. Treasury Money Market Fund, may acquire rights to "put" its securities
at an agreed upon price within a specified
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period prior to their maturity date. Such Funds 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. Each such Fund's right to exercise a stand-by commitment will
be unconditional and unqualified.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 Funds intend to enter
into stand-by commitments solely to facilitate portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes. The acquisition
of a stand-by commitment will not affect the valuation of the underlying
security, which will continue to be valued in accordance with the amortized cost
method. The actual stand-by commitment will be valued at zero in determining net
asset value. Where a 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
reflect in realized gain or loss when the stand-by commitment is exercised or
expires.
In the event that the issuer of a stand-by commitment acquired by a Fund
defaults on its obligation to purchase the underlying security, then that 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.
SPECIAL FACTORS AFFECTING
THE NEW YORK TAX FREE MONEY MARKET FUND
Some of the significant financial considerations relating to the
investments of The New York Tax Free Money Market Fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
NEW YORK STATE
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State Constitution,
the State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
New York State Legislature (the "Legislature") and approved by the voters. There
is no limitation on the amount of long-term general obligation debt that may be
so authorized and subsequently incurred by the State. With the exception of
general obligation housing bonds (which must be paid in equal annual
installments or installments that result in substantially level or declining
debt service payments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
In April 1993, legislation was also enacted providing for significant
constitutional changes to the long-term financing practices of the State and the
Authorities.
In June 1994, the Legislature passed a proposed constitutional amendment
that would permit the State, within a formula-based cap, to issue revenue bonds,
which would be debt of the State secured solely by a pledge of certain State tax
receipts (including those allocated to State funds dedicated for transportation
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purposes), and not by the full faith and credit of the State. In addition, the
proposed amendment would permit multiple purpose general obligation bond
proposals to be proposed on the same ballot, require that State debt be incurred
only for capital projects included in a multi-year capital financing plan and
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Public hearings were held on the proposed constitutional amendment during
1993. Following these hearings, in February 1994, Governor Cuomo and the State
Comptroller recommended a revised constitutional amendment which would further
tighten the ban on lease-purchase and contractual-obligation financing,
incorporate existing lease-purchase and contractual-obligation debt under the
proposed revenue bond cap while simultaneously reducing the size of the cap.
After considering these recommendations, the Legislature passed a revised
constitutional amendment which tightens the ban, and provides for a phase-in to
a lower cap (4.4 percent of personal income).
Although the State Senate and Assembly passed the amendment, the voters
defeated it in November 1995.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes ("BANs"). TRANs must mature within one year from their dates
of issuance and may not be refunded or refinanced beyond such period. BANS may
only be issued for the purposes and within the amounts for which bonds may be
issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. The
constitutional provisions allowing a State-guarantee of certain Port Authority
of New York and New Jersey debt stipulates that no such guaranteed debt may be
outstanding after December 31, 1996.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financing, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the States makes certain
local aid payments. The State also participates in the issuance of certificates
of participation ("COPs")in a pool of leases entered into by the State's Office
of General Services on behalf of several State departments and agencies interest
in acquiring operational equipment, or in certain cases, real property.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
The State also employs moral obligations financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is
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secured by project revenues and includes statutory provisions requiring the
State, subject to appropriation by the Legislature, to make up any deficiencies
which may occur in the issuer's debt service reserve fund. There has never been
a default on any moral obligation debt of any public authority.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1995-96 fiscal
year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during the
State's 1995-96 fiscal year, to redeem notes sold in June 1995.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.7 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1994-95
capital projects. Included therein are borrowings by (i) the Dormitory Authority
of the State of New York ("DA") for State University of New York ("SUNY"), The
City University of New York ("CUNY"), and health facilities, (ii) the New York
State Medical Care Facilities Finance Agency ("MCFFA") for mental health
facilities; (iii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iv) UDC for prison and youth
facilities and economic development programs; (v) the Housing Finance Agency
("HFA") for housing programs; and (vi) other borrowings by the Environmental
Facilities Corporation ("EFC") and the Energy Research and Development Authority
("ERDA").
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to aid
financially troubled localities. The Municipal Assistance Corporation for The
City of New York ("MAC"), created to provide financing assistance to New York
City (the "City"), is the only municipal assistance corporation created to date.
To enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York State
Sales Tax for the Benefit of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to the City. The legislation creating MAC also includes a moral
obligation provision. Under its enabling legislation, MAC's authority to issue
bonds and notes (other than refunding bonds and notes) expired on December 31,
1984.
State Financial Operations. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although the State ranks 22nd in the nation for its State tax burden, the
State has the second highest combined state and local tax burden in the United
States. In 1991, total State and local taxes in New York were $3,349 per capita,
compared with $1,475 per capita in 1980. Between 1980 and 1991, State and local
taxes per capita increased at approximately the same rate in the State as in the
nation as a whole with per capita taxes in the State increasing by 127% while
such taxes increased 111% in the nation. The State Division of the Budget
("DOB")believes, however, that it is more informative to describe the state and
local tax burden in terms of its relationship to personal income. In 1992, total
State and local taxes in New York were $154.70 per $1,000 of personal income,
compared with $152.70 in 1980. Between 1980 and 1992, State and local taxes per
$1,000 of personal income increased at a slower rate in the State than in the
nation as a whole with such taxes in the State increasing by 1.3 percent while
such taxes increased 4 percent in the nation. The burden of State and local
taxation, in combination with the many other causes of regional economic
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dislocation, may have contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within the State. The State and
its localities have used these taxes to develop and maintain their respective
transportation networks, public schools and colleges, public health systems,
other social services, and recreational facilities. Despite these benefits, the
burden of State and local taxation, in combination with the many other causes of
regional economic dislocation, may have contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
The national economy began expanding in 1991 and has added over 7 million
jobs since early 1992. However, the recession lasted longer in the State and the
State's economic recovery has lagged behind the nation's. Although the State has
added approximately 185,000 jobs since November 1992, employment growth in the
State has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, defense, and banking industries.
DOB forecasted that national economic growth would weaken, but not turn
negative, during the course of 1995 before beginning to rebound. This dynamic is
often described as a "soft landing."
The national economy achieved the desired "soft landing" in 1995, as growth
slowed from 6.2 percent in 1994 to a rate sufficiently slow to inhibit the
buildup of inflationary pressures. This was achieved without any material pause
in the economic expansion, although recession worries flared in the late spring
and early summer. Growth in the national economy is expected to moderate during
1996. Real GDP grew only 0.9 percent in the fourth quarter of 1995, and there
were declines in the leading economic indicators in four of the past five
months. It is anticipated that slow economic growth will continue through the
first half of 1996 and inflationary pressures will be modest in 1996. Economic
growth will gradually accelerate in the second half of 1996 as the lower level
of interest rates over the last year is expected to stimulate economic activity.
Economic growth, as measured by the nation's nominal GDP, is projected to expand
by 4.3 percent in 1996 versus 4.6 in 1995. In 1992 dollars, real GDP is expected
to grow 1.8 percent as compared with the 2.1 percent growth in 1995. By either
measure, economic growth is projected to be noticeably slower for 1996 than
1995.
To stimulate economic growth, the State has developed programs, including
the provision of direct financial assistance, designed to assist businesses to
expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the State corporation franchise tax. Furthermore, the State has created
40 "economic development zones" in economically distressed regions of the
States. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones. There can be no
assurance that these programs will be successful.
From 1994 to 1995 the annual growth rates of most economic indicators for
the State improved. The pace of private sector employment expansion and personal
income and wage growth all accelerated. Government employment fell as workforce
reductions were implemented at federal, State and local levels. Similar to the
nation, some moderation of growth is expected in the year ahead. Private sector
employment is expected to continue to rise, although somewhat more slowly than
in 1995, while public employment should continue to fall, reflecting government
budget cutbacks. Anticipated continued restraint in wage settlements, a lower
rate of employment growth and falling interest rates are expected to slow
personal income growth significantly.
The State's current fiscal year commenced on April 1, 1995, and ends on
March 31, 1996, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year (the "1995-96 State Financial Plan")
was formulated on June 20, 1995 and is based on the State's budget as enacted by
the Legislature and signed into law by the Governor. The State Financial Plan is
updated quarterly pursuant to law in July, October and January.
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The 1995-96 budget is the first to be enacted in the administration of
Governor George Pataki, who assumed office on January 1, 1995. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in General Fund disbursements. Spending for
State operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the 1995-96 State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
The 1995-96 State Financial Plan contemplates closing this gap based on the
enacted budget, through a series of actions, mainly spending reductions and cost
containment measures and certain reestimates that are expected to be recurring,
but also through the use of one-time solutions. The 1995-96 State Financial Plan
projects (i) nearly $1.6 billion in savings from cost containment, disbursement
reestimates, and other savings in social welfare programs, including Medicaid,
income maintenance and various child and family care programs; (ii) $2.2 billion
in savings from State agency actions to reduce spending on the State workforce,
SUNY and CUNY, mental hygiene programs, capital projects, the prison system and
fringe benefits; (iii) $300 million in savings from local assistance reforms,
including actions affecting school aid and revenue sharing while proposing
program legislation to provide relief from certain mandates that increase local
spending; (iv) over $400 million in revenue measures, primarily a new Quick Draw
Lottery game, changes to tax payment schedules, and the sale of assets; and (v)
$300 million from reestimates in receipts.
The following discussion summarizes updates to the 1995-96 State Financial
Plan and recent fiscal years with particular emphasis on the State's General
Fund. Pursuant to statute, the State updates the financial plan at least on a
quarterly basis. Due to changing economic conditions and information, public
statements or reports may be released by the Governor, members of the
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, including potential operating results for the current
fiscal year and projected baseline gaps for future fiscal years, that may vary
materially and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1995-96 fiscal year, the General Fund is expected by the State to
account for approximately 49 percent of total governmental-fund receipts and 71
percent of total governmental-fund disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts are projected to be $33.110 billion, an
increase of $48 million over total receipts in the prior fiscal year. Total
General Fund disbursements are projected to be $33.055 billion, an increase of
$344 million over the total amount disbursed and transferred in the prior fiscal
year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified
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purposes. Although activity in this fund type is expected to comprise more than
40 percent of total government funds receipts and disbursements in the 1995-96
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the "MTA") funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds are used to account for the financial resources used
for the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1995-96 fiscal year, activity in these funds
is expected to comprise 7 percent of total governmental receipts and
disbursements.
Disbursements from this fund type are projected to increase by $541 million
over prior-year levels, primarily reflecting higher spending for transportation
and mental hygiene projects. The Dedicated Highway and Bridge Trust Fund is
projected to comprise 23 percent of the activity in this fund type -- $936
million in 1995-96 -- and is the single largest dedicated fund. Projected
disbursements from this dedicated fund reflect an increase of $80 million over
1994-95 levels. Spending for capital projects will be financed through a
combination of sources: Federal grants (25 percent), public authority bond
proceeds (38 percent), general obligation bond proceeds (9 percent), and current
revenues (28 percent). Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be available from the proceeds
of general obligation bonds.
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1995-96 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund, which
is supported primarily by tax dollars transferred from the General Fund, and
seven other funds. In the 1995-96 fiscal year, total disbursements in this fund
type are projected at $2.506 billion, an increase of $303 million or 13.8
percent. The transfer from the General Fund of $1.583 billion is expected to
finance 63 percent of these payments.
The State contemplates financing the remaining payments by pledged
revenues, including $1.794 billion in taxes, $228 million in dedicated fees, and
$2.200 billion in patient revenues, including transfers of Federal
reimbursements. After impoundment for debt service, as required, $3.481 billion
is expected to be transferred to the General Fund and other funds in support of
State operations. The largest transfer -- $1.761 billion -- is made to the
Special Revenue Fund type, in support of operations of the mental hygiene
agencies. Another $1.341 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service on
bonds of LGAC.
The State issued the first of the three required quarterly updates to the
1995-96 cash-basis State Financial Plan on July 28, 1995 (the "First Quarter
Update"). The First Quarter Update projected continued balance in the State's
1995-96 Financial Plan, and incorporated few revisions to the initial State
Financial Plan of June 20, 1995. The economic forecast was unchanged. A number
of small, offsetting changes were made to the annual receipts and disbursements
estimates. The First Quarter Update also incorporated the restatement of three
transactions within the budget so that these transactions conformed with
accounting treatments utilized by the Office of the State Comptroller. These
restatements had the net effect of reducing
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both General Fund receipts and disbursements by $251 million; therefore, they
had no impact on the closing balance of the General Fund.
The State issued its second quarterly update to the cash-basis 1995-96
State Financial Plan (the "Mid-Year Update") on October 26, 1995. The Mid-Year
Update projected continued balance in the State's 1995-96 Financial Plan, with
estimated receipts reduced by a net $71 million and estimated disbursements
reduced by a net $30 million as compared to the First Quarter Update. The
resulting General Fund balance decreased from $213 million in the First Quarter
Update to $172 million in the Mid-Year Update, reflecting the expected use of
$41 million from the Contingency Reserve Fund for payments of litigation and
disallowance expenses. The Mid-Year Update also incorporated changes resulting
from implementation of the Governor's Management Review Plan which was released
on October 12, 1995. The Management Review Plan is expected to produce savings
of $148 million in State fiscal year 1995-96, primarily through Medicaid
Utilization controls, consolidation of State agency staffing and office space,
controls on staffing, overtime and contractual expenses, and increased
productivity. Of the $148 million in savings attributable to the Management
Review Plan, $146 million was reflected in low spending from the General Fund
and $2 million was reflected in increased General Fund receipts.
The State revised the cash-basis 1995-96 Financial Plan on December 15,
1995 (the "December 15 Update"), in conjunction with the release of the
Executive Budget for the 1996-97 fiscal year.
The December 15 Update projected continued balance in the 1995-96 General
Fund Financial Plan, with reductions on projected receipts offset by an
equivalent reduction in projected disbursements. Modest changes were made to the
Mid-Year Update, reflecting two more months of actual results, deficiency
requests by State agencies (the largest of which is for school aid resulting
from revisions to data submitted by school districts), and administrative
efficiencies achieved by State agencies. Total General Fund receipts are
expected to be approximately $73 million lower than estimated at the time of the
Mid-Year Update. Tax receipts are now projected to be $29.57 billion, $8 million
less than in the earlier plan. Miscellaneous receipts and transfers from other
funds are estimated at $3.15 billion, $65 million lower than in the Mid-Year
Update. The largest single change in these estimates is attributable to the lag
in achieving $50 million in proceeds from sales of State assets, which are
unlikely to be completed prior to the end of the fiscal year.
Projected General Fund disbursements are reduced by a total of $73 million,
with changes made in most major categories of the 1995-96 State Financial Plan.
The reduction in overall spending masks the impact of deficiency requests
totaling more than $140 million, primarily for school aid and tuition assistance
to college students. Offsetting reductions in spending are attributable to the
continued maintenance of strict controls on spending through the fiscal year by
State agencies, yielding savings of $50 million. Reductions of $49 million in
support for capital projects reflect a stringent review of all capital spending.
Reductions of $30 million in debt service costs reflect savings from refundings
undertaken in the current fiscal year, as well as savings from lower interest
rates in the financial market. Finally, the 1995-96 Financial Plan reflects
reestimates based on actual results through November, the largest of which is a
reduction of $70 million in projected costs for income maintenance. This
reduction is consistent with declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal year is
expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into that
Fund. A $40 million deposit in the Contingency Reserve Fund included as part of
the enacted 1995-96 budget will not be made, and the minor balance of $1 million
currently in the Fund will be transferred to the General Fund. These Contingency
Reserve Fund monies are expected to support payments from the General Fund for
litigation related to the State's Medicaid program, and for federal
disallowances.
Changes in federal aid programs currently pending in Congress are not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to be
those related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balances of the year.
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The State issued its third required quarterly update to the 1995-96
cash-basis State Financial Plan on January 30, 1996 (the "Third Quarterly
Update"). The Third Quarterly Update was published two weeks after the closure
of the Governor's 30-day amendment period, during the Governor revised the
1996-97 State Financial Plan.
The Third Quarterly Update reflected actual results through the third
quarter of the State's fiscal year, quarterly and year-end tax payments received
in December and January, and modest changes in spending to reflect the current
year impact of certain 30-day amendments. The 1995-96 General Fund State
Financial Plan was projected to remain in balance on a cash basis, with both
receipts and disbursements projected to be $47 million higher than in the
December 15 Update. Total taxes were projected to be $29.66 billion, $88 million
higher than in the December 15 Update. Miscellaneous receipts and transfers were
expected to total $3.1 billion, down $41 million from the December 15 Update.
Total disbursements were projected to be $32.75 billion. Spending in
Governmental Funds were projected at $63.31 billion, an increase of $15 million
from the December 15 Update.
The Governor presented his 1996-97 Executive Budget to the Legislature on
December 15, 1995. The Executive Budget also contains financial projections for
the State's 1997-98 and 1998-99 fiscal years and an updated Capital Plan. As
provided by the State Constitution, the Governor submitted amendments to his
1996-97 Executive Budget within 30 days following submission and after the
30-day amendment period. Those amendments are reflected in the discussion of the
1996-97 Executive Budget contained in this Statement of Additional Information.
There can be no assurance that the Legislature will enact the Executive Budget
as proposed by the Governor into law, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in this Statement of Additional Information.
The 1996-97 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State spending,
including program restructurings, reductions in social welfare spending, and
efficiency and productivity initiatives. Total General Fund receipts and
transfers from other funds are projected to be $31.32 billion, a decrease of
$1.4 billion from total receipts projected in the current fiscal year. Total
General Fund disbursements and transfers to other funds are projected to be
$31.22 billion, a decrease of $1.5 billion from spending totals projected for
the current fiscal year. After adjustments and transfers for comparability
between the 1995-96 and 1996-97 State Financial Plans, the Executive Budget
proposes an absolute year-to-year decline in General Fund spending of 5.8
percent. Spending from all funding sources (including federal aid) is proposed
to increase by 0.4 percent from the prior fiscal year after adjustments and
transfers for comparability.
The Executive Budget proposes $3.9 billion in actions to balance the
1996-97 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1996-97 were projected at
$35 billion, an increase of $2.3 billion or 7 percent from 1995-96. This
increase would have resulted from growth in Medicaid, inflationary increases in
school aid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1995-96. Receipts would have been expected to fall by $1.6
billion. This reduction would have been attributable to modest growth in the
State's economy and underlying tax base, the loss of non-recurring revenues
available in 1995-96 and implementation of previously enacted tax reduction
programs.
The Executive Budget proposes to close this gap primarily through a series
of spending reductions and cost containment measures. The Executive Budget
projects (i) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental programs; (ii) $1.3 billion in savings from a reduced State
General Fund share of Medicaid made available from anticipated changes in the
federal Medicaid program, including an increase in the federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The assumption regarding an increased share of federal
Medicaid funding has received bipartisan Congressional support and would benefit
32 states, including New York.
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The 1996-97 Financial Plan projects receipts of $31.32 billion and spending
of $31.22 billion, allowing for a deposit of $85 million to the Contingency
Reserve Fund and a required repayment of $15 million to the Tax Stabilization
Reserve Fund.
The Governor has submitted several amendments to the Executive Budget.
These amendments have a nominal impact on the State's Financial Plan for 1996-97
and the subsequent years. The net impact of the amendments leaves unchanged the
total estimated amount of General Fund spending in 1996-97, which continues to
be projected at $31.22 billion. All funds spending in 1996-97 is increased by
$68 million, primarily reflecting adjustments to projections of federal funds,
and now totals $63.87 billion.
The budget amendments advanced by the Governor are largely technical
revisions, with General Fund spending increases fully offset by spending
decreases. Reductions in estimated 1996-97 disbursements are recommended
primarily for welfare (associated with updated projections showing a declining
caseload) and debt service (reflecting lower interest rates and recent bond
sales). Disbursement increases are projected for snow and ice control, the AIDS
Institute, Health Department utilization review programs and other items.
Estimated disbursements for other funds are increased to accommodate updated
projections of federal funding in certain categorical grant programs and reduced
for welfare as noted for the General Fund.
On March 15, 1996, two weeks before the start of the 1996-97 fiscal year,
the Governor presented additional amendments to the 1996-97 Executive Budget
which address two potential outcomes of the federal debate on entitlement
reform:
- Contingency Plan -- If the federal government fails to adopt
entitlement changes assumed to produce savings in the Executive Budget for
the State's 1996-97 fiscal year, the Governor has identified $2.01 billion
in new or redirected resources to replace these savings in order to
preserve budget balance in the 1996-97 State Financial Plan.
- Balanced Budget Bonus Plan -- If the federal government acts,
through legislation or through waivers of existing federal provisions, and
any necessary conforming changes are adopted by the State Legislature, the
State could receive all or a portion of the $2.01 billion benefit
anticipated in the original 1996-97 Executive Budget. As a result, a
portion of the new resources identified in the Contingency Plan would then
be available to make restorations or add new spending to the 1996-97 State
budget. The Balanced Budget Bonus Plan sets priorities for up to $1.42
billion in potential recurring and non-recurring spending increases.
There can be no assurance that the Legislature will enact the Executive
Budget or any of the amendments proposed by the Governor, that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in this Statement of Additional Information, or that the
State's actions will be sufficient to maintain budgetary balance in 1996-97 or
future fiscal years Further, since the amendments implementing the Contingency
Plan and the Balanced Budget Bonus Plan have been submitted after the 30-day
amendment period, the Legislature must consent to their introduction.
DOB believes that its economic assumptions and its projections of receipts
and disbursements for the 1996-97 Executive Budget as amended by the Contingency
Plan and the Balanced Budget Bonus Plan are reasonable. However, various
financial, social, economic, and political factors can affect these projections,
of which certain factors, such as action by the federal government, are outside
the State's control. Because of the uncertainty and unpredictability of these
factors, their impact cannot be fully anticipated in the assumptions underlying
the State's projections.
The 1996-97 Executive Budget includes actions that will have an impact on
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 budget gap primarily through expenditures reductions and
without increases in taxes or deferrals of scheduled tax reductions. After
accounting for proposed changes to the Executive Budget submitted during the
30-day amendment period, the net impact of these actions is expected to produce
a potential imbalance in the 1997-98 fiscal year of $1.44 billion and in the
1998-99 fiscal year of $2.46 billion, assuming implementation of the 1996-97
Executive Budget recommendations. For 1997-98, receipts are estimated at $30.62
billion and disbursements at $32.05 billion. For 1998-99, receipts are estimated
at $31.85 billion and disbursements at $34.32 billion.
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For 1996-97 the closing fund balance in the General Fund is projected to be
$272 million. The required deposit to the Tax Stabilization Reserve Fund adds
$15 million to the 1995-96 balance of $172 million in that fund, bringing the
total to $187 million at the close of 1996-97. The remaining General Fund
balance reflects the deposit of $85 million to the Contingency Reserve Fund, to
provide resources to finance potential costs associated with litigation against
the State. This deposit is expected to be made pursuant to legislation submitted
with the Executive Budget which will require the State share of certain
non-recurring federal recoveries to be deposited to the Contingency Reserve
Fund.
For 1996-97, the Financial Plan projects disbursements of $28.93 billion
from this Fund. This includes $7.65 billion from Special Revenue Funds
containing State revenues, and $21.28 billion from funds containing federal
grants, primarily for social welfare programs.
The 1996-97 Executive Budget recommends that all of the SUNY's revenues be
consolidated in a single fund, permitting SUNY more flexibility and control in
the use of its revenues. As a result of this proposal, General Fund support
would be transferred to this fund, rather than spent directly from the General
Fund. SUNY's spending from this fund is projected to total $2.55 billion in
1996-97. The Mass Transportation Operating Assistance Fund and the Dedicated
Mass Transportation Trust Fund, which receive taxes earmarked for mass
transportation programs throughout the State, are projected to have total
disbursements of $1.23 billion in 1996-97. Disbursements also include $1.63
billion in lottery proceeds which, after payment of administrative expenses,
permit the distribution of $1.43 billion for education purposes. One hundred
million dollars of lottery proceeds will be reserved in a separate account for a
local school tax reduction program to be agreed upon by the Governor and the
Legislature for disbursement in State fiscal year 1997-98. Disbursements of $650
million in 1996-97 from the Disproportionate Share Medicaid Assistance Fund
constitutes most of the remaining estimated State Special Revenue Funds
disbursements.
Federal Special Revenue Fund projections for 1996-97 were developed in the
midst of considerable uncertainty as to the ultimate composition of the federal
budget, including uncertainties regarding major federal entitlement reforms.
Disbursements are estimated at $21.27 billion in 1996-97, an increase of $2.02
billion, or 10.5 percent from 1995-96. The projections included in the 1996-97
State Financial Plan assume that the federal Medicaid program will be reformed
generally along the lines of the congressional MediGrant program. This would
include an increase from 50 percent to 60 percent in the federal share of New
York's Medicaid expenses. A repeal of the federal Boren amendment regarding
provider rates is also anticipated. As a result of these changes, the Executive
Budget projects the receipt of $13.1 billion in total federal Medicaid
reimbursements in 1996-97, an increase of approximately $915 million from the
1995-96 level.
The second largest projected increase in federal reimbursement is for the
State's welfare program. The State is projected to receive $2.5 billion, up $421
million from 1995-96 levels, primarily because of increased funding anticipated
from the proposed federal welfare block grant. All other federal spending is
projected at $5.7 billion for 1996-97, an increase of $626 million.
Disbursements from the Capital Projects Funds in 1996-97 are estimated at
$3.76 billion. This estimate is $332 million less than the 1995-96 projections.
The spending reductions are the result of program restructuring, achieved in
1995-96 and continued in the 1996-97 Financial Plan. The spending plan includes:
- $2.5 billion in disbursements for the second year of the five-year $12.6
billion State and local highway and bridge program;
- Environmental Protection Fund spending of $106.5 million;
- Correctional services spending of $153 million; and
- SUNY and CUNY capital spending of $196 million and $87 million,
respectively.
The share of capital projects to be financed by "pay-as-you-go" resources
is projected to hold steady in 1996-97 at approximately 27 percent.
State-supported bond issuances finance 44 percent of capital projects, with
federal grants financing the remaining 29 percent.
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Disbursements from the Debt Service Fund are estimated at $2.64 billion in
1996-97, an increase of $206 million or 9 percent from 1995-96. Of this
increase, $85 million is attributable to transportation bonding for the State
and local highway and bridge programs which are financed by the Dedicated
Highway and Bridge Trust Fund, $35 million is for corrections including new debt
service on prisons recently purchased from New York City, and $27 million is for
the mental hygiene programs financed through the Mental Health Services Fund.
Debt service for LGAC bonds increases only slightly after years of significant
increases, as the new-money bond issuance portion of the LGAC program was
completed in State fiscal year 1995-96. Increased debt service costs primarily
reflect prior capital commitments financed by bonds issued by the State and its
public authorities, the reduced use of capitalized interest, and the use of
shorter term bonds, such as the 10 year average maturity for the Dedicated
Highway and Bridge Trust Fund bonds.
The 1995-96 State Financial Plans and the 1996-97 Executive Budget are
based upon forecasts of national and State economic and financial conditions.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State but also by entities, such as the federal
government, that are outside the State's control. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results in the 1995-96 and
the 1996-97 fiscal years that are worse than predicted, with corresponding
material and adverse effects on the State's financial projections.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. First, the national recession, and then the lingering economic slowdown
in the New York and regional economy, resulted in repeated shortfalls in
receipts and three budget deficits. For its 1992-93, 1993-94 and 1994-95 fiscal
years, the State recorded balanced budgets on a cash basis, with substantial
fund balances in 1992-93 and 1993-94, and a smaller fund balance in 1994-95 as
described below.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June 16,
1994, reported receipts fell short of original projections by $1.163 billion,
primarily in the categories of personal income and business taxes. Of this
amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848 million.
After adjusting for the net impact of restatements relating to the CRF and LGAC
which raised disbursements by $38 million, the variance is $886 million. Well
over two-thirds of this variance is in the category of grants to local
governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and
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other programs. Lower education costs are attributable to the availability of
$110 million in additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated in
January 1995 by the Governor to reduce spending to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects. These actions, together with $71 million in
other measures comprised the Governor's $259 million gap-closing plan, submitted
to the Legislature in connection with the 1995-96 Executive Budget.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
its tax refund reserve account, $265 million in its CRF and $134 million in its
Tax Stabilization Reserve Fund. These fund balances were primarily the result of
an improving national economy, State employment growth, tax collections that
exceeded earlier projections and disbursements that were below expectations.
Deposits to the personal income tax refund reserve have the effect of reducing
reported personal income tax receipts in the fiscal year when made and
withdrawals from such reserve increase receipts in the fiscal year when made.
The balance in the tax refund reserve account will be used to pay taxpayer
refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the LGAC program. The balance in
the CRF will be used to meet the cost of litigation facing the State. The Tax
Stabilization Reserve Fund may be used only in the event of an unanticipated
General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in the 1993-94 fiscal year exceeded those originally
projected when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal
income tax, the bank tax, the corporation franchise tax and the estate tax
accounted for most of this variance, and more than offset weaker-than-projected
collections from the sales and use tax and miscellaneous receipts. Collections
from individual taxes were affected by various factors including changes in
Federal business laws, sustained profitability of banks, strong performance of
securities firms, and higher-than-expected consumption of tobacco products
following price cuts.
The higher receipts resulted, in part, because the State economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The
State economy exhibited signs of strength in the service sector, in
construction, and in trade. Long Island and the Mid-Hudson Valley continued to
lag behind the rest of the State in economic growth. The State Division of the
Budget (the "DOB") believes that approximately 100,000 jobs were added during
the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below
the level that was projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which in
the April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted from lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the
CRF as a way to assist the State in financing the cost of litigation affecting
the State. The CRF was initially funded with a transfer of $100 million
attributable to the positive margin recorded in the 1992-93 fiscal year. In
addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF,
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which, after a disbursement for authorized fund purposes, brought the CRF
balance at the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
The State ended its 1992-93 fiscal year with a balance of $671 million in
the tax refund reserve account and $67 million in the Tax Stabilization Reserve
Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and unemployment
performed better than originally projected in April 1992. This favorable
economic performance, particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of the General Fund
surplus. Personal income tax collections were more than $700 million higher than
originally projected (before reflecting the tax refund reserve account
transaction), primarily in the withholding and estimated payment components of
the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections made in April 1992, although this includes a $150 million payment to
health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1993). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of spending, including Medicaid, local health programs,
agency operations, fringe benefits, capital projects and debt service as
partially offset by higher-than-anticipated costs for education programs.
The financial condition of the State is affected by several factors,
including the strength of the State and regional economy and actions of the
Federal government, as well as State actions affecting the level of receipts and
disbursements. Owing to these and other factors, the State may, in future years,
face substantial potential budget gaps resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
future costs of maintaining State programs at current levels. Any such recurring
imbalance would be exacerbated if the State were to use a significant amount of
nonrecurring resources to balance the budget in a particular fiscal year. To
address a potential imbalance for a given fiscal year, the State would be
required to take actions to increase receipts and/or reduce disbursements as it
enacts the budget for that year, and under the State Constitution the Governor
is required to propose a balanced budget each year. To correct recurring
budgetary imbalances, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years. There can be no
assurance, however, that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except in cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
This provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
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As of June 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995-96 State
Financial Plan includes no spring borrowing nor did the 1994-95 State Financial
Plan, which was the first time in 35 years there was no short-term seasonal
borrowing.
On January 13, 1992, Standard & Poor's ("S&P") lowered its rating on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised the
rating outlook assessment to stable. On February 14, 1994, S&P revised its
outlook to positive and, on October 3, 1995, confirmed its A- rating. On January
6, 1992, Moody's reduced its ratings on outstanding limited-liability State
lease purchase and contractual obligations from A to Baa1. On October 2, 1995,
Moody's reconfirmed its A rating on the State's general obligation long-term
indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating. In
1992, S&P lowered the State's general obligation bond rating to A-, where it
currently remains and was affirmed on July 13, 1995. Prior to this, on March 26,
1990, S&P lowered its rating of all of the State's outstanding general
obligation bonds from AA- o A. Previous S&P ratings were AA- from August, 1987
to March, 1990 and A+ from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially
adversely affected, if any of its public authorities were to default on their
respective obligations. As of September 30, 1994, the date of the latest data
available, there were 18 Authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of these
18 Authorities was $70.3 billion. As of March 31, 1995, aggregate Authority debt
outstanding as State-supported debt was $27.9 billion and as State-related debt
was $36.1 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements if local
assistance payments are so diverted, the affected localities could seek
additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency, the New York State Urban Development Corporation
and certain other Authorities have in the past required and continue to require
substantial amounts of assistance from the State to meet debt service costs or
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to pay operating expenses. Further assistance, possibly in increasing amounts,
may be required for these, or other, Authorities in the future. In addition,
certain other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and
tunnels. Because fare revenues are not sufficient to finance the mass transit
portion of these operations, the MTA has depended, and will continue to depend
for operating support upon a system of State, local government and TBTA support,
and, to the extent available, Federal operating assistance, including loans,
grants and operating subsidies. If current revenue projections are not realized
and/or operating expenses exceed current projections, the TA or commuter
railroads may be required to seek additional State assistance, raise fares or
take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1995-96 fiscal year, total State assistance to the MTA is estimated by the
State to be approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the
"1992-96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the TBTA and the TA are collectively
authorized to issue an aggregate of $3.1 billion of bonds (net certain statutory
exclusions) to finance a portion of the 1992-96 Capital Program. The 1992-96
Capital Program may be financed in significant part through dedication of State
petroleum business taxes referred to above. However, in December 1994 the
proposed bond resolution based on such tax receipts was not approved by the MTA
Capital Program Review Board. Further consideration of the resolution was
deferred until 1995.
There can be no assurance that all the necessary governmental actions for
the 1992-96 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1992-96
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the 1995-96 fiscal years and thereafter. The potential impact on the State of
such actions by localities is not included in the projections of the State
receipts and disbursements for the 1995-96 fiscal year.
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Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the reestablishment of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipal Indebtedness. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1993, the total
indebtedness of all localities in the State was approximately $17.7 billion. A
small portion (approximately $105 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Fifteen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1993.
From time to time, proposed Federal expenditure reductions could reduce, or
in some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
a challenge to certain enhanced supplemental pension allowances for members of
the state and local retirement systems; (ii) several challenges to provisions of
Chapter 81 of the Laws of 1995 which after the nursing home Medicaid
reimbursement methodology; (iii) the validity of agreements and treaties by
which various Indian tribes transferred title to the State of certain land in
central and upstate New York; (iv) a challenge to State regulations which reduce
base prices for the direct and indirect component of Medicaid reimbursement for
rate years commencing 1989; (v) an action against State and City officials
alleging that the present level of shelter allowance for public assistance
recipients is inadequate under statutory standards to maintain proper housing;
(vi) challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the client's Social Security benefits; (vii) alleged
responsibility of State officials to assist in remedying racial segregation in
the City of Yonkers; (viii) alleged responsibility of the State Department of
Environmental Conservation for a plaintiff's inability to complete construction
of a cogeneration facility in a timely fashion and the damages suffered thereby;
(ix) challenges to the promulgation of the State's proposed procedure to
determine the eligibility for and nature of home care services for Medicaid
recipients; (x) a challenge to State implementation of a program which reduces
Medicaid benefits to certain home-relief recipients; (xi) a challenge to the
constitutionality of petroleum business tax assessments authorized by Tax Law
sec. 301; and (xii) two cases by commercial insurers, employee welfare benefit
plans, and health maintenance organizations to provisions of Section 2807-c of
the Public Health Law which impose 13%, 11%, and 9% surcharges on inpatient
hospital bills and a bad debt and charity care allowance on all hospital bills
paid by such entities were resolved by order dated October 2, 1995, the United
States District Court for the Southern District of New York held that the 11
percent and 13 percent surcharges are preempted by FEBHA and unenforceable
against commercial insurers which provide stop-loss coverage to self-funded
ERISA plans.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1994, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $675
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1995-96 State Financial
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Plan reserves for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1995-96 State Financial Plan.
NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health of
its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its fiscal years from 1981
through 1993, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). In addition,
the City's financial statements for the 1993 fiscal year received an unqualified
opinion from the City's independent auditors, the eleventh consecutive year the
City has received such an opinion.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the State
established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities; and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
"substantial likelihood and imminence" of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its Covered Organizations (i.e., those which receive or
may receive money from the City directly, indirectly or contingently) operate
under a four-year financial plan which the City prepares annually and
periodically updates.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected Federal or State aid
is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State.
On January 31, 1996, the City published the Financial Plan for the
1996-1999 fiscal years, which is a modification to a financial plan submitted to
the Control Board on July 11, 1995 (the "July Financial Plan") and which relates
to the City, the Board of Education ("BOE") and the City University of New York
("CUNY"). The Financial Plan sets forth proposed actions by the City for the
1996 fiscal year to close substantial projected budget gaps resulting from lower
than projected tax receipts and other revenues and greater than projected
expenditures. In addition to substantial proposed agency expenditure reductions,
the Financial Plan reflects a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the Federal share of Medicaid costs otherwise paid by the City. This strategy is
the subject of substantial debate, and implementation of this strategy will be
significantly affected by State and Federal budget proposals currently being
considered. The Financial Plan, which is consistent with the City's preliminary
budget for the 1997 fiscal year, may be changed significantly by the time the
budget for the 1997 fiscal year is adopted.
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The July Financial Plan set forth proposed actions to close a previously
projected gap of approximately $3.1 billion for the 1996 fiscal year. The
proposed actions in the July Financial Plan for the 1996 fiscal year included
(i) a reduction in spending of $400 million, primarily affecting public
assistance and Medicaid payments by the City; (ii) agency reduction programs,
totaling $1.2 billion; (iii) transitional labor savings totaling $600 million;
and (iv) the phase-in of the increased annual pension funding cost due to
revisions resulting from an actuarial audit of the City pension systems, which
would reduce such costs in the 1996 fiscal year. A modification to the July
Financial Plan published on November 29, 1995 (the "November Financial Plan")
included savings from a proposed refunding of outstanding debt and other
expenditure reductions to offset a $129 million increase in projected
expenditures.
The 1996-1999 Financial Plan published on January 31, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the November Financial Plan, and projects revenues and expenditures for
the 1996 fiscal year balanced in accordance with GAAP. For the 1996 fiscal year,
the Financial Plan includes actions to offset an additional $759 million budget
gap resulting primarily from (i) the failure of the Port Authority of New York
and New Jersey (the "Port Authority") to pay disputed back rent for the City's
airports in the amount included in the November Financial Plan, (ii) shortfalls
in Federal and State aid included in the November Financial Plan, (iii)
shortfalls in revenues and in amounts to be saved through gap-closing actions at
BOE, (iv) shortfalls in projected savings from cost containment initiatives
proposed in the July Financial Plan affecting public assistance and Medicaid,
and (v) the failure of the City and its labor unions to identify assumed savings
in the City's health benefits system. The gap-closing measures for the 1996
fiscal year set forth in the Financial Plan include (i) additional proposed
agency actions aggregating $207 million, (ii) the receipt of $150 million from
MAC, and (iii) the receipt of $120 million from the proposed sale of mortgages,
$75 million from increased revenues from the proposed sale of City tax liens on
real property and $207 million from the proposed sale of the City's television
station.
The receipt of funds from MAC is subject to approval of MAC, the sale of
the tax liens requires adoption of a local law by the City Council and the
proposed sale of the City's television station is subject to Federal regulatory
approval. In addition, the Federal budget negotiation process for the 1996
Federal fiscal year could result in a reduction in, or a delay in the receipt
of, Federal grants in the City's 1996 fiscal year. If such approvals are not
received on a timely basis, the City may be required to identify alternative
measures to balance its 1996 fiscal year budget.
The Financial Plan also sets forth projections for the 1997 through 1999
fiscal years and outlines a proposed gap-closing program to eliminate a
projected gap of $2.0 billion for the 1997 fiscal year, and to reduce projected
gaps of $3.3 billion and $4.1 billion for the 1998 and 1999 fiscal years,
respectively, assuming successful implementation of the gap-closing program for
the 1996 fiscal year. The projected gaps for the 1997 through 1999 fiscal years
have increased from the gaps projected in the November Financial Plan to reflect
(i) reductions in projected property taxes of $177 million, $294 million and
$421 million in the 1997, 1998 and 1999 fiscal years, respectively, due to a
lower than forecast increase in the tentative assessment roll published by the
New York City Department of Finance, (ii) reductions in other forecast tax
revenues of $114 millon, $216 million and $261 million in the 1997, 1998 and
1999 fiscal years, respectively, (iii) reductions in tax revenues of $79
million, $224 million and $341 million in the 1997, 1998 and 1999 fiscal years,
respectively, as a result of new tax reduction initiatives, including a proposed
sales tax exemption on clothing items under $500, and (iv) increased agency
expenditures.
The proposed gap-closing actions for the 1997 through 1999 fiscal years
include (i) additional agency actions, totaling between $643 million and $691
million in each of the 1997 through 1999 fiscal years; (ii) additional savings
resulting from State and Federal aid and cost containment in entitlement
programs to reduce City expenditures and increase revenues by $650 million in
the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal
years; (iii) additional proposed Federal aid of $50 million in the 1997 fiscal
year and State aid of $100 million in each of the 1997 through 1999 fiscal
years; (iv) the receipt of $300 million in the 1997 fiscal year from
privatization or other initiatives, including the sale of the City's parking
meters and associated revenues, which may require legislative action by the City
Council, or the sale of other assets; and (v) the assumed receipt of revenues
relating to rent payments for the City's airports, totaling $244 million, $226
million and $70 million in the 1997 through 1999 fiscal years, respectively,
which are currently
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the subject of a dispute with the Port Authority and the collection of which may
depend on the successful completion of negotiations with the Port Authority or
the enforcement of the City's remedies under the leases through pending legal
actions. The City is also preparing an additional contingency gap-closing
program for the 1997 fiscal year to be comprised of $200 million in additional
agency actions.
The Governor has released the 1996-1997 Executive Budget, which will be
considered for adoption by the State Legislature. The City estimates that the
1996-1997 Executive Budget provides the City with $173 million of savings from
Medicaid cost containment proposals and $127 million of savings from proposed
reductions in welfare spending in the 1997 fiscal year. The Financial Plan
assumes that the remaining $350 million of the $650 million of entitlement
reform benefits included in the Financial Plan for the 1997 fiscal year will be
generated by the State providing the City with a portion of the additional funds
received by the State as a result of the increased Federal share of Medicaid
costs proposed in the State Executive Budget. However, the State Executive
Budget does not currently contemplate sharing such funds with the City. In
addition, the President and Congress are currently considering budget proposals
for the 1996 Federal fiscal year. The Federal budget or other factors may cause
substantial amendments to the State Executive Budget.
The Federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The Federal and State aid projected in the Financial Plan, and the
substantial savings assumed from cost containment in entitlement programs
included in the Financial Plan gap-closing program for the 1997 through 1999
fiscal years, will be significantly affected both by the outcome of the current
Federal budget negotiations and by the State budget proposals made by the
Governor and to be considered by the State Legislature. The nature and extent of
the impact on the City of the Federal and State budgets, when adopted, is
uncertain, and no assurance can be given that Federal or State actions included
in the Federal and State adopted budgets may not have a significant adverse
impact on the City's budget and its Financial Plan.
The projections for the 1996 through 1999 fiscal years reflect the costs of
the proposed settlement with the United Federation of Teachers ("UFT") and the
recent settlement with a coalition of unions headed by District Council 37 of
the American Federation of State, County and Municipal Employees ("District
Council 37"), and assume that the City will reach agreement with its remaining
municipal unions under terms which are generally consistent with such
settlements which are discussed below. The projections for the 1996 through 1999
fiscal years also assume the BOE will be able to identify actions to offset
possible substantial shortfalls in Federal, State and City revenues.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. In November 1995 the City announced a tentative settlement
with the UFT and a coalition of unions headed by District Council 37 which
represent approximately two-thirds of the City's workforce. The settlement
provides for a wage freeze in the first two years, followed by a cumulative
effective wage increase of 11% by the end of the five year period covered by the
proposed agreements, ending in fiscal years 2000 and 2001. Additional benefit
increases would raise the total cumulative effective increase to 13% above
present costs. The Financial Plan reflects the costs associated with the
settlements, and assumes similar increases for all other City-funded employees,
which total $49 million, $459 million and $1.2 billion in the 1997, 1998 and
1999 fiscal years, respectively. Such increases exceed $2 billion in each fiscal
year after the 1999 fiscal year. District Council 37 and Local 237, representing
approximately 90,000 full-time employees, have ratified the proposed settlement.
On December 7, 1995, the members of the UFT voted on the proposed settlement
with the UFT. Six chapters of the UFT, representing approximately 18,000
full-time employees, including teaching paraprofessionals, voted to ratify the
proposed settlement, which will apply to those chapters if approved by BOE. Five
chapters, representing approximately 76,000 full-time employees, including
teachers, voted not to ratify the proposed settlement. A portion of the
transitional labor savings contained in the Financial Plan is dependent upon
conclusion of collective bargaining agreements with the City's workforce. There
can be no assurance that the City will reach an agreement with the chapters of
the UFT which rejected the proposed settlement on the terms contained in the
Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective
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bargaining with the UFT, which may be subject to non-binding arbitration. On
January 23, 1996, the City requested the Office of Collective Bargaining to
declare an impasse against the Patrolmen's Benevolent Association ("PBA") and
the United Firefighters Association ("UFA").
From time to time, the Control Board staff, MAC, OSDC, the City Comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that reports and statements will continue to be issued and
to engender public comment. It is expected that the staff of the Control Board
will issue a report in March 1996 reviewing the Financial Plan.
On February 29, 1996 the staff of the City Comptroller issued a report on
the Financial Plan. The report projects that there remains $408 million to $528
million in budget risks for the 1996 fiscal year, before taking into account the
availability of $160 million in the General Reserve. The principal risks for the
1996 fiscal year identified in the report include $140 million to $190 million
of uncertain revenues and projected savings at BOE and the receipt by the City
of $100 million to $130 million from a proposed MAC refunding. The report also
expressed concern as to whether the required regulatory approval for the sale of
the City's television station would be received before the end of the 1996
fiscal year.
With respect to the 1997 fiscal year, the report states that the Financial
Plan includes total risks of between $2.05 billion and $2.15 billion. The report
notes that the gap-closing program for the 1997 fiscal year assumes the
implementation of highly uncertain State and Federal actions that would provide
between $1.2 billion and $1.4 billion in relief to the City resulting from
proposed public assistance and medical assistance entitlement reductions, a
proposed increase in Federal Medicaid reimbursements, additional State aid and
various privatization proposals. The report concludes that it is unlikely that
the City will be able to implement most of these initiatives due to Federal and
State budget difficulties. Additional risks for the 1997 fiscal year identified
in the report include (i) risks attributable to BOE relating to unspecified
additional State aid, unspecified expenditure reductions and proposals to reduce
special education spending, which total $415 million, without taking into
account potential reductions that will likely take place upon adoption of the
Federal and State budgets; (ii) proposals for the sale of parking meters and
other assets; and (iii) the receipt of $244 million to $294 million of lease
payments from the Port Authority for the City's airports.
The report concluded that the magnitude of the budget risk for the 1997
fiscal year, after two years of large agency cutbacks and work force reductions,
indicates the seriousness of the City's continuing budget difficulties, and that
the Financial Plan will require substantial revision in order to provide a
credible program for dealing with the large projected budget gap for the 1997
fiscal year. The report further notes that the relative weakness of the national
and City economies makes it unlikely that new jobs and business expansion will
generate significant additional tax revenues and that proposed Federal and State
reductions in funding will reduce the levels of intergovernmental assistance for
the City.
On March 6, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that there remained a budget gap for the 1996 fiscal
year of $44 million, which can be closed with the $200 million General Reserve,
and additional significant risks totaling $507 million involving actions which
require the approval of the State and Federal governments or other third
parties. These risks include (i) potential delays in the sale of the City's
television station; (ii) shortfalls in projected resources from MAC; and (iii)
shortfalls of $100 million in projected State education aid and $50 million in
projected Federal assistance. In addition, the report expressed concern that (i)
the City may have to write off a portion of approximately $300 million in State
education aid that was included as revenue in prior years' budgets, since the
State has not made payment and neither the current nor the proposed State budget
include an appropriation sufficient to cover most of this liability, and (ii)
the City must complete two transactions before the end of the fiscal year,
23
<PAGE> 67
the sale of property tax liens and housing mortgages, that together are expected
to produce resources of $267 million.
The report also concluded that the gap for the 1997 fiscal year could be
$544 million greater than the City's projected budget gap of $2 billion,
primarily due to the failure of BOE to specify $304 million of expenditure
reductions or additional resources necessary to bring its spending in line with
the resources allocated to it in the Financial Plan. In addition, the report
noted that gap-closing proposals set forth in the Financial Plan totalling $1.6
billion are at high risk of falling short of target. The proposals identified in
the report as high risk include (i) $800 million in expected State and Federal
assistance, primarily from savings in social service entitlement programs, which
are dependent on the ultimate resolution of the Federal and State budgets; (ii)
$300 million from initiatives to privatize parking meters and other City assets;
(iii) $244 million to be received from the Port Authority as retroactive lease
payments for the City's two airports; and (iv) $181 million in spending cuts for
BOE. Moreover, the report expressed concern that the potential for budget cuts
at BOE could exceed $1 billion after taking into account the possible loss of
$453 million in proposed reductions in State and Federal funding. The report
also stated that non-recurring resources for the 1996 fiscal year have increased
to over $1.7 billion, approaching the unprecedented $2 billion used in the 1995
fiscal year, and that one-third of the 1997 fiscal year gap-closing program
already relies on one-time resources.
With respect to the economy, the report noted that, in a time of slow
economic growth, revenues continue to stagnate, and that the City's economic
forecast, which is premised on sluggish national growth, does not reflect the
potential for a national recession during the four years of the Financial Plan.
In addition, the report expressed concern that the City's economy, and City and
State tax revenues, are closely tied to swings in the financial markets, such as
rising interest rates, which sharply reduced the profits of securities firms in
1994, and rising equity markets, which raised personal income and business tax
collections in 1995, as well as economic conditions in Europe and Japan, which
are currently weak.
The report noted that Federal and State assistance is likely to be
significantly reduced and that there is little potential for significant new
revenues beyond those already reflected in the Financial Plan. The report
concluded that, despite the City's success in work force reduction and
entitlement savings, the Financial Plan shows an increasing imbalance between
the City's recurring revenues and expenditures.
On December 12, 1995, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be reduced in future
years. The report noted that, under the State constitution, the City is
permitted to issue debt in an amount not greater than 10% of the average full
value of taxable real estate for the current year and preceding four years. The
report concluded that, if the value of taxable real property in each of 1998 and
1999 fiscal years continues to decline, reflecting the continuing trend of lower
values of taxable property, the City would have to continue to curtail its
capital program from the levels projected in the Financial Plan to remain within
the legal debt-incurring limit in those years. The City Comptroller recommended
that the City prioritize and improve the efficiency and administration of its
current capital plan to determine which capital projects can be delayed or
cancelled to further reduce capital expenditures and thus debt service over the
course of the Financial Plan.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes
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<PAGE> 68
could be hurt by the imposition of a flat tax, if uncertainty is introduced with
regard to their repayment revenues, until property values fully reflect the loss
of mortgage and property tax deductions.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. The City's current monthly cash flow forecast for the 1996
fiscal year shows a need of $2.4 billion of seasonal financing for the 1996
fiscal year, a portion of which will be met with the proceeds of notes. Seasonal
financing requirements for the 1995 fiscal year increased to $2.2 billion from
$1.75 billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
The delay in the adoption of the State's budget for its 1992 fiscal year
required the City to issue $1.25 billion in short-term notes on May 7, 1991, and
the delay in the adoption of the State's budget for its 1991 fiscal year
required the City to issue $900 million in short-term notes on May 15, 1990.
Seasonal financing requirements were $2.25 billion and $3.65 billion in the 1992
and 1991 fiscal years, respectively.
The 1996-1999 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1996-1999 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1996 through 1999 fiscal years; continuation of interest
earnings assumptions for pension fund assets and current assumptions with
respect to wages for City employees affecting the City's required pension fund
contributions; the willingness and ability of the State, in the context of the
State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City, including
the proposed entitlement spending reductions; the ability of HHC, BOE and other
such agencies to maintain balanced budgets; the willingness of the Federal
government to provide the amount of Federal aid contemplated in the Financial
Plan; adoption of the City's budgets by the City Council in substantially the
forms submitted by the Mayor; the ability of the City to implement proposed
reductions in City personnel and other cost reduction initiatives, and the
success with which the City controls expenditures; the impact of conditions in
the real estate market on real estate tax revenues; approval by MAC of the
projected receipt of funds from MAC; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
On June 7, 1995, the State adopted its Budget for the State's 1996 fiscal
year, commencing April 1, 1995. Prior to adoption of the budget the State had
projected a potential budget gap of approximately $5 billion for its 1996 fiscal
year. This gap is projected to be closed in the 1995-1996 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
On January 30, 1996, the State issued an update to the 1995-1996 state
Financial Plan. These projections show continued balance in the State's
1995-1996 Financial Plan.
A significant risk to the State's projections arises from tax legislation
under consideration by Congress and the President. Congressionally-adopted
retroactive changes to Federal tax treatment of capital gains would flow through
automatically to the State personal income tax. Such changes, if ultimately
enacted, could produce revenue losses in both the 1995-1996 fiscal year and the
1996-1997 fiscal year. In addition, changes in Federal aid programs, currently
pending in Congress, could result in prolonged interruptions in the receipt of
Federal grants. According to the State Division of the Budget, the major
remaining uncertainties in the 1995-
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<PAGE> 69
1996 State Financial Plan continue to be those related to the economy and tax
collections, which could produce either favorable or unfavorable variances
during the balance of the year.
The Governor presented his 1996-1997 Executive Budget to the Legislature on
December 15, 1995. The Legislature and the Comptroller will review the
Governor's Executive Budget and are expected to comment on it. There can be no
assurance that the Legislature will enact the Executive Budget into law, or that
the State's adopted budget projections will not differ materially and adversely
from the projections set forth in the Executive Budget.
The Governor's Executive Budget projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.3 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $31.2 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year.
The 1996-1997 Executive Budget proposes $3.9 billion in actions to balance
the 1996-97 State Financial Plan. The Executive Budget proposes to close this
gap primarily through a series of spending reductions and cost containment
measures. The Executive Budget projects (i) over $1.8 billion in savings from
cost containment and other actions in social welfare programs, including
Medicaid, welfare and various health and mental health programs; (ii) $1.3
billion in savings from a reduced State General Fund share of Medicaid made
available from anticipated changes in the Medicaid program, including an
increase in the Federal share of Medicaid; (iii) over $450 million in savings
from reforms and cost avoidance in educational services (including school aid
and higher education), while providing fiscal relief from certain State mandates
that increase local spending; and (iv) $350 million in savings from efficiencies
and reductions in other State programs. The State has noted that there is
considerable uncertainty as to the ultimate composition of the Federal budget,
including uncertainties regarding major Federal entitlement reforms. The
1996-1997 Executive Budget seeks to lessen the effect of the proposed cuts on
localities by granting certain mandate relief to permit them to exercise greater
flexibility in allocating their resources. However, no assurance can be given as
to the amount of savings which the City might realize from any of the Medicaid
cost containment or welfare reform measures proposed in the Executive Budget or
the size of any reductions in State aid to the City. Depending upon the amount
of such savings or the size of any such reduction in State aid, the City might
be required to make substantial additional changes in the Financial Plan.
The State Division of the Budget has noted that the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. Those factors can be very complex, can vary from fiscal
year to fiscal year, and are frequently the result of actions taken not only by
the State but also by entities, such as the Federal government, that are outside
the State's control. Because of the uncertainty and unpredictability of these
changes, their impact cannot be included in the assumptions underlying the
State's projections at this time. There can be no assurance that the State
economy will not experience results that are worse than predicted, with
corresponding material and adverse effects on the State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in future fiscal years. The 1996-1997
Executive Budget includes actions that will have an impact on receipts and
disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in State fiscal year 1997-98 of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming implementation
of the 1996-97 Executive Budget recommendations. It is expected that the
Governor will propose to close these budget gaps with future spending
reductions.
Uncertainties with regard to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to Federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Specific budget and tax
proposals under consideration at the Federal level but
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<PAGE> 70
not included in the State's 1996-1997 Executive Budget forecast could also have
a disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
In the State's 1996 fiscal year and in certain recent fiscal years, the
State has failed to enact a budget prior to the beginning of the State's fiscal
year. A delay in the adoption of the State's budget beyond the statutory April 1
deadline could delay the projected receipt by the City of State aid, and there
can be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline. In the event that a State budget is not adopted
by the statutory deadline of April 1, 1996, temporary spending measures may be
adopted by the State pending the adoption of a Federal budget.
The projections and assumptions contained in the 1996-1999 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control, will
be realized. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. The City's projections are subject to the
City's ability to implement the necessary service and personnel reduction
programs successfully.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1996-99 Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of outstanding
claims against it as of June 30, 1995 amounted to approximately $2.5 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector". Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the Financial Plan, optimistic projections of additional federal and State aid
or mandate relief, a history of cash flow difficulties caused by State budget
delays and continued high debt levels.
Fitch Investors Service, Inc. ("Fitch") rates City general obligation bonds
A-. Moody's rating for City general obligation bonds is Baa1. On March 1, 1996,
Moody's put the City's Baa1 general obligation bond rating under review for a
possible downgrade pending the outcome of the adoption of the City's budget for
the 1997 fiscal year and in light of the status of the debate on public
assistance and Medicaid reform; the enactment of a State budget, upon which
major assumptions regarding State aid are dependent, which may be extensively
delayed; and the seasoning of the City's economy with regard to its strength and
direction in the face of a potential national economic slowdown. Since July 15,
1993, Fitch has rated City bonds A-. On February 28, 1996, Fitch placed the
City's general obligation bonds on FitchAlert with negative implications. There
is no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of the
City's general obligation bonds.
In 1975, S&P suspended its A rating of City bonds. This suspension remained in
effect until March 1981, at which time the City received an investment grade
rating of BBB from S&P. On July 2, 1985, S&P revised its rating of City bonds
upward to BBB+ and on November 19, 1987, to A-. On July 10, 1995, S&P revised
its rating of City bonds downward to BBB+, as discussed above. Moody's ratings
of City bonds were revised in November 1981 from B (in effect since 1977) to
Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and
again in February 1991 to Baa1. Since July 15, 1993, Fitch has rated City bonds
A-. On July 12, 1995, Fitch stated that the City's credit trend remains
"declining."
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<PAGE> 71
LIMITING INVESTMENT RISKS
In addition to the limitations described under "Limiting Investment Risks"
in the Prospectus, the Funds are subject to the following investment
limitations:
None of the Funds may:
(i) purchase any securities which would cause more than 25% of the
value of their respective total assets at the time of such purchase to
be invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that there
is no limitation: (a) in the case of The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund or The Government
Money Market Fund, with respect to investment in obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities; (b) in the case of The Cash Management Fund, with
respect to investment in obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities or with respect to
bank obligations; and (c) in the case of The Tax Free Money Market Fund
and The New York Tax Free Money Market Fund (the "Tax Free Funds"), with
respect to obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities, or by any state or
territory, any possession of the United States, the District of
Columbia, or any of their authorities, agencies, instrumentalities, or
political subdivisions. In determining the industry of an issuer, wholly
owned finance companies will be considered to be in the industries of
their parents and utilities will be divided according to their services;
(ii) make loans, except that each Fund may: (a) purchase and hold
debt instruments (including bonds, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed time deposits)
in accordance with its investment objectives and policies; (b) except
for The 100% U.S. Treasury Securities Money Market Fund, enter into
repurchase agreements with respect to portfolio securities; and (c) lend
portfolio securities with a value not in excess of one-third of the
value of its total assets;
(iii) purchase or sell real estate (other than municipal
obligations or other money market securities secured by real estate or
interests therein or securities issued by companies that invest in real
estate or interests therein), commodities or commodity contracts,
warrants or interests in oil, gas, mineral or other exploration or
development programs or leases;
(iv) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short sales of
securities;
(v) underwrite securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such
securities in accordance with any Fund's investment program may be
deemed to be an underwriting;
(vi) purchase securities of other investment companies (except as
part of a merger, consolidation or reorganization or purchase of assets
approved by a Fund's shareholders); provided that a Fund may purchase
shares of any registered open-end investment company that determines its
net asset value per share based on the amortized cost or penny-rounding
method, if immediately after any such purchase the Fund does not (a) own
more than 3% of the outstanding voting stock of any one investment
company, (b) invest more than 5% of the value of its total assets in any
one investment company, or (c) invest more than 10% of the value of its
total assets in the aggregate in securities of investment companies; or
(vii) invest in or sell put options, call options, straddles,
spreads, or any combination thereof, except that the Funds may acquire
rights to put their portfolio securities in order to maintain liquidity.
For purposes of investment restriction (iii) above, real estate includes
Real Estate Limited Partnerships.
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<PAGE> 72
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's portfolio securities will not constitute violation of such limitation.
For purposes of the investment limitations applicable to the Tax Free
Funds, as well as for purposes of diversification under the 1940 Act, the
identification of the issuer of a municipal obligation depends on the terms and
conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision would be
regarded as the sole issuer. Similarly, in the case of a private activity bond,
if the bond is backed only by the assets and revenues of the non-governmental
user, the non-governmental user would be deemed to be the sole issuer. If in
either case the creating government or another entity guarantees an obligation,
the guarantee would be considered a separate security and be treated as an issue
of such government or entity.
The investment limitations described above and in the Prospectus with
respect to the Funds under "Limiting Investment Risks" are fundamental policies
of each of the Funds and may be changed only when permitted by law and approved
by the holders of a majority of such Fund's outstanding voting securities, as
described under "Capital Stock."
In order to permit the sale of their shares in certain states, any of the
Funds may make commitments more restrictive than the investment policies and
limitations described above and in the Prospectus. Should any such 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.
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<PAGE> 73
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations for the past five years of the Directors and
executive officers of the Company are listed below. Directors deemed to be
"interested persons" of the Company for purposes of the 1940 Act are indicated
by an asterisk.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT PAST 5 YEARS
- ------------------------------------- ---------------- --------------------------------------
<S> <C> <C>
W. Perry Neff*....................... Chairman Independent Financial Consultant;
RR 1 Box 102A Director of North America Life
Weston, VT 05181 Assurance Co., Petroleum & Resources
Age 68 Corp. and The Adams Express Co.;
Director, Chairman and President of
The Hanover Investment Funds, Inc.
Roland R. Eppley, Jr................. Vice Chairman Retired; formerly President and Chief
105 Coventry Place Executive Officer, Eastern States
Palm Beach Gardens, FL 33418 Bankcard Association Inc. (1971-1988);
Age 63 Director, Janel Hydraulics, Inc.
Robert H. Dunker..................... Director Retired; Director of E.J. Brooks Co.;
401 N.E. Plantation Road #322 Trustee of FFB Funds Trust
Stuart, FL 34996 (distributed by Furman Selz); formerly
Age 65 Executive Vice President, First
Fidelity Bank, N.A. N.J.
W.D. MacCallan....................... Director Director of The Adams Express Co., The
624 East 45th Street Hanover Investment Funds, Inc. and
Savannah, GA 31405 Petroleum & Resources Corp.; formerly
Age 68 Chairman of the Board and Chief
Executive Officer of The Adams Express
Co. and Petroleum & Resources Corp.
Joseph L. McElroy*................... Director and Independent Trust Consultant and
30 Stoneleigh Park President Expert Witness; formerly Executive
Westfield, NJ 07090 Vice President, Manufacturers Hanover
Age 65 Trust Company; formerly Director of
Trust Services, The Howard Savings
Bank (1989-1991).
Ralph J. Rohner...................... Director Dean, Columbus School of Law, The
The Catholic University of America Catholic University of America (since
Washington, DC 20064 1987; member of the faculty since
Age 57 1965), Special Counsel, Consumer
Bankers Association (since 1985).
David P. Sloterbeck, Jr.............. Director Principal, KV Partners (1994); Vice
10 Rockefeller Plaza President, Proprietary Trading, Fuji
Suite 1120 Securities, Inc. (1993); Vice
New York, NY 10020 President, Proprietary Trading, First
Age 60 Boston, Inc. (1988-1992); Director of
The Hanover Investment Funds, Inc.
Anne K. Zopfi........................ Director Senior Vice President (since 1984) and
Young & Rubicam, Inc. Group Director (since 1987), Young &
285 Madison Avenue Rubicam, Inc.
New York, NY 10017
Age 50
</TABLE>
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<PAGE> 74
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT PAST 5 YEARS
- ------------------------------------- ---------------- --------------------------------------
<S> <C> <C>
John J. Pileggi...................... Treasurer Senior Managing Director, Furman Selz
237 Park Avenue Incorporated.
New York, NY 10017
Age 37
Joan V. Fiore........................ Secretary Managing Director, Furman Selz
237 Park Avenue Incorporated (since 1991); formerly
New York, NY 10017 attorney with the Securities and
Age 39 Exchange Commission (1986-1991).
Sheryl Hirschfeld.................... Assistant Director, Corporate Secretary
237 Park Avenue Secretary Services, Furman Selz Incorporated
New York, NY 10017 (since November 1994); formerly
Age 35 Assistant to the Corporate Secretary
and General Counsel at The Dreyfus
Corporation.
Donald Brostrom...................... Assistant Managing Director, Furman Selz
237 Park Avenue Treasurer Incorporated (since March 1995);
New York, NY 10017 Formerly Director, Fund Services,
Age 37 Furman Selz Incorporated (since 1986).
</TABLE>
Mr. Pileggi, Ms. Fiore, Ms. Hirschfeld and Mr. Brostrom hold the same
offices for The Hanover Investment Funds, Inc. as those listed above. The
Hanover Investment Funds, Inc. is a registered investment company in the same
"Fund Complex" (as defined in Item 22(a) of Schedule 14A under the Securities
Exchange Act of 1934, as amended) as the Company.
The Directors and officers of the Company together as a group own less than
1% of the issued and outstanding shares of the Company.
Each Director of the Company serves an indefinite term, until his or her
successor is elected and qualified, or until his or her earlier resignation or
removal, as provided in the Company's By-Laws. Directors of the Company receive
from the Company an annual fee of $6,000 ($7,000 in the case of the Chairman)
and a fee of up to $350 for each meeting of the Board of Directors attended and
are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Officers of the Company do not receive compensation from the Company
for serving as officers. No person who is a director, officer or employee of the
investment advisers of the Company serves as a director, officer or employee of
the Company.
The following table sets forth certain information with respect to
compensation received by the Company's Directors during the fiscal year ended
November 30, 1995. For the purposes of this table, the term "Fund Complex"
includes the Company and The Hanover Investment Funds, Inc. None of the
Company's officers, nor any affiliated persons of the Company, received
aggregate compensation in excess of $60,000 from the Company during the fiscal
year ended November 30, 1995.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- -------------------------------- --------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
W. Perry Neff................... $ 9,550 $-0- $-0- $ 18,350
Roland R. Eppley, Jr............ 8,550 -0- -0- 8,550
Robert H. Dunker................ 8,050 -0- -0- 8,050
W.D. MacCallan.................. 8,550 -0- -0- 18,200
Joseph L. McElroy............... 8,550 -0- -0- 8,550
Ralph J. Rohner................. 7,800 -0- -0- 7,800
David P. Sloterbeck, Jr......... 9,050 -0- -0- 18,350
Anne K. Zopfi................... 7,700 -0- -0- 7,700
</TABLE>
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Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent "access persons" (as
defined in Rule 17j-1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Company's Board of Directors has adopted a
code of ethics (the "Fund Code") that incorporates personal trading policies and
procedures applicable to access persons of the Company, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the Company.
In addition, the Fund Code attaches and incorporates personal trading policies
and procedures applicable to access persons of each of the entities that serves
as the investment adviser to one or more of the Funds and to certain officers of
the Company that are employed by the Company's administrator, which policies
serve as each such investment adviser's code of ethics (the "Adviser Code"). The
Fund and Adviser Codes have been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for the Company. In addition, the Adviser Code contains specified
prohibitions and blackout periods for certain categories of securities and
transactions, including a prohibition on purchasing securities during an initial
public offering. The Adviser Code also requires that access persons obtain
preclearance to engage in personal securities transactions. Finally, the Fund
and Adviser Codes require access persons to report all personal securities
transactions periodically
INVESTMENT ADVISERS
The Portfolio Group, Inc. ("The Portfolio Group"), whose principal offices
are located at 600 Fifth Avenue, 4th floor, New York, New York 10020, acts as
the investment adviser for The 100% U.S. Treasury Securities Money Market Fund,
The U.S. Treasury Money Market Fund, The Government Money Market Fund and The
New York Tax Free Money Market Fund, and Texas Commerce Bank, National
Association ("TCB"), whose principal offices are located at 600 Travis, Houston,
Texas 77002, acts as the investment adviser for The Cash Management Fund and The
Tax Free Money Market Fund, in each case pursuant to a separate Advisory
Agreement (each, an "Advisory Agreement") with each Fund. The Portfolio Group is
a wholly-owned subsidiary of Chemical Banking Corporation, a bank holding
company ("Chemical"). TCB is a wholly-owned subsidiary of Texas Commerce
Bancshares, Inc., which is a wholly-owned subsidiary of Chemical. Subject to the
supervision and direction of the Company's Board of Directors, each of The
Portfolio Group and TCB provides investment advisory service with respect to the
Funds it manages in accordance with those Funds' objectives and policies, makes
investment decisions for the Funds it manages and places orders to purchase and
sell securities on behalf of the Funds it manages. For their services under the
Advisory Agreements, each of The Portfolio Group and TCB receives from the Funds
it manages an advisory fee payable monthly at an annual rate of 0.15% of such
Funds' average daily net assets.
Each Advisory Agreement provides that the investment adviser thereunder
shall not be liable for any mistake in judgment or in any other event
whatsoever, provided that nothing in an Advisory Agreement shall protect the
investment adviser thereunder against any liability to the Company or its
shareholders to which such investment adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
Unless sooner terminated, each of the Advisory Agreements will continue in
effect with respect to the particular Fund from year to year if such continuance
is approved at least annually by the Company's Board of Directors or by a vote
of a majority (as defined under "Capital Stock") of the outstanding shares of
such Fund and, in either case, by a majority of the Directors who are not
parties to the Advisory Agreements or "interested persons" (as defined in the
1940 Act) of any party by votes cast in person at a meeting called for
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such purpose. Each Advisory Agreement will be terminable by the Company or the
investment adviser thereunder on 60 days' written notice, and will terminate
immediately in the event of its assignment.
For the fiscal year ended November 30, 1995, The Portfolio Group received
advisory fees, after waivers, of $1,272,578, $1,769,302, $1,729,641 and $259,026
from The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury
Money Market Fund, The Government Money Market Fund and The New York Tax Free
Money Market Fund, respectively. For the fiscal year ended November 30, 1995,
The Portfolio Group waived advisory fees totalling $318,145, $442,325, $432,410
and $64,756, payable by The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund and The New
York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1995, TCB (including Texas Commerce Investment Management Company
("TCIMCo"), an affiliate of TCB which acted as investment adviser to the Cash
Management Fund and The Tax Free Money Market Fund prior to September 1, 1995)
received advisory fees, after waivers, of $1,385,147 and $405,896 from The Cash
Management Fund and The Tax Free Money Market Fund, respectively. For the fiscal
year ended November 30, 1995, TCB (including TCIMC.) waived advisory fees
totalling $346,287 and $101,474 payable by The Cash Management Fund and The Tax
Free Money Market Fund, respectively.
For the fiscal year ended November 30, 1994, The Portfolio Group received
advisory fees, after waivers, of $891,720, $1,276,657, $945,316 and $209,333
from The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury
Money Market Fund, The Government Money Market Fund and The New York Tax Free
Money Market Fund, respectively. For the fiscal year ended November 30, 1994,
The Portfolio Group waived advisory fees totalling $222,930, $319,165, $236,329
and $52,333, payable by The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund and The New
York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1994, TCIMCo received advisory fees, after waivers, of $917,277 and
$448,612 from The Cash Management Fund and The Tax Free Money Market Fund,
respectively. For the fiscal year ended November 30, 1994, TCIMCo waived
advisory fees totalling $229,320 and $112,153 payable by The Cash Management
Fund and The Tax Free Money Market Fund, respectively.
For the fiscal year ended November 30, 1993, The Portfolio Group received
advisory fees, after waivers, of $591,137, $1,311,589, $591,009 and $189,216
from The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury
Money Market Fund, The Government Money Market Fund and The New York Tax Free
Money Market Fund, respectively. For the fiscal year ended November 30, 1993,
The Portfolio Group waived advisory fees totalling $147,784, $327,897, $147,752
and $47,304, payable by The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund and The New
York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1993, TCIMCo received advisory fees, after waivers, of $856,531 and
$265,666 from The Cash Management Fund and The Tax Free Money Market Fund,
respectively. For the fiscal year ended November 30, 1993, TCIMCo waived
advisory fees totalling $214,133 and $66,416 payable by The Cash Management Fund
and The Tax Free Money Market Fund, respectively.
For the fiscal period ended November 30, 1992, The Portfolio Group received
advisory fees, after waivers, of $52,414, $205,231, $111,348 and $20,110 from
The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money
Market Fund, The Government Money Market Fund and The New York Tax Free Money
Market Fund, respectively. For the fiscal period ended November 30, 1992, The
Portfolio Group waived advisory fees totalling $924,196, $40,317, $8,199 and
$14,089, payable by The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund and The New
York Tax Free Money Market Fund, respectively. For the fiscal period ended
November 30, 1992, TCIMCo received advisory fees, after waivers, of $111,138 and
$32,259 from The Cash Management Fund and The Tax Free Money Market Fund,
respectively. For the fiscal period ended November 30, 1992, TCIMCo waived
advisory fees totalling $21,898 and $14,329, payable by The Cash Management Fund
and The Tax Free Money Market Fund, respectively.
Manufacturers Hanover Trust Company ("MHT") acted as investment adviser for
the Funds (other than The U.S. Treasury Money Market Fund, which did not
commence operations until October 1, 1992)
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<PAGE> 77
until the merger of MHT and Chemical Bank in June, 1992 (the "Merger"), at which
time Chemical Bank became investment adviser for those Funds. Chemical Bank
acted as investment adviser for those Funds until September 30, 1992. MHT and
Chemical Bank had been entitled to receive from each of those Funds an advisory
fee for the period it acted as investment adviser payable monthly at an annual
rate of 0.25% of the average daily net assets of each Fund it advised. For the
fiscal period ended November 30, 1992, MHT received advisory fees, after
waivers, of $96,902, $457,027, $310,539, $144,515 and $18,201 from The 100% U.S.
Treasury Securities Money Market Fund, The Government Money Market Fund, The
Cash Management Fund, The Tax Free Money Market Fund and The New York Tax Free
Money Market Fund, respectively. For the fiscal period ended November 30, 1992,
MHT waived advisory fees totalling $135,699, $69,782, $87,259, $59,910 and
$50,024, payable by The 100% U.S. Treasury Securities Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively. For the
fiscal period ended November 30, 1992, Chemical received advisory fees, after
waivers, of $60,303, $170,569, $104,897, $40,739 and $6,946 from The 100% U.S.
Treasury Securities Money Market Fund, The Government Money Market Fund, The
Cash Management Fund, The Tax Free Money Market Fund and The New York Tax Free
Money Market Fund, respectively. For the fiscal period ended November 30, 1992,
Chemical waived advisory fees totalling $92,957, $74,436, $58,160, $39,689 and
$30,177, payable by The 100% U.S. Treasury Securities Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively.
ADMINISTRATORS, CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Furman Selz LLC ("Furman Selz") and Chemical Bank currently serve as the
Company's administrators pursuant to an administration agreement (the "Furman
Administration Agreement") and an administration agreement (the "Chemical
Administration Agreement"), respectively. Under the Furman Administration
Agreement, Furman Selz has agreed to maintain office facilities for the Company,
furnish the Company with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Company. Furman
Selz also prepares and files various reports with the appropriate regulatory
agency, updates the Company's Registration Statement for filing with the
Securities and Exchange Commission (the "Commission") and prepares any other
materials required by the Commission or any state securities commission having
jurisdiction over the Funds. Under the Chemical Administration Agreement,
Chemical Bank supervises and coordinates the service providers to the Company,
negotiates related contracts, acts as liaison to the Company's Board of
Directors and provides product support and general business management services
to the Company. For its services under the Furman Administration Agreement,
Furman Selz receives a monthly fee, based upon the aggregate average daily net
assets of the Funds, at an annual rate of 0.06% of the first $500 million of
average daily net assets, 0.05% of the next $500 million of average daily net
assets and 0.04% of average daily net assets in excess of $1 billion. For its
services under the Chemical Administration Agreement, Chemical Bank receives
from each Fund a monthly fee at an annual rate of 0.03% of average daily net
assets of that Fund and an annual fee of $25,000. The Furman Administration
Agreement continues in effect for an indefinite term and may be terminated by
either party on 60 days' written notice. The Chemical Administration Agreement
continues in effect from year to year if such continuance is approved at least
annually by the Company's Board of Directors and by a majority of the Directors
who are not parties to such Agreement or "interested persons" (as defined in the
1940 Act) of any party, and such Agreement may be terminated by either party on
60 days' written notice.
Furman Selz provides fund accounting services for each fund pursuant to an
accounting services agreement (the "Accounting Services Agreement"), including
the computation of each Fund's net asset value, net income and realized capital
gains, if any. With respect to each Fund, Furman Selz receives an annual fee of
$25,000 for its fund accounting services under the Accounting Services
Agreement.Chemical previously provided these services to each Fund pursuant to
the Chemical Administration Agreement for the same level of compensation. The
Accounting Services Agreement will continue in effect for an initial term of
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<PAGE> 78
one year from the date of its execution and from year to year thereafter if such
continuance is approved at least annually by the Company's Board of Directors
and by a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice.
Chemical Bank serves as the Company's transfer agent and dividend
disbursing agent pursuant to a Transfer Agency Agreement (the "Transfer Agency
Agreement") with the Company. Under the Transfer Agency Agreement, Chemical Bank
has agreed, among other things, to: (i) issue and redeem shares of each Fund;
(ii) transmit all communications by each Fund to its shareholders of record,
including reports to shareholders, dividend and distribution notices and proxy
materials for meetings of shareholders; (iii) respond to correspondence by
security brokers and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to the Board of Directors concerning the
Funds' operations. Under the Transfer Agency Agreement, Chemical Bank is
entitled to a fee of $10.00 per year for each shareholder account. The Transfer
Agency Agreement continues in effect from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who are not parties to such Agreement or "interested persons"
(as defined in the 1940 Act) of any party, and such Agreement may be terminated
by either party on 60 days' written notice.
Chemical Bank and the Company have entered into a Sub-Transfer Agency
Agreement with Furman Selz under which the services to be provided by Chemical
Bank as transfer agent will be performed by Furman Selz, subject to the general
supervision of Chemical Bank. Furman Selz, as sub-transfer agent, receives the
fee to which Chemical Bank is entitled under the Transfer Agency Agreement. The
Sub-Transfer Agency Agreement continues in effect for an indefinite term and may
be terminated by any party thereto on 60 days' written notice.
Chemical Bank (in such capacity, the "Custodian") serves as the Company's
custodian pursuant to a Custodian Agreement (the "Custodian Agreement") with the
Company. The Custodian is located at 450 West 33rd Street, New York, New York
10001. Under the Custodian Agreement, the Custodian has agreed to (1) maintain a
separate account or accounts in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities; (iv) respond to correspondence by security brokers and others
relating to its duties; and (v) make periodic reports to the Company's Board of
Directors concerning the Funds' operations. The Custodian is authorized under
the Custodian Agreement to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the Custodian remains
responsible for the performance of all of its duties under the Custodian
Agreement. The Custodian is entitled to receive the following fees under the
Custodian Agreement: a monthly fee at an annual rate of 0.015% of the first $300
million of the aggregate average daily net assets of the Funds, 0.010% of the
next $300 million of such assets and 0.005% of such assets in excess of $600
million, plus a fee of $25.00 for each transaction involving a security which is
not book-entry and $15.00 for each transaction involving a book-entry security.
The Custodian Agreement continues in effect from year to year if such
continuance is approved at least annually by the Company's Board of Directors
and by a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice.
For the fiscal year ended November 30, 1995, Furman Selz received
administration and accounting fees of $643,246, $629,285, $506,699, $158,893 and
$106,595 from The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund, respectively. For the fiscal year ended November 30, 1995, Chemical
Bank received administration and accounting fees of $324,318, $444,409,
$438,660, $354,621, $104,643 and $73,090 from The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund, The Government Money
Market Fund, The Cash Management Fund, The Tax Free Money Market Fund and The
New York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1995, Furman Selz received sub-transfer agency fees of $29,463,
$19,393, $28,489, $23,174, $6,108 and $12,957 from The 100% U.S. Treasury
Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market
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<PAGE> 79
Fund, The Cash Management Fund, The Tax Free Money Market Fund and The New York
Tax Free Money Market Fund, respectively. For the fiscal year ended November 30,
1995, Chemical Bank received custodian fees, after waivers, of $61,725, $93,170,
$205,543, $75,395, $37,108 and $23,277 from The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund, The Government Money
Market Fund, The Cash Management Fund, The Tax Free Money Market Fund and The
New York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1995, Chemical Bank waived custodian fees of $19,673, $184,025,
$44,239, $27,261, $23,537 and $18,142 from The 100% U.S. Treasury Security Fund,
The U.S. Treasury Fund, The Government Money Market Fund, The Cash Management
Fund, The Tax Free Fund and The New York Tax Free Money Market Fund,
respectively.
For the fiscal year ended November 30, 1994, Furman Selz received
administration fees of $325,945, $466,349, $344,864, $335,205, $164,087 and
$76,521 from The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund, respectively. For the fiscal year ended November 30, 1994, Chemical
Bank received administration and accounting fees of $247,930, $344,164,
$261,329, $254,320, $137,153 and $77,333 from The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund, The Government Money
Market Fund, The Cash Management Fund, The Tax Free Money Market Fund and The
New York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1994, Furman Selz received sub-transfer agency fees of $11,616,
$9,010, $8,271, $11,723, $3,495 and $9,510 from The 100% U.S. Treasury
Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively. For the
fiscal year ended November 30, 1994, Chemical Bank received custodian fees,
after waivers, of $62,198, $170,526, $131,136, $18,668 and $45,293 from The 100%
U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money Market Fund,
The Government Money Market Fund, The Cash Management Fund and The Tax Free
Money Market Fund and The New York Tax Free Money Market Fund, respectively. For
the fiscal year ended November 30, 1994, Chemical Bank waived custodian fees of
$69,275, $42,680 and $29,851 from The Government Money Market Fund, The Cash
Management Fund and The New York Tax Free Money Market Fund, respectively.
For the fiscal year ended November 30, 1993, Furman Selz received
administration fees of $220,338, $488,954, $220,346, $319,189, $99,020 and
$70,535 from The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund, respectively. For the fiscal year ended November 30, 1993, Chemical
Bank received administration and accounting fees of $147,784, $327,897,
$147,752, $214,133, $66,416 and $47,304 from The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund, The Government Money
Market Fund, The Cash Management Fund, The Tax Free Money Market Fund and The
New York Tax Free Money Market Fund, respectively. For the fiscal year ended
November 30, 1993, Furman Selz received sub-transfer agency fees of $29,352,
$27,354, $14,657, $29,087, $9,865 and $28,415 from The 100% U.S. Treasury
Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively. For the
fiscal year ended November 30, 1993, Chemical Bank received custodian fees of
$41,875, $169,921, $96,138, $110,225, $44,105 and $31,761 from The 100% U.S.
Treasury Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively.
For the fiscal period ended November 30, 1992, Furman Selz received
administration fees of $57,952, $74,763, $92,074, $79,062, $32,863 and $18,812
from The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury
Money Market Fund, The Government Money Market Fund, The Cash Management Fund,
The Tax Free Money Market Fund and The New York Tax Free Money Market Fund,
respectively. For the fiscal period ended November 30, 1992, Chemical Bank
received administration and accounting fees of $23,678, $53,288, $32,266,
$35,974, $17,887 and $15,196 from The 100% U.S. Treasury
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Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively. For the
fiscal period ended November 30, 1992, Furman Selz received sub-transfer agency
fees of $5,991, $3,057, $2,835, $3,720, $1,658 and $3,969 from The 100% U.S.
Treasury Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively. For the
fiscal period ended November 30, 1992, Chemical Bank received custodian fees of
$14,625, $72,850, $28,818, $21,857, $12,099 and $14,764 from The 100% U.S.
Treasury Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund, The Tax Free Money
Market Fund and The New York Tax Free Money Market Fund, respectively.
The Company's administration, custody and transfer agency services were
previously furnished by different service providers than those set forth above
pursuant to different arrangements with each service provider. Until June 26,
1992, The Boston Company Advisors, Inc. and Provident Financial Processing
Corporation acted as the Company's administrators (the "Prior Administrators"),
MHT acted as the Company's transfer agent (for no additional compensation to
MHT) and Provident Financial Processing Corporation served as sub-transfer agent
(the "Prior Sub-Transfer Agent"). Until July 31, 1992, Provident National Bank
served as the Company's custodian (the "Prior Custodian"). Until July 31, 1992,
Provident Financial Processing Corporation continued to perform fund accounting
services for the Company in its role as administrator. On August 1, 1992,
Chemical Bank assumed these custodian and accounting functions. The Prior
Administrators, Prior Custodian and Prior Sub-Transfer Agent were entitled,
until June 26, 1992, to receive from each Fund a single fee, based on the
average daily net assets of the Funds, at an annual rate of 0.15% of the first
$300 million of average daily net assets, 0.11% of the next $300 million of
average daily net assets and 0.08% of average daily net assets in excess of $600
million. For the period from June 26, 1992 until July 31, 1992, Provident
National Bank and Provident Financial Processing Corporation were entitled to
receive an aggregate fee at an annual rate of 0.075% of the first $300 million
of average daily net assets of the Funds, 0.055% of the next $300 million of
average daily net assets and 0.04% of average daily net assets in excess of $600
million, plus a fee per portfolio transaction, for acting as the Company's
custodian and performing fund accounting services for the Company during that
period. For the fiscal period ended November 30, 1992, the Prior Administrators,
Prior Custodian and Prior Sub-Transfer Agent received fees totalling $127,774,
$268,878, $205,759, $109,668 and $44,441, from The 100% U.S. Treasury Securities
Money Market Fund, The Government Money Market Fund, The Cash Management Fund,
The Tax Free Money Market Fund and The New York Tax Free Money Market Fund,
respectively.
SHAREHOLDER SERVICING AGENTS
As stated in the Prospectus, in accordance with its Shareholder Servicing
Plan, the Company may enter into Shareholder Servicing Agreements with
Shareholder Servicing Agents pursuant to which each such Shareholder Servicing
Agent will, as agent for its customers, render shareholder administrative
support services to its customers. Such services may include: (i) aggregating
and processing purchase and redemption requests from customers and placing net
purchase and redemption orders with the Company's Distributor; (ii) providing
customers periodically with information showing their positions in shares of the
Funds; (iii) processing dividend payments from the Funds on behalf of customers;
(iv) arranging for bank wires; (v) responding to customer inquiries relating to
the services performed by the Shareholder Servicing Agents; (vi) providing
sub-accounting with respect to Fund shares beneficially owned by customers (or
the information necessary for sub-accounting); (vii) forwarding shareholder
communications from the Funds (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers, if required by law; (viii) providing customers with a service that
invests the assets of their accounts in shares of a Fund pursuant to specific or
preauthorized instructions; and (ix) other similar services if requested by the
Company. Agreements between the Company and Shareholder Servicing Agents with
respect to a Fund may be terminated by either party at any time without penalty.
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As of the date of this Statement of Additional Information, Chemical Bank,
certain of its affiliates, Furman Selz and certain other broker-dealers act as
Shareholder Servicing Agents for the Company pursuant to Shareholder Servicing
Agreements. The Shareholder Servicing Agreements provide that each Shareholder
Servicing Agent will receive a monthly fee from each Fund for which it acts as
Shareholder Servicing Agent at an annual rate of up to 0.35% of the average
daily net asset value of shares in that Fund for which that Shareholder
Servicing Agent provides services. For the fiscal year ended November 30, 1995,
The 100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money
Market Fund, The Government Money Market Fund, The Cash Management Fund, The Tax
Free Money Market Fund and The New York Tax Free Money Market Fund paid
$3,242,463, $2,784,123, $2,668,587, $2,731,215, $711,450 and $727,522
respectively, as fees to Chemical Bank as a shareholder servicing agent. For the
fiscal year ended November 30, 1995, The 100% U.S. Treasury Securities Money
Market Fund, The U.S. Treasury Money Market Fund, The Government Money Market
Fund, The Cash Management Fund, The Tax Free Money Market Fund and The New York
Tax Free Money Market Fund paid $304,060, $2,350,163, $2,288,624, $1,211,607,
$430,626 and $712 respectively, as fees to TCB as a shareholder servicing agent.
For the fiscal year ended November 30, 1995, The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury Money Market Fund, The Government Money
Market Fund, The Cash Management Fund and The Tax Free Money Market Fund paid
$3,895, $7,277, $6,043, $16,704 and $7,118 respectively, as fees to Chemical
Bank New Jersey, National Association ("CBNJ") as a shareholder servicing agent.
For the fiscal year ended November 30, 1995, The 100% U.S. Treasury Securities
Money Market Fund, The Government Money Market Fund, The Cash Management Fund,
The Tax Free Money Market Fund and The New York Tax Free Money Market Fund paid
$12,593, $241, $403, $58 and $441 respectively, as fees to Furman Selz LLC as a
shareholder servicing agent. For the fiscal year ended November 30, 1994, The
100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money Market
Fund, The Government Money Market Fund, The Cash Management Fund, The Tax Free
Money Market Fund, and The New York Tax Free Money Market Fund paid $2,449,424,
$2,453,531, $1,956,886, $1,782,006, $1,040,352 and $601,203, respectively, as
fees to Chemical as a Shareholder Servicing Agent of the Company. For the fiscal
year ended November 30, 1994, The 100% U.S. Treasury Securities Money Market
Fund, The U.S. Treasury Money Market Fund, The Government Money Market Fund, The
Cash Management Fund and The Tax Free Money Market Fund paid $68,057,
$1,237,536, $790,967, $860,081 and $216,587, respectively, as fees to TCB as a
Shareholder Servicing Agent of the Company. For the fiscal year ended November
30, 1994, The 100% U.S. Treasury Securities Money Market Fund, The Government
Money Market Fund, The Cash Management Fund, The Tax Free Money Market Fund, and
The New York Tax Free Money Market Fund paid $3,449, $481, $190, $55 and $536,
respectively, as fees to Furman Selz as a Shareholder Servicing Agent of the
Company. For the fiscal year ended November 30, 1994, The 100% U.S. Treasury
Securities Money Market Fund, the U.S. Treasury Money Market Fund, the
Government Money Market Fund, The Cash Management Fund and The Tax Free Money
Market Fund paid $693, $10,004, $1,047, $19,062 and $9,938, respectively, as
fees to CBNJ, as a Shareholder Servicing Agent of the Company. For the fiscal
year ended November 30, 1993, The 100% U.S. Treasury Securities Money Market
Fund, The U.S. Treasury Money Market Fund, The Government Money Market Fund, The
Cash Management Fund, The Tax Free Money Market Fund, and The New York Tax Free
Money Market Fund paid $1,612,088, $2,867,929, $1,597,092, $1,647,683, $690,992
and $551,822, respectively, as fees to Chemical as a Shareholder Servicing Agent
of the Company. For the fiscal year ended November 30, 1993, The 100% U.S.
Treasury Securities Money Market Fund, The Government Money Market Fund and The
Tax Free Money Market Fund paid $2,360, $4,251 and $9,352, respectively, as fees
to Chemical Bank, New Jersey, as a Shareholder Servicing Agent of the Company.
For the fiscal year ended November 30, 1993, The 100% U.S. Treasury Securities
Money Market Fund, The U.S. Treasury money Market Fund, The Government Money
Market Fund, The Cash Management Fund and The Tax Free Money Market Fund paid
$22,692, $922,944, $100,208, $849,547 and $50,634, respectively, as fees to TCB
as a Shareholder Servicing Agent of the Company. For the fiscal year ended
November 30, 1993, The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund, and The New York Tax Free Money
Market Fund paid $2,559, $32,994, $36, $12, $22,279 and $58, respectively, as
fees to Furman Selz as a Shareholder Servicing Agent of the Company. Prior to
September 30, 1992, each Shareholder Servicing Agent was entitled to receive a
monthly fee from each Fund for which it acted as
38
<PAGE> 82
Shareholder Servicing Agent at an annual rate of up to 0.30% of the average
daily net asset value of shares in that Fund for which that Shareholder
Servicing Agent provided services. Until June 26, 1992, MHT was the sole
Shareholder Servicing Agent for each Fund (other than The U.S. Treasury Money
Market Fund, which did not commence operations until October 1, 1992). For the
fiscal period ended November 30, 1992, The 100% U.S. Treasury Securities Money
Market Fund, The Government Money Market Fund, The Cash Management Fund, The Tax
Free Money Market Fund and The New York Tax Free Money Market Fund paid
$232,589, $632,170, $477,358, $245,310 and $81,870, respectively, as fees to MHT
as a Shareholder Servicing Agent of the Company. For the fiscal period ended
November 30, 1992, The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund paid $280,628, $495,583, $562,398, $413,534, $198,931 and $124,345,
respectively, as fees to Chemical as a Shareholder Servicing Agent of the
Company. For the fiscal period ended November 30, 1992, The 100% U.S. Treasury
Securities Money Market Fund, The U.S. Treasury Money Market Fund, The
Government Money Market Fund, The Cash Management Fund and The Tax Free Money
Market Fund paid $418, $72,003, $10,551, $104,338 and $5,525, respectively, as
fees to TCB as a Shareholder Servicing Agent of the Company. For the fiscal
period ended November 30, 1992, The Tax Free Money Market Fund and the U.S.
Treasury Money Market Fund paid $3,247 and $5,360, respectively, as fees to
Furman Selz as a Shareholder Servicing Agent of the Company.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
monies in the Funds. Institutions, including banks regulated by state banking
authorities and the Board of Governors of the Federal Reserve System, and
investment advisers and other money managers subject to the jurisdiction of the
Commission, the Department of Labor or state securities commissions are urged to
consult their legal advisers before investing fiduciary monies in the Funds.
EXPENSE LIMITATIONS
If expenses borne by any Fund in any fiscal year exceed limitations imposed
by applicable state securities regulations, The Portfolio Group or TCB, as the
case may be, in its capacity as investment adviser to the Fund, and the
Company's administrators will reimburse the Company for any such excess to the
extent required by such regulations up to the amount of the fees payable them;
provided, however, that to the extent required by such state regulations, The
Portfolio Group, TCB and the Company's administrators have agreed to effect such
reimbursement regardless of the fees payable to them. Any such reimbursement
would be made no less frequently than the payment of fees to each organization.
California is the only state which currently imposes such an expense limitation.
As of the date of this Statement of Additional Information, the limitation is
2.5% of the first $30 million of the average net assets, 2% of the next $70
million of the average net assets and 1.5% of the remaining average net assets
of funds which have registered their shares in California. Such amount, if any,
will be estimated, reconciled and paid on a monthly basis.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, The Portfolio Group and TCB are
primarily responsible for the portfolio decisions of the respective Funds they
manage, and the placing of such Funds' portfolio decisions.
The Funds' policy of investing in securities with short maturities will
result in high portfolio turnover. Portfolio securities normally will be
purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions.
In placing orders, it is the policy of the Company to obtain the best
results taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as
39
<PAGE> 83
the dealer's risk in positioning the securities involved. While The Portfolio
Group and TCB generally seek the best price in placing their orders, the Funds
may not necessarily be paying the lowest prices available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Each of the Funds may purchase securities from underwriting
syndicates of which Chemical Bank or any of its affiliates is a member under
certain conditions, in accordance with the provisions of a rule adopted under
the 1940 Act and any restrictions imposed by the Board of Governors of the
Federal Reserve System.
As investment advisers for Funds, The Portfolio Group and TCB may, with
respect to the Funds they manage, in circumstances in which two or more dealers
are in a position to offer comparable results for the Funds, give preference to
a dealer which has provided statistical or other research services to them. Such
statistical and research services may consist of written reports or oral advice
from dealers regarding particular issuers, industries or general economic
conditions, and performance analytics. The Portfolio Group and TCB may also have
arrangements with dealers pursuant to which such dealers provide research
services to them in exchange for a certain volume of transactions placed with
such dealers. To the extent they allocate transactions in this manner, The
Portfolio Group and TCB are able to supplement their research and analysis with
the views and information of other securities firms. Information so received
will be in addition to, and not in lieu of, the services required to be
performed by The Portfolio Group and TCB under their respective Advisory
Agreements, and the expenses of The Portfolio Group and TCB will not necessarily
be reduced as a result of the receipt of this supplemental research information.
Furthermore, research services furnished by dealers through whom The Portfolio
Group or TCB effect securities transactions for the Funds they manage may be
used by them in servicing other accounts, and not all of these services may be
used by The Portfolio Group or TCB in connection with advising the Funds they
manage. Arrangements by The Portfolio Group or TCB for the receipt of
statistical and other research services as described above may create conflicts
of interest.
The Portfolio Group, TCB and their affiliates deal, trade and invest for
their own accounts in the types of securities in which the Funds they manage may
invest and may have deposit, loan and commercial banking relationships with the
issuers of securities purchased by a Fund.
Investment decisions for each Fund are made independently from those for
the other Funds and for any accounts advised or managed by The Portfolio Group
or TCB. Such other Funds and accounts may also invest in the same securities as
such Fund. When a purchase or sale of the same security is made at substantially
the same time on behalf of a Fund and another Fund or account managed by the
same investment adviser, the transaction will be averaged as to price and
available investments allocated as to amount, in a manner which the investment
adviser believes to be equitable to the Fund and such other Fund or account. In
some instances, this investment procedure may inadvertently affect the price
paid or received by a Fund or the size of the position obtained or sold by such
Fund. To the extent permitted by law, The Portfolio Group and TCB may each
aggregate the securities to be sold or purchased for a Fund it manages with
those to be sold or purchased for other Funds or accounts it manages in order to
obtain best execution.
Each investment adviser may place portfolio transactions with brokerage
firms that have provided assistance in the distribution of shares of the Funds
if it reasonably believes that the quality of the transaction and the commission
is comparable to what they would be with other qualified brokerage firms.
Transactions with affiliated broker-dealers will only be executed on an
agency basis in accordance with applicable Commission regulations.
DISTRIBUTOR
Shares of the Company are distributed continuously on a best efforts basis
and without a sales load by Hanover Funds Distributor, Inc. (the "Distributor")
pursuant to a Distribution Agreement (the "Distribution Agreement") with the
Company. Solely for the purpose of reimbursing the Distributor for its expenses
incurred in certain activities primarily intended to result in the sale of Fund
shares, the Company has adopted
40
<PAGE> 84
a Plan of Distribution (the "Plan") under Section 12(b) of the 1940 Act and Rule
12b-1 thereunder. Under the Plan and Distribution Agreement, each Fund is
authorized to spend up to 0.10% of its average daily net assets to reimburse the
Distributor for such activities, which are summarized in the Prospectus.
During the fiscal years ended November 30, 1995, November 30, 1994 and
November 30, 1993, The 100% Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund paid no distribution fees to the Distributor.
The Plan, together with the Distribution Agreement, will continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan ("Qualified
Directors") and who are not "interested persons" (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. In
approving the continuance of the Plan and the Distribution Agreement, the
Directors must determine that the Plan is in the best interest of the
shareholders of each Fund.
The Plan requires that, at least quarterly, the Board of Directors must
review a written report prepared by the Treasurer of the Company enumerating the
amounts expended and purposes therefor under the Plan. Rule 12b-1 also requires
that the selection and nomination of Directors who are not "interested persons"
of the Company be made by such Qualified Directors.
NET ASSET VALUE
As indicated under "Pricing of Shares" in the Prospectus, each Fund uses
the amortized cost method to determine the value of its portfolio securities
pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method involves
valuing a security at its cost initially and thereafter accruing or amortizing
any discount or premium, as the case may be, over the period until maturity,
regardless of the impact of fluctuating interest rates on the market value of
the security. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price each Fund would receive if the security were sold. During
such periods, the yield to investors in such Fund may differ somewhat from that
obtained in a similar entity that uses available indications as to market value
to value its portfolio instruments.
Rule 2a-7 provides that in order to value its portfolio using the amortized
cost method, each Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase securities having remaining maturities (as
defined in Rule 2a-7) of thirteen months or less and invest only in securities
determined by the Company's Board of Directors to present minimal credit risks
and meet certain quality requirements. Pursuant to Rule 2a-7, the Board of
Directors has established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether such Fund's net asset value calculated by
using available market quotations (or an appropriate substitute which reflects
current market conditions) deviates from $1.00 per share based on amortized
cost. In the event the Board of Directors determines that a deviation exists
that may result in material dilution or other unfair results to investors or
existing shareholders, the Board of Directors will take such corrective action
as it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or establishing a net asset
value per share by using available market quotations (or an appropriate
substitute). The Funds generally use one or more professional independent
pricing services to provide available market quotations or market valuations. If
market quotations (or an appropriate substitute) are not readily available,
securities will be valued at fair value as determined by or under the direction
of the Board of Directors for purposes of reviewing deviations from amortized
cost.
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<PAGE> 85
HOW TO PURCHASE AND REDEEM SHARES
Shares of the Funds may be purchased and redeemed only through a
Shareholder Servicing Agreement or the Distributor. A purchase order for Fund
shares received by the Distributor by 12:00 noon, Eastern time, on any Business
Day, will be executed on the same day if the Company's custodian receives
federal funds or other immediately available funds by 4:00 p.m., Eastern time,
that day. "Federal funds" are funds on deposit in the reserve accounts of banks
which are members of the Federal Reserve System. The Company reserves the right
to reject any purchase order and to suspend the offering of shares of any Fund
for a period of time.
The Company has filed an election pursuant to Rule 18f-1 under the 1940 Act
to pay in cash all requests for redemption by any shareholder of record of a
particular Fund, limited in amount with respect to each shareholder during any
90-day period to the lesser of (i) $250,000, or (ii) 1% of the net asset value
of such Fund at the beginning of such period.
DIVIDENDS
As stated in the Prospectus, the Company intends to maintain the net asset
value per share of the Funds at $1.00. As a result of a significant expense or
realized or unrealized loss incurred by any of the Funds, it is possible that
such Fund's net asset value per share may fall below $1.00. Should the Company
incur or anticipate any unusual or unexpected significant expense or loss which
would affect disproportionately the income of a Fund for a particular period,
the Board of Directors would at that time consider whether to adhere to the
present dividend policy with respect to the Funds or to revise it in order to
ameliorate to the extent possible the disproportionate effect of such expense or
loss on the income of the Fund experiencing such effect. Such expense or loss
may result in a shareholder's receiving no dividends for the period in which it
holds shares of a Fund and in its receiving upon redemption a price per share
lower than that which it paid.
YIELD
Each Fund makes available various yield information with respect to its
shares, including yield quotations based upon the seven-day period ended on the
date of calculation. In arriving at such quotations as to their respective
shares, each Fund first determines the net change during the period in value of
a hypothetical pre-existing account having a balance of one share at the
beginning of the period (such net change being inclusive of the value of any
additional shares issued in connection with the distributions of net income as
well as net income accrued on both the original share and any such additional
shares but exclusive of realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), then divides such net change by
the value of the account at the beginning of the period to obtain the base
period return, and then multiplies the base period return by 365/7.
In addition, each Fund may make available "compound effective yield"
quotations, computed by adding 1 to the base period return (calculated as
above), raising the sum to a power equal to 365 divided by 7, and subtracting 1
from the results.
The 100% U.S. Treasury Securities Money Market Fund may advertise a
"pass-through yield" to demonstrate the level of taxable yield necessary to
produce an after-tax yield equivalent to a particular state's tax-exempt yield
achieved by the Fund. The "pass-through yield" refers to that portion of income
which is derived from interest income on direct obligations of the United States
Government and which qualified for exemption from state taxes. The yield
calculation assumes that 100% of the interest income is exempt from state
personal income tax. A "pass-through yield" will be computed by dividing the
tax-exempt (for state income tax purposes) portion of the Fund's yield by one
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's computed yield that is not tax-exempt. For illustrative purposes,
pass-through yields assume the payment of state income tax rates of 3%, 7% or
11%.
With respect to the Tax Free Funds, tax equivalent yields are computed by
dividing that portion of such Funds' yield that is tax-exempt by one minus a
stated income tax rate and adding the quotient to that portion, if any, of such
Funds' yield that is not tax-exempt.
42
<PAGE> 86
Yield quotations provided by the Funds are carried to at least the nearest
hundredth of one percent. Yield quotations are based on historical earnings and
are not intended to indicate future performance.
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain additional tax
considerations affecting the Company, its Funds and its shareholders. No attempt
is made to present a detailed explanation of all federal, state, local and
formal tax concerns, and the discussion set forth here and in the Prospectus is
not intended as a substitute for careful tax planning. Investors are urged to
consult their own tax advisers with specific questions relating to federal,
state, local or foreign taxes.
IN GENERAL
Each Fund qualified to be treated as a regulated investment company (a
"RIC") under Subchapter M of the Code during the 1995 taxable year and intends
to continue to so qualify in subsequent years. Qualification as a RIC requires,
among other things, that each Fund: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stocks or securities; (b) derive less than 30% of its gross income in
each taxable year from the sale or other disposition of any of the following
held for less than three months: (i) stock or securities, (ii) options, futures,
or forward contracts, or (iii) foreign currencies (or foreign currency options,
futures or forward contracts) that are not directly related to its principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities) (the "30% limitation"); and (c) diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least
50% of the market value of the Fund's assets is represented by cash, cash items,
United States Government securities, securities of other regulated investment
companies and other securities with such other securities limited, in respect of
any issuer, to an amount not greater than 5% of the value of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
United States Government securities or the securities of other regulated
investment companies) of any one issuer.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
Gain or loss, if any, on the sale or other disposition of shares of any of
the Funds will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of a Fund before holding it for more than six
months, any loss on the sale or other disposition of such share shall be treated
as a long-term capital loss to the extent of any capital gain dividends received
by the shareholder with respect to such share, or shall be disallowed to the
extent of any exempt-interest dividend. Currently, the maximum federal income
tax rate imposed on individuals with respect to net realized long-term capital
gains is limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at the same rates as ordinary income) is 39.6%.
As stated in the Prospectus, descriptions of tax consequences set forth in
the Prospectus and in this Statement of Additional Information are intended to
be a general guide. In addition, descriptions of state and local income tax
consequences set forth in the Prospectus have not been independently verified by
the Company, its investment managers or their counsel and should not be relied
upon as authoritative.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
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<PAGE> 87
SPECIAL TAX CONSIDERATIONS PERTAINING TO THE TAX FREE FUNDS
Shares of the Tax Free Funds would not be a suitable investment for
tax-exempt institutions and may not be a suitable investment for retirement
plans qualified under section 401 of the Code, H.R. 10 plans and individual
retirement accounts, because such plans and accounts are generally tax-exempt
and, therefore, would not gain any additional benefit from the receipt of
exempt-interest dividends from the Tax Free Funds. Moreover, subsequent
distributions of such dividends to the beneficiaries will be taxable. In
addition, the Tax Free Funds may not be an appropriate investment for entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. A "substantial user" is defined under United States
Treasury Regulations to include a non-exempt person who regularly uses a part of
such facilities in his trade or business and, unless such facility, or part
thereof, is constructed, reconstructed or acquired specifically for the
non-exempt person, whose gross revenue derived with respect to the facilities
financed by the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities. "Related persons" include certain related
natural persons, affiliated corporations, partnerships and their partners and
Subchapter S corporations and their shareholders.
All or a portion of the exempt-interest dividends distributed by the Tax
Free Funds may be included in calculating alternative minimum taxable income for
purposes of the alternative minimum tax imposed by the Code on both individual
and corporate taxpayers, and for purposes of the environmental tax imposed on
certain corporations by section 59A of the Code. Likewise, all or a portion of
the exempt-interest dividends received by certain foreign corporations may be
subject to the federal branch profits tax and all or a portion of the
exempt-interest dividends may be taxable to certain Subchapter S corporations
that have Subchapter C earnings and profits and substantial passive investment
income. In addition, the exempt-interest dividends may reduce the deduction for
loss reserves for certain insurance companies. Such corporations and insurance
companies, and taxpayers that may be subject to the alternative minimum tax,
should consult their tax advisers before investing in the Fund.
Because the Tax Free Funds will distribute exempt-interest dividends,
interest on indebtedness incurred or continued to purchase or carry shares of
the Tax Free Funds may not be deductible for federal income tax purposes. The
Code may also require shareholders that receive exempt-interest dividends to
treat as taxable income a portion of certain otherwise nontaxable social
security and railroad retirement benefit payments.
Under the Omnibus Budget Reconciliation Act of 1993, all or a portion of a
Tax Free Fund's gain from the sale or redemption of tax-exempt obligations
acquired after April 30, 1993 attributable to market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a non-resident
alien individual, foreign trust or estate, foreign corporation or foreign
partnership ("foreign shareholder") depends, in part, on whether the
shareholder's income from a Fund is "effectively connected" with a U.S. trade or
business carried on by the shareholder. If a shareholder is a resident alien or
if dividends or distributions from the Fund are effectively connected with a
U.S. trade or business carried on by a foreign shareholder, then dividends of
net investment income, distributions of net capital gains and gain 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.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by the foreign shareholder, (i) dividends of net
investment income will be subject to a 30% (or lower treaty rate) U.S. federal
withholding tax, and (ii) distributions of net capital gains and gains realized
upon the sale of shares of the Fund will not be subject to U.S. federal income
tax as long as such foreign shareholder is not a non-resident alien individual
who was physically present in the United States for more than 182 days during
the taxable year and, in the case of gains realized upon the sale of Fund
shares, certain other conditions are met. However, certain foreign shareholders
may nonetheless be subject to 31% backup withholding on distributions of net
capital gains and gross proceeds paid to them upon the sale of their shares of
the Fund. See "Backup Withholding."
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<PAGE> 88
Transfer by gift of shares of a Fund by a foreign shareholder who is a
non-resident alien individual will not be subject to U.S. federal gift tax, but
the value of shares of the Fund held by such a shareholder at his death will be
includable in such shareholder's gross estate for U.S. federal estate tax
purposes.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Shareholders may be required to provide appropriate documentation
to establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from a Fund is or is not effectively connected with a U.S.
trade or business carried on by them, (b) whether they may claim the benefits of
an applicable tax treaty and (c) any other tax consequences to them of an
investment in any of the Funds.
BACKUP WITHHOLDING
The Company may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (except shareholders of the Tax Free Funds
to the extent that such Funds distribute exempt-interest dividends) and
redemption proceeds paid to non-corporate shareholders. This tax may be withheld
from dividends if (i) the payee fails to furnish the Company with the payee's
correct taxpayer identification number, (ii) the Internal Revenue Service
("IRS") notifies the Company that the payee has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (iii) when required to do so, the payee fails to certify that he
or she is not subject to backup withholding. Redemption proceeds may be subject
to withholding under the circumstances described in (i) above.
CAPITAL STOCK
For additional information as to the organization and capital stock of the
Company, see "Additional Information About the Company -- Organization and
Capital Stock" in the Prospectus.
As used in the Prospectus and in this Statement of Additional Information,
the term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting any particular Fund or any
other single portfolio (e.g., approval of investment advisory contracts), means
the vote of the lesser of (i) 67% of the shares of that particular portfolio
represented at a meeting if the holders of more than 50% of the outstanding
shares of such portfolio are present in person or by proxy, or (ii) more than
50% of the outstanding shares of such portfolio. Shareholders are entitled to
one vote for each full share held and the fractional votes for fractional shares
held.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of stockholders in any year in which the election of
the Directors to the Company's Board of Directors is not required to be acted
upon under the 1940 Act.
Each share of a particular Fund is entitled to such dividends and
distributions out of the assets belonging to that Fund as are declared in the
discretion of the Company's Board of Directors. In determining a Fund's net
asset value, assets belonging to a particular Fund are credited with a
proportionate share of any general assets of the Company not belonging to a
particular Fund and are charged with the direct liabilities in respect of that
Fund and with a share of the general liabilities of the Company which are
normally allocated in proportion to the relative asset values of the respective
Funds at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of a
Fund are entitled to receive the assets attributable to that Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Funds, of any general assets not attributable to a
Fund that are available for distribution. Shareholders are not entitled to any
preemptive rights.
Subject to the provisions of the Company's Articles of Incorporation,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Company,
with respect to a particular Fund are conclusive.
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<PAGE> 89
As of March 19, 1996, the following persons or entities owned beneficially
or of record as much as 5% of the indicated Fund's outstanding shares:
THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIS Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 240,099,581.1700 14.60%
</TABLE>
THE U.S. TREASURY MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIS Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 129,958,965.0400 8.42%
Chemical Bank
Global Securities Services
450 W. 33rd Street, 15th Fl.
New York, NY 10001-2603........................................ 158,294,559.7500 10.25%
Obie & Co.
c/o Texas Commerce Bank
P.O. Box 2558
Houston, TX 77252-2558......................................... 321,091,386.0000 20.80%
</TABLE>
THE GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIS Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 189,689,468.2300 11.30%
Chemical Bank
Global Securities Services
4 New York Plaza 4th
New York, NY 10004-2413........................................ 113,009,593.9600 6.73%
</TABLE>
THE CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIR Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 254,061,681.8000 16.40%
Manufacturers Hanover Trust Co.
4 New York Plaza 4th
New York, NY 10004-2413........................................ 96,308,416.5900 6.22%
</TABLE>
46
<PAGE> 90
THE TAX FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIS Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 129,131,147.3100 32.76%
Obie & Co.
c/o Texas Commerce Bank
P.O. Box 2558
Houston, TX 77252-2558......................................... 73,318,755.9600 18.60%
Daniel B. Burke &
Harriett S. Burke
77 West 66 St.
New York, NY 10023-6201........................................ 22,159,765.3100 5.62%
</TABLE>
THE NEW YORK TAX FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF OWNERSHIP OF
OF BENEFICIAL OR RECORD OWNER SHARES OWNED PORTFOLIO
- --------------------------------------------------------------- ---------------- ------------
<S> <C> <C>
Chemical Bank
Administrative Services
AIS Section 31/270
270 Park Avenue
New York, NY 10017-2014........................................ 128,348,176.5200 43.52%
</TABLE>
VALIDITY OF SHARES
The validity of the shares has been passed upon for the Company by Venable,
Baetjer and Howard, Baltimore, Maryland.
AUDITORS
The Statements of Assets and Liabilities, including the Portfolio of
investments, of The 100% U.S. Treasury Securities Money Market Fund, The U.S.
Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund and The New York Tax Free Money
Market Fund of The Hanover Funds, Inc. as of November 30, 1995 and the related
Statements of Operations, the Statements of Changes in Net Assets and financial
highlights, for each of the periods which appear in this Statement of Additional
Information, and the financial highlights which appear in the Prospectus have
been included herein and in the Prospectus in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. KPMG Peat Marwick LLP has offices at 345 Park Avenue, New York, New
York 10154.
47
<PAGE> 91
AUDITED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
The 100% U.S. Treasury Securities Money Market Fund Portfolio of Investments...... F-2
The U.S. Treasury Money Market Fund Portfolio of Investments...................... F-3
The Government Money Market Fund Portfolio of Investments......................... F-5
The Cash Management Fund Portfolio of Investments................................. F-7
The Tax Free Money Market Fund Portfolio of Investments........................... F-14
The New York Tax Free Money Market Fund Portfolio of Investments.................. F-22
Footnotes to Portfolios........................................................... F-28
Statement of Assets and Liabilities............................................... F-30
Statement of Operations........................................................... F-32
Statement of Changes in Net Assets................................................ F-33
Notes to Financial Statements..................................................... F-35
Financial Highlights.............................................................. F-42
Independent Auditors' Report...................................................... F-48
</TABLE>
F-1
<PAGE> 92
THE HANOVER FUNDS, INC.
THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
------------ ------------ --------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 100.0%
U.S. TREASURY BILLS -- 92.5%
12/07/95...................................... 5.31% $ 976,000 $ 975,151
12/14/95...................................... 5.48 174,080,000 173,740,944
12/21/95...................................... 5.67 748,745,000 746,415,722
01/04/96...................................... 5.48 100,000,000 99,496,611
01/11/96...................................... 5.47 38,480,000 38,246,854
01/25/96...................................... 5.56 105,000,000 104,130,542
02/15/96...................................... 5.51 50,000,000 49,434,222
04/25/96...................................... 5.48 25,000,000 24,466,695
--------------
1,236,906,741
--------------
U.S. TREASURY NOTE -- 7.5%
7.50%, 02/29/96............................... 5.55 100,000,000 100,462,291
--------------
TOTAL INVESTMENTS -- 100.0% (COST
$1,337,369,032)+............................ 1,337,369,032
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.0%......................... 179,789
--------------
NET ASSETS -- 100.0%.......................... $1,337,548,821
=============
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-2
<PAGE> 93
THE HANOVER FUNDS, INC.
THE U.S. TREASURY MONEY MARKET FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
------------ ------------ --------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 69.4%
U.S. TREASURY BILLS -- 65.7%
12/07/95........................................ 5.39% $ 80,000,000 $ 79,929,400
12/14/95........................................ 5.29 1,000,000 998,130
12/21/95........................................ 5.65 736,000,000 733,732,125
01/11/96........................................ 5.43 105,000,000 104,368,543
01/18/96........................................ 5.42 100,000,000 99,297,333
02/15/96........................................ 5.51 50,000,000 49,434,222
04/25/96........................................ 5.48 25,000,000 24,466,694
--------------
1,092,226,447
--------------
U.S. TREASURY NOTE -- 3.7%
7.875%, 07/15/96................................ 5.67 61,500,000 62,271,837
--------------
TOTAL INVESTMENTS(COST $1,154,498,284).......... 1,154,498,284
--------------
REPURCHASE AGREEMENTS -- 30.0%
Dean Witter Reynolds Inc.
dated 11/30/95, 5.87%, 12/01/95............... 5.95 125,000,000 125,000,000
(Proceeds at maturity $125,020,382)
collateralized by:
$122,721,000 U.S. Treasury Notes,
6.50%-8.00%, 10/15/96-10/31/99
Morgan (J.P.) Securities Inc.
dated 11/30/95, 5.85%, 12/01/95............... 5.93 125,000,000 125,000,000
(Proceeds at maturity $125,020,313)
collateralized by:
$123,887,000 U.S. Treasury Notes,
6.50%-7.625%, 05/31/95-04/30/99
Morgan Stanley & Co. Inc.
dated 11/30/95, 5.87%, 12/01/95............... 5.95 125,000,000 125,000,000
(Proceeds at maturity $125,020,382)
collateralized by:
$121,260,000 U.S. Treasury Note,
6.75%, 04/30/00
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-3
<PAGE> 94
THE HANOVER FUNDS, INC.
THE U.S. TREASURY MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
------------ ------------ --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- (CONTINUED)
Nomura Securities Int'l, Inc.
dated 11/30/95, 5.875%, 12/01/95.............. 5.96% $125,000,000 $ 125,000,000
(Proceeds at maturity $125,020,399)
collateralized by:
$124,860,000 U.S. Treasury Notes,
6.50%-6.875%, 02/28/97-05/15/97
--------------
TOTAL REPURCHASE AGREEMENTS (COST
$500,000,000)................................. 500,000,000
--------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
-- 99.4% (COST $1,654,498,284)+............... 1,654,498,284
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.6%... 9,330,668
--------------
NET ASSETS -- 100.0%............................ $1,663,828,952
=============
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-4
<PAGE> 95
THE HANOVER FUNDS, INC.
THE GOVERNMENT MONEY MARKET FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
------------ ------------ --------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 94.3%
FEDERAL FARM CREDIT BANK DEBENTURES -- 4.1%
5.75%, 08/01/96............................... 5.92% $ 50,000,000 $ 49,966,268
5.75%, 09/09/96............................... 6.02 13,685,000 13,666,089
--------------
63,632,357
--------------
FEDERAL HOME LOAN BANK -- 48.0%
DEBENTURES:
5.98%, 07/08/96............................ 6.10 50,000,000 49,991,008
5.97%, 07/18/96............................ 6.05 50,000,000 50,000,000
6.10%, 09/05/96............................ 6.19 30,000,000 30,000,000
DISCOUNT NOTES:
12/01/95................................... 5.88 400,000,000 400,000,000
12/26/95................................... 5.81 100,000,000 99,604,167
01/02/96++................................. 6.19 115,000,000 114,922,056
--------------
744,517,231
--------------
FEDERAL HOME LOAN MORTGAGE CORP. DISCOUNT
NOTES -- 25.2%
12/01/95................................... 5.88 232,040,000 232,040,000
12/20/95................................... 5.80 160,000,000 159,518,667
--------------
391,558,667
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DEBENTURE -- 4.3%
5.66%, 03/15/96............................ 5.78 67,260,000 67,244,458
--------------
STUDENT LOAN MARKETING ASSOCIATION*** -- 12.7%
5.68%, 12/05/95............................... 5.63 50,000,000 50,000,000
5.69%, 12/05/95............................... 5.69 77,000,000 76,993,082
5.73%, 12/05/95............................... 5.75 25,000,000 25,000,000
5.82%, 12/05/95............................... 5.69 45,000,000 45,116,373
--------------
197,109,455
--------------
TOTAL INVESTMENTS (COST $1,464,062,168)......... 1,464,062,168
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-5
<PAGE> 96
THE HANOVER FUNDS, INC.
THE GOVERNMENT MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
------------ ------------ --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 12.9%
Smith Barney Inc.
dated 11/30/95, 5.91%, 12/01/95............... 5.99% $200,000,000 $ 200,000,000
(Proceeds at maturity $200,032,833)
collateralized by:
$5,415,000 Federal National Mortgage
Association Debenture, 7.50%, 02/11/02
$10,000,000 Student Loan Marketing Association
Debenture, 9.01%, 12/02/04
$34,565,000 Tennessee Valley Authority
Debenture, 8.375%, 10/01/99
$50,000,000 U.S. Treasury Bill, 11/14/96
$97,485,000 U.S. Treasury Notes,
5.75%-8.50%, 07/15/97-09/30/97
--------------
TOTAL REPURCHASE AGREEMENT (COST
$200,000,000)................................. 200,000,000
--------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT
-- 107.2% (COST $1,664,062,168)+.............. 1,664,062,168
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (7.2%).............................. (112,063,729)
--------------
NET ASSETS -- 100.0%............................ $1,551,998,439
=============
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-6
<PAGE> 97
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- 72.5%
AUTO REPAIR, SERVICES
AND PARKING -- 1.4%
A1/P1 PHH Corp. 02/09/96................... 5.79% $23,000,000 $ 22,748,214
--------------
BUSINESS SERVICES -- 3.8%
International Lease Finance Corp.:
A1/P1 01/16/96........................... 5.84 25,000,000 24,818,555
A1/P1 02/01/96........................... 5.79 4,250,000 4,209,744
A1/P1 02/05/96........................... 5.82 11,500,000 11,380,668
A1/P1 02/09/96........................... 5.82 16,500,000 16,318,408
A1/P1 02/20/96........................... 5.81 6,000,000 5,923,725
--------------
62,651,100
--------------
CHEMICALS AND ALLIED PRODUCTS -- 1.1%
A1+/P1 duPont (EI) de Nemours & Co.
01/03/96........................... 6.45 18,000,000 17,899,680
--------------
COMMUNICATION -- 2.9%
American Telephone & Telegraph Co.:
A1+/P1 12/01/95........................... 5.76 18,000,000 18,000,000
A1+/P1 01/18/96........................... 5.85 9,000,000 8,931,960
A1+/P1 01/24/96........................... 5.88 5,000,000 4,957,250
A1+/P1 02/23/96........................... 5.80 15,000,000 14,805,050
--------------
46,694,260
--------------
DEPOSITORY INSTITUTIONS -- 13.5%
A1+/P1 Bank of Nova Scotia 01/26/96......... 5.84 50,000,000 49,555,889
A1+/P1 Commerzbank U.S. Finance, Inc.
01/16/96........................... 5.83 28,000,000 27,797,140
A1/P1 Corestates Capital Corp. 01/31/96.... 5.86 5,000,000 4,951,624
A1+/P1 Norwest Corp. 12/28/95............... 5.86 11,000,000 10,952,562
A1+/P1 Republic National Bank New York
01/25/96........................... 5.78 5,000,000 4,957,757
A1+/P1 Societe Generale 02/26/96............ 5.80 50,000,000 49,318,500
Toronto Dominion Bank:
A1+/P1 12/21/95........................... 5.81 20,000,000 19,937,333
A1+/P1 01/02/96........................... 5.86 14,000,000 13,928,444
A1+/P1 01/31/96........................... 5.83 24,000,000 23,769,827
A1+/P1 02/20/96........................... 5.78 16,000,000 15,797,680
--------------
220,966,756
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-7
<PAGE> 98
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- (CONTINUED)
ELECTRIC AND ELECTRIC
EQUIPMENT -- 1.8%
General Electric Co.:
A1+/P1 12/29/95........................... 5.80% $ 5,000,000 $ 4,977,989
A1+/P1 01/31/96........................... 5.94 25,000,000 24,762,354
--------------
29,740,343
--------------
ELECTRIC, GAS AND SANITARY
SERVICES -- 0.8%
A1/P1 WMX Technologies Family Waste
Management Co. 06/07/96 (b)........ 5.87 12,500,000 12,135,781
--------------
FINANCIAL INSTITUTIONS -- 11.3%
A1/P1 American Express Credit Corp.
12/11/95........................... 5.81 30,000,000 29,952,917
National Rural Utilities Cooperative
Finance Corp.:
A1+/P1 01/24/96........................ 5.85 7,000,000 6,940,255
A1+/P1 01/26/96........................ 5.84 10,000,000 9,911,644
A1+/P1 02/27/96........................ 5.83 15,000,000 14,792,833
Transamerica Finance Corp.:
A1/P1 01/12/96........................... 6.48 12,000,000 11,914,600
A1/P1 01/24/96........................... 5.86 12,000,000 11,896,860
A1/P1 01/29/96........................... 5.84 35,125,000 34,796,874
A1/P1 02/16/96........................... 5.80 15,500,000 15,312,687
A1/P1 U.S. Leasing International Corp.
02/08/96........................... 5.83 20,000,000 19,782,267
A1/P1 USL Capital Corp. 01/19/96........... 5.87 30,000,000 29,766,433
--------------
185,067,370
--------------
FOOD AND KINDRED PRODUCTS -- 4.7%
Cargill, Inc.:
A1+/P1 12/05/95........................... 5.80 11,000,000 10,993,070
A1+/P1 12/07/95........................... 5.77 20,000,000 19,981,300
A1+/P1 02/06/96........................... 5.79 13,180,000 13,041,899
A1+/P1 02/14/96........................... 5.77 23,300,000 23,027,196
A1/P1 PepsiCo, Inc. 01/22/96............... 5.74 10,000,000 9,920,556
--------------
76,964,021
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-8
<PAGE> 99
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- (CONTINUED)
INDUSTRIAL MACHINERY
AND EQUIPMENT -- 7.6%
A1/P1 Caterpillar, Inc. 12/20/95........... 5.82% $22,000,000 $ 21,934,397
Hewlett-Packard Co.:
A1+/P1 12/21/95........................... 5.74 8,500,000 8,473,650
A1+/P1 01/24/96........................... 5.81 50,000,000 49,577,000
A1/P1 International Business Machines Corp.
03/01/96........................... 5.82 20,000,000 19,715,372
International Business Machines
Credit Corp.:
A1/P1 12/11/95........................ 5.80 10,000,000 9,984,333
A1/P1 12/12/95........................ 5.78 15,000,000 14,974,242
--------------
124,658,994
--------------
INSURANCE CARRIERS -- 8.2%
A1+/P1 Met Life Funding Corp. 01/12/96...... 5.82 66,116,000 65,676,912
USAA Capital Corp.:
A1+/P1 12/11/95........................... 5.81 9,500,000 9,485,038
A1+/P1 12/20/95........................... 5.80 25,000,000 24,925,320
A1+/P1 01/11/96........................... 5.84 20,000,000 19,870,850
A1+/P1 01/23/96........................... 5.82 14,000,000 13,882,723
--------------
133,840,843
--------------
PRIMARY METAL INDUSTRIES -- 1.1%
A1+/P1 U.S. Borax & Chemical Corp.
01/17/96........................... 5.87 18,500,000 18,362,329
--------------
SECURITY AND COMMODITY
BROKERS -- 3.7%
Merrill Lynch & Co.:
A1+/P1 01/08/96........................... 5.86 30,000,000 29,819,500
A1+/P1 01/12/96........................... 5.88 15,000,000 14,899,900
A1+/P1 02/16/96........................... 5.81 15,000,000 14,818,729
--------------
59,538,129
--------------
TRADE RECEIVABLES -- 2.6%
Ciesco Limited Partnership:
A1+/P1 12/07/95........................... 5.77 10,000,000 9,990,633
A1+/P1 12/14/95........................... 5.81 9,000,000 8,981,638
A1+/P1 01/12/96........................... 5.76 18,985,000 18,861,407
A1+/P1 02/26/96........................... 5.85 5,000,000 4,932,213
--------------
42,765,891
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-9
<PAGE> 100
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- (CONTINUED)
TRANSPORTATION EQUIPMENT -- 8.0%
Daimler-Benz North America Corp.:
A1/P1 12/15/95........................... 5.83% $10,000,000 $ 9,977,833
A1/P1 02/14/96........................... 5.82 22,000,000 21,741,042
A1/P1 03/15/96........................... 5.88 5,000,000 4,918,333
Ford Motor Credit Co.:
A1/P1 12/01/95........................... 5.83 10,000,000 10,000,000
A1/P1 12/19/95........................... 5.81 25,000,000 24,929,500
A1/P1 01/12/96........................... 5.74 10,000,000 9,936,183
A1/P1 02/09/96........................... 5.81 19,000,000 18,790,894
A1/P1 02/22/96........................... 5.73 5,000,000 4,935,819
A1+/P1 Toyota Motor Credit Corp. 01/11/96... 5.81 26,000,000 25,831,513
--------------
131,061,117
--------------
TOTAL COMMERCIAL PAPER............... 1,185,094,828
--------------
CERTIFICATES OF DEPOSIT -- 6.1%
FOREIGN BANK -- 6.1%
Banque National de Paris:
A1+/P1 5.78%, 12/29/95.................... 5.71 10,000,000 10,001,054
A1+/P1 5.75%, 02/29/96.................... 5.82 20,000,000 20,000,488
A1+/P1 Commerzbank A.G. 5.67%, 01/19/96..... 5.73 20,000,000 20,000,534
A1+/P1 Dresdner Bank A.G. 6.94%, 01/08/96... 6.39 5,000,000 5,002,709
A1+/P1 Lloyds Bank PLC 5.64%, 01/16/96...... 5.70 10,000,000 10,000,247
A1+/P1 National Westminster Bank PLC 6.50%,
01/04/96........................... 6.39 25,000,000 25,003,715
A1+/P1 Westdeutsche Landesbank GZ 5.79%,
01/12/96........................... 5.86 10,000,000 10,000,050
--------------
TOTAL CERTIFICATES OF DEPOSIT........ 100,008,797
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-10
<PAGE> 101
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 7.6%
FINANCIAL INSTITUTIONS -- 3.5%
A1/P1 First Chicago Corp. 9.00%,
06/06/96........................... 5.63% $ 5,000,000 $ 5,076,389
A1+/P1 General Electric Capital Corp. 7.85%,
07/18/96........................... 5.97 13,000,000 13,138,920
A1+/P1 J.P. Morgan & Co., Inc. Delaware
5.75%, 08/07/96.................... 5.88 2,000,000 1,999,351
A1+/P1 Morgan Guaranty Trust Co. 6.05%,
08/21/96........................... 6.13 10,000,000 10,000,000
A1+/P1 Norwest Corp. 7.75%, 12/31/96........ 5.31 9,400,000 9,615,598
A1/P1 PNC Bank N.A. 5.65%, 09/18/96........ 5.63 17,000,000 17,004,303
--------------
56,834,561
--------------
ELECTRIC, GAS AND SANITARY
SERVICES -- 0.6%
A1/P1 WMX Technologies Family Waste
Management Co. 4.875%, 06/15/96.... 5.87 10,000,000 9,941,263
--------------
INDUSTRIAL MACHINERY
AND EQUIPMENT -- 0.2%
International Business Machines
Credit Corp.:
A1/P1 5.12%, 11/12/96................. 5.83 1,000,000 993,131
A1/P1 5.14%, 11/15/96................. 5.83 2,000,000 1,986,532
--------------
2,979,663
--------------
INSURANCE CARRIERS -- 0.1%
A1+/P1 American General Corp. 4.90%,
08/16/96........................... 5.76 1,000,000 993,190
--------------
NONDEPOSITORY INSTITUTIONS -- 0.9%
FCC National Bank Notes:
A1/P1 6.51%, 05/02/96.................... 6.39 10,000,000 10,003,226
A1/P1 5.70%, 10/02/96.................... 5.79 5,000,000 4,995,250
--------------
14,998,476
--------------
TRADE RECEIVABLES -- 0.6%
A1+/P1 Ciesco Limited Partnership 6.62%,
02/26/96........................... 6.69 10,000,000 9,999,066
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-11
<PAGE> 102
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
CREDIT ON DATE PRINCIPAL VALUE
RATINGS* OF PURCHASE AMOUNT (NOTE 2A)
- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES --
(CONTINUED)
TRANSPORTATION EQUIPMENT -- 1.7%
A1/P1 Ford Motor Credit Co. 9.05%,
07/09/96........................... 5.85% $ 2,000,000 $ 2,036,536
A1+/P1 Toyota Motor Credit Corp. 6.74%,
03/18/96........................... 6.54 25,000,000 25,010,007
--------------
27,046,543
--------------
TOTAL CORPORATE BONDS AND NOTES...... 122,792,762
--------------
VARIABLE RATE OBLIGATIONS*** -- 5.4%
AUTO REPAIR, SERVICES
AND PARKING -- 2.1%
A1/P1 PHH Corp. 5.66%, 12/05/95............ 5.68 35,000,000 34,999,063
--------------
FINANCIAL INSTITUTIONS -- 3.3%
A1/P1 American Express Centurian Bank
5.7825%, 12/13/95.................. 5.92 5,000,000 5,000,000
A1/P1 American Telephone & Telegraph
Capital Corp. 5.80%, 12/01/95...... 5.80 13,000,000 13,000,000
FCC National Bank Notes:
A1/P1 5.52%, 12/05/95.................... 5.49 5,000,000 5,000,187
A1/P1 5.68%, 12/05/95.................... 5.68 18,000,000 18,000,000
A1/P1 First Chicago Corp. Medium Term Note
5.868%, 02/29/96................... 5.80 8,000,000 8,000,000
A1/P1 Household Finance Corp. Medium Term
Note 5.70%, 12/05/95............... 5.75 5,000,000 4,998,872
--------------
53,999,059
--------------
TOTAL VARIABLE RATE OBLIGATIONS...... 88,998,122
--------------
TAXABLE MUNICIPAL OBLIGATION -- 0.3%
A1+/VMIG1 Richmond County Georgia Development
Authority IDR, Monsanto Co. Project
(Union Bank of Switzerland) 6.27%,
06/01/96 (a)....................... 6.27 5,000,000 5,000,000
--------------
U.S. GOVERNMENT AGENCY
OBLIGATION -- 0.7%
Federal Home Loan Mortgage Corp.
Debenture 6.84%, 02/28/96.......... 5.74 12,000,000 12,026,940
--------------
TOTAL INVESTMENTS (COST
$1,513,921,449).................... 1,513,921,449
--------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-12
<PAGE> 103
THE HANOVER FUNDS, INC.
THE CASH MANAGEMENT FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE PRINCIPAL VALUE
OF PURCHASE AMOUNT (NOTE 2A)
----------- ----------- --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 7.0%
Goldman Sachs & Co.
dated 11/30/95, 5.78%, 12/01/95................ 5.86% $74,000,000 $ 74,000,000
(Proceeds at maturity $74,011,881)
collateralized by:
$74,710,000 U.S. Treasury Note,
5.25%, 07/31/98
Merrill Lynch Government Securities, Inc.
dated 11/30/95, 5.80%, 12/01/95................ 5.88 40,000,000 40,000,000
(Proceeds at maturity $40,006,444)
collateralized by:
$42,785,000 U.S. Treasury Bill, 10/17/96
--------------
TOTAL REPURCHASE AGREEMENTS...................... 114,000,000
--------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
-- 99.6% (COST $1,627,921,449)+................ 1,627,921,449
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4%.... 6,571,643
--------------
NET ASSETS -- 100.0%............................. $1,634,493,092
=============
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-13
<PAGE> 104
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- 98.8%
ALABAMA -- 1.7%
A1+/VMIG1 The Board of Trustees of the University of Alabama at
Birmingham General RB Series 1993B 3.70%,
12/6/95***......................................... $5,500,000 $ 5,500,000
------------
ARIZONA -- 8.7%
Apache County IDA, IDR RB Tucson Electric Power Co.
Springville Project:
A1+/P1 Series 1983A (Barclays Bank PLC) 3.65%,
12/6/95***...................................... 6,000,000 6,000,000
A1+/VMIG1 Series 1985A (Barclays Bank PLC) 3.65%,
12/6/95***...................................... 1,300,000 1,300,000
SP1/MIG1 Maricopa County School District TANS Series 1995
4.50%, 7/31/96..................................... 9,000,000 9,029,556
NR/VMIG1 Mesa Municipal Development Corp. Special Tax UPDATES
(Union Bank of Switzerland) 3.75%, 12/7/95**....... 3,000,000 3,000,000
Pima County IDA, Industrial Development
RB Tucson Electric Power Co.:
A1+/VMIG1 General Project Series 1982A (BankAmerica
National Trust and Savings Association) 3.65%,
12/6/95***.................................... 3,000,000 3,000,000
A1+/VMIG1 Irvington Series 1982A (Societe Generale) 3.65%,
12/6/95***.................................... 1,000,000 1,000,000
A1+/P1 Revenue RFB Tucson Retirement Center Project Series
1988 (Swiss Bank Corp.) 3.75%, 12/6/95***....... 4,100,000 4,100,000
------------
27,429,556
------------
ARKANSAS -- 2.9%
NR/VMIG1 The Board of Trustees of the University of Arkansas
Various Facility UAMS Campus RB Series 1994 (Credit
Suisse) 3.65%, 12/6/95***.......................... 9,000,000 9,000,000
------------
CALIFORNIA -- 4.4%
A1+/VMIG1 California Higher Education Loan Authority Series
1987 (National Westminster Bank PLC) 3.65%,
12/6/95***......................................... 2,000,000 2,000,000
NR/VMIG1 California Student Education Loan Marketing Corp.
Student Loan Revenue RFB Series 1993A (Dresdner
Bank A.G.) 3.70%, 12/7/95***....................... 7,000,000 7,000,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-14
<PAGE> 105
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
CALIFORNIA -- (CONTINUED)
A1/P1 Oakland HFA, Multifamily Rental Revenue RB Skyline
Hills Association Project Series 1985 (Citibank,
N.A.) 3.50%, 12/7/95***............................ $ 3,300,000 $ 3,300,000
NR/VMIG1 San Diego City HFA, Multifamily Revenue Demand Bonds
Market Street Square Apartments Project Series 1985
Issue G (Barclays Bank PLC) 3.70%, 12/6/95***...... 1,500,000 1,500,000
------------
13,800,000
------------
COLORADO -- 4.2%
A1+/VMIG1 Colorado HFA, Sisters of Charity Health Care Systems
Series 1992A ARTS (SPA-Toronto Dominion Bank)
3.70%, 12/7/95***.................................. 2,000,000 2,000,000
SP1+/NR Colorado State General Fund Revenue TRANS Series 1995
4.50%, 6/27/96..................................... 11,200,000 11,252,233
------------
13,252,233
------------
CONNECTICUT -- 1.0%
A1+/VMIG1 Connecticut State Development Authority PCR,
Connecticut Light & Power Co. Project A (Deutsche
Bank A.G.) 3.65%, 12/6/95***....................... 3,000,000 3,000,000
------------
DISTRICT OF COLUMBIA -- 5.0%
District of Columbia:
GO RFB Series 1992:
A1+/VMIG1 A-1 (National Westminster Bank PLC) 3.85%,
12/1/95***.................................... 3,000,000 3,000,000
A1+/VMIG1 A-2 (Bank of Nova Scotia) 3.85%, 12/1/95***..... 1,800,000 1,800,000
A1+/VMIG1 A-3 (Toronto Dominion Bank) 3.85%, 12/1/95***... 3,400,000 3,400,000
A1+/VMIG1 A-4 (Toronto Dominion Bank) 3.85%, 12/1/95***... 600,000 600,000
A1+/VMIG1 A-5 (Bank of Nova Scotia) 3.85%, 12/1/95***..... 5,400,000 5,400,000
A1/VMIG1 Revenue RB American Assignment Advancement Science
Project Series 1995 (Nations Bank) 3.75%,
12/1/95***...................................... 1,500,000 1,500,000
------------
15,700,000
------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-15
<PAGE> 106
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
FLORIDA -- 2.0%
A1+/P1 Okaloosa County Revenue Gulf Coast Treatment Center
Project Series 1984 (Societe Generale) 3.70%,
12/6/95***......................................... $1,800,000 $ 1,800,000
A1+/NR Orange County HFA Housing Revenue Multifamily RFB
Smokewood/Sun Series 1992A (Citibank, N.A.) 3.80%,
12/6/95***......................................... 2,000,000 2,000,000
A1+/VMIG1 St. Lucie County PCR, Florida Power & Light Co.
Project Series 1993 (Florida Power & Light Co.)
3.80%, 12/6/95***.................................. 2,500,000 2,500,000
------------
6,300,000
------------
GEORGIA -- 6.7%
A1/NR Bibb County Development Authority Environmental
Improvement Revenue RFB Series 1991 IR-1 (Temple
Inland, Inc.) 3.90%, 12/7/95*** (b)................ 8,000,000 8,000,000
A1+/P1 Burke County Development Authority PCR, Oglethorpe
Power Corp. Project 1992A (Credit Suisse) 3.75%,
2/12/96**.......................................... 1,800,000 1,800,000
A1+/NR Columbus Downtown Development Authority IDR, One
Arsenal Plane Project Series 1985 (National
Westminster Bank PLC) 3.65%, 12/6/95***............ 1,800,000 1,800,000
A1+/NR Fulton County HFA, Multifamily Housing Revenue RFB
Spring Creek Crossing Project Series 1994 (Wachovia
Bank of Georgia, N.A.) 3.70%, 12/6/95***........... 5,000,000 5,000,000
A1+/NR Marietta City Housing Authority Multifamily Housing
Revenue RFB Concepts 21 Delk Apartments Series 1994
(FNMA) 3.60%, 12/6/95***........................... 4,525,000 4,525,000
------------
21,125,000
------------
ILLINOIS -- 4.3%
A1+/VMIG1 Chicago O'Hare International Airport General Airport
Second Lien RB Series 1994C (Societe Generale)
3.70%, 12/6/95***.................................. 5,500,000 5,500,000
NR/VMIG1 Illinois EFAR, RB Museum of Science and Industry
Series 1985 (Northern Trust Co.) 3.75%, 12/6/95***
(b)................................................ 2,100,000 2,100,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-16
<PAGE> 107
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
A1+/VMIG1 Illinois HFAR, RB Revolving Fund Pooled Financing
Program Series 1985F (NBD Bank Corp., Inc.) 3.60%,
12/6/95***......................................... $4,300,000 $ 4,300,000
A1+/NR Savanna IDR, Metform Corp. Project Series 1994C
(First National Bank of Chicago) 3.75%,
12/6/95***......................................... 1,600,000 1,600,000
------------
13,500,000
------------
INDIANA -- 4.2%
A1+/P1 Indiana Health Facility Financing Authority Refunding
RB MMM-Invest, Inc. Project Series 1990A (Banc One
Indianapolis, N.A.) 3.75%, 12/7/95*** (b).......... 3,460,000 3,460,000
NR/VMIG1 Indiana Health Facilities Financing Authority, RB
Rehabilitation Hospital Inc. Project Series 1990
(NBD Bank Corp., Inc.) 3.70%, 12/6/95***........... 4,000,000 4,000,000
A1+/NR Lafayette City EDR, RFB Health Quest Realty XI
Project Series 1993 (Banc One Indianapolis, N.A.)
3.75%, 12/7/95*** (b).............................. 2,500,000 2,500,000
A1+/NR Muncie City EDR, RFB Health Quest Realty Project
Series 1993 (Banc One Indianapolis, N.A.) 3.75%,
12/7/95*** (b)..................................... 1,035,000 1,035,000
A1+/P1 Sullivan City PCR, RB Hoosier Energy Rural Electric
Cooperative, Inc. Project Series 1985L-4 (NRUCFC)
3.80%, 2/13/96**................................... 2,200,000 2,200,000
------------
13,195,000
------------
LOUISIANA -- 2.5%
A1+/NR Louisiana State Offshore Terminal Authority Deepwater
Port Revenue RB Loop Inc. First Stage Series 1991A
(Union Bank of Switzerland) 3.70%, 12/1/95***...... 5,300,000 5,300,000
A1+/VMIG1 South La Port Commercial Marine Terminal Facilities
Revenue RB Occidental Petroleum Project Series 1991
(Credit Suisse) 3.70%, 12/6/95***.................. 2,700,000 2,700,000
------------
8,000,000
------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-17
<PAGE> 108
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
MARYLAND -- 1.5%
A1+/NR Baltimore PCR Multi-Modal SCM Plants, Inc. Project
Series 1993 (Barclays Bank PLC) 3.70%,
12/7/95***......................................... $3,500,000 $ 3,500,000
NR/NR Baltimore Series 1986 6.50%, 8/1/96 (c).............. 1,150,000 1,193,490
------------
4,693,490
------------
MASSACHUSETTS -- 2.8%
SP1/MIG1 Massachusetts State UTGO Series 1995A 4.25%,
6/12/96............................................ 8,625,000 8,639,911
------------
MICHIGAN -- 1.5%
SP1+/NR Michigan Municipal Bond Authority Revenue Notes
Series 1995B 4.50%, 7/3/96......................... 4,750,000 4,768,454
------------
MINNESOTA -- 2.0%
A1+/VMIG1 Duluth City Miller Dwan Medical Center Revenue RB
Series 1989A (Citibank, N.A.) 3.75%, 12/7/95***.... 6,300,000 6,300,000
------------
MISSOURI -- 2.9%
A1+/VMIG1 Missouri State Health & Educational Facilities
Authority Health Facilities Revenue RB Barnes
Hospital Project Series 1985 (Morgan Guaranty Trust
Co.) 3.55%, 12/6/95***............................. 7,000,000 7,000,000
NR/VMIG1 St. Charles County IDA, IDR RFB Venture Stores, Inc.
Project Series 1991 (Bank of Nova Scotia) 3.75%,
12/6/95***......................................... 2,000,000 2,000,000
------------
9,000,000
------------
NEVADA -- 1.6%
A1+/NR Clark County IDR, Nevada Power Corp. Project Series
1995C (Barclays Bank PLC) 3.75%, 12/6/95***........ 5,000,000 5,000,000
------------
NEW MEXICO -- 2.1%
A1+/VMIG1 Albuquerque City Municipal Gross Receipts Tax
Adjustable Tender RB Series 1995 (Canadian Imperial
Bank of Commerce) 3.70%, 12/6/95***................ 1,500,000 1,500,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-18
<PAGE> 109
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
NEW MEXICO -- (CONTINUED)
A1+/VMIG1 Albuquerque Hospital Revenue Sisters of Charity St.
Josephs Hospital Series 1992 (SPA-Toronto Dominion
Bank) 3.70%, 12/6/95***............................ $5,000,000 $ 5,000,000
------------
6,500,000
------------
NEW YORK -- 5.2%
NR/MIG1 East Meadow UFSD TANS Series 1995 4.25%, 6/27/96..... 6,800,000 6,822,451
NR/NR New York State Urban Development Corp. Revenue RB
Correctional Facilities 8.00%, 1/1/96 (c).......... 7,500,000 7,674,558
NR/MIG1 West Islip UFSD TANS Series 1995 4.75%, 6/27/96...... 2,000,000 2,008,121
------------
16,505,130
------------
NORTH CAROLINA -- 1.3%
A1/P1 Lenoir County Industrial Facilities and Pollution
Control Financing Authority IDR, RB Texasgulf Inc.
Project Series 1983 (Bankers Trust Co.) 4.00%,
12/7/95*** (b)..................................... 1,400,000 1,400,000
A1+/VMIG1 North Carolina Medical Care Community Hospital
Revenue Duke University Hospital Project Series
1993A 3.75%, 12/7/95***............................ 2,650,000 2,650,000
------------
4,050,000
------------
OHIO -- 1.0%
NR/MIG1 Toledo City Services Special Obligations Project
Series 1995 (Canadian Imperial Bank of Commerce)
3.90%, 6/1/96...................................... 3,000,000 3,002,051
------------
OREGON -- 3.2%
Klamath Falls City Electric RB Salt Caves
Hydroelectric Project Escrowed to Maturity:
SP1+/NR Series 1986A 4.40%, 5/1/96 (a)(c)............... 5,000,000 5,000,000
SP1+/NR Series 1986B 4.40%, 5/1/96 (a)(c)............... 5,000,000 5,014,318
------------
10,014,318
------------
PENNSYLVANIA -- 1.5%
SP1/MIG1 Philadelphia TRANS Series 1995A 4.50%, 6/27/96....... 4,800,000 4,814,288
------------
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-19
<PAGE> 110
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
TENNESSEE -- 3.8%
A1/NR Carter County IDB, Industrial Development RB Inland
Container Corp. Project Series 1983 (Temple Inland,
Inc.) 3.95%, 12/1/95*** (b)........................ $ 3,000,000 $ 3,000,000
A1+/VMIG1 Memphis UTGO Series 1995A (SPA-Westdeutsche
Landesbank GZ) 3.50%, 12/6/95***................... 1,400,000 1,400,000
A1+/P1 Shelby County Health Educational and Housing Facility
Board Multifamily Housing Revenue RFB Wyndridge II
Apartments Project Series 1994 (Credit Suisse)
3.70%, 12/6/95***.................................. 7,635,000 7,635,000
------------
12,035,000
------------
TEXAS -- 13.8%
NR/P1 Brazos River PCR, RB Monsanto Co. Project Series 1990
(Monsanto Co.) 3.60%, 12/6/95***................... 1,100,000 1,100,000
NR/NR Dallas Water Works & Sewer Systems Revenue Series
1986A 8.50%, 10/1/96............................... 1,955,000 2,029,561
A1+/VMIG1 Greater East Texas Higher Education Project Series
1992A (SLMA) 3.70%, 12/7/95***..................... 2,000,000 2,000,000
A1+/P1 Guadalupe-Blanco River Authority IDC, IDR RFB The BOC
Group, Inc. Project Series 1993 (Wachovia Bank of
Georgia, N.A.) 3.75%, 12/7/95*** (b)............... 3,000,000 3,000,000
NR/NR Houston Sewer System Revenue Series 1984 Escrowed to
Maturity U.S. Government Securities Collateral
9.00%, 10/1/96..................................... 2,200,000 2,294,137
A1+/NR Katy ISD Series 1995A (SPA-Credit Suisse) 4.00%,
12/6/95***......................................... 10,000,000 10,000,000
A1+/P1 Port of Corpus Christi IDC, IDR RFB Lantana Corp.
Project Series 1992 (Banc One Texas, N.A.) 3.75%,
12/7/95***......................................... 3,085,000 3,085,000
A1+/VMIG1 Red River Authority PCR, RFB Southwestern Public
Service Co. Project Series 1991 ARTS (SPA-Union
Bank of Switzerland) 3.60%, 12/7/95***............. 5,300,000 5,300,000
A1+/VMIG1 San Antonio City Higher Education Authority, Inc.
Educational Facilities UTSA Phase I Dormitory
Project Series 1985 (Lloyds Bank PLC) 3.80%,
12/1/95***......................................... 3,085,000 3,085,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-20
<PAGE> 111
THE HANOVER FUNDS, INC.
THE TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- --------------- ----------- ------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES -- (CONTINUED)
TEXAS -- (CONTINUED)
A1/P1 Shenandoah City HFDC, Hospital RB Southwood Ltd.
Project I Series 1984 (Bank America National Trust
and Savings Association) 4.07%, 12/7/95*** (b)..... $4,300,000 $ 4,300,000
Texas State TRANS:
SP1+/MIG1 Series 1995A 4.75%, 8/30/96........................ 5,000,000 5,023,952
A1+/P1 Series 1995B 3.65%, 8/20/96**...................... 2,200,000 2,200,000
------------
43,417,650
------------
UTAH -- 2.5%
NR/MIG1 Davis County School District TANS Series 1995 4.25%,
6/28/96............................................ 3,000,000 3,006,437
A1+/P1 Salt Lake County HFA, Elderly Housing Revenue RFB
Sandy Retirement Center Series 1988 (Swiss Bank
Corp.) 3.65%, 12/7/95***........................... 4,900,000 4,900,000
------------
7,906,437
------------
WYOMING -- 4.5%
A1+/P1 Green River City PCR, RB Texasgulf Project Series
1984 (Societe Generale) 4.00%, 12/7/95*** (b)...... 1,800,000 1,800,000
Lincoln County PCR RB PacificCorp. Project Series
1991 (PacificCorp.):
A1+/VMIG1 3.75%, 2/7/96**................................. 2,500,000 2,500,000
A1+/VMIG1 3.70%, 2/12/96**................................ 3,500,000 3,500,000
A1+/VMIG1 Sweetwater County PCR, RB PacificCorp. Project Series
1992B (Union Bank of Switzerland) 3.70%,
3/13/96**.......................................... 6,305,000 6,305,000
------------
14,105,000
------------
TOTAL INVESTMENTS -- 98.8% (COST $310,553,518)+...... 310,553,518
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.2%........ 3,912,866
------------
NET ASSETS -- 100.0%................................. $314,466,384
===========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-21
<PAGE> 112
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES*** -- 52.9%
A1+/VMIG1 Babylon GO Series 1994B (AMBAC/SPA-Bank of
Nova Scotia) 3.45%, 12/6/95....................... $ 2,500,000 $ 2,500,000
A1+/VMIG1 Indian Trace Community Development District Florida
Basin 1 Water Management Series A UPDATES
(MBIA/SPA-Swiss Bank Corp.) 3.60%, 12/6/95........ 3,800,000 3,800,000
A1+/NR Nassau County IDA, CFR Cold Spring Harbor Laboratory
Project Series 1989 (Morgan Guaranty Trust Co.)
3.80%, 12/1/95.................................... 5,000,000 5,000,000
A1/NR New York City Housing Development Corp. Mortgage
Revenue Multifamily Columbus Gardens Project
Series A 3.50%, 12/6/95........................... 200,000 200,000
New York City IDA:
A1+/NR CFR Calhoun School Inc. Project (Barclays Bank
PLC) 3.50%, 12/7/95............................ 1,800,000 1,800,000
A1+/NR CFR Childrens Oncology Society (Barclays Bank PLC)
3.45%, 12/6/95................................. 1,900,000 1,900,000
A1+/NR CFR National Audubon Society RB Series 1989 (Swiss
Bank Corp.) 3.70%, 12/1/95..................... 2,000,000 2,000,000
A2/VMIG1 IDR Field Hotel Association JFK Project (Banque
Indosuez) 3.60%, 12/6/95....................... 9,700,000 9,700,000
NR/P1 IDR La Guardia Association Project (Banque
Indosuez) 3.60%, 12/6/95....................... 11,000,000 11,000,000
New York City Municipal Water Finance Authority
Water & Sewer System Revenue RB (FGIC):
A1+/VMIG1 Fiscal 1994 Series 1993C 3.80%, 12/1/95........ 280,000 280,000
A1+/VMIG1 Series 1995A 4.00%, 12/1/95.................... 500,000 500,000
New York City Trust Cultural Resources Revenue:
NR/VMIG1 American Museum of Natural History Series 1993A
(MBIA/SPA-Credit Suisse) 3.45%, 12/6/95........ 3,550,000 3,550,000
A1+/VMIG1 Solomon R. Guggenheim Series 1990B (Swiss Bank
Corp.) 3.70%, 12/1/95.......................... 2,000,000 2,000,000
New York City UTGO:
A1+/VMIG1 Fiscal 1993 Subseries B (FGIC) 4.00%, 12/1/95..... 11,000,000 11,000,000
A1+/VMIG1 Fiscal 1994 Subseries B-4 (Union Bank of
Switzerland) 4.00%, 12/1/95.................... 2,400,000 2,400,000
Fiscal 1995:
A1+/VMIG1 Subseries B-3 (MBIA) 3.80%, 12/1/95............ 1,150,000 1,150,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-22
<PAGE> 113
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES*** -- (CONTINUED)
New York City UTGO Fiscal 1995: -- (continued)
A1+/VMIG1 Subseries B-4 (MBIA) 3.80%, 12/1/95............... $ 3,600,000 $ 3,600,000
A1+/VMIG1 Subseries B-7 (AMBAC) 3.80%, 12/1/95.............. 300,000 300,000
A1+/VMIG1 New York State Dormitory Authority Revenues RB
Cornell University Series 1990B (Liq. Morgan
Guaranty Trust) 3.70%, 12/1/95.................... 700,000 700,000
New York State ERDA, PCR:
Central Hudson Gas and Electric:
NR/P1 Series 1985B (Deutsche Bank A.G.) 3.45%,
12/7/95...................................... 3,500,000 3,500,000
NR/P1 Series 1987B (Union Bank of Switzerland) 3.60%,
12/7/95...................................... 1,800,000 1,800,000
A1+/VMIG1 Electric and Gas Series 1994D (Union Bank of
Switzerland) 3.70%, 12/1/95.................... 900,000 900,000
A1+/VMIG1 New York State HFA Normandie Court 1 Project Series
1991A (Societe Generale) 3.45%, 12/6/95........... 12,800,000 12,800,000
A1+/VMIG1 New York State Local Assistance Corp. Series A
(Credit Suisse, Swiss Bank Corp. and Union Bank of
Switzerland) 3.50%, 12/6/95....................... 9,700,000 9,700,000
New York State Local Government Assistance Corp.:
A1+/VMIG1 Series D (Societe Generale) 3.55%, 12/6/95........ 1,700,000 1,700,000
A1+/VMIG1 Series E (Canadian Imperial Bank Canada) 3.55%,
12/6/95........................................ 2,000,000 2,000,000
A1+/VMIG1 Series G (National Westminster Bank PLC) 3.50%,
12/6/95........................................ 8,600,000 8,600,000
NR/VMIG1 New York State Thruway Authority General Revenue
(FGIC GO of Authority) 3.65%, 12/1/95............. 200,000 200,000
NR/VMIG1 North Hempstead Solid Waste Management Authority
Series A (National Westminster Bank PLC) 3.50%,
12/6/95........................................... 3,500,000 3,500,000
A1+/NR Seneca County IDA, CFR New York Chiropractic College
(Barclays Bank PLC) 3.50%, 12/6/95................ 9,500,000 9,500,000
NR/P1 St. Lawrence County IDA, PCR Reynolds Metals Co.
Project Series 1985 (Bank of Nova Scotia) 3.80%,
12/1/95........................................... 5,250,000 5,250,000
NR/VMIG1 Suffolk County Water Authority BANS (SPA-Bank of
Nova Scotia) 3.65%, 12/6/95....................... 3,800,000 3,800,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-23
<PAGE> 114
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES*** -- (CONTINUED)
A1+/VMIG1 Syracuse IDA, CFR RB Multi-Modal Syracuse University
Project (Morgan Guaranty Trust Co.) 3.70%,
12/1/95........................................... $ 3,000,000 $ 3,000,000
A1+/VMIG1 Triborough Bridge and Tunnel Authority Special
Obligation RB Series 1994 (FGIC) 3.50%, 12/6/95... 4,000,000 4,000,000
------------
TOTAL VARIABLE RATE DEMAND NOTES.................... 133,630,000
------------
MUNICIPAL OBLIGATIONS -- 25.6%
NR/NR Brockport CSD BANS 4.25%, 6/27/96................... 4,000,000 4,010,664
NR/NR Clarence CSD TANS 4.00%, 6/28/96.................... 2,000,000 2,003,243
NR/MIG1 East Meadow UFSD TANS 4.25%, 6/27/96................ 2,000,000 2,006,491
NR/NR Greece CSD Monroe County TANS 4.00%, 6/28/96........ 3,000,000 3,003,218
Town of Hempstead:
BANS Series A:
NR/NR 5.25%, 3/1/96.................................. 3,500,000 3,505,297
NR/NR 5.50%, 3/1/96.................................. 500,000 501,053
NR/NR UFSD TANS 4.50%, 6/28/96.......................... 2,000,000 2,007,659
NR/NR Merrick UFSD TANS 4.25%, 6/27/96.................... 1,000,000 1,003,050
NR/NR Metropolitan Transportation Authority Series F
8.375%, 7/1/96 (c)................................ 4,000,000 4,184,268
Nassau County:
BANS:
SP1/MIG1 Series E 4.25%, 3/15/96........................ 1,570,000 1,572,831
SP1+/MIG1 Series F 4.50%, 3/15/96........................ 500,000 501,089
SP1/MIG1 RANS 4.25%, 6/27/96............................... 2,000,000 2,005,321
New York City Municipal Assistance Corp. Series 56
(c):
NR/NR 7.90%, 7/1/96..................................... 1,500,000 1,565,156
NR/NR 8.10%, 7/1/96..................................... 500,000 522,500
NR/NR New York City Municipal Water Finance Authority
Water & Sewer System Revenue Series A 7.00%,
6/15/96 (c)....................................... 1,500,000 1,555,079
NR/NR New York State Dormitory Authority Revenues
Refunding Insured New York University Series B
(MBIA) 3.65%, 7/1/96.............................. 530,000 529,829
New York State ERDA, PCR:
New York State Electric and Gas Corp. RB:
A1+/NR (Morgan Guaranty Trust Co.) 4.65%, 3/15/96
(a).......................................... 1,500,000 1,500,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-24
<PAGE> 115
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
MUNICIPAL OBLIGATIONS -- (CONTINUED)
New York State ERDA, PCR; New York State Electric
and Gas Corp. RB: -- (continued)
A1+/NR Series D (Union Bank of Switzerland) 4.60%,
12/1/95 (a).................................. $ 1,000,000 $ 1,000,000
A1+/NR Series D (Union Bank of Switzerland) 3.65%,
12/1/96 (a)++................................ 1,000,000 1,000,000
NR/VMIG1 LILCO Project Series B (Deutsche Bank A.G.) 4.70%,
3/1/96 (a)..................................... 2,500,000 2,500,000
New York State HFA U.S. Government Securities
Collateral:
NR/NR Special Obligation Health Facilities New York
City Series A Escrowed to Maturity 6.55%,
5/1/96....................................... 500,000 505,671
State University Construction Series A:
NR/NR Escrowed to Maturity 7.00%, 5/1/96........... 200,000 202,328
NR/NR 8.00%, 5/1/96 (c)............................ 200,000 207,312
New York State PAR and General Purposes RB:
A1/VMIG1 (GO of New York State Power Authority) 3.85%,
3/1/96 (a)..................................... 4,000,000 4,000,000
Series T (c):
NR/NR 7.375%, 1/1/96................................. 400,000 409,007
NR/NR 7.400%, 1/1/96................................. 325,000 332,390
New York State Urban Development Corporation Revenue
Correctional Facility Series A (c):
NR/NR 7.00%, 1/1/96.................................. 1,400,000 1,431,488
NR/NR 9.20%, 1/1/96.................................. 250,000 255,980
NR/NR Oyster Bay BANS 4.00%, 7/12/96...................... 4,000,000 4,008,224
NR/NR Port Washington UFSD TANS 4.25%, 6/27/96............ 2,000,000 2,006,039
NR/NR Scarsdale UFSD TANS 4.00%, 6/27/96.................. 3,000,000 3,006,484
NR/NR Southampton County of Suffolk UFSD TANS 4.50%,
6/28/96........................................... 4,350,000 4,365,357
NR/MIG1 South Huntington UFSD TANS 4.25%, 6/28/96........... 2,000,000 2,006,515
NR/MIG1 Three Village CSD TANS 4.50%, 6/28/96............... 1,600,000 1,607,049
NR/NR Triborough Bridge and Tunnel Authority Revenue
General Purpose Series 1 7.625%, 1/1/96 (c)....... 2,500,000 2,557,724
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-25
<PAGE> 116
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
MUNICIPAL OBLIGATIONS -- (CONTINUED)
NR/NR United Nations Development Corp. Revenue Phase 2 & 3
Senior Lien 7.875%, 7/1/96 (c).................... $ 1,300,000 $ 1,356,155
------------
TOTAL MUNICIPAL OBLIGATIONS......................... 64,734,471
------------
TAX EXEMPT COMMERCIAL PAPER -- 21.1%
New York City Municipal Water Finance Authority
(Credit Suisse):
A1+/P1 3.80%, 12/4/95................................. 2,800,000 2,800,000
A1+/P1 3.35%, 12/7/95................................. 2,100,000 2,100,000
A1+/P1 3.95%, 12/7/95................................. 1,000,000 1,000,000
A1+/P1 3.50%, 12/20/95................................ 1,000,000 1,000,000
A1+/P1 3.70%, 1/23/96................................. 1,000,000 1,000,000
A1+/P1 3.75%, 1/24/96................................. 3,000,000 3,000,000
A1+/P1 3.75%, 1/26/96................................. 1,600,000 1,600,000
A1+/P1 3.70%, 1/29/96................................. 2,000,000 2,000,000
A1+/P1 3.70%, 1/30/96................................. 2,000,000 2,000,000
New York City UTGO Fiscal 1994 Series 1994H:
Subseries H-3 (FSA/SPA-Banque Paribas):
A1/VMIG1 3.90%, 12/4/95................................. 2,000,000 2,000,000
A1/VMIG1 3.75%, 12/7/95................................. 2,000,000 2,000,000
A1/VMIG1 3.70%, 1/17/96................................. 2,200,000 2,200,000
A1/VMIG1 3.75%, 1/25/96................................. 2,000,000 2,000,000
A1/VMIG1 3.70%, 2/28/96................................. 3,100,000 3,100,000
Subseries H-4 (AMBAC/SPA-Kredietbank, N.V.):
A1/VMIG1 3.70%, 1/26/96................................. 2,800,000 2,800,000
A1/VMIG1 3.75%, 3/7/96.................................. 2,500,000 2,500,000
A1+/P1 New York State EFC, Solid Waste Disposal RFB General
Electric Capital Corp. Project Series 1987A
(General Electric Capital Corp.) 3.75%, 1/10/96... 2,500,000 2,500,000
New York State GO BANS:
Series Q:
A1/P1 3.80%, 1/16/96................................. 2,000,000 2,000,000
A1/P1 3.70%, 1/18/96................................. 2,200,000 2,200,000
A1/P1 3.70%, 1/22/96................................. 2,000,000 2,000,000
A1/P1 3.75%, 2/7/96.................................. 2,350,000 2,350,000
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-26
<PAGE> 117
THE HANOVER FUNDS, INC.
THE NEW YORK TAX FREE MONEY MARKET FUND
Portfolio of Investments (continued)
November 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT (NOTE 2A)
- ----------- ----------- ------------
<S> <C> <C> <C>
TAX EXEMPT COMMERCIAL PAPER -- (CONTINUED)
New York State GO BANS:-- (continued)
Series R:
A1/P1 3.625%, 1/11/96................................ $ 2,000,000 $ 2,000,000
A1/P1 3.75%, 1/16/96................................. 2,000,000 2,000,000
A1/P1 3.70%, 2/7/96.................................. 2,000,000 2,000,000
A1/P1 3.70%, 2/8/96.................................. 3,100,000 3,100,000
------------
TOTAL TAX EXEMPT COMMERCIAL PAPER................... 53,250,000
------------
TOTAL INVESTMENTS -- 99.6% (COST $251,614,471)+..... 251,614,471
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4%....... 1,006,630
------------
NET ASSETS -- 100.0%................................ $252,621,101
===========
</TABLE>
See Footnotes to Portfolios and accompanying notes to financial statements.
F-27
<PAGE> 118
THE HANOVER FUNDS, INC.
Footnotes to Portfolios (unaudited)
* Credit Ratings given by Standard and Poor's Ratings Group and Moody's
Investors Service, Inc.
<TABLE>
<CAPTION>
Standard & Poor's Moody's
- -------------------- -----------
<S> <C> <C>
Long-Term Ratings:
AAA Aaa Instrument judged to be of the best quality and
carrying the smallest amount of credit risk.
Short-Term Ratings:
A1 P1 Instrument judged to be of the highest quality.
SP1 MIG1/VMIG1 Instrument judged to be of the best quality
with strong protection.
NR NR Not Rated. In the opinion of the Investment
Advisers, instrument judged to be of comparable
investment quality to rated securities which
may be purchased by the Funds.
</TABLE>
Items which possess the strongest investment attributes of their category
are given that letter rating followed by a number. The Standard & Poor's
ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories. Moody's applies
numerical modifiers to designate relative standing within the generic
rating categories.
U.S. Government Issues have assumed ratings of AAA/Aaa.
** Tax Exempt Commercial Paper.
*** Variable Rate Demand Notes or Obligations. Maturity date shown is the later
of next exercise date of the demand feature (redemption at par by the
issuers) or the next interest reset date; rate shown is rate in effect at
November 30, 1995. Yield to maturity on date of purchase shown is yield in
effect at November 30, 1995.
+ The cost of securities for Federal income tax purposes is substantially the
same.
++ Security purchased on a when issued basis. Portfolio securities in The
Government Money Market Fund and The New York Tax Free Money Market Fund
with a market value of $117,244,458 and $1,023,090, respectively, have been
segregated against the portfolio purchase.
(a) Maturity date shown is the mandatory or optional put date.
(b) Security may be sold to institutional investors only.
(c) Pre-refunded and U.S. Government Securities Collateral.
INVESTMENT PERCENTAGES SHOWN ARE CALCULATED AS A PERCENTAGE OF NET ASSETS.
INSTITUTIONS SHOWN IN PARENTHESIS HAVE ENTERED INTO CREDIT SUPPORT AGREEMENTS
WITH THE ISSUERS.
F-28
<PAGE> 119
THE HANOVER FUNDS, INC.
Footnotes to Portfolios (unaudited) (continued)
<TABLE>
<CAPTION>
ABBREVIATIONS USED IN THE PORTFOLIOS:
<S> <C>
AMBAC American Municipal Bond Assurance Corporation
ARTS Adjustable Rate Tender Security
BANS Bond Anticipation Notes
CFR Civil Facilities Revenue
CSD Central School District
EDR Economic Development Revenue
EFAR Education Facilities Authority Revenue
EFC Environmental Facilities Corporation
ERDA Energy Research and Development Authority
FGIC Financial Guaranty Insurance Corporation
FNMA Federal National Mortgage Association
FSA Financial Security Assurance
HFA Housing Finance Agency
HFAR Health Facilities Authority Revenue
HFDC Health Facilities Development Corporation
GO General Obligation
IDA Industrial Development Authority
IDB Industrial Development Board
IDC Industrial Development Corporation
IDR Industrial Development Revenue
ISD Independent School District
MBIA Municipal Bond Insurance Association
NRUCFC National Rural Utilities Cooperative Finance Corp.
PAR Power Authority Revenue
PCR Pollution Control Revenue
RANS Revenue Anticipation Notes
RB Revenue Bonds
RFB Refunding Bonds
SLMA Student Loan Marketing Association
SPA Standby Purchase Agreement
TANS Tax Anticipation Notes
TRANS Tax and Revenue Anticipation Notes
UFSD Union Free School District
UPDATES Unit Priced Demand Adjustable Tax-Exempt Security
UTGO Unlimited Tax General Obligation
</TABLE>
F-29
<PAGE> 120
THE HANOVER FUNDS, INC.
Statement of Assets and Liabilities
November 30, 1995
<TABLE>
<CAPTION>
THE 100%
U.S. TREASURY THE U.S. THE
SECURITIES TREASURY GOVERNMENT
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost
$1,337,369,032, $1,154,498,284, and
$1,464,062,168, respectively) (Note 2A).... $1,337,369,032 $1,154,498,284 $1,464,062,168
Repurchase agreements, at value (cost $0,
$500,000,000, and $200,000,000,
respectively) (Note 8)..................... -- 500,000,000 200,000,000
Cash.......................................... 91,949 11,072,335 --
Receivable for securities sold................ -- -- 25,000,000
Interest receivable........................... 1,895,605 1,910,808 5,894,185
Deferred organizational costs (Note 2E)....... 1,762 10,853 --
Other assets.................................. 20,536 22,635 27,610
-------------- -------------- --------------
Total assets............................... 1,339,378,884 1,667,514,915 1,694,983,963
-------------- -------------- --------------
LIABILITIES:
Payable for securities purchased.............. -- -- 139,922,056
Dividend payable (Note 2C).................... 1,218,124 2,675,555 2,271,183
Shareholder servicing fee payable (Note 6).... 374,997 487,887 429,836
Investment advisory fee payable (Note 4)...... 128,570 167,276 147,372
Administrative services fee payable (Note
5)......................................... 45,349 59,001 51,980
Co-Administrative services fee payable (Note
5)......................................... 32,143 41,819 36,843
Custodian fee payable (Note 7)................ -- 48,046 --
Cash overdraft due to custodian............... -- -- 7,259
Transfer agent fee payable (Note 7)........... -- 7,125 --
Fund accounting fee payable (Note 5).......... 2,083 2,083 2,083
Other accrued liabilities..................... 28,797 197,171 116,912
-------------- -------------- --------------
Total liabilities.......................... 1,830,063 3,685,963 142,985,524
-------------- -------------- --------------
NET ASSETS:
Shares of capital stock outstanding (par value
of $.001 per share); ten billion shares
authorized................................. 1,337,563 1,663,829 1,551,998
Additional paid-in capital.................... 1,336,225,405 1,662,165,123 1,550,446,441
Accumulated undistributed net realized loss on
investment transactions.................... (14,147) -- --
-------------- -------------- --------------
Net assets applicable to outstanding shares..... $1,337,548,821 $1,663,828,952 $1,551,998,439
============= ============= =============
Shares of capital stock outstanding............. 1,337,562,968 1,663,828,952 1,551,998,439
============= ============= =============
Net asset value per share outstanding........... $1.00 $1.00 $1.00
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 121
THE HANOVER FUNDS, INC.
Statement of Assets and Liabilities (continued)
November 30, 1995
<TABLE>
<CAPTION>
THE
NEW YORK
THE CASH THE TAX FREE TAX FREE
MANAGEMENT MONEY MARKET MONEY MARKET
FUND FUND FUND
-------------- ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value (cost
$1,513,921,449, $310,553,518, and
$251,614,471, respectively) (Note 2A)...... $1,513,921,449 $310,553,518 $251,614,471
Repurchase agreements, at value (cost
$114,000,000, $0, and $0, respectively)
(Note 8)................................... 114,000,000 -- --
Cash.......................................... 10,537,302 2,423,238 815,426
Receivable for securities sold................ 20,257,330 -- --
Interest receivable........................... 5,779,898 2,204,741 1,869,552
Other assets.................................. 21,788 3,725 3,309
-------------- ------------ ------------
Total assets............................... 1,664,517,767 315,185,222 254,302,758
-------------- ------------ ------------
LIABILITIES:
Payable for securities purchased.............. 27,130,907 -- 1,208,823
Dividend payable (Note 2C).................... 2,089,945 486,275 305,769
Shareholder servicing fee payable (Note 6).... 396,417 91,737 74,300
Investment advisory fee payable (Note 4)...... 135,914 31,453 25,474
Administrative services fee payable (Note
5)......................................... 47,939 11,094 8,985
Co-Administrative services fee payable (Note
5)......................................... 33,978 7,863 6,369
Custodian fee payable (Note 7)................ 25,613 30,588 12,322
Transfer agent fee payable (Note 7)........... 8,846 8,151 3,627
Fund accounting fee payable (Note 5).......... 2,083 2,300 2,139
Other accrued liabilities..................... 153,033 49,377 33,849
-------------- ------------ ------------
Total liabilities.......................... 30,024,675 718,838 1,681,657
-------------- ------------ ------------
NET ASSETS:
Shares of capital stock outstanding (par value
of $.001 per share); ten billion shares
authorized................................. 1,634,493 314,512 252,669
Additional paid-in capital.................... 1,632,858,599 314,197,593 252,416,056
Accumulated undistributed net realized loss on
investment transactions.................... -- (45,721) (47,624)
-------------- ------------ ------------
Net assets applicable to outstanding shares... $1,634,493,092 $314,466,384 $252,621,101
============= =========== ===========
Shares of capital stock outstanding........... 1,634,493,092 314,512,105 252,668,725
============= =========== ===========
Net asset value per share outstanding......... $1.00 $1.00 $1.00
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 122
THE HANOVER FUNDS, INC.
Statement of Operations
For the Year Ended November 30, 1995
<TABLE>
<CAPTION>
THE 100%
U.S. THE THE
TREASURY THE U.S. GOVERNMENT NEW YORK
SECURITIES TREASURY MONEY THE CASH THE TAX FREE TAX FREE
MONEY MARKET MONEY MARKET MARKET MANAGEMENT MONEY MARKET MONEY MARKET
FUND FUND FUND FUND FUND FUND
------------ ------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME:
INTEREST INCOME...................... $59,142,062 $84,441,346 $85,684,159 $68,443,684 $13,229,723 $ 8,106,519
------------ ------------ ----------- ------------ ------------ -------------
EXPENSES:
Shareholder servicing (Note 6)..... 3,711,688 5,160,464 5,044,785 4,040,014 1,183,863 755,492
Investment advisory (Note 4)....... 1,590,723 2,211,627 2,162,051 1,731,434 507,370 323,782
Administrative services (Note 5)... 452,063 628,663 614,702 492,115 144,310 92,011
Co-Administrative services (Note
5)............................... 318,145 442,325 432,410 346,287 101,474 64,756
Registration....................... 176,597 185,710 231,636 176,953 62,538 31,580
Custodian (Note 7)................. 81,398 277,195 246,782 102,656 60,645 41,689
Transfer agent (Note 7)............ 51,432 70,623 70,607 70,975 26,475 28,220
Legal.............................. 30,900 62,103 46,099 36,048 59,253 6,850
Fund accounting (Note 5)........... 25,507 25,128 25,451 26,942 29,027 27,086
Insurance.......................... 17,812 24,849 19,622 14,710 9,808 4,059
Directors.......................... 14,404 20,533 19,685 15,680 5,270 2,993
Reports to shareholders............ 13,609 19,250 18,799 15,160 6,070 3,110
Audit.............................. 11,216 15,840 17,852 12,907 3,174 2,774
Amortization of organization
expenses (Note 2E)............... 7,618 19,768 -- 4,345 10,090 --
Miscellaneous...................... 15,991 71,297 28,614 23,160 8,938 4,849
------------ ------------ ----------- ------------ ------------ -------------
Total expenses before waivers.... 6,519,103 9,235,375 8,979,095 7,109,386 2,218,305 1,389,251
Expenses waived by Investment
advisers, Co-Administrator &
Custodian (Notes 4, 5 & 7)..... (342,061) (634,684) (480,816) (375,631) (132,259) (85,251)
------------ ------------ ----------- ------------ ------------ -------------
Net expenses....................... 6,177,042 8,600,691 8,498,279 6,733,755 2,086,046 1,304,000
------------ ------------ ----------- ------------ ------------ -------------
NET INVESTMENT INCOME................ 52,965,020 75,840,655 77,185,880 61,709,929 11,143,677 6,802,519
------------ ------------ ----------- ------------ ------------ -------------
NET REALIZED GAIN (LOSS) ON
INVESTMENTS........................ 286,897 106,094 8,875 51,803 (65,920) (915)
------------ ------------ ----------- ------------ ------------ -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.................... $53,251,917 $75,946,749 $77,194,755 $61,761,732 $11,077,757 $ 6,801,604
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 123
THE HANOVER FUNDS, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
THE 100% U.S. TREASURY SECURITIES THE U.S. TREASURY THE GOVERNMENT
MONEY MARKET FUND MONEY MARKET FUND MONEY MARKET FUND
--------------------------------- ----------------------------------- ----------------------------------
YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30,
--------------------------------- ----------------------------------- ----------------------------------
1995 1994 1995 1994 1995 1994
--------------- --------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET
ASSETS:
Operations:
Net investment
income.......... $ 52,965,020 $ 24,200,846 $ 75,840,655 $ 36,769,435 $ 77,185,880 $ 29,545,724
Net realized gain
on invest-
ments........... 286,897 40,715 106,094 24,119 8,875 34,426
--------------- --------------- ---------------- ---------------- ---------------- ---------------
Net increase in net
assets resulting
from operations... 53,251,917 24,241,561 75,946,749 36,793,554 77,194,755 29,580,150
--------------- --------------- ---------------- ---------------- ---------------- ---------------
Distributions to
shareholders:
Net investment
income.......... (52,965,020) (24,200,846) (75,840,655) (36,769,435) (77,185,880) (29,545,724)
Net realized gain
(loss) on
investments..... (287,803) (53,956) (90,389) (39,824) 64 (63,266)
--------------- --------------- ---------------- ---------------- ---------------- ---------------
(53,252,823) (24,254,802) (75,931,044) (36,809,259) (77,185,816) (29,608,990)
--------------- --------------- ---------------- ---------------- ---------------- ---------------
Capital share
transactions (at
$1.00 per share):
Proceeds from
sales of
shares........ 8,315,731,409 6,313,225,632 13,719,687,712 11,697,651,225 16,830,561,076 8,540,855,568
Net asset value
of shares
issued in
reinvestment
of distri-
butions....... 38,827,021 17,702,352 44,475,592 22,994,479 44,844,948 12,795,260
--------------- --------------- ---------------- ---------------- ---------------- ---------------
8,354,558,430 6,330,927,984 13,764,163,304 11,720,645,704 16,875,406,024 8,553,650,828
Cost of shares
redeemed...... (8,041,133,881) (6,180,420,868) (13,321,482,895) (11,428,612,498) (16,465,315,771) (7,957,986,557)
--------------- --------------- ---------------- ---------------- ---------------- ---------------
Net increase in net
assets derived
from capital share
transactions...... 313,424,549 150,507,116 442,680,409 292,033,206 410,090,253 595,664,271
--------------- --------------- ---------------- ---------------- ---------------- ---------------
NET INCREASE IN NET
ASSETS............ 313,423,643 150,493,875 442,696,114 292,017,501 410,099,192 595,635,431
NET ASSETS:
Beginning of
period.......... 1,024,125,178 873,631,303 1,221,132,838 929,115,337 1,141,899,247 546,263,816
--------------- --------------- ---------------- ---------------- ---------------- ---------------
End of period..... $ 1,337,548,821 $ 1,024,125,178 $ 1,663,828,952 $ 1,221,132,838 $ 1,551,998,439 $ 1,141,899,247
============== ============== =============== =============== =============== ==============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 124
THE HANOVER FUNDS, INC.
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
THE CASH THE TAX FREE THE NEW YORK TAX FREE
MANAGEMENT FUND MONEY MARKET FUND MONEY MARKET FUND
---------------------------------- ---------------------------------- ------------------------------
YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30,
---------------------------------- ---------------------------------- ------------------------------
1995 1994 1995 1994 1995 1994
--------------- --------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment
income............ $ 61,709,929 $ 27,662,057 $ 11,143,677 $ 8,285,351 $ 6,802,519 $ 3,436,386
Net realized gain
(loss) on
investments....... 51,803 26,136 (65,920) (272,226) (915) (3,816)
--------------- --------------- --------------- --------------- ------------- -------------
Net increase in net
assets resulting
from operations..... 61,761,732 27,688,193 11,077,757 8,013,125 6,801,604 3,432,570
--------------- --------------- --------------- --------------- ------------- -------------
Distributions to
shareholders:
Net investment
income............ (61,709,929) (27,662,057) (10,945,829) (8,190,774) (6,802,519) (3,436,315)
Net realized gain on
investments....... (51,803) (26,136) -- -- -- --
--------------- --------------- --------------- --------------- ------------- -------------
(61,761,732) (27,688,193) (10,945,829) (8,190,774) (6,802,519) (3,436,315)
--------------- --------------- --------------- --------------- ------------- -------------
Capital share
transactions (at
$1.00 per share):
Proceeds from
sales of
shares.......... 10,290,191,626 7,914,911,934 1,492,967,257 1,950,480,104 650,155,917 561,794,942
Net asset value of
shares issued in
reinvestment of
distributions... 36,322,846 14,408,576 4,501,517 3,447,870 3,539,264 1,645,715
--------------- --------------- --------------- --------------- ------------- -------------
10,326,514,472 7,929,320,510 1,497,468,774 1,953,927,974 653,695,181 563,440,657
Cost of shares
redeemed........ (9,682,066,076) (7,800,301,282) (1,542,176,447) (1,829,904,382) (583,079,840) (545,068,230)
--------------- --------------- --------------- --------------- ------------- -------------
Net increase
(decrease) in net
assets derived from
capital share
transactions........ 644,448,396 129,019,228 (44,707,673) 124,023,592 70,615,341 18,372,427
--------------- --------------- --------------- --------------- ------------- -------------
NET INCREASE
(DECREASE) IN NET
ASSETS.............. 644,448,396 129,019,228 (44,575,745) 123,845,943 70,614,426 18,368,682
NET ASSETS:
Beginning of
period............ 990,044,696 861,025,468 359,042,129 235,196,186 182,006,675 163,637,993
--------------- --------------- --------------- --------------- ------------- -------------
End of period....... $ 1,634,493,092 $ 990,044,696 $ 314,466,384 $ 359,042,129 $ 252,621,101 $ 182,006,675
============== ============== ============== ============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 125
THE HANOVER FUNDS, INC.
Notes to Financial Statements
November 30, 1995
1. DESCRIPTION
The Hanover Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and was established as a Maryland corporation on October 5,
1988. The Articles of Incorporation of the Company authorize ten billion shares,
having a par value of $.001 per share. The Company has six separate investment
portfolios: The 100% U.S. Treasury Securities Money Market Fund ("The 100% U.S.
Treasury Securities Fund"), The U.S. Treasury Money Market Fund ("The U.S.
Treasury Fund"), The Government Money Market Fund ("The Government Fund"), The
Cash Management Fund, The Tax Free Money Market Fund ("The Tax Free Fund") and
The New York Tax Free Money Market Fund ("The New York Tax Free Fund"), (each, a
"Fund," collectively, the "Funds").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements:
A) SECURITY VALUATION: Pursuant to Rule 2a-7 of The Investment Company Act
of 1940, investment securities are valued under the amortized cost
method, which approximates current market value. Under this method,
securities are valued at cost when purchased and, thereafter, a constant
proportionate amortization of any discount or premium is recorded until
maturity of the security. Regular review and monitoring of the valuation
is performed to avoid dilution of net asset value per share. The Funds
seek to maintain a stable net asset value of $1.00 per share.
B) INVESTMENT TRANSACTIONS AND INCOME: Investment transactions are recorded
on the trade date. The cost of investments sold is determined by use of
the specific identification method to calculate gain and loss on sales
for both financial statement and Federal income tax purposes. Interest
income, including the amortization of discount or premium, is recorded
as earned.
C) DIVIDENDS TO SHAREHOLDERS: Dividends from net investment income are
declared daily and paid monthly, generally on the first business day of
each month. Net investment income for dividend purposes consists of (i)
interest accrued and discount earned on the Fund's assets (including
both original issue and market discount), less (ii) amortization of
market premium on such assets, and the accrued expenses of the Fund. Any
net realized capital gains less available capital loss carryover are
distributed at least annually.
D) FEDERAL INCOME TAXES: Each Fund is a separate taxable entity for Federal
income tax purposes, and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as
amended. By so qualifying, each Fund will not be subject to Federal
income taxes to the extent that it distributes all of its "investment
company taxable income", as defined in the Code, and net capital gains,
if any, to its shareholders. Each Fund also intends to meet the
distribution requirements to avoid the payment of an excise tax.
Accordingly, no provision for Federal income taxes is required.
E) ORGANIZATIONAL COSTS: Costs incurred by the Company in connection with
its organization and initial registration and public offering of shares
are being amortized on a straight-line basis for a five-year period
beginning with the operations of each Fund. In the event that any of the
F-35
<PAGE> 126
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
initial shares of the Funds owned by Furman Selz Incorporated ("Furman
Selz"), the Company's Administrator, are redeemed during the
amortization period, the redemption proceeds will be reduced by a pro
rata portion of any unamortized deferred organization expenses in the
same proportion as the number of initial shares being redeemed bears to
the number of initial shares outstanding at the time of redemption.
F) EXPENSES: Expenses directly attributable to a Fund are charged to that
Fund, other expenses are allocated proportionately among each Fund
within the Company in relation to the net assets of each Fund, or on
another reasonable basis.
3. CONCENTRATION OF CREDIT RISK
Because The New York Tax Free Fund will invest primarily in obligations
issued by the State of New York and its cities, municipalities and other public
authorities, it is more susceptible to factors adversely affecting issuers of
such obligations than a comparable municipal bond fund that is not so
concentrated. New York State and New York City have recently encountered
financial difficulties. If either New York State or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by The New York Tax Free Fund and its ability to preserve capital and
liquidity could be adversely affected. (See the Statement of Additional
Information for more information.)
4. INVESTMENT ADVISERS
The Portfolio Group, Inc. ("TPG") provides investment advisory services to
The 100% U.S. Treasury Securities Fund, The U.S. Treasury Fund, The Government
Fund and The New York Tax Free Fund; Texas Commerce Bank, National Association
("TCB") provides investment advisory services to The Cash Management Fund and
The Tax Free Fund, in each case pursuant to an Advisory Agreement with the
Company (together, the "Advisory Agreements").
TPG was organized in March 1983 and is a wholly-owned subsidiary of
Chemical Banking Corporation, a bank holding company ("Chemical"). TPG provides
a wide range of asset management services to individuals, institutions and
retirement benefit plans. TCB has been in the investment counselling business
since 1987 and is a wholly-owned subsidiary of Texas Commerce Bancshares, Inc.,
which is a wholly-owned subsidiary of Chemical. TCB renders investment advice to
a wide variety of corporations, pension plans, foundations, trusts and
individuals.
Under the Advisory Agreements, TPG and TCB act as Investment Advisers and,
subject to the supervision and direction of the Company's Board of Directors,
direct the investments of the Funds in accordance with their investment
objectives and policies, make investment decisions and place orders to purchase
and sell securities for the Funds. As compensation for their investment advisory
services, TPG and TCB are each entitled to receive from the respective Funds
they advise a monthly fee at an annual rate of 0.15% of average daily net assets
of such Funds.
F-36
<PAGE> 127
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
For the year ended November 30, 1995, TPG and TCB (including Texas Commerce
Investment Management Company, an affiliate of TCB which acted as investment
adviser to The Cash Management Fund and The Tax Free Fund prior to September 1,
1995) were entitled to and voluntarily waived the investment advisory fees as
indicated below:
<TABLE>
<CAPTION>
TPG TCB
-------------------- --------------------
ENTITLED WAIVED ENTITLED WAIVED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
The 100% U.S. Treasury Securities
Fund................................. $1,590,723 $318,145 -- --
The U.S. Treasury Fund................. 2,211,627 442,325 -- --
The Government Fund.................... 2,162,051 432,410 -- --
The Cash Management Fund............... -- -- $1,731,434 $346,287
The Tax Free Fund...................... -- -- 507,370 101,474
The New York Tax Free Fund............. 323,782 64,756 -- --
</TABLE>
5. ADMINISTRATORS
Furman Selz serves as the Company's Administrator. Furman Selz provides
management and administrative services for the operation of the Funds, furnishes
office space and facilities required for conducting the business of the Funds
and pays the compensation of the Company's officers affiliated with Furman Selz.
As compensation for its administrative services, Furman Selz receives a
monthly fee, based upon the aggregate average daily net assets of the Funds, at
an annual rate of 0.06% of the first $500 million of the average daily net
assets, 0.05% of the next $500 million of the average daily net assets, 0.04% of
the average daily net assets in excess of $1 billion. Furman Selz also provides
fund accounting services for the Funds and receives a monthly fee of $2,083 from
each Fund for those services. Furman Selz commenced providing fund accounting
services for the Funds on May 1, 1995.
Chemical Bank, a wholly-owned subsidiary of Chemical, serves as the
Company's Co-Administrator and generally assists the Company in all aspects of
its administration and operation. As compensation for its administrative
services, Chemical Bank receives from each Fund a monthly fee at an annual rate
of 0.03% of the average daily net assets of that Fund. In addition, Chemical
Bank provided fund accounting services for the Funds from December 1, 1994 to
April 30, 1995 and received a monthly fee of $2,083 from each Fund during that
period.
For the year ended November 30, 1995, Furman Selz and Chemical Bank were
entitled to and voluntarily waived the administrative services and fund
accounting fees as indicated below:
<TABLE>
<CAPTION>
FURMAN SELZ CHEMICAL BANK
------------------ ----------------
ENTITLED WAIVED ENTITLED WAIVED
-------- -------- -------- ------
<S> <C> <C> <C> <C>
The 100% U.S. Treasury Securities Fund..... $466,646 -- $328,561 $4,243
The U.S. Treasury Fund..................... 643,246 -- 452,742 8,333
The Government Fund........................ 629,285 -- 442,827 4,167
The Cash Management Fund................... 506,699 -- 356,704 2,083
The Tax Free Fund.......................... 158,893 -- 111,891 7,248
The New York Tax Free Fund................. 106,595 -- 75,173 2,083
</TABLE>
F-37
<PAGE> 128
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
Certain of the states in which the shares of the Funds are qualified for
sale impose limitations on the expenses of the Funds. If, in any fiscal year,
the total expenses of a Fund (excluding taxes, interest, distribution expenses,
brokerage commissions, certain portfolio transaction expenses, other
expenditures which are capitalized in accordance with generally accepted
accounting principles and extraordinary expenses, but including the advisory and
administrative services fees) exceed the expense limitations applicable to that
Fund imposed by the securities regulations of any state, TPG, TCB, Furman Selz
and Chemical Bank will reimburse the Funds for expenses to meet these
limitations. In the most restrictive state, aggregate annual expenses shall not
normally exceed two and one-half percent (2 1/2%) of the first $30 million of
the average net assets, two percent (2%) of the next $70 million of the average
net assets and one and one-half percent (1 1/2%) of the remaining average net
assets. For the year ended November 30, 1995, there were no reimbursements
required as a result of these expense limitations for the Funds.
6. SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents"). Shareholder
administrative support services will be performed by Shareholder Servicing
Agents for their customers who beneficially own shares. Such services, which are
described more fully in the Statement of Additional Information, may include,
among other things: (i) aggregating and processing purchase and redemption
orders; (ii) placing net purchase and redemption orders with the Company's
distributor; (iii) providing necessary personnel and facilities to establish and
maintain customer accounts and records; (iv) processing dividend payments; and
(v) providing information periodically to beneficial owners showing their
positions in the Fund's shares. Shareholder Servicing Agents may enter into
arrangements with, and pay a portion of their fees to, other entities that
perform or assist in performing shareholder administrative support services.
For the services provided, the Company's Shareholder Servicing Plan permits
the Company to pay fees to Shareholder Servicing Agents from each Fund at an
annual rate of up to 0.35% of the average daily net asset value of shares in the
Funds for which such Shareholder Servicing Agents provide services for the
benefit of customers. The Company has entered into Shareholder Servicing
Agreements with Chemical Bank, certain of its affiliates, Furman Selz and
certain other broker-dealers, pursuant to which it pays them a monthly fee from
each Fund at an annual rate of 0.35% of the average daily net asset value of the
shares in the Funds for which they provide services. The Company may appoint
additional Shareholder Servicing Agents in the future.
Shareholder Servicing Agents will provide their customers with a schedule
of any credits, fees or other conditions that may be applicable to the
investment of customer assets in the Funds' shares. The Company's Board of
Directors has determined that the amount payable by each Fund in respect of
"service fees" (as defined under Article III, Section 26 of the Rules of Fair
Practice by the National Association of Securities Dealers, Inc.) does not
exceed 0.25% of the average annual net assets of that Fund.
F-38
<PAGE> 129
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
For the year ended November 30, 1995, Chemical Bank and its affiliates and
Furman Selz earned the shareholder servicing fees as indicated below:
<TABLE>
<CAPTION>
CHEMICAL BANK
AND
ITS FURMAN
AFFILIATES SELZ
------------- -------
<S> <C> <C>
The 100% U.S. Treasury Securities Fund.............. $ 3,684,527 $12,594
The U.S. Treasury Fund.............................. 5,157,842 --
The Government Fund................................. 5,044,309 241
The Cash Management Fund............................ 4,012,435 403
The Tax Free Fund................................... 1,159,289 58
The New York Tax Free Fund.......................... 754,984 441
</TABLE>
7. OTHER TRANSACTIONS WITH AFFILIATES
Shares in each Fund are sold on a continuous basis without a sales load by
the Company's Distributor, Hanover Funds Distributor, Inc. (the "Distributor"),
an affiliate of Furman Selz.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of its shares, each Fund is authorized
to spend up to 0.10% of its net assets annually in accordance with a Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 promulgated under the 1940 Act.
Activities for which the Distributor may be reimbursed include (but are not
limited to) the development and implementation of direct mail promotions and
advertising for the Funds and the preparation, printing and distribution of
prospectuses for the Funds to recipients other than existing shareholders. For
the year ended November 30, 1995, none of the Funds paid any amounts in
accordance with the Plan.
Chemical Bank serves as the Company's transfer agent and dividend
disbursing agent, and is entitled to a fee of $10 per year for each shareholder
account. Furman Selz serves as the Company's sub-transfer agent and provides the
services to be performed by Chemical Bank as transfer agent, subject to the
general supervision of Chemical Bank, and receives the fee to which Chemical
Bank is entitled as transfer agent, and reimbursement for certain expenses.
For the year ended November 30, 1995, Furman Selz earned the sub-transfer
agent fees as indicated below:
<TABLE>
<S> <C>
The 100% U.S. Treasury Securities Fund............................. $29,463
The U.S. Treasury Fund............................................. 19,393
The Government Fund................................................ 28,489
The Cash Management Fund........................................... 23,174
The Tax Free Fund.................................................. 6,108
The New York Tax Free Fund......................................... 12,957
</TABLE>
Chemical Bank serves as the Company's custodian, and receives a monthly fee
at an annual rate of 0.015% of the first $300 million of the aggregate average
daily net assets of the Company's Funds, 0.010% of the next $300 million of such
assets and 0.005% of such assets in excess of $600 million, plus a
F-39
<PAGE> 130
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
fee of $25 for each transaction involving a security which is not book-entry and
$15 for each transaction involving a book-entry security, and reimbursement for
out-of-pocket expenses.
For the year ended November 30, 1995, Chemical Bank was entitled to and
voluntarily waived the custodian fees as indicated below:
<TABLE>
<CAPTION>
ENTITLED WAIVED
-------- --------
<S> <C> <C>
The 100% U.S. Treasury Securities Fund................. $ 81,398 $ 19,673
The U.S. Treasury Fund................................. 277,195 184,025
The Government Fund.................................... 246,782 44,239
The Cash Management Fund............................... 102,656 27,261
The Tax Free Fund...................................... 60,645 23,537
The New York Tax Free Fund............................. 41,689 18,412
</TABLE>
8. REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board, with member banks of the
Federal Reserve System or with other brokers or dealers that meet the credit
guidelines established by the Board of Directors of the Company. The Funds will
always receive and maintain securities as collateral whose market value,
including accrued interest, will equal or exceed the value of the dollar amount
invested by that Fund in each agreement, and that Fund will make payment for
such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the custodian. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines, or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Funds may be delayed or limited.
9. FEDERAL INCOME TAX STATUS
For the year ended November 30, 1995, The Tax Free Fund and The New York
Tax Free Fund had net capital loss carryforwards of $338,145 and $82,846,
respectively. These losses, which may be used to offset future realized gains,
will expire in varying degrees and at varying times up through the year ending
November 30, 2003.
10. BANK MERGER
In August 1995 Chemical Banking Corporation ("Chemical") and The Chase
Manhattan Corporation ("Chase") announced that they had entered into a merger
agreement. Following the merger of these two Bank holding companies, The Chase
Manhattan Bank, N.A. will be merged with and into Chemical Bank, at which time
Chemical Bank will assume the Chase Manhattan name.
In anticipation of the consummation of the foregoing mergers, the Board of
Directors of The Hanover Funds, Inc. (the "Company"), which is affiliated with
Chemical, and the Board of Trustees of Mutual Fund Trust ("Vista"), a mutual
fund company affiliated with Chase, each have approved an Agreement and Plan of
Reorganization and Liquidation (the "Agreement") between the Company and
F-40
<PAGE> 131
THE HANOVER FUNDS, INC.
Notes to Financial Statements (continued)
November 30, 1995
Vista. The Agreement provides that, subject to certain conditions, including
approval of the Agreement by the shareholders of the Company and consummation of
the merger of Chemical and Chase, each investment portfolio of the Company will
sell all of its assets and liabilities to a corresponding existing or
newly-created investment portfolio of Vista having a substantially identical
investment objective and similar investment policies, in exchange for the
issuance by Vista of shares of the respective acquiring investment portfolio.
The value of the shares of a portfolio of Vista issued in connection with the
contemplated transaction will equal the value of the net assets of the
corresponding portfolio of the Company being sold. Each portfolio of the Company
will distribute to its shareholders the shares received from Vista in
cancellation of the outstanding shares of the Company, and shareholders of the
Company will become shareholders of Vista. The total net asset value of the
holdings of the shareholders of the Company immediately before and after the
contemplated transaction will be the same. The Agreement provides that, subject
to the satisfaction of the conditions contained therein, the transaction will be
consummated before July 31, 1996.
F-41
<PAGE> 132
THE HANOVER FUNDS, INC.
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
----------------------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
------------------------------------------------ NOVEMBER 30,
1995 1994 1993 1992 1991*
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- ----------
Income from Investment Operations:
Net investment income.............. 0.050 0.033 0.026 0.033 0.021
---------- ---------- -------- -------- ----------
Less Distributions:
Dividends from net investment
income.......................... (0.050) (0.033) (0.026) (0.033) (0.021)
---------- ---------- -------- -------- ----------
Net Asset Value, End of Period....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ======== ======== =========
Total Return......................... 5.15% 3.32% 2.62% 3.33% 2.58%
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)...................... $1,337,549 $1,024,125 $873,631 $383,688 $141,875
Ratio of Expenses to Average Net
Assets++........................ 0.58% 0.59% 0.58% 0.55% 0.45%+
Ratio of Net Investment Income to
Average Net Assets.............. 4.99% 3.26% 2.58% 3.28% 5.02%+
</TABLE>
- ---------------
* Fund commenced operations on July 1, 1991.
+ Annualized.
++ Ratios of expenses before effect of waivers were 0.61%, 0.62%, 0.61%, 0.67%
and 0.74% (annualized), respectively.
See accompanying notes to financial statements.
F-42
<PAGE> 133
THE HANOVER FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE U.S. TREASURY MONEY MARKET FUND
----------------------------------------------------
YEAR ENDED NOVEMBER 30, PERIOD ENDED
------------------------------------ NOVEMBER 30,
1995 1994 1993 1992*
---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- ------------
Income from Investment Operations:
Net investment income....................... 0.052 0.034 0.025 0.004
---------- ---------- -------- ------------
Less Distributions:
Dividends from net investment income........ (0.052) (0.034) (0.025) (0.004)
---------- ---------- -------- ------------
Net Asset Value, End of Period................ $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ======== ===========
Total Return.................................. 5.28% 3.45% 2.57% 0.43%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).... $1,663,829 $1,221,133 $929,115 $1,073,194
Ratio of Expenses to Average Net Assets++... 0.58% 0.59% 0.59% 0.65%+
Ratio of Net Investment Income to Average
Net Assets............................... 5.14% 3.46% 2.54% 2.58%+
</TABLE>
- ---------------
* Fund commenced operations on October 1, 1992.
+ Annualized.
++ Ratios of expenses before effect of waivers were 0.63%, 0.63%, 0.62% and
0.68% (annualized), respectively.
See accompanying notes to financial statements.
F-43
<PAGE> 134
THE HANOVER FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE GOVERNMENT MONEY MARKET FUND
------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- --------
Income from Investment Operations:
Net investment income..................... 0.054 0.036 0.027 0.035 0.057
---------- ---------- -------- -------- --------
Less Distributions:
Dividends from net investment income...... (0.054) (0.036) (0.027) (0.035) (0.057)
---------- ---------- -------- -------- --------
Net Asset Value, End of Period.............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=========== =========== ========= ========= =========
Total Return................................ 5.49% 3.62% 2.71% 3.52% 5.81%
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands).............................. $1,551,998 $1,141,899 $546,264 $471,279 $335,093
Ratio of Expenses to Average Net
Assets++................................ 0.59% 0.61% 0.61% 0.66% 0.66%
Ratio of Net Investment Income to Average
Net Assets.............................. 5.35% 3.75% 2.68% 3.46% 5.65%
</TABLE>
- ---------------
++ Ratios of expenses before effect of waivers were 0.62%, 0.64%, 0.64%, 0.70%,
and 0.72%, respectively.
See accompanying notes to financial statements.
F-44
<PAGE> 135
THE HANOVER FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE CASH MANAGEMENT FUND
----------------------------------------------------------
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income...................... 0.054 0.036 0.027 0.035 0.059
---------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income....... (0.054) (0.036) (0.027) (0.035) (0.059)
---------- -------- -------- -------- --------
Net Asset Value, End of Period............... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
=========== ========= ========= ========= =========
Total Return................................. 5.49% 3.62% 2.74% 3.51% 6.01%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)... $1,634,493 $990,045 $861,025 $560,173 $343,166
Ratio of Expenses to Average Net
Assets++................................. 0.58% 0.58% 0.61% 0.67% 0.67%
Ratio of Net Investment Income to Average
Net Assets............................... 5.35% 3.62% 2.70% 3.41% 5.84%
</TABLE>
- ---------------
++ Ratios of expenses before effect of waivers were 0.62%, 0.62%, 0.64%, 0.72%,
and 0.73%, respectively.
See accompanying notes to financial statements.
F-45
<PAGE> 136
THE HANOVER FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE TAX FREE MONEY MARKET FUND
--------------------------------------------------------
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income........................ 0.032 0.022 0.019 0.026 0.041
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income......... (0.032) (0.022) (0.019) (0.026) (0.041)
-------- -------- -------- -------- --------
Net Asset Value, End of Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ========= ========= =========
Total Return................................... 3.29% 2.23% 1.91% 2.61% 4.21%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)..... $314,466 $359,042 $235,196 $195,952 $135,514
Ratio of Expenses to Average Net Assets++.... 0.62% 0.61% 0.63% 0.67% 0.67%
Ratio of Net Investment Income to Average Net
Assets..................................... 3.29% 2.22% 1.89% 2.55% 4.13%
</TABLE>
- ---------------
++ Ratios of expenses before effect of waivers were 0.66%, 0.64%, 0.66%, 0.74%,
and 0.74%, respectively.
See accompanying notes to financial statements.
F-46
<PAGE> 137
THE HANOVER FUNDS, INC.
Financial Highlights (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
THE NEW YORK TAX FREE MONEY MARKET FUND
-------------------------------------------------------
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------
Income from Investment Operations:
Net investment income......................... 0.032 0.020 0.016 0.024 0.037
-------- -------- -------- -------- -------
Less Distributions:
Dividends from net investment income.......... (0.032) (0.020) (0.016) (0.024) (0.037)
-------- -------- -------- -------- -------
Net Asset Value, End of Period.................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ========= ========= ========= ========
Total Return.................................... 3.20% 1.99% 1.63% 2.29% 3.77%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)...... $252,621 $182,007 $163,638 $146,640 $39,776
Ratio of Expenses to Average Net Assets++..... 0.60% 0.60% 0.63% 0.66% 0.67%
Ratio of Net Investment Income to Average Net
Assets...................................... 3.15% 1.97% 1.64% 2.26% 3.70%
</TABLE>
- ---------------
++ Ratios of expenses before effect of waivers were 0.64%, 0.65%, 0.66%, 0.81%,
and 0.80%, respectively.
See accompanying notes to financial statements.
F-47
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Hanover Funds, Inc.:
We have audited the accompanying statements of assets and liabilities of The
Hanover Funds, Inc. (The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund, and The New York Tax Free Money
Market Fund), including the portfolios of investments, as of November 30, 1995
and the related statements of operations for the year then ended, and statements
of changes in net assets for each of the years in the two-years then ended and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Our procedures included verification of
securities owned at November 30, 1995, by count and by correspondence with
custodians and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Hanover Funds, Inc. (The 100% U.S. Treasury Securities Money Market Fund, The
U.S. Treasury Money Market Fund, The Government Money Market Fund, The Cash
Management Fund, The Tax Free Money Market Fund, and The New York Tax Free Money
Market Fund), as of November 30, 1995, and the results of their operations for
the year then ended, the changes in their net assets for each of the years in
the two-years then ended, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
January 19, 1996
F-48
<PAGE> 139
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
The Financial Statements included in Parts A and B of this
Registration Statement are as follows:
Condensed Financial Information
The 100% Treasury Securities Money Market Fund Portfolio of
Investments dated November 30, 1995
The U.S. Treasury Money Market Fund Portfolio of Investments dated
November 30, 1995
The Government Money Market Fund Portfolio of Investments dated
November 30, 1995
The Cash Management Fund Portfolio of Investments dated November
30, 1995
The Tax Free Money Market Fund Portfolio of Investments dated
November 30, 1995
The New York Tax Free Money Market Fund Portfolio of Investments
dated November 30, 1995
Footnotes to Portfolios
Statement of Assets and Liabilities dated November 30, 1995
Statement of Operations for the period ended November 30, 1995
Statement of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Independent Auditors' Report dated January 19, 1996
(b) Exhibits:
Exhibit
Number Description
------- -----------
1(a) -- Registrant's Articles of Incorporation are
incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form N-1A,
filed October 6, 1988, Registration Nos. 33-24753
and 811-5668 (the "Registration Statement").
C-1
<PAGE> 140
Exhibit
Number Description
------- -----------
1(b) -- Registrant's Articles of Amendment are
incorporated by reference to Exhibit 1(b) to
Pre-Effective Amendment No. 1, filed November 15,
1988 to the Registration Statement.
1(c) -- Registrant's Articles Supplementary are
incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 6 ("Post-Effective
Amendment No. 6"), filed June 3, 1991, to the
Registration Statement.
1(d) -- Registrant's Articles Supplementary are
incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 8 ("Post-Effective
Amendment No. 8"), filed June 19, 1992, to the
Registration Statement.
2 -- Registrant's Amended and Restated By-Laws are
incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 8
3 -- None.
4(a) -- Forms of Stock Certificate for shares of Class A
stock is incorporated by reference to Exhibit 4(a)
to Pre-Effective Amendment No. 2, filed December
12, 1988 ("Pre-Effective Amendment No. 2") to the
Registration Statement.
4(b) -- Form of Stock Certificate for shares of Class B
stock is incorporated by reference to Exhibit 4(b)
to Pre-Effective Amendment No. 2.
4(c) -- Form of Stock Certificate for shares of Class C
stock is incorporated by reference to Exhibit 4(c)
to Pre-Effective Amendment No. 2.
4(d) -- Form of Stock Certificate for shares of Class D
stock is incorporated by reference to Exhibit 4(d)
to Pre-Effective Amendment No. 2.
4(e) -- Form of Stock Certificate for shares of Class E
stock is incorporated by reference to Exhibit 4(e)
to Post-Effective Amendment No. 6.
4(f) -- Form of Stock Certificate for shares of Class F
stock is incorporated by reference to Exhibit 4(f)
to Post-Effective Amendment No. 8.
5(a) -- Form of Advisory Agreements between Registrant and
Chemical Bank is incorporated by reference to
Exhibit 5(d) to Post-Effective Amendment No. 7,
filed December 31, 1991, to the Registration
Statement.
C-2
<PAGE> 141
Exhibit
Number Description
------- -----------
5(b) -- Form of Advisory Agreements between Registrant and
The Portfolio Group, Inc. for The 100% U.S.
Treasury Securities Money Market Fund, The
Government Money Market Fund, The New York Tax
Free Money Market Fund and The U.S. Treasury Money
Market Fund is incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 8.
5(c) -- Form of Advisory Agreements between Registrant and
Texas Commerce Bank, National Association for The
Cash Management Fund and The Tax Free Money Market
Fund.
6(a) -- Form of Distribution Agreement between Registrant
and Furman Selz Incorporated is incorporated by
reference to Exhibit 6(c) to Post-Effective
Amendment No. 8.
6(b) -- Form of Distribution Agreement between Registrant
and Hanover Funds Distributor, Inc. is
incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 10, filed August 27,
1992 ("Post-Effective Amendment No. 10"), to the
Registration Statement.
7 -- None.
8 -- Form of Custodian Agreement between Registrant and
Chemical Bank is incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 8.
9(a) -- Form of Administration and Accounting Services
Agreement between Registrant and Chemical Bank is
incorporated by reference to Exhibit 9(b) to
Post-Effective Amendment No. 8.
9(b) -- Form of Administration Agreement between
Registrant and Furman Selz Incorporated is
incorporated by reference to Exhibit 9(d) to
Post-Effective Amendment No. 8.
9(c) -- Form of Transfer Agency Agreement between
Registrant and Chemical Bank is incorporated by
reference to Exhibit 9(f) to Post-Effective
Amendment No. 8.
9(d) -- Form of Sub-Transfer Agency Agreement between
Registrant, Chemical and Furman Selz Incorporated
is incorporated by reference to Exhibit 9(i) to
Post-Effective Amendment No. 8.
9(e) -- Form of Shareholder Servicing Agreement between
Registrant and Chemical Bank is incorporated by
C-3
<PAGE> 142
Exhibit
Number Description
------- -----------
reference to Exhibit 9(n) to Post-Effective
Amendment No. 8.
9(f) -- Form of Shareholder Servicing Agreement between
Registrant and Furman Selz Incorporated is
incorporated by reference to Exhibit 9(o) to
Post-Effective Amendment No. 8.
9(g) -- Form of Shareholder Servicing Agreement between
Registrant and Texas Commerce Bank, National
Association is incorporated by reference to
Exhibit 9(p) to Post-Effective Amendment No. 8.
9(h) -- Agreement and Plan of Reorganization and
Liquidation between Registrant and CBC Cornerstone
Funds is incorporated by reference to Exhibit 9(g)
to Post-Effective Amendment No. 8.
9(i) -- Form of Amendment to Administration and Accounting
Services Agreement between Registrant and Chemical
Bank is incorporated by reference to Exhibit 9(i)
to Post-Effective Amendment No. 14, filed March
30, 1995 ("Post-Effective Amendment No. 14"), to
the Registration Statement.
9(j) -- Form of Accounting Services Agreement between
Registrant and Furman Selz Incorporated is
incorporated by reference to Exhibit 9(j) to
Post-Effective Amendment No. 14.
10 -- Opinion and consent by Venable, Baetjer and Howard
is incorporated by reference to Exhibit 9(g) to
Post-Effective Amendment No. 10.
11(a) -- Consent of KPMG Peat Marwick LLP.
11(b) -- Powers of Attorney for Messrs. McElroy, Eppley,
Rohner, Pileggi and Ms. Zopfi are incorporated by
reference to Exhibit 11(b) to Post-Effective
Amendment No. 8.
11(c) -- Power of Attorney for Mr. Sloterbeck is
incorporated by reference to Exhibit 11(c) to
Post-Effective Amendment No. 14.
12 -- None.
13(a) -- Share Purchase Agreement between Registrant and
TBC Funds Distributor, Inc. is incorporated by
reference to Exhibit 13 to Post-Effective
Amendment No. 1.
13(b) -- Share Purchase Agreement between Registrant and TBC
Funds Distributor, Inc. with respect to Class E
Shares
C-4
<PAGE> 143
Exhibit
Number Description
------- -----------
is incorporated by reference to Exhibit 13(b) to
Post-Effective Amendment No. 6.
13(c) -- Share Purchase Agreement between Registrant and
Furman Selz Incorporated with respect to Class F
Shares is incorporated by reference to Exhibit
13(c) to Post-Effective Amendment No. 8.
14 -- None.
15 -- Form of Distribution Plan, as amended, is
incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 10.
16 -- Schedule of performance calculations.
17 -- Financial Data Schedules
Item 25. Persons Controlled by or under Common Control with Registrant.
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of Record Holders at
Title of Class March 20, 1996
-------------- --------------
<S> <C>
Shares of The 100% U.S. Treasury Securities Money Market Fund, par
value $.001 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,892
Shares of The U.S. Treasury Money Market Fund, par value $.001 per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,807
Shares of The Government Money Market Fund, par value $.001 per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,867
Shares of The Cash Management Fund, par value $.001 per share . . . . . . . . . 4,485
Shares of The Tax Free Money Market Fund, par value $.001 per share . . . . . . 820
Shares of The New York Tax Free Money Market Fund, par value
$.001 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,669
</TABLE>
C-5
<PAGE> 144
Item 27. Indemnification.
Reference is made to Article VII of Registrant's Articles of
Incorporation, Article IV of Registrant's By-Laws, Paragraph 4 of the form of
Distribution Agreement between Registrant and Hanover Funds Distributor, Inc.
(Exhibit 6(b) hereto), Paragraph 22 of the Form of Custodian Agreement between
Registrant and Chemical Bank (Exhibit 8 hereto), Paragraph 13 of the Form of
Administration and Accounting Services Agreement between Registrant and
Chemical Bank (Exhibit 9(a) hereto), Paragraph 17 of the Form of Transfer
Agency Agreement between Registrant and Chemical Bank (Exhibit 9(c) hereto),
Paragraph 7 of the Forms of Shareholder Servicing Agreement (Exhibit 9(e), 9(f)
and 9(g) hereto) and Paragraph 14 of the Form of Accounting Services Agreement
between Registrant and Furman Selz Incorporated (Exhibit 9(j) hereto).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant understands that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
The Portfolio Group, Inc. ("The Portfolio Group") and Texas
Commerce Bank, National Association ("TCB") provide a wide range of asset
management services to individuals, institutions and retirement benefit plans.
The list required by this Item 28 of officers and directors of
The Portfolio Group, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV filed by The Portfolio Group pursuant to the
Advisers Act (SEC File No. 801-19502).
To the knowledge of Registrant, none of the Directors or
executive officers of TCB except those described below, are or have been, at
any time during the past two years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain Directors
and executive officers of TCB also hold or
C-6
<PAGE> 145
have held various positions with bank and non-bank affiliates of TCB.
<TABLE>
<CAPTION>
Principal Occupation or Other
Employment of a Substantial
Position Nature During the Past Two
Name with TCB Years
---- -------- -----------------------------
<S> <C> <C>
David W. Biegler Director Chairman, President and CEO,
ENSERCH Corporation, 300 South
St. Paul, Dallas, TX 75201
Charles W. Duncan Director Private Investing, 600 Travis,
Houston, TX 77002-3007
Dennis R. Hendrix Director Chairman, President and CEO,
Panhandle Eastern Corporation,
P.O. Box 1642, Houston, TX 77251-1642
Harold S. Hook Director Chairman and CEO,
American General Corporation,
P.O. Box 3247, Houston, TX 77253
R. Bruce LaBoon Director Managing Partner, Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P.,
3400 Texas Commerce Tower,
Houston, TX 77002-3004
</TABLE>
Item 29. Principal Underwriters.
(a) In addition to Registrant, Hanover Funds Distributor,
Inc. currently acts as distributor to The Hanover Investment Funds, Inc.
Hanover Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker/dealer and is a member of the National Association of
Securities Dealers, Inc.
(b) The information required by this Item 29(b) with respect
to each director, officer or partner of Hanover Funds Distributor, Inc. is as
follows:
<TABLE>
<CAPTION>
Position and Offices
Name and Principal with Hanover Funds Position and Offices With
Business Address Distributor, Inc. Registrant
------------------ -------------------- ------------
<S> <C> <C>
Michael C. Petrycki Director and None
Furman Selz Incorporated President
230 Park Avenue
New York, New York 10169
Robert J. Miller Vice President and None
Furman Selz Incorporated Chief Financial Officer
230 Park Avenue
New York, New York 10169
Steven D. Blecher Vice President, None
Furman Selz Incorporated Secretary and Treasurer
230 Park Avenue
New York, New York 10169
Elizabeth Q. Solazzo Assistant Secretary None
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
Martin S. Wagner Assistant Secretary None
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
(c) Not applicable.
</TABLE>
C-7
<PAGE> 146
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
(the "1940 Act"), and the Rules thereunder are maintained at the offices of:
(1) Furman Selz Incorporated
237 Park Avenue
New York, New York 10017
(2) The Portfolio Group, Inc.
600 Fifth Avenue
New York, New York 10020
(3) Texas Commerce Bank, National Association
712 Main Street
Houston, Texas 77002
(4) Chemical Bank
450 West 33rd Street
New York, New York 10001
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting upon the question of removal of one or
more of Registrant's directors when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares of common stock and,
in connection with such meeting, to assist in communications with other
shareholders in this regard, as provided under Section 16(c) of the 1940 Act.
(d) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
C-8
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and Registrant has duly caused
this Post-Effective Amendment to the Registration Statement to be signed in its
behalf by the undersigned, thereunto duly authorized in the City of New York,
and State of New York on the 29th day of March, 1996.
THE HANOVER FUNDS, INC.
By: /s/ John J. Pileggi
-----------------------------
John J. Pileggi, Treasurer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment to the Registration Statement has been
signed by the following persons in the capacities and on the 29th day of March,
1995.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director and President (Principal March 29, 1996
- ------------------------ Executive Officer)
Joseph L. McElroy
* Director and Chairman March 29, 1996
- ------------------------
Roland R. Eppley, Jr.
* Director March 29, 1996
- ------------------------
Ralph J. Rohner
* Director March 29, 1996
- ------------------------
David P. Sloterbeck, Jr.
* Director March 29, 1996
- ------------------------
Anne K. Zopfi
* Treasurer March 29, 1996
- ------------------------ (Principal Financial and Accounting
John J. Pileggi Officer)
</TABLE>
*By: /s/ Joan V. Fiore
-------------------------------
Joan V. Fiore
Attorney-in-Fact
C-9
<PAGE> 148
THE HANOVER FUNDS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------- ---------------------- -------------
<S> <C> <C>
5(c) -- Form of Advisory Agreements between Registrant and Texas Commerce
Bank, National Association for The Cash Management Fund and The
Tax Free Money Market Fund.
11(a) -- Consent of KPMG Peat Marwick LLP.
16 -- Schedule of performance calculations.
17 -- Financial Data Schedules.
</TABLE>
C-10
<PAGE> 1
Exhibit 5(c)
ADVISORY AGREEMENT
THE HANOVER FUNDS, INC.
230 Park Avenue
New York, New York 10169
September 1, 1995
Texas Commerce Bank, National Association
600 Travis
Houston, Texas 77002
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Adviser") as follows:
1. The Company is an open-end investment company which currently has six
investment portfolios -- The Hanover Government Money Market Fund, The Hanover
Cash Management Fund, The Hanover Tax Free Income Fund, The Hanover Tax Free
Money Market Fund, The Hanover New York Tax Free Money Market Fund, The Hanover
100% U.S. Treasury Securities Money Market Fund and The Hanover U. S. Treasury
Money Market Fund. The Company proposes to engage in the business of investing
and reinvesting the assets of The Hanover Cash Management Fund (the "Fund") in
the manner and in accordance with the investment objectives and limitations
specified in the Company's Articles of Incorporation, as amended (the
"Articles"), and the currently effective prospectus, including the documents
incorporated by reference therein (the "Prospectus"), relating to the Company
and the Fund, included in the Company's Registration Statement, as amended from
time to time (the "Registration Statement"), filed by the Company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished to the Adviser. Any amendments to these documents
shall be furnished to the Adviser promptly.
<PAGE> 2
2. The Company employs the Adviser to (a) make investment
strategy decisions for the Fund, (b) manage the investing and reinvesting of the
Fund's assets as specified in paragraph 1, (c) place purchase and sale orders on
behalf of the Fund, and (d) provide continuous supervision of the Fund's
investment portfolio.
3. (a) The Adviser shall, at its expense, employ or
associate with itself such persons as it believes appropriate to
assist it in performing its obligations under this agreement.
(b) Except as provided in subparagraph 3(a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid to
its directors); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; charges of any
shareholder servicing agents; certain insurance premiums; auditing and legal
expenses; costs of shareholders' reports and shareholder meetings; any
extraordinary expenses; brokerage fees and commissions, if any, in connection
with the purchase of portfolio securities; and payments to the Fund's
distributor for activities intended to result in the sale of Fund shares.
4. As manager of the Fund's assets, the Adviser shall make
investments for the Fund's account in accordance with the investment objectives
and limitations set forth in the Articles, the Prospectus, the 1940 Act, the
provisions of the Internal Revenue Code relating to regulated investment
companies, applicable banking laws and regulations, and policy decisions adopted
by the Company's Board of Directors from time to time. The Adviser shall advise
the Company's officers and Board of Directors, at such times as the Company's
Board of Directors may specify, of investments made for the Fund's account and
shall, when requested by the Company's officers or Board of Directors, supply
the reasons for making such investments.
5. The Adviser is authorized on behalf of the Company, from
time to time when deemed to be in the best interests of the Company and to the
extent permitted by applicable law, to purchase and/or sell securities in which
the Adviser or any of its affiliates underwrites, deals in and/or makes a market
and/or may perform or seek to perform investment banking services for issuers of
such securities. The Adviser is further authorized, to the extent permitted by
applicable law, to select brokers for the execution of trades for the Company,
which broker may be an affiliate of the Adviser, provided that the best
competitive execution price is obtained at the time of the trade execution.
<PAGE> 3
6. In consideration of the Adviser's undertaking to render the
services described in this agreement, the Company agrees that the Adviser shall
not be liable under this agreement for any error of judgment or mistake of law
or for any loss suffered by the Company in connection with the performance of
this agreement, provided that nothing in this agreement shall be deemed to
protect or purport to protect the Adviser against any liability to the Company
or its stockholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of the
Adviser's duties under this agreement or by reason of the Adviser's reckless
disregard of its obligations and duties hereunder.
7. In consideration of the services to be rendered by the
Adviser under this agreement, the Company shall pay the Adviser a monthly fee on
the first Business Day (as defined in the Prospectus) of each month at an annual
rate of 0.15% of the average daily value (as determined on the days and at the
time set forth in the Prospectus for determining net asset value per share) of
the Fund's net assets during the preceding month. If the fee payable to the
Adviser pursuant to this paragraph 7 begins to accrue before the end of any
month or if this agreement terminates before the end of any month the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or allocated to, the
Fund in any fiscal year shall exceed the expense limitations applicable to the
Fund imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Adviser shall
reimburse the Fund for such excess. The Adviser's reimbursement obligation will
be limited to the amount of fees it received under this agreement during the
period in which such expense limitations were exceeded, unless otherwise
required by applicable laws or regulations. With respect to portions of a fiscal
year in which this contract shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. Any payments required to be made by this
paragraph 8 shall be made once a year promptly after the end of the Company's
fiscal year.
9. This agreement shall continue in effect until two
years from the date hereof and thereafter for successive annual
periods, provided that such continuance is specifically approved
<PAGE> 4
at least annually (a) by the vote of a majority of each Fund's outstanding
voting securities (as defined in the 1940 Act) or by the Company's Board of
Directors and (b) by the vote, cast in person at a meeting called for the
purpose, of a majority of the Company's directors who are not parties to this
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. This agreement may be terminated at any time, without the payment of any
penalty, by a vote of a majority of each Fund's outstanding voting securities
(as defined in the 1940 Act) or by a vote of a majority of the Company's entire
Board of Directors on 60 days' written notice to the Adviser or by the Adviser
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
10. Upon expiration or earlier termination of this agreement,
the Company shall, if reference to "Hanover" is made in the corporate name of
the Company or in the name of the Funds and if the Adviser requests in writing,
as promptly as practicable change its corporate name and the name of the Funds
so as to eliminate all reference to "Hanover", thereafter the Company and the
Funds shall cease transacting business in any corporate name using the word
"Hanover" or any other reference to the Adviser or "Hanover." The foregoing
rights of the Adviser and obligations of the Company shall not deprive the
Adviser, or any affiliate thereof which has "Hanover" in its name, of, but shall
be in addition to, any other rights or remedies to which the Adviser and any
such affiliate may be entitled in law or equity by reason of any breach of this
agreement by the Company, and the failure or omission of the Adviser to request
a change of the Company's or the Funds' names or a cessation of the use of the
name of "Hanover" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the Adviser's
obligations under this agreement, nothing herein shall be deemed to limit or
restrict the right of the Adviser, or any affiliate of the Adviser, or any
employee of the Adviser, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
12. This Agreement shall be governed by the laws of
the State of New York.
<PAGE> 5
If the foregoing correctly sets forth the agreement between
the Company and the Adviser, please so indicate by signing and returning to the
Company the enclosed copy hereof.
Very truly yours,
THE HANOVER INVESTMENT FUNDS, INC.
By: /s/ Joan V. Fiore
-------------------------------
Title: Secretary
ACCEPTED:
TEXAS COMMERCE BANK, NATIONAL ASSOCIATION
By: /s/ Thomas J. Press
--------------------------------------
Title: Senior Vice President
<PAGE> 1
Exhibit 11(a)
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and Board of Directors of The Hanover Funds, Inc.:
We consent to the use of our report dated January 19, 1996 with respect to The
100% U.S. Treasury Securities Money Market Fund, The U.S. Treasury Money Market
Fund, The Government Money Market Fund, The Cash Management Fund, The Tax Free
Money Market Fund, and The New York Tax Free Money Market Fund incorporated
herein by reference and to the references to our Firm under the headings
"Financial Highlights" and "Reports to Shareholders" in the Prospectus and
"Auditors" in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
March 29, 1996
<PAGE> 1
Exhibit 16
HANOVER GOVERNMENT MONEY MARKET FUND
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 5.514 5.515 5.515 1,055.146 5.515 1,055.146
Year to Date 5.031 5.032 5.032 1,050.315 5.032 1,050.315
12 Month 5.514 5.515 5.515 1,055.146 5.515 1,055.146
6 Month 2.669 2.669 2.669 1,026.692 2.669 1,026.692
3 Month 1.305 1.306 1.306 1,013.056 1.306 1,013.056
1 Month 0.430 0.430 0.430 1,004.300 0.430 1,004.300
2 Years 9.333 9.333 4.562 1,093.326 4.562 1,093.326
3 Years 12.299 12.299 3.946 1,122.990 3.946 1,122.990
4 Years N/A N/A N/A N/A N/A N/A
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
</TABLE>
Beginning Investment . . . $1,000.00
<PAGE> 2
HANOVER CASH MANAGEMENT FUND
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 5.483 5.483 5.483 1,054.831 5.483 1,054.831
Year to Date 5.031 5.032 5.032 1,050.315 5.032 1,050.315
12 Month 5.483 5.483 5.483 1,054.831 5.483 1,054.831
6 Month 2.710 2.710 2.710 1,027.101 2.710 1,027.101
3 Month 1.325 1.326 1.326 1,013.258 1.326 1,013.258
1 Month 0.430 0.430 0.430 1,004.300 0.430 1,004.300
2 Years 9.300 9.300 4.547 1,093.000 4.547 1,093.000
3 Years 12.299 12.299 3.942 1,122.991 3.942 1,122.991
4 Years 15.818 15.818 3.819 1,158.182 3.819 1,158.182
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
Beginning investment ... $1,000.00
</TABLE>
<PAGE> 3
HANOVER TAX FREE MONEY MARKET FUND
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 3.288 3.289 3.289 1,032.885 3.289 1,032.885
Year to Date 2.989 2.990 2.990 1,029.898 2.990 1,029.898
12 Month 3.288 3.289 3.289 1,032.885 3.289 1,032.885
6 Month 1.580 1.580 1.580 1,015.803 1.580 1,015.803
3 Month 0.782 0.782 0.782 1,007.820 0.782 1,007.820
1 Month 0.260 0.260 0.260 1,002.600 0.260 1,002.600
2 Years 5.594 5.594 2.759 1,055.944 2.759 1,055.944
3 Years 7.608 7.688 2.474 1,076.075 2.474 1,076.075
4 Years 10.417 10.417 2.508 1,104.167 2.508 1,104.167
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
</TABLE>
Beginning Investment . . . $1,000.00
<PAGE> 4
HANOVER NEW YORK TAX FREE MONEY MARKET FUND
11/30/95
<TABLE>
<CAPTION>
NAV OFFER AVERAGE SEC ENDING RED. AVG. NAV ENDING NAV
TOTAL RETURN TOTAL RETURN TOTAL RETURN VALUE TOTAL RETURN RED. VALUE
<S> <C> <C> <C> <C> <C> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 3.206 3.206 3.206 1,032.061 3.206 1,032.061
Year to Date 2.928 2.928 2.928 1,029.282 2.928 1,029.282
12 Month 3.206 3.206 3.206 1,032.061 3.206 1,032.061
6 Month 1.570 1.570 1.570 1,015.701 1.570 1,015.701
3 Month 0.782 0.782 0.782 1,007.820 0.782 1,007.820
1 Month 0.260 0.260 0.260 1,002.600 0.260 1,002.600
2 Years 5.258 5.258 2.595 1,052.577 2.595 1,052.577
3 Years 6.976 6.976 2.275 1,069.755 2.275 1,069.755
4 Years N/A N/A N/A N/A N/A N/A
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
Beginning Investment ..... $1,000.00
</TABLE>
<PAGE> 5
HANOVER 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 5.158 5.158 5.158 1,051.580 5.158 1,051.580
Year to Date 4.739 4.739 4.739 1,047.390 4.739 1,047.390
12 Month 5.158 5.158 5.158 1,051.580 5.158 1,051.580
6 Month 2.546 2.547 2.547 1,025.466 2.547 1,025.466
3 Month 1.224 1.225 1.225 1,012.249 1.225 1,012.249
1 Month 0.400 0.400 0.400 1,004.000 0.400 1,004.000
2 Years 8.649 8.649 4.235 1,086.485 4.235 1,086.485
3 Years 11.496 11.496 3.694 1,114.961 3.694 1,114.961
4 Years 14.956 14.956 3.622 1,149.557 3.622 1,149.557
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
Beginning investment ... $1,000.00
</TABLE>
<PAGE> 6
HANOVER U.S. TREASURY MONEY MARKET FUND
11/30/95
<TABLE>
<CAPTION>
NAV Offer Average SEC Ending Red. Avg. NAV Ending NAV
Total Return Total Return Total Return Value Total Return Red. Value
<S> <C> <C> <C> <C> <C> <C>
Inception N/A N/A N/A N/A N/A N/A
Fiscal Year 5.262 5.263 5.263 1,052.628 5.263 1,052.628
Year to Date 4.832 4.833 4.833 1,048.329 4.833 1,048.329
12 Month 5.262 5.263 5.263 1,052.628 5.263 1,052.628
6 Month 2.597 2.598 2.598 1,025.976 2.598 1,025.976
3 Month 1.275 1.275 1.275 1,012.753 1.275 1,012.753
1 Month 0.420 0.420 0.420 1,004.200 0.420 1,004.200
2 Years 8.898 8.898 4.354 1,088.978 4.354 1,088.978
3 Years 11.696 11.696 3.759 1,116.962 3.759 1,116.962
4 Years N/A N/A N/A N/A N/A N/A
5 Years N/A N/A N/A N/A N/A N/A
10 Years N/A N/A N/A N/A N/A N/A
Beginning investment ... $1,000.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> THE GOVERNMENT MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 1,664,062
<INVESTMENTS-AT-VALUE> 1,664,062
<RECEIVABLES> 30,894
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 28
<TOTAL-ASSETS> 1,694,984
<PAYABLE-FOR-SECURITIES> 139,922
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,064
<TOTAL-LIABILITIES> 142,986
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,551,998
<SHARES-COMMON-STOCK> 1,551,998
<SHARES-COMMON-PRIOR> 1,141,908
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,551,998
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 85,684
<OTHER-INCOME> 0
<EXPENSES-NET> 8,498
<NET-INVESTMENT-INCOME> 77,186
<REALIZED-GAINS-CURRENT> 9
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 77,195
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 77,186
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,830,561
<NUMBER-OF-SHARES-REDEEMED> 16,465,316
<SHARES-REINVESTED> 44,845
<NET-CHANGE-IN-ASSETS> 410,090
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,162
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,979
<AVERAGE-NET-ASSETS> 1,441,382
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .054
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .054
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> THE CASH MANAGEMENT FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 1,627,921
<INVESTMENTS-AT-VALUE> 1,627,921
<RECEIVABLES> 26,038
<ASSETS-OTHER> 10,537
<OTHER-ITEMS-ASSETS> 22
<TOTAL-ASSETS> 1,664,518
<PAYABLE-FOR-SECURITIES> 27,131
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,894
<TOTAL-LIABILITIES> 30,025
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,634,493
<SHARES-COMMON-STOCK> 1,634,493
<SHARES-COMMON-PRIOR> 990,045
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,634,493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 68,444
<OTHER-INCOME> 0
<EXPENSES-NET> 6,734
<NET-INVESTMENT-INCOME> 61,710
<REALIZED-GAINS-CURRENT> 52
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 61,762
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 61,710
<DISTRIBUTIONS-OF-GAINS> 52
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,290,192
<NUMBER-OF-SHARES-REDEEMED> 9,682,066
<SHARES-REINVESTED> 36,322
<NET-CHANGE-IN-ASSETS> 644,448
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,109
<AVERAGE-NET-ASSETS> 1,154,300
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .054
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .054
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> THE TAX FREE MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 310,553
<INVESTMENTS-AT-VALUE> 310,553
<RECEIVABLES> 2,205
<ASSETS-OTHER> 2,423
<OTHER-ITEMS-ASSETS> 4
<TOTAL-ASSETS> 315,185
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 719
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,512
<SHARES-COMMON-STOCK> 314,512
<SHARES-COMMON-PRIOR> 359,220
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 314,466
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,230
<OTHER-INCOME> 0
<EXPENSES-NET> 2,086
<NET-INVESTMENT-INCOME> 11,144
<REALIZED-GAINS-CURRENT> (66)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 11,078
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,946
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,492,967
<NUMBER-OF-SHARES-REDEEMED> 1,542,176
<SHARES-REINVESTED> 4,501
<NET-CHANGE-IN-ASSETS> (44,576)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (178)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 507
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,218
<AVERAGE-NET-ASSETS> 338,245
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .032
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .032
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> THE NEW YORK TAX FREE MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 251,614
<INVESTMENTS-AT-VALUE> 251,614
<RECEIVABLES> 1,870
<ASSETS-OTHER> 815
<OTHER-ITEMS-ASSETS> 3
<TOTAL-ASSETS> 254,303
<PAYABLE-FOR-SECURITIES> 1,209
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 473
<TOTAL-LIABILITIES> 1,682
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 252,669
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<NAME> THE 100% US TREASURY FUND
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<NAME> THE U.S. TREASURY MONEY MARKET FUND
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